<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NO. 1-13367
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
NEW MANORCARE HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2053999
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
11555 DARNESTOWN ROAD 20878
GAITHERSBURG, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(301) 979-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES TO BE REGISTERED
PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
Common Stock, par value $.01 per
share The New York Stock Exchange, Inc.
</TABLE>
SECURITIES TO BE REGISTERED
PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM LOCATIONS IN INFORMATION STATEMENT
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<TABLE>
<S> <C>
Item 1. Business.............. Summary; Introduction; The Distribution; Risk
Factors; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Consolidated Financial Statements
Item 2. Financial Summary; Risk Factors; Pro Forma Capitalization;
Information........... Pro Forma Financial Data; Selected Historical
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Consolidated Financial Statement
Item 3. Properties............ Business
Item 4. Security Ownership of
Certain Beneficial Security Ownership of Certain Beneficial Owners;
Owners and Beneficial Ownership of Management
Management............
Item 5. Directors and Management; Liability and Indemnification of
Executive Officers.... Directors and Officers
Item 6. Executive Management; Security Ownership of Certain
Compensation.......... Beneficial Owners
Item 7. Certain Relationships
and Related Summary; The Distribution; Relationship Between
Transactions.......... Manor Care Realty and The Company after the
Distribution; Certain Relationships and
Transactions
Item 8. Legal Proceedings..... Business
Item 9. Market Price of and
Dividends on the
Registrant's Common Summary; The Distribution; Risk Factors;
Equity and Related Security Ownership of Certain Beneficial Owners;
Stockholder Matters... Beneficial Ownership of Management; Description
of Capital Stock
Item 10. Recent Sales of
Unregistered
Securities........... None
Item 11. Description of
Registrant's Risk Factors; Description of Capital Stock;
Securities to be Purposes and Effects of Certain Provisions of
Registered........... The Charter and Bylaw Provisions
Item 12. Indemnification of
Directors and Liability and Indemnification of Officers and
Officers............. Directors
Item 13. Financial Statements
and Supplementary Summary; Management's Discussion and Analysis of
Data................. Financial Condition and Results of Operations;
Consolidated Financial Statements
Item 14. Changes in and
Disagreements With
Accountants on
Accounting and
Financial
Disclosure........... None
</TABLE>
1
<PAGE>
Item 15.Financial Statements and Exhibits
(a) Financial Statements--See Index to Consolidated Financial Statements
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Form of Distribution Agreement, dated as of , 1998, between Manor Care, Inc.
("Manor Care") and the Registrant.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended Bylaws of the Registrant.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP re: Tax Matters.*
10.1 Form of Tax Sharing Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1998, between Manor Care and
the Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1998, between Manor Care
Realty and the Registrant.*
10.4 Credit Agreement, dated as of , 1998, among the Registrant, Manor Care, The
Chase Manhattan Bank and Chase Securities Inc.*
10.5 Commitment Letter, dated , 1998, among the Registrant, Manor Care, The Chase
Manhattan Bank and Chase Securities, Inc.*
10.6 Form of Assisted Living Facility Management Agreement, dated as of , 1998,
between the Registrant and Manor Care.*
10.7 Form of Master Development Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.8 Form of Lease Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.9 Form of Non-Competition Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.10 Form of Employee Benefits and Other Employment Matters Allocation Agreement, dated
as of , 1998, between the Registrant and Manor Care.*
10.11 Form of Employee Benefits Administration Agreement, dated as of , 1998, between
the Registrant and Manor Care Realty.*
10.12 Form of Office Lease Agreement, dated as of , 1998, between the Registrant and
Manor Care.*
10.13 Form of Trademark Agreement, dated as of , 1998, between the Registrant and
Manor Care.*
10.14 Form of Cash Management Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.15 Form of Risk Management Consulting Services Agreement, dated as of , 1998,
between the Registrant and Manor Care Realty.*
10.16 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Compensation
Plan.*
10.17 Form of New ManorCare Health Services, Inc. Long-term Incentive Plan.*
10.18 Form of New ManorCare Health Services, Inc. Supplemental Executive Retirement Plan.*
10.19 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.*
10.20 Form of Employment Agreement, dated as of , 1998, between Stewart Bainum, Jr.
and the Registrant.*
10.21 Form of Employment Agreement, dated as of , 1998, between Scott J. Van Hove and
the Registrant.*
10.22 Form of License Agreement, dated , 1998, between Manor Care Realty and the
Registrant.*
10.23 Form of % Senior Note due 2008 of Manor Care Realty (Realty Note).*
10.24 Form of Vehicle Lease Agreement, dated , 1998, between Manor Care and the
Registrant.*
10.25 Form of Design Services Agreement, dated , 1998, between Manor Care and the Reg-
istrant.*
21.1 Subsidiaries of the Registrant.*
23.01 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1).*
27.01 Financial Data Schedule.
99.01 Schedule II--Valuation and Qualifying Accounts.**
</TABLE>
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* To be filed by amendment.
** Previously filed.
2
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED.
New ManorCare Health Services, Inc.
/s/ James H. Rempe
By: _________________________________
Name:James H. Rempe
Title: Senior Vice President,
General Counsel and
Secretary
Date: December 15, 1997
3
<PAGE>
[MANOR CARE, INC. LETTERHEAD]
, 1998
Dear Stockholder:
I am pleased to inform you that the Board of Directors of Manor Care, Inc.
has approved the separation of Manor Care into two public companies. This
separation will be achieved through a distribution to stockholders of all
outstanding shares of a new company named New ManorCare Health Services, Inc.
(to be renamed ManorCare Health Services, Inc.) ("ManorCare Health Services"),
which is being formed to own and operate Manor Care's assisted living business
and to operate and manage Manor Care's skilled nursing facilities. ManorCare
Health Services will also operate Manor Care's institutional pharmacy and home
health businesses.
Holders of record of Manor Care common stock on , 1998 will receive one
share of ManorCare Health Services for every share then held of Manor Care
common stock.
ManorCare Health Services will provide a full continuum of senior support
health care services through its ownership, operation and management of Manor
Care's assisted living facilities, its leasing, operation and management of
168 skilled nursing facilities owned by Manor Care, its ownership of Manor
Care's 50% joint venture interests in and operation of three additional
skilled nursing facilities, and its controlling interests in Vitalink Pharmacy
Services, Inc. (NYSE: VTK), which owns and operates institutional pharmacies,
and In Home Health, Inc. (NASDAQ: IHHI), which provides comprehensive health
care services to clients in their homes.
Manor Care, which will be renamed Manor Care Realty, Inc. ("Manor Care
Realty"), will own 168 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. In addition, Manor Care will continue to own
Mesquite Community Hospital.
The Board of Directors believes that the separation will significantly
improve each company's ability to raise equity capital on a cost-effective
basis to fund its expansion plans. The Board of Directors believes that
providing our shareholders the opportunity to have an investment in the growth
profiles of both these businesses, each with a distinct strategy for being a
major participant in the senior support health care industry, will offer them
significant and sustainable value.
MANORCARE HEALTH SERVICES
At the time of the distribution, Manor Care Realty will capitalize ManorCare
Health Services with approximately $250 million in cash and an intercompany
note in an aggregate principal amount of up to $250 million. This will provide
ManorCare Health Services with the financial foundation and flexibility it
needs to build itself into a leading participant in the assisted living
industry.
Over the next five years, ManorCare Health Services plans to acquire
approximately 200 new assisted living facilities to be newly developed by
Manor Care Realty. These and other potential acquisitions form the core of
ManorCare Health Services' strategy to become the nation's foremost provider
of high-quality senior support health care services within the private pay
segment.
Approximately 170 of the newly developed facilities will be Arden Courts,
which provide assistance to individuals suffering from early to middle-stages
of Alzheimer's disease or related memory impairment; approximately 38 new
facilities will be Springhouse senior residence facilities, serving the
general assisted living population.
<PAGE>
MANOR CARE REALTY
Over the past three years, Manor Care has established itself as a leader in
the high-growth, high-margin private pay segment of the assisted living
industry. The assisted living industry is currently experiencing unprecedented
market demand. Driven by America's aging population, increasing life
expectancies and health care industry trends toward greater diversity of
senior support care offerings and services, demand for assisted living
services is expected to continue to grow significantly over the next thirty
years.
Over the next five years, Manor Care Realty will focus on the site
selection, development and construction of approximately 200 assisted living
facilities for sale to ManorCare Health Services under a Development Agreement
between the two companies. Pursuant to a Development Agreement to be entered
into between Manor Care Realty and ManorCare Health Services, Manor Care
Realty will develop assisted living facilities for sale to ManorCare Health
Services. If at any time during the two-year period following the time a
particular facility opens occupancy reaches 75% for a period of five days,
ManorCare Health Services will be obligated to purchase the facility at a 15-
34% premium to total approved development costs of Manor Care Realty, based on
the number of months elapsed since the opening of the facility. In addition to
the income from these sales, Manor Care Realty will also benefit from Lease
Agreements, pursuant to which ManorCare Health Services will lease Manor Care
Realty's skilled nursing facilities.
The transaction also contemplates debt and equity financing by Manor Care
Realty sufficient to provide ManorCare Health Services with funding, financial
strength and flexibility necessary to execute its accelerated property
acquisition program.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding
ManorCare Health Services. We urge you to read it carefully. Holders of Manor
Care common stock are not required to take any action to participate in the
distribution. A stockholder vote is not required in connection with this
matter and accordingly, your proxy is not being sought.
We continue to be very excited about the growth prospects for the senior
support health care industry. We believe that as contemplated this transaction
maximizes the ability of both ManorCare Health Services and Manor Care Realty
to capitalize on the opportunities this growth represents for the betterment
of our shareholders.
Sincerely,
Stewart Bainum, Jr.
Chairman of the Board and
Chief Executive Officer
2
<PAGE>
[NEW MANORCARE HEALTH SERVICES, INC. LETTERHEAD]
, 1998
Dear Stockholder:
The enclosed Information Statement includes detailed information about New
ManorCare Health Services, Inc., (to be renamed ManorCare Health Services,
Inc.) the new company of which you will become a stockholder if you own shares
of Manor Care common stock on , 1998.
ManorCare Health Services is striving to become the foremost provider of
high-quality senior support health care services in the nation by providing a
full range of services covering an integrated continuum of care in
geographically clustered facilities. ManorCare Health Services will primarily
be engaged in the ownership, operation and management of assisted living
facilities through Arden Courts, which provide assistance to individuals
suffering from early to middle-stages Alzheimer's disease and related memory
impairment, and Springhouse facilities, which are focused on serving the needs
of the general assisted living population. In addition, ManorCare Health
Services will lease, operate and manage Manor Care's 168 skilled nursing
facilities, and will own a 50% joint venture interest in and operate and
manage three additional skilled nursing facilities currently owned by Manor
Care. ManorCare Health Services also will provide institutional pharmacy
services through its controlling interest in Vitalink Pharmacy Services, Inc.
and home health care services through its controlling interest in In Home
Health, Inc.
We are extremely excited about the growth prospects for the senior support
health care industry and our ability to develop a national reputation as the
leading provider of high quality senior support health care services.
We welcome you as a stockholder and look forward to your participation in
our future.
Sincerely,
Donald C. Tomasso
President
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN FILED +
+WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS INFORMATION STATEMENT SHALL +
+NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THESE +
+SECURITIES. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY AND SUBJECT TO COMPLETION, DATED DECEMBER 15, 1997
INFORMATION STATEMENT
NEW MANORCARE HEALTH SERVICES, INC.
(TO BE RENAMED MANORCARE HEALTH SERVICES, INC.)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Manor Care, Inc. ("Manor Care") to holders
of record of Manor Care common stock at the close of business on , 1998 (the
"Record Date") of one share of common stock, par value $.01 per share (the
"Common Stock"), of New ManorCare Health Services, Inc. (the "Company" or
"ManorCare Health Services"), for every share of Manor Care common stock owned
on the Record Date. The Distribution will result in 100% of the outstanding
shares of Common Stock of the Company being distributed to holders of Manor
Care common stock on a pro rata basis. The Distribution will be effective on
, 1998 (the "Effective Date"). Certificates representing the shares of
Common Stock will be mailed to Manor Care stockholders who so request as soon
as practicable after such request is received.
The Company is a newly formed company which, as a result of the transactions
entered into in connection with the Distribution, will (i) own the businesses
and assets of, and, subject to certain exceptions, be responsible for the
liabilities associated with, Manor Care's assisted living business, (ii)
operate and manage the 168 skilled nursing facilities owned by Manor Care, and
(iii) own a 50% joint venture interest in and operate and manage three
additional skilled nursing facilities. In addition, the Company owns
approximately 51% of Vitalink Pharmacy Services, Inc. ("Vitalink"), a public
company that operates institutional pharmacies, and owns 41% of the outstanding
common stock and 100% of the outstanding convertible voting preferred stock
(which, in the aggregate, constitutes 64% of the voting power) of In Home
Health, Inc. ("In Home Health"), a public company that provides comprehensive
health care services to clients in their homes.
No consideration will be paid by Manor Care's stockholders for the shares of
Common Stock. There is no current public trading market for the shares of
Common Stock, although it is expected that a "when-issued" trading market will
develop on or about the Record Date. Application has been made to list the
shares of Common Stock on the New York Stock Exchange under the symbol "MRH."
In reviewing this Information Statement, you should carefully consider the
matters described under the caption "RISK FACTORS."
-----------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE NOT REQUESTED TO TAKE ANY ACTION
WITH RESPECT TO YOUR SHARES.
-----------
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 SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Information Statement is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.................................................................. 1
SUMMARY FINANCIAL INFORMATION............................................ 8
INTRODUCTION............................................................. 10
THE DISTRIBUTION......................................................... 15
Reasons for the Distribution........................................... 15
Manner of Effecting the Distribution................................... 15
Solvency Opinion....................................................... 16
Federal Income Tax Consequences of the Distribution.................... 16
Listing and Trading of the Shares of Common Stock...................... 17
Future Management of the Company....................................... 18
RISK FACTORS............................................................. 19
Forward-Looking Information............................................ 19
Operating History and Future Prospects................................. 19
Dependence by the Company on Related Party Agreements.................. 20
Dependence on Manor Care Realty........................................ 21
Conflicts with Manor Care Realty....................................... 21
Fraudulent Transfer Considerations; Legal Dividend Requirements........ 22
Competition............................................................ 23
Regulation............................................................. 23
Staffing and Labor Costs............................................... 25
Dependence on Attracting Seniors with Sufficient Resources to Pay...... 26
Payment by Third-Party Payors.......................................... 26
Environmental Matters.................................................. 26
Absence of Prior Trading Market for the Common Stock................... 27
Significant Bainum Family Interest..................................... 27
Certain Tax Considerations............................................. 27
Common Stock Dividend Policy........................................... 27
The Year 2000 Issue.................................................... 28
RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION............................................................ 29
Lease Agreements Relating to Skilled Nursing Facilities................ 29
Development Agreement Relating to Assisted Living Facilities........... 32
Assisted Living Facility Management Agreement.......................... 33
Non-Competition Agreement.............................................. 33
Employee Benefits and Other Employment Matters Allocation Agreement ... 37
Employee Benefits Administration Agreement............................. 38
Office Lease Agreement................................................. 38
Distribution Agreement................................................. 39
Tax Sharing Agreement.................................................. 41
Tax Administration Agreement........................................... 41
Corporate Services Agreement........................................... 42
Trademark Agreement.................................................... 42
License Agreement...................................................... 42
Design Services Agreement.............................................. 42
Cash Management Agreement.............................................. 42
Risk Management Consulting Services Agreement.......................... 43
Realty Note............................................................ 43
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCING................................................................ 45
The Capital Contribution............................................... 45
Concurrent Manor Care Real Estate Financings........................... 45
The MCHS Credit Facility............................................... 45
New MCHS Senior Notes.................................................. 46
PRO FORMA CAPITALIZATION................................................. 47
PRO FORMA FINANCIAL DATA................................................. 48
SELECTED HISTORICAL FINANCIAL DATA....................................... 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION..................................................... 56
Introduction........................................................... 56
Overview And Outlook................................................... 56
Results of Operations.................................................. 57
Liquidity and Capital Resources........................................ 61
Property and Acquisitions.............................................. 62
Provision for Asset Impairment and Restructuring....................... 63
Forward-Looking and Cautionary Statements.............................. 63
Impact of Recently Issued Accounting Standards......................... 64
BUSINESS................................................................. 65
Overview............................................................... 65
Industry Trends........................................................ 66
Business Strategy...................................................... 67
Skilled Nursing Services............................................... 69
Assisted Living Services............................................... 70
Institutional Pharmacy Services........................................ 71
Home Health Care Services.............................................. 72
Employees.............................................................. 73
Properties............................................................. 73
Competition............................................................ 78
Government Funding..................................................... 79
Government Regulation.................................................. 80
Insurance.............................................................. 83
Legal Proceedings...................................................... 84
MANAGEMENT............................................................... 85
Executive Officers of the Company...................................... 85
Compensation of Executive Officers..................................... 86
Retirement Plans....................................................... 89
Option and Stock Purchase Plans........................................ 90
Employment Agreements.................................................. 91
THE BOARD OF DIRECTORS................................................... 92
Directors of the Company............................................... 92
Committees of the Board of Directors................................... 93
Non-Employee Director Plan............................................. 94
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.......................... 96
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BENEFICIAL OWNERSHIP OF MANAGEMENT......................................... 98
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................ 100
Common Stock............................................................. 100
Preferred Stock.......................................................... 100
Preemptive Rights........................................................ 100
PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS.............. 101
General.................................................................. 101
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS.................... 102
Elimination of Liability in Certain Circumstances........................ 102
Indemnification and Insurance............................................ 102
INDEPENDENT ACCOUNTANTS.................................................... 102
ADDITIONAL INFORMATION..................................................... 102
INDEX TO COMBINED FINANCIAL STATEMENTS..................................... F-1
</TABLE>
iii
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information and financial statements set
forth in this Information Statement, which should be read in its entirety. As
used herein, "Manor Care" refers to Manor Care, Inc. prior to the Distribution,
"Manor Care Realty" refers to Manor Care, Inc. after the Distribution and
"ManorCare Health Services" and the "Company" refers to New ManorCare Health
Services, Inc. (to be renamed ManorCare Health Services, Inc.) after the
Distribution.
MANORCARE HEALTH SERVICES
OVERVIEW
ManorCare Health Services believes that it is a leading provider of a full
range of senior support health care services. ManorCare Health Services
provides an array of services that includes skilled nursing, assisted living,
institutional pharmacy and home health care and additional support services for
the frail elderly living at home. ManorCare Health Services is striving to
become the nation's foremost provider of high-quality senior support health
care services within the private pay segment. In order to achieve this goal,
ManorCare Health Services is planning to focus on the rapid acquisition of
assisted living facilities in cluster markets pursuant to the Development
Agreement with Manor Care Realty. Under the Development Agreement, ManorCare
Health Services intends to acquire from Manor Care Realty approximately 170
Arden Courts and 38 Springhouse senior residences to be newly developed by
Manor Care Realty during the next five years. See "RELATIONSHIP BETWEEN MANOR
CARE REALTY AND THE COMPANY 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, and
operates and manages three additional skilled nursing facilities. The Company's
skilled nursing facilities are located in 28 states and contain approximately
24,079 beds. These facilities provide skilled nursing services principally for
residents over the age of 65. Within its skilled nursing facilities, ManorCare
Health Services operates 143 Arcadia special-care units which provide care to
individuals in the middle to late stages of Alzheimer's disease and 21
MedBridge high acuity units which focus on short-term, post-hospital care for
medically complex residents and those in need of aggressive physical
rehabilitation. ManorCare Health Services owns and operates 35 assisted living
facilities in 12 states containing 3,757 units. These facilities include 14
Arden Courts, serving persons with early to middle-stage Alzheimer's disease or
related memory impairment, and 21 Springhouse senior residences, serving the
general assisted living population. ManorCare Health Services also has majority
control of Vitalink Pharmacy Services, Inc, ("Vitalink"), one of the largest
public institutional pharmacy companies, and In Home Health Inc. ("In Home
Health"), a national home health care services company. Vitalink operates 57
institutional pharmacies in 36 states, serving approximately 172,000 beds. In
Home Health provides home health services in 14 states.
The Company's principal offices are located at 11555 Darnestown Road,
Gaithersburg, Maryland, 20878, and its telephone number is (301) 979-4000.
1
<PAGE>
THE DISTRIBUTION
DISTRIBUTING COMPANY............ Manor Care, Inc., a Delaware corporation.
DISTRIBUTED COMPANY.............
New ManorCare Health Services, Inc., a Dela-
ware corporation (to be renamed ManorCare
Health Services, Inc.), a newly formed com-
pany which will on the Effective Date (i) own
all of the business and assets of, and, sub-
ject to certain exceptions, be responsible
for the liabilities associated with, the as-
sisted living business conducted by Manor
Care and certain of its subsidiaries (the
"Assisted Living Business"), (ii) operate and
manage the 168 skilled nursing facilities
owned by Manor Care (the "Skilled Nursing Fa-
cilities"), (iii) own a 50% joint venture in-
terest in and operate and manage three addi-
tional skilled nursing facilities, (iv) own
approximately 51% of Vitalink, a public com-
pany that operates institutional pharmacies,
and (v) own approximately 64% of the voting
power of In Home Health, a public company
that provides health care services to clients
in their homes.
After giving pro forma effect to the Distri-
bution and related transactions as if they
occurred on August 31, 1997, (and assuming
the holders of 100% of the Old Senior Notes
(as defined below) accept the Exchange Offer
(as defined below)), ManorCare Health Serv-
ices would have assumed approximately (i)
$195.1 million of Manor Care's indebtedness,
(ii) liabilities relating to benefits and
workers' compensation of approximately $49.8
million, (iii) current liabilities of the
skilled nursing facilities of approximately
$55.5 million, and (iv) deferred tax liabili-
ties of approximately $38.4 million. In addi-
tion, pursuant to the Distribution Agreement,
ManorCare Health Services will assume certain
contingent liabilities of Manor Care. See
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND
THE COMPANY AFTER THE DISTRIBUTION - Distri-
bution Agreement."
On the Effective Date, ManorCare Health Serv-
ices will enter into the Development Agree-
ment with Manor Care Realty pursuant to which
ManorCare Health Services intends to acquire
from Manor Care Realty approximately 170
newly developed Arden Courts and 38 newly de-
veloped Springhouse senior residences during
the next five years. See "RELATIONSHIP BE-
TWEEN MANOR CARE REALTY AND THE COMPANY AFTER
THE DISTRIBUTION--Development Agreement."
PRIMARY PURPOSES OF THE The Board of Directors and management of
DISTRIBUTION................... Manor Care believe that the separation into
two public companies of Manor Care's health
care services business and the operation of
its
2
<PAGE>
health care real estate development activi-
ties, including site and market selection for
the development of skilled nursing and as-
sisted living facilities and construction re-
lated activities, by means of the Distribu-
tion will provide Manor Care with better ac-
cess to the equity capital markets and im-
prove Manor Care's capital-raising efficiency
since investors will be better able to assess
the different risk profiles and operating
characteristics of both companies. Manor Care
believes that it will be able to raise needed
equity capital on a more cost-effective basis
than would be available under Manor Care's
current structure. Manor Care Realty plans to
raise approximately $100 to $150 million in
equity in 1998. Raising a significant amount
of equity capital will provide Manor Care
with the necessary flexibility in its capital
structure to enable it to fund its expansion
plans on a timely and cost-effective basis
and pursue any material acquisitions which
Manor Care believes would enhance its compet-
itive position. There can be no assurances
that Manor Care Realty will be able to con-
summate an equity offering on terms accept-
able to it. See "RISK FACTORS--Certain Tax
Considerations." The Board of Directors and
management of Manor Care also believe that
the Distribution will enable each company to
focus its managerial resources on the devel-
opment of its business. See "THE DISTRIBU-
TION--Reasons for the Distribution."
DISTRIBUTION RATIO.............. Each Manor Care stockholder will receive one
share of common stock, par value $.01 per
share (the "Common Stock"), of the Company
for every share of Manor Care common stock
held on the Record Date.
TAX CONSEQUENCES................
Manor Care has received a private letter rul-
ing (the "Ruling") from the Internal Revenue
Service ("IRS") which provides, among other
things, that the Distribution will qualify as
a tax-free transaction under Section 355 of
the Internal Revenue Code of 1986, as amended
(the "Code") and that neither the stockhold-
ers of Manor Care nor Manor Care will recog-
nize any income, gain or loss as a result of
the Distribution. Nevertheless, if Manor Care
engages in the Distribution and the Distribu-
tion is held to be taxable, both Manor Care
Realty and stockholders of Manor Care could
recognize income or gain and thus become lia-
ble for the payment of a material amount of
income tax. See "THE DISTRIBUTION--Federal
Income Tax Consequences of the Distribution"
and "RISK FACTORS--Certain Tax Considera-
tions."
SHARES TO BE DISTRIBUTED........
Approximately shares of Common Stock will
be distributed pursuant to the Distribution
based on approximately shares of Manor
Care common stock outstanding on ,
1998. The shares to be distributed will con-
stitute 100% of the outstanding shares of
Common Stock of the Company.
3
<PAGE>
LISTING AND TRADING MARKET......
Application has been made to list the shares
of Common Stock on the New York Stock Ex-
change, Inc. ("NYSE") under the symbol "MRH."
RECORD DATE.....................
Close of business on , 1998.
EFFECTIVE DATE..................
, 1998.
MAILING DATE....................
Certificates representing the shares of Com-
mon Stock will be mailed to Manor Care stock-
holders who so request as soon as practicable
after such request is received.
DISTRIBUTION AGENT.............. ChaseMellon Shareholder Services, L.L.C., the
transfer agent for Manor Care.
DIVIDEND POLICY.................
It is currently contemplated that following
the Distribution, the Company will pay quar-
terly cash dividends on the shares of Common
Stock of $0.022 per share. Adjusted for stock
splits, Manor Care has paid a quarterly divi-
dend of $0.022 per share since 1987. The pay-
ment of dividends on the Common Stock will be
subject to the discretion of the Board of Di-
rectors of the Company and will depend upon,
among other things, the Company's financial
condition, capital requirements, funds from
operations, future business prospects and
such other factors as the Board may deem rel-
evant. See "RISK FACTORS--Common Stock Divi-
dend Policy."
RELATIONSHIP WITH MANOR CARE
REALTY AFTER THE
DISTRIBUTION...................
Following the Distribution, Manor Care Realty
will have a continuing relationship with the
Company as a result of the agreements being
entered into between Manor Care and the Com-
pany in connection with the Distribution, in-
cluding the Lease Agreements, the Development
Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agree-
ment, the Distribution Agreement, the Tax
Sharing Agreement, the Tax Administration
Agreement and various other agreements with
respect to among other things, employee bene-
fits, risk management and corporate and ad-
ministrative services.
Pursuant to the Lease Agreements, Manor Care
Realty will lease to ManorCare Health Serv-
ices all the Skilled Nursing Facilities owned
by Manor Care Realty and Manor Care Realty
will grant to ManorCare Health Services the
right to operate and manage the Skilled Nurs-
ing Facilities. The Lease Agreements provide
that Manor Care Realty will receive annual
lease payments equal to the greater of 10% of
the value of each facility (as agreed to by
Manor Care Realty and ManorCare Health Serv-
ices) or 77% of the Net Operating Profit (as
defined herein) of each facility. See "RELA-
TIONSHIP BETWEEN MANOR CARE REALTY AND THE
COMPANY AFTER THE DISTRIBUTION--Lease Agree-
ments Relating to Skilled Nursing Facili-
ties."
4
<PAGE>
Pursuant to the Development Agreement, Manor
Care Realty will develop assisted living fa-
cilities for sale to ManorCare Health Servic-
es. If at any time during the two-year period
following the time a particular facility
opens occupancy reaches 75% for a period of
five days, ManorCare Health Services will be
obligated to purchase the facility at a 15-
34% premium to total approved development
costs of Manor Care Realty, based on the num-
ber of months elapsed since the opening of
the facility. Total approved development
costs include expenses incurred in connection
with the development and construction of the
facilities, but do not include operating
losses incurred during the two-year stabili-
zation period. The premium to total approved
development costs is intended to compensate
Manor Care Realty for the increasing value of
its investment over time as well as for the
risks it takes in connection with developing
assisted living facilities, including the
risks inherent in operating the facilities
during the two year stabilization period.
Prior to purchase by ManorCare Health Servic-
es, ManorCare Health Services will operate
and manage the assisted living facilities for
Manor Care Realty for a fixed monthly fee
pursuant to the terms of the Assisted Living
Facility Management Agreement. See "RELATION-
SHIP BETWEEN MANOR CARE REALTY AND THE COM-
PANY AFTER THE DISTRIBUTION."
The Company and Manor Care Realty will share
two common directors. In addition, upon com-
pletion of the Distribution, Mr. Stewart
Bainum, Jr., who will be Chairman of the
Board of Manor Care Realty and ManorCare
Health Services, is expected to own benefi-
cially approximately 22.86% of the Common
Stock of Manor Care Realty and the Company.
The relationship between Manor Care Realty
and the Company may be subject to certain po-
tential conflicts of interest. See "RISK FAC-
TORS--Conflicts with Manor Care Realty" and
"RISK FACTORS--Significant Bainum Family In-
terest."
RISK FACTORS............... Stockholders should carefully consider the
matters discussed under the section entitled
"RISK FACTORS" in this Information Statement.
CONCURRENT FINANCINGS......
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
approximately $250 million in cash and an
intercompany senior note of Manor Care Real
Estate in an aggregate principal amount of up
to $250 million (the "Realty Note"). Manor
Care will utilize part of the proceeds from
the sale of the Manor Care Notes (as defined
below) and borrowings under the Credit
Facilities (as defined below) to fund the
cash portion of the Capital Contribution.
5
<PAGE>
In connection with the Distribution,
ManorCare Health Services, Inc., Manor Care's
principal operating subsidiary, will change
its name to Manor Care Real Estate Corp.
("Manor Care Real Estate"). Manor Care Real
Estate is offering $350 million aggregate
principal amount of % Senior Notes due 2008
(the "Manor Care Notes"). The Manor Care
Notes will be fully and unconditionally
guaranteed by Manor Care Realty and
substantially all of Manor Care Realty's
present and future subsidiaries, other than
certain unrestricted subsidiaries. See
"FINANCING--Concurrent Manor Care Real Estate
Financings."
In addition, Manor Care, on behalf of Manor
Care Real Estate, is negotiating a commitment
letter with The Chase Manhattan Bank
("Chase") and Chase Securities Inc. ("CSI")
relating to an eight-year $150 million term
loan facility, subject to earlier maturity
under certain circumstances, and a five-year
$300 million revolving credit facility
(collectively, the "Credit Facilities"). See
"FINANCING--Concurrent Manor Care Real Estate
Financings."
The Realty Note will contain substantially
the same terms as the Manor Care Notes. Manor
Care Realty may redeem the Realty Note after
three years at a redemption price equal to
100% of the principal amount thereof plus
accrued and unpaid interest. In addition,
ManorCare Health Services has agreed not to
transfer the Realty Note on or prior to the
six-month anniversary of the date of issuance
thereof. After such date, ManorCare Health
Services may transfer the Realty Note without
restriction subject to Manor Care Realty's
right to redeem the Realty Note. On or after
the third anniversary of the issuance of the
Realty Note, ManorCare Health Services may
request that Manor Care Realty redeem the
Realty Note. For a description of the Realty
Note, see "RELATIONSHIP BETWEEN MANOR CARE
REALTY AND THE COMPANY AFTER THE
DISTRIBUTION--The Realty Note." Also see
"RISK FACTORS--Dependence on Manor Care
Realty" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--Liquidity and Capital
Resources."
In addition, ManorCare Health Services is
negotiating a commitment letter with Chase
and CSI relating to a five-year $100 million
revolving credit facility. ManorCare Health
Services anticipates using borrowings under
the revolving credit facility for general
corporate purposes, including funding its
working capital requirements. See
"FINANCING-- MCHS Credit Facility."
6
<PAGE>
THE EXCHANGE OFFER......... ManorCare Health Services plans to offer to
exchange $1,000 principal amount of its 7
1/2% Senior Notes due 2006 (the "New MCHS Se-
nior Notes") for each $1,000 principal amount
of 7 1/2% Senior Notes due 2006 of Manor Care
(the "Old Senior Notes") properly tendered
(the "Exchange Offer"). In addition, consents
to certain amendments of the covenants gov-
erning the Old Senior Notes will be sought in
connection with the Exchange Offer. Consumma-
tion of the Exchange Offer is conditioned up-
on, among other things, acceptance of the Ex-
change Offer by holders of at least a major-
ity in principal amount of the Old Senior
Notes (the "Minimum Tender Condition") and
consummation of the Distribution. As a result
of the Exchange Offer, ManorCare Health Serv-
ices, not Manor Care Realty, will be the ob-
ligor on the New MCHS Senior Notes; and Manor
Care Realty, not ManorCare Health Services,
will remain the obligor on the Old Senior
Notes. See "FINANCING--New MCHS Senior
Notes."
CONDITIONS TO THE
DISTRIBUTION............... The Distribution is conditioned upon, among
other things, (i) the receipt of all
necessary regulatory approvals and consents
of third parties; (ii) the execution of the
agreements relating to the financing
necessary to consummate the Distribution and
the related transactions and the receipt of
the requisite funds pursuant to such
financing agreements; and (iii) the receipt
by the Board of Directors of Manor Care of an
opinion of a reputable appraisal or financial
advisory firm, in a form satisfactory to the
Board of Directors, with respect to the
solvency, prior to the Distribution, of Manor
Care and, after the Distribution, of each of
Manor Care Realty and ManorCare Health
Services (the "Solvency Opinion"). The Board
of Directors has reserved the right to waive
the receipt of the Solvency Opinion as a
condition to the consummation of the
Distribution, only in the event that the
Board of Directors is satisfied as to the
solvency of Manor Care, Manor Care Realty and
ManorCare Health Services and as to the
permissibility of the Distribution under
Section 170 of the Delaware General
Corporation Law. Manor Care has retained
American Appraisal Associates, Inc. to render
the Solvency Opinion. See "THE DISTRIBUTION--
Solvency Opinion."
7
<PAGE>
SUMMARY PRO FORMA AND HISTORICAL FINANCIAL DATA
The following table sets forth a summary of selected historical and pro forma
financial data for ManorCare Health Services. The historical financial data
relates to the businesses of ManorCare Health Services as they were operated as
part of Manor Care and may not necessarily be indicative of the results of
operations or financial position that would have been obtained if ManorCare
Health Services had been a separate, independent company during the periods
shown nor necessarily indicative of ManorCare Health Services' future
performance as an independent company. See "RISK FACTORS--Operating History and
Future Prospects." The historical statements of income data for the fiscal
years ended May 31, 1995, 1996 and 1997 and the historical balance sheet data
as of May 31, 1996 and 1997 are derived from the audited combined financial
statements of ManorCare Health Services. The historical statements of income
data for the three month period ended August 31, 1996 and 1997 and the
historical balance sheet data as of August 31, 1997 are derived from the
unaudited combined financial statements of ManorCare Health Services. The
historical financial data set forth below should be read in conjunction with
ManorCare Health Services' Combined Financial Statements and the notes thereto
found elsewhere in this Information Statement. The operations of ManorCare
Health Services will consist principally of the pharmacy operations, assisted
living operations and home health operations formerly conducted by Manor Care
directly or through Manor Care's subsidiaries. As such, historical statements
of income and other financial data include results of pharmacy, assisted living
and home health operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF MANORCARE HEALTH SERVICES' OPERATIONS AND FINANCIAL CONDITION." The
summary pro forma financial data for the fiscal year ended May 31, 1997 and the
three month period ended August 31, 1997 make adjustments to the historical
balance sheet and the historical statements of income, as if the Distribution
had occurred on August 31, 1997 for purposes of the pro forma balance sheet,
and on June 1, 1996 and June 1, 1997, respectively for purposes of the pro
forma statements of income. See "PRO FORMA FINANCIAL DATA OF MANORCARE HEALTH
SERVICES" and the accompanying footnotes for a discussion of the principal
adjustments made in the preparation of the pro forma financial information. The
pro forma financial statements of ManorCare Health Services may not reflect the
future results of operations or financial position of ManorCare Health Services
or what the results of operations would have been if ManorCare Health Services
had been a separate, independent company during such period. The pro forma
adjustments reflect the impact of the Distribution, Lease Agreements, Assisted
Living Facility Management Agreements, net additional costs associated with
general corporate functions, TeamCare (as defined herein) operations from June
1, 1996 to January 31, 1997 (the portion of the fiscal year prior to the
TeamCare Merger (as defined herein)), the issuance of the New MCHS Senior
Notes, and the related income tax effects of these adjustments. See "PRO FORMA
FINANCIAL DATA OF MANORCARE HEALTH SERVICES."
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED MAY 31, ENDED AUGUST 31,
---------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- -------- ---------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues.................. $125,987 $263,047 $471,152 $1,681,966 $86,253 $158,696 $436,932
Expenses:
Operating expenses...... 99,011 227,410 413,762 1,494,809 74,533 153,619 403,446
Depreciation and
amortization........... 6,090 11,583 20,135 27,797 3,718 7,199 6,939
General corporate and
other.................. 2,957 9,195 8,385 70,592 1,814 3,292 13,921
Provision for asset
impairment............. -- 1,200 -- -- -- -- --
-------- -------- -------- ---------- ------- -------- --------
Total expenses........ 108,058 249,388 442,282 1,593,198 80,065 164,110 424,306
-------- -------- -------- ---------- ------- -------- --------
Income before other income
and (expenses) and income
taxes.................... 17,929 13,659 28,870 88,768 6,188 (5,414) 12,626
Other income and
(expenses):
Gain on issuance of
Vitalink stock......... -- -- 50,271 50,271 -- -- --
Interest expense........ (3,898) (11,387) (17,317) (25,113) (3,840) (4,527) (4,228)
Interest income and
other.................. (1,152) 276 (1,719) 16,215 150 7,727 13,196
-------- -------- -------- ---------- ------- -------- --------
Income before income
taxes.................... 12,879 2,548 60,105 130,141 2,498 (2,214) 21,594
Income taxes.............. 6,055 1,437 23,917 55,074 1,273 750 9,841
-------- -------- -------- ---------- ------- -------- --------
Net income................ $ 6,824 $ 1,111 $ 36,188 $ 75,067 $ 1,225 $ (2,964) $ 11,753
======== ======== ======== ========== ======= ======== ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
----------------- --------------------
PRO FORMA
1996 1997 1997 1997
-------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $334,880 $787,377 $ 782,767 $1,412,392
Long-term debt......................... 51,387 180,843 193,308 312,808
Investments and advances from Manor
Care.................................. 193,807 277,066 277,235 --
Common stock and paid-in-capital....... -- -- -- 681,453
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, THREE MONTHS ENDED AUGUST 31,
---------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- --------- --------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)............... $ 24,019 $ 26,442 $ 49,005 $116,565 $ 9,906 $ 1,785 $ 19,565
EBITDA margin........... 19.06% 10.05% 10.40% 6.9% 11.48% 1.12% 4.48%
Ratio of EBITDA to
interest expense....... 6.16x 2.32x 2.83x 4.64x 2.58x 0.39x 4.63x
Cash provided (used) by
operating activities... 16,701 8,043 4,401 N/A 8,793 (11,015) N/A
Cash (used in) provided
by investing
activities............. (59,183) (86,603) (185,602) N/A (20,083) 6,938 N/A
Cash provided by
financing activities... 42,072 101,908 172,097 N/A 8,663 13,222 N/A
Investment in property
and equipment.......... 25,020 32,001 39,974 N/A 9,527 4,246 N/A
</TABLE>
- --------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including $1.2 million in
fiscal year 1996 relating to the impairment of assets. EBITDA is presented
to assist in understanding ManorCare Health Services' operating results.
Additionally, certain covenants in the MCHS Credit Facility are expected to
be calculated based on EBITDA. EBITDA is not intended to represent cash
flows for the period, is not presented as an alternative to operating
income as an indicator of operating performance, may not be comparable to
other similarly titled measures of other companies and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. The
items excluded from the calculation of EBITDA are significant components in
understanding and assessing the financial performance of ManorCare Health
Services. EBITDA is included herein to provide additional information with
respect to the ability of ManorCare Health Services to meet future debt
service, capital expenditures and working capital requirements. See
ManorCare Health Services' consolidated financial statements and the notes
thereto appearing elsewhere in this Information Statement.
9
<PAGE>
INFORMATION STATEMENT
FOR THE
STOCKHOLDERS OF MANOR CARE, INC.
----------------
INTRODUCTION
On , 1998, the Board of Directors of Manor Care, Inc., a Delaware
corporation ("Manor Care"), declared a distribution (the "Distribution")
payable to the holders of record of Manor Care's common stock, par value $.10
per share, at the close of business on , 1998 (the "Record Date"), of
one share of common stock, par value $.01 per share (the "Common Stock"), of
New ManorCare Health Services, Inc., a Delaware corporation, for every share
of Manor Care common stock outstanding on the Record Date. The Distribution
will occur on , 1998 (the "Effective Date"). As a result of the
Distribution, 100% of the outstanding shares of the Common Stock of the
Company will be distributed to Manor Care stockholders on a pro rata basis.
Certificates representing the shares of Common Stock will be mailed to Manor
Care stockholders on or about , 1998.
New ManorCare Health Services, Inc. is currently a wholly owned subsidiary
of Manor Care. New ManorCare Health Services, Inc. was formed for the purposes
of effecting the Distribution. ManorCare Health Services, Inc. is currently
Manor Care's principal operating subsidiary, engaged in the ownership,
operation and management of assisted living facilities and skilled nursing
facilities. Following consummation of the Distribution, Manor Care will change
its name to Manor Care Realty, Inc. ("Manor Care Realty"), ManorCare Health
Services, Inc. will change its name to Manor Care Real Estate Corp. ("Manor
Care Real Estate") and New ManorCare Health Services, Inc. will change its
name to ManorCare Health Services, Inc. ("ManorCare Health Services" or the
"Company").
THE DISTRIBUTION
Pursuant to the Distribution Agreement (the "Distribution Agreement") to be
entered into between Manor Care Realty and ManorCare Health Services, on or
prior to the Effective Date, Manor Care will convey or cause to be conveyed to
ManorCare Health Services (i) all of the business and assets of Manor Care's
assisted living business (the "Assisted Living Business"); (ii) the shares of
Common Stock owned by Manor Care of Vitalink Pharmacy Services, Inc., a public
company that owns and operates institutional pharmacies ("Vitalink");
(iii) the shares of Common and Preferred Stock owned by Manor Care of In Home
Health, Inc., a public company that provides comprehensive health care
services to clients in their homes ("In Home Health"); and (iv) the 50%
partnership interests (the "Joint Venture Interests") owned by Manor Care in
partnerships owning three additional skilled nursing facilities (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
Manor Care's 168 skilled nursing facilities (the "Skilled Nursing Facilities")
after the Effective Date, and (iii) the ownership of stock in Vitalink and In
Home Health and the ownership of the Joint Venture Interests, in each case
whether arising before, on or after the Distribution (collectively, the
"Assumption of Liabilities"). However, the assumption of such liabilities will
not release Manor Care Realty therefrom if ManorCare Health Services should
fail, for any reason, to perform its obligations pursuant to such assumed
liabilities. After giving pro forma effect to the Distribution and related
transactions as if they occurred on August 31, 1997, (and assuming the holders
of 100% of the Old Senior Notes accept the Exchange Offer), ManorCare Health
Services would have assumed approximately (i) $195.1 million of Manor Care's
indebtedness, (ii) liabilities relating to benefits and workers' compensation
of approximately $49.8 million, (iii) current liabilities of the Skilled
Nursing Facilities of approximately $55.5 million and (iv) deferred tax
liabilities of approximately $38.4 million. In addition, pursuant to the
Distribution Agreement, ManorCare Health Services will assume certain
contingent liabilities of Manor Care. See "RELATIONSHIP BETWEEN MANOR CARE
REALTY AND THE COMPANY AFTER THE DISTRIBUTION--Distribution Agreement."
10
<PAGE>
At or prior to the Distribution, Manor Care will make or cause to be made a
capital contribution (the "Capital Contribution") to ManorCare Health Services
consisting of (i) approximately $250 million in cash and (ii) an intercompany
senior note of Manor Care Real Estate in an aggregate principal amount of up
to $250 million (the "Realty Note"). For a description of the Realty Note, see
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION--The Realty Note." Also see "RISK FACTORS--Dependence on Manor
Care Realty" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION--Liquidity and Capital Resources." Manor
Care may determine to reduce the principal amount of the Realty Note prior to
issuance or to reduce the amount of the cash portion of the Capital
Contribution to the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer (as herein defined). See "--The Exchange
Offer."
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 $.10 per share (the "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.
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 in Mesquite Texas. ManorCare Health
Services will (i) own and operate all of the business assets of, and subject
to certain exceptions, be responsible for the liabilities associated with,
Manor Care's assisted living business, (ii) operate and manage the Skilled
Nursing Facilities, (iii) own the Joint Venture Interests and (iv) own all of
Manor Care's stock in Vitalink and In Home Health. Following the Distribution,
Manor Care Realty's principal sources of revenue will be payments from
ManorCare Health Services under the Lease Agreements, the proceeds of the sale
of assisted living facilities to ManorCare Health Services under the
Development Agreement, and revenues derived from the operation of Mesquite
Hospital. Following the Distribution, ManorCare Health Services' principal
sources of revenue will be derived from the operation of the skilled nursing
facilities and the assisted living facilities, and revenues from Vitalink and
In Home Health.
The Distribution is conditioned upon, among other things, (i) the receipt of
all necessary regulatory approvals and consents of third parties; (ii) the
execution of the agreements relating to the financing necessary to consummate
the Distribution and the related transactions and the receipt of the requisite
funds pursuant to such financing agreements; and (iii) the receipt by the
Board of Directors of Manor Care of the Solvency Opinion.
THE MANOR CARE REAL ESTATE DEBT OFFERING
In connection with the Distribution, Manor Care Real Estate is offering (the
"Debt Offering") $350 million aggregate principal amount of % Senior Notes
due 2008 (the "Manor Care Notes"). The Manor Care Notes will be fully and
unconditionally guaranteed by Manor Care Realty and substantially all of Manor
Care Real Estate's present and future subsidiaries, other than certain
unrestricted subsidiaries. The Manor Care Notes will rank senior to
subordinated indebtedness of Manor Care Real Estate and pari passu with all
other indebtedness of Manor Care Real Estate, including borrowings under the
Credit Facilities (as herein defined) and the Realty Note. Manor Care will
utilize part of the proceeds from the sale of the Manor Care Notes together
with borrowings under the Credit Facilities to fund the cash portion of the
Capital Contribution.
THE MANOR CARE REAL ESTATE CREDIT FACILITIES
Manor Care, on behalf of Manor Care Real Estate, is negotiating a commitment
letter with The Chase Manhattan Bank ("Chase") and Chase Securities Inc.
("CSI") relating to an eight-year $150 million term loan facility, subject to
earlier maturity under certain circumstances, and a five-year $300 million
revolving credit facility (collectively, the "Credit Facilities"). It is
anticipated that the Credit Facilities will be secured by
11
<PAGE>
a majority of the assets of Manor Care Realty and Manor Care Real Estate, by a
pledge of the capital stock of Manor Care Real Estate and Manor Care Realty's
other subsidiaries and by an assignment of certain agreements with ManorCare
Health Services. In addition, the Credit Facilities will be fully and
unconditionally guaranteed by Manor Care Realty and substantially all of Manor
Care Realty's present and future subsidiaries. Manor Care anticipates that the
Credit Facilities will be available, subject to the terms and conditions
thereof, for general corporate purposes and working capital purposes,
including funding development and operating costs and acquisitions. Borrowings
under the Credit Facilities will also be used together with part of the
proceeds from the sale of the Manor Care Notes to fund the cash portion of the
Capital Contribution.
THE EXCHANGE OFFER
In connection with the Distribution, New ManorCare Health Services, Inc. is
offering to exchange (the "Exchange Offer") $1,000 principal amount of its 7
1/2% Senior Notes due 2006 (the "New MCHS Senior Notes"') for each $1,000
principal amount of 7 1/2% Senior Notes due 2006 of Manor Care (the "Old
Senior Notes"). In connection with the Exchange Offer, Manor Care is
soliciting consents to certain amendments of the covenants governing the Old
Senior Notes. 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 and consummation of the
Distribution. As a result of the Exchange Offer, ManorCare Health Services,
not Manor Care Realty, will be the obligor on the New Senior Notes. Manor Care
may determine to reduce the principal amount of the Realty Note prior to
issuance to the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
THE MCHS CREDIT FACILITY
ManorCare Health Services is negotiating a commitment letter with Chase and
CSI relating to a five-year $100 million revolving credit facility (the "MCHS
Credit Facility"). ManorCare Health Services anticipates using the Capital
Contribution and borrowings under the revolving credit facility for general
corporate purposes, including capital expenditures in connection with the
expansion of the Assisted Living Business. See "FINANCING--The MCHS Credit
Facility" for a description of the MCHS Credit Facility.
RELATED PARTY AGREEMENTS
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements
being entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Lease Agreement, the Corporate Services
Agreement, the Trademark Agreement, the License Agreement, the Design Services
Agreement, the Cash Management Agreement, and the Risk Management Consulting
Services Agreement. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE
COMPANY AFTER THE DISTRIBUTION."
Pursuant to the Lease Agreements, Manor Care Realty will lease to ManorCare
Health Services the 168 Skilled Nursing Facilities owned by Manor Care Realty
and Manor Care Realty will grant to ManorCare Health Services the right to
operate and manage the Skilled Nursing Facilities. The Lease Agreements
provide that Manor Care Realty will receive annual lease payments equal to the
greater of 10% of the value of each facility (as agreed to by Manor Care
Realty and ManorCare Health Services) or 77% of the Net Operating Profit (as
defined herein) of each facility. Pursuant to the Development Agreement, Manor
Care Realty will develop assisted living facilities for sale to ManorCare
Health Services. If at any time during the two-year period following the time
a particular facility opens occupancy reaches 75% for a period of 5 days,
ManorCare Health Services will be obligated to purchase the facility at a 15-
34% premium to total approved development costs of Manor Care Realty, based on
the number of months elapsed since the opening of the facility. If ManorCare
Health Services does not acquire a facility within the two-year stabilization
period, Manor Care Realty will have
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the right to sell the facility to a third party. Total approved development
costs include expenses incurred in connection with the development and
construction of the facilities, but do not include operating losses incurred
during the two-year stabilization period. The premium to total approved
development costs is intended to compensate Manor Care Realty for the
increasing value of its investment over time as well as for the risks it takes
in connection with developing assisted living facilities, including the risks
inherent in operating the facilities during the two year stabilization period.
Prior to purchase by ManorCare Health Services, ManorCare Health Services will
operate and manage the assisted living facilities for Manor Care Realty for a
fixed monthly fee pursuant to the terms of the Assisted Living Facility
Management Agreement. The Non-Competition Agreement will impose certain non-
competition restrictions on each of ManorCare Health Services and Manor Care
Realty in connection with each entity's ability to participate in the skilled
nursing business and the assisted living business. See "RISK FACTORS" and
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE DISTRIBUTION"
for a more detailed description of the relationship between ManorCare Health
Services and Manor Care Realty after the Distribution and of the terms of the
Lease Agreements, the Development Agreement and the other agreements referred
to above.
Set forth below is a chart which illustrates the corporate structure of Manor
Care prior to the Distribution and the corporate structure of Manor Care Realty
and ManorCare Health Services after giving effect to the Distribution and
related transactions:
[CHART DEPICTING MANOR CARE, INC. BEFORE THE DISTRIBUTION]
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Stockholders of Manor Care with questions concerning the Distribution or the
trading of Manor Care common stock for the period generally between the Record
Date and the Effective Date should contact the Distribution Agent at 1-800-
851-9677. Other inquiries should be directed to the Investor Relations
Department of Manor Care, Inc., 11555 Darnestown Road, Gaithersburg, Maryland,
20878. Manor Care's telephone number is (301) 979-4408. After the Effective
Date, stockholders of the Company with inquiries relating to the Distribution
or their investment in the Company should contact the Investor Relations
Department of ManorCare Health Services, 11555 Darnestown Road, Gaithersburg,
Maryland, 20878. The Company's telephone number is (301) 979-4000.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
Manor Care reviews the performance of its business, operations and
investments on a regular basis in order to maximize the long-term value of
Manor Care for all its stockholders. As a result of this analysis, Manor Care
has determined to separate its Assisted Living Business and investments in
Vitalink and In Home Health as well as its management of the Skilled Nursing
Facilities from the operation of its health care real estate development
activities, including site and market selection for the development of its
facilities and construction related activities.
The Distribution is designed primarily to separate two entities with
distinct operating characteristics, creating two independent public companies:
ManorCare Health Services, an assisted living and health care services
management company; and Manor Care Realty, a skilled nursing and health care
real estate development company. The Board of Directors and management of
Manor Care believe this separation will better enable the financial community
to assess the different investment profiles, operating characteristics and
credit fundamentals of each resulting entity, thus providing each of ManorCare
Health Services and Manor Care Realty with greater financial flexibility to
implement its unique business strategies through enhanced and more cost-
effective access to public sources of equity capital.
Specifically, the Distribution is intended to provide ManorCare Health
Services with the financial strength and flexibility to execute its strategy
of acquiring 170 Arden Courts and 38 Springhouse senior residences during the
next five years. ManorCare Health Services believes this acquisition plan,
which is an integral part of its effort to become the nation's foremost
provider of high-quality senior support health care services within the
private pay segment, is necessary to consolidate its leadership position and
capitalize on opportunities for continued business growth and margin
expansion. Pursuant to the Development Agreement, these facilities will be
developed by Manor Care Realty, which, by virtue of the Distribution, will be
able to focus its management expertise and financial resources primarily on
developing purpose-built real estate products that meet the unique needs of
the senior population.
The Board of Directors and management of Manor Care also believe that the
Distribution will enable each company to focus its managerial resources on the
development of its business. Finally, the Distribution will allow investors to
better evaluate the fundamentals of Manor Care Realty's and ManorCare Health
Services' respective businesses and future outlooks, which the Company
believes will enhance overall stockholder value.
For the reasons stated above, the Manor Care Board of Directors believes
that the Distribution is in the best interests of Manor Care and its
stockholders.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in a Distribution Agreement, dated as of , 1998 (the "Distribution
Agreement"), between Manor Care and ManorCare Health Services. Pursuant to the
Distribution Agreement, on or prior to the Effective Date, Manor Care will
effect or cause to be effected the Contribution of Assets and the Assumption
of Liabilities. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY
AFTER THE DISTRIBUTION--Distribution Agreement."
In addition, on or prior to the Effective Date, Manor Care will make or
cause to be made the Capital Contribution. See "FINANCING." Following the
Contribution of Assets, Assumption of Liabilities and Capital Contribution,
Manor Care will effect the Distribution on the Effective Date by providing for
the delivery of the shares of Common Stock to the Distribution Agent for
distribution to the holders of record of Manor Care common stock on the Record
Date. The Distribution will be made on the basis of one share of Common Stock
for every share of Manor Care common stock outstanding on the Record Date. The
actual total number of shares of Common Stock to be distributed will depend on
the number of shares of Manor Care common stock
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outstanding on the Record Date. Based upon the number of shares of Manor Care
common stock outstanding on , 1998, approximately shares of Common
Stock will be distributed to Manor Care stockholders. The shares of Common
Stock will be fully paid and nonassessable, and the holders thereof will not
be entitled to preemptive rights. Certificates representing the shares of
Common Stock will be mailed to Manor Care stockholders who so request as soon
as practicable after such request is received. See "DESCRIPTION OF CAPITAL
STOCK OF THE COMPANY."
No holder of Manor Care common stock will be required to pay any cash or
other consideration for the shares of Common Stock received in the
Distribution or to surrender or exchange shares of Manor Care common stock in
order to receive shares of Common Stock. The Distribution will not affect the
number of outstanding shares of Manor Care Realty common stock.
SOLVENCY OPINION
The Distribution is conditioned upon, among other things, the receipt by the
Board of Directors of Manor Care of an opinion of a reputable appraisal or
financial advisory firm, in a form satisfactory to the Board of Directors, to
the effect that, assuming the Distribution and the transactions related
thereto are consummated as proposed: (i) with respect to each of Manor Care
Realty and ManorCare Health Services, immediately after giving effect to the
Distribution (a) the fair value of such company's aggregate assets would
exceed such company's total liabilities (including contingent liabilities);
(b) the present fair saleable value of such company's aggregate assets would
be greater than such company's probable liabilities on its debts as such debts
become absolute and mature; (c) such company would be able to pay its debts
and other liabilities (including contingent liabilities and other commitments)
as they mature; and (d) the capital remaining in such company after the
Distribution would not be unreasonably small for the business in which such
company is engaged, as management has indicated it is now conducted and is
proposed to be conducted following consummation of the Distribution; and (ii)
with respect to Manor Care, before consummation of the Distribution and the
transactions related thereto (a) the fair value of Manor Care's aggregate
assets would exceed its total liabilities (including contingent liabilities);
(b) the present fair saleable value of Manor Care's aggregate assets would be
greater than its probable liabilities on its debts as such debts become
absolute and mature; and (c) the excess of the value of the aggregate assets
of Manor Care, over the total identified liabilities (including contingent
liabilities) of Manor Care would equal or exceed the value of the Distribution
to stockholders plus the stated capital of the Company (the "Solvency
Opinion"). The Board of Directors has reserved the right to waive the receipt
of the Solvency Opinion as a condition to consummation of the Distribution.
The Board of Directors may not provide stockholders with notice if receipt of
the Solvency Opinion is waived as a condition to consummation of the
Distribution; however, the Board of Directors will waive such condition only
if the Board of Directors is satisfied as to the solvency of Manor Care, Manor
Care Realty and ManorCare Health Services and as to the permissibility of the
Distribution under Section 170 of the Delaware General Corporation Law
("DGCL").
The Company has engaged American Appraisal Associates, Inc. to provide such
an opinion and has agreed to pay American Appraisal Associates, Inc. a fee of
$20,000 upon execution of the commitment letter relating to the opinion, an
additional fee of $40,000 plus expenses upon delivery of a draft opinion and
another $10,000 plus expenses upon delivery of the final opinion.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Manor Care has received a private letter ruling (the "Ruling") from the IRS
which provides, among other things, that the Distribution will qualify as a
tax-free transaction under Section 355 of the Internal Revenue Code of 1986,
as amended (the "Code") and that neither the stockholders of Manor Care nor
Manor Care will recognize any income, gain or loss as a result of the
Distribution. The Ruling is based upon various factual representations that
were made to the IRS. If 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. See "RISK FACTORS--Certain Tax
Considerations."
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The following is a summary of the material Federal income tax consequences
of the Distribution assuming that it qualifies as a tax-free transaction under
Section 355 of the Code:
(1) Pursuant to Section 355 of the Code, Manor Care stockholders will not
recognize any income, gain or loss upon the receipt of the shares of Common
Stock.
(2) A Manor Care stockholder's tax basis for the Manor Care common stock
with respect to which shares of Common Stock are received will be
apportioned between such shares of Manor Care common stock and such shares
of Common Stock in proportion to the fair market values of each on the date
the shares of Common Stock are distributed to the Manor Care stockholder.
Such allocation must be calculated separately for each block of Manor Care
shares (shares purchased at the same time and at the same cost) with
respect to which the shares of Common Stock are received. The holding
period for the shares of Common Stock received in the Distribution will
include the period during which such Manor Care shares were held (provided
that such Manor Care shares are held as a capital asset at the time of the
Distribution).
(3) Neither Manor Care nor the Company will recognize any income, gain or
loss as a result of the Distribution.
Treasury regulations governing Section 355 of the Code require that each
Manor Care stockholder who receives shares of Common Stock pursuant to the
Distribution attach a statement to the Federal income tax return that will be
filed by the stockholder for the taxable year in which such stockholder
receives the shares in the Distribution, which statement shows the
applicability of Section 355 of the Code to the Distribution. Manor Care will
provide each Manor Care stockholder with information necessary to comply with
this requirement.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO STOCKHOLDERS WHO
RECEIVED THEIR SHARES THROUGH THE EXERCISE OF AN OPTION OR OTHERWISE AS
COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES OR WHO
ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE. ALL STOCKHOLDERS
SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL
AND FOREIGN TAX LAWS.
LISTING AND TRADING OF THE SHARES OF COMMON STOCK
Application has been made to list the shares of Common Stock on the New York
Stock Exchange, Inc. ("NYSE") under the symbol "MRH." The Company expects that
initially it will have approximately holders of record of the shares of
Common Stock, based on the number of stockholders of record of Manor Care on
, 1998.
A "when-issued" trading market is expected to develop on or about the Record
Date. The term "when-issued" means that shares can be traded prior to the time
certificates are actually available or issued. Prices at which the shares of
Common Stock may trade on a "when-issued" basis or after the Distribution
cannot be predicted. See "RISK FACTORS--Absence of Prior Trading Market for
the Common Stock."
The shares of Common Stock distributed to Manor Care stockholders will be
freely transferable, except for shares received by persons who may be deemed
to be "affiliates" of the Company under the Securities Act of 1933, as amended
(the "Securities Act"). Persons who may be deemed to be affiliates of the
Company after the Distribution generally include individuals or entities that
control, are controlled by, or are under common control with, the Company and
may include the directors and principal executive officers of the Company as
well as any principal stockholder of the Company. Persons who are affiliates
of the Company will be permitted to sell their shares of Common Stock only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act, including
an exemption contained in Rule 144 thereunder.
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FUTURE MANAGEMENT OF THE COMPANY
Following the Distribution, the business and operations of ManorCare Health
Services will continue to be operated substantially in the manner in which
they have been operated in the past and with substantially the same operating
management as at present. The seven principal executive officers of the
Company have an average of more than 15 years of industry experience.
Effective upon consummation of the Distribution, Mr. Stewart Bainum, Jr. will
resign as Chief Executive Officer of Manor Care. Mr. Bainum, Jr. will act as
Chairman of the Board of both ManorCare Health Services and Manor Care Realty.
See "MANAGEMENT--Executive Officers of the Company."
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RISK FACTORS
This Information Statement contains certain forward-looking statements
regarding the Company's future plans, operations and prospects, which involve
risks and uncertainties. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result
of certain of the factors set forth under "Risk Factors" and elsewhere in this
Information Statement.
FORWARD-LOOKING INFORMATION
This Information 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 the Company 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 the Company's operating results is the Company's 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 Information Statement including, among others (i) Manor Care Realty's
success in implementing its business strategy, including its success in
arranging financing where required, (ii) the nature and extent of future
competition and (iii) the extent of future reform and regulation.
OPERATING HISTORY AND FUTURE PROSPECTS
The Company was formed for the purpose of effecting the Distribution. The
Company does not have an operating history as an independent public company,
but will own and conduct the operations of the Assisted Living Business and
the stock of Vitalink and In Home Health previously owned and conducted by
Manor Care and will operate and manage the Skilled Nursing Facilities
previously operated and managed by Manor Care. On an historical basis, for the
three fiscal years ended May 31, 1997, the Company's businesses were
profitable. There can be no assurance, however, that the Company's operations
will be profitable in 1998 or future years. See "SELECTED HISTORICAL FINANCIAL
DATA" and "COMBINED FINANCIAL STATEMENTS."
The Company's future success will depend on a number of factors, including
(i) the level of demand for the Company's assisted living facilities and the
Skilled Nursing Facilities, (ii) the success of the Company's planned
expansion of its Assisted Living Business, (iii) the Company's ability to
manage and operate the Skilled Nursing Facilities, (iv) the substantial
competition encountered by the Company, see "--Competition" and "BUSINESS--
Competition," (v) the presence of existing governmental regulation and the
potential for health care reform which might be adverse to the Company, see
"--Regulation," and "BUSINESS--Government Regulation," (vi) the Company's
transition to an independent, public company and the costs associated
therewith and (vii) the future success of Vitalink and In Home Health.
The success of the Company's acquisition and expansion strategy depends, in
significant part, upon the anticipated development of assisted living
facilities by Manor Care Realty and in turn upon Manor Care Realty's ability
to obtain necessary financing, locate desirable sites, acquire property,
obtain local regulatory approvals and construct the facilities on schedule and
on budget. At or prior to the Distribution, Manor Care will utilize part of
the proceeds from the sale of the Manor Care Notes and borrowings under the
Credit Facilities to make or cause to be made the cash portion of the Capital
Contribution. The Company's acquisition and expansion strategy also depends,
in significant part, upon receipt of the Capital Contribution and upon the
Company's entering into the MCHS Credit Facility.
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DEPENDENCE BY THE COMPANY ON RELATED PARTY AGREEMENTS
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 Agreements.
Pursuant to the Development Agreement, Manor Care Realty will develop assisted
living facilities for sale to ManorCare Health Services. If at any time during
the two-year period measured from the time a particular facility opens
occupancy reaches 75% for a period of five days, ManorCare Health Services
will be obligated to purchase the facility. Such purchases shall be at fixed
prices based upon a stated premium to approved construction costs as
determined under the Development Agreement. If ManorCare Health Services does
not acquire a facility within the two-year stabilization period, Manor Care
Realty will have the right to sell the facility to a third party. Total
approved development costs include expenses incurred in connection with the
development and construction of the facilities, but do not include operating
losses incurred during the two-year stabilization period. The premium to total
approved development costs is intended to compensate Manor Care Realty for the
increasing value of its investment over time as well as for the risks it takes
in connection with developing assisted living facilities, including the risks
inherent in operating the facilities during the two-year stabilization period.
Pursuant to the Assisted Living Facility Management Agreement, ManorCare
Health Services will manage assisted living facilities for Manor Care Realty
for a fixed monthly fee during the two-year stabilization period under the
Development Agreement. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE
COMPANY AFTER THE DISTRIBUTION--Development Agreement." Accordingly, the risks
related to construction and the initial operation of the assisted living
facilities developed by Manor Care Realty will be borne by Manor Care Realty.
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. 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 the Company. 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 THE
COMPANY AFTER THE DISTRIBUTION--Lease Agreements."
The financial terms of the Lease Agreements were structured by Manor Care's
management under the general direction of Manor Care's Board of Directors to
create a risk/reward sharing arrangement at each of the Skilled Nursing
Facilities pursuant to which each of the companies would be fairly and
reasonably compensated for the contributions it made and the risks it assumed.
Manor Care did not seek proposals from unaffiliated third parties. Such a
solicitation would not have been practical in view of the proposed
relationship and make-up of the two companies to be parties to the Lease
Agreements. However, after the terms of the Lease Agreements were finalized,
Manor Care's Board of Directors reviewed them in light of the objectives
listed above taking into account that alternative third party proposals were
not solicited. Based on that review, the Board concurred with management's
judgement that the terms of the Lease Agreements are no less favorable to
either party than would be available from an unaffiliated third party.
Similarly, the financial terms of the Development Agreement and the Assisted
Living Facility Management Agreements were structured to achieve the following
objectives: (i) Manor Care Realty should receive a fair return on its capital
invested in developing new assisted living facilities; (ii) ManorCare Health
Services should be required to purchase a facility immediately upon its
achievement of a profitable occupancy level; and (iii) each party should
receive returns based on the risks assumed by that party pursuant to the terms
of the Distribution Agreement and the Assisted Living Facility Management
Agreement. After the terms of the Development Agreement and the Assisted
Living Facility Management Agreements were finalized, Manor Care's Board of
Directors reviewed them in light of the objectives listed above taking into
account that Manor Care
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Realty would be functioning substantially as ManorCare Health Services'
developer of assisted living facilities. Based on that review, the Board
concurred with management's judgement that the terms of the Development
Agreement and the Assisted Living Facility Management Agreements are no less
favorable to either party than would be available to an unaffiliated third
party.
DEPENDENCE ON MANOR CARE REALTY
The Company's core strategy contemplates the acquisition from Manor Care
Realty of 170 new Arden Courts facilities and 38 new Springhouse facilities
over the next five years. Under the Development Agreement, Manor Care Realty
will locate, develop and build these facilities for sale to the Company and,
pending their purchase by the Company, will own them for an occupancy
stabilization period of up to two years. The success of the Company's strategy
will thus depend in very significant part upon Manor Care Realty's capacity to
locate desirable sites, acquire property, obtain local regulatory approvals and
construct the facilities on schedule and on budget. The estimated cost to
complete these facilities is approximately $1.4 billion. Manor Care Realty's
ability to achieve its development goals will depend upon a variety of factors,
many of which are beyond Manor Care Realty's control, including Manor Care
Realty's ability to obtain necessary financing. As a result of the
Distribution, Manor Care Realty will be highly leveraged, with indebtedness
that is substantial in relation to its stockholders' equity. On a pro forma
basis after giving effect to the offering of the Manor Care Notes and the use
of proceeds thereof, the Distribution and related borrowings and assuming that
all holders of the outstanding Old Senior Notes accept the Exchange Offer, on
August 31, 1997, Manor Care Realty's aggregate outstanding indebtedness would
have been $805 million. This high degree of leverage may make it more difficult
for Manor Care Realty to secure short-term construction financing for these
facilities and will make Manor Care Realty 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 the Company. In addition, Manor Care Realty's high
degree of leverage could adversely affect Manor Care Realty's ability to pay
principal and interest on or to redeem the Realty Note and may adversely affect
the ability of ManorCare Health Services to sell the Realty Note. The failure
of Manor Care Realty to pay principal and interest on the Realty Note in a
timely manner or the inability of ManorCare Health Services to sell the Realty
Note to a third party for its principal amount could have a material adverse
effect on ManorCare Health Services . See "RELATIONSHIP BETWEEN MANOR CARE
REALTY AND THE COMPANY AFTER THE DISTRIBUTION."
CONFLICTS WITH MANOR CARE REALTY
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing relationships
between the companies. Such sources of conflict include the fact that after the
Distribution, (i) ManorCare Health Services will lease, manage and operate
Manor Care Realty's skilled nursing facilities pursuant to the Lease
Agreements, (ii) Manor Care Realty will develop assisted living facilities for
ManorCare Health Services and ManorCare Health Services will manage each of
those facilities until certain sustained occupancy targets are achieved, at
which point ManorCare Health Services will be obligated to purchase the
facility pursuant to the Development Agreement, (iii) pending the possible
purchase of an assisted living facility by ManorCare Health Services pursuant
to the terms of the Development Agreement, ManorCare Health Services will
manage the facility for a fixed monthly fee to be agreed upon with Manor Care
Realty, (iv) Manor Care Realty will be indebted to ManorCare Health Services as
a result of the Realty Note, (v) ManorCare Health Services and Manor Care
Realty will enter into the Non-Competition Agreement that will limit the
competition between the companies and (vi) ManorCare Health Services may manage
assisted living facilities not developed by Manor Care Realty. See
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION." With respect to these matters, the potential exists for
disagreements as to the quality of the services provided by the parties and as
to contract compliance. However, Manor Care believes that each of Manor Care
Realty and ManorCare Health Services will benefit from a strategic relationship
with the other entity created by the Lease Agreements, the Development
Agreement, the Assisted
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Living Facility Management Agreement and the other related party agreements. As
a result of this relationship, each company's revenues are dependent in part on
the other company and thus Manor Care believes that Manor Care Realty and
ManorCare Health Services will have a mutual interest in resolving any contract
compliance disagreements. ManorCare Health Services believes that there will be
sufficient mutuality of interest between the two companies to result in a
mutually productive relationship. However, despite the anticipated mutuality of
interest, each of Manor Care Realty and ManorCare Health Services will have
unique shareholder groups whose interests may differ from one another.
In addition, ManorCare Health Services and Manor Care Realty will have two
common directors, Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs.
Bainum, Jr. and Simmons, as well as certain other officers and directors of
ManorCare Health Services and Manor Care Realty will also own shares (and/or
options or other rights to acquire shares) in both companies following the
Distribution. Appropriate policies and procedures will be followed by the board
of directors of each company to limit the involvement of the overlapping
directors (and if appropriate, relevant officers of such companies) in conflict
situations, including requiring them to abstain from voting as directors of
either ManorCare Health Services or Manor Care Realty. Such procedures will
include requiring Messrs. Bainum, Jr. and Simmons (or such other executive
officers or directors having a significant ownership interest in both
companies) to abstain from voting as directors of either company, with respect
to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest situation exists
will be determined on a case-by-case basis depending on 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 the Company or Manor Care Realty and the
likelihood that resolution of the matter will have significant strategic,
operational or financial implications for the business of the respective
companies.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that the Board of
Directors of Manor Care shall have received a satisfactory opinion regarding
the solvency of Manor Care and ManorCare Health Services and the permissibility
of the Contribution of Assets, the Assumption of Liabilities, the Capital
Contribution and the Distribution under the requirements of Section 170 of the
DGCL of Manor Care's net assets following the Distribution. See "THE
DISTRIBUTION--Solvency Opinion." The solvency opinion will address certain
factual matters relevant to an assessment of the legality of the Distribution
under Delaware law, but will not constitute a legal opinion and will not be
delivered by a firm qualified to practice law in Delaware. Manor Care's Board
of Directors does not intend to consummate the Distribution unless it is
satisfied regarding the solvency of Manor Care and ManorCare Health Services
and the permissibility of the Distribution under Section 170 of the DGCL. There
is no certainty, however, that a court would reach the same conclusion.
If a court in a lawsuit by an unpaid creditor or representatives of creditors
such as a trustee in bankruptcy were to find that, at the time Manor Care
effected the Distribution, Manor Care or ManorCare Health Services, as the case
may be, (i) (a) was insolvent, (b) was rendered insolvent by reason of the
Distribution, (c) was engaged in a business or transaction for which its
remaining assets, as the case may be, constituted unreasonably small capital,
or (d) intended to incur, or believed it would incur, debts beyond its ability
to pay as such debts matured and received less than fair consideration or
reasonably equivalent value or (ii) made this Distribution with actual intent
to hinder, delay or defraud existing or future creditors of Manor Care, such
court may be asked to void the Distribution (in whole or in part) as a
fraudulent conveyance and require that the stockholders return the distribution
(in whole or in part) to Manor Care, or require Manor Care or ManorCare Health
Services, as the case may be, to fund certain liabilities of the other company
for the benefit of creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the jurisdiction whose law is being applied.
Generally, however, Manor Care or ManorCare Health Services, as the case may
be, would be considered insolvent if the fair value of their respective assets
were less than the amount of their respective liabilities or if they incurred
debt beyond their ability to repay such debt as it matures. In addition, under
Section 170 of the
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DGCL (which is applicable to Manor Care in the Distribution) a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
Manor Care's Board of Directors and management believe that, in accordance
with the solvency opinion rendered in connection with the Distribution, both
prior to and immediately following the consummation of the Distribution, (i)
Manor Care, Manor Care Realty and ManorCare Health Services each (a) will be
solvent (in accordance with the foregoing definitions), (b) will be able to
repay its debts as they mature, and (c) will have sufficient capital to carry
on its businesses and (ii) the Distribution will be made entirely out of Manor
Care's surplus, as required under Section 170 of the DGCL. Manor Care's Board
of Directors and management further believe that neither Manor Care nor
ManorCare Health Services is entering into the Distribution with any actual
intent to hinder, delay or defraud existing or future creditors of Manor Care
Realty or ManorCare Health Services.
COMPETITION
The Company 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, the Company expects that the assisted living industry will become
increasingly competitive in the future. Some of the Company's present and
potential competitors have, or may have access to, greater financial resources
than those of the Company and may be more established in their respective
communities than the Company. Consequently, increased competition in the future
could limit the Company's 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 the Company. See
"BUSINESS--Competition."
REGULATION
General. Health care is an area of extensive and frequent regulatory change.
The Federal government and all states in which the Company operates regulate
various aspects of the Company's 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. The Company is also subject to inspection regarding record keeping
and inventory control. Failure of the nursing centers to be in substantial
compliance with licensure and certification laws, rules and regulations could
result in loss of certification as a Medicare and Medicaid provider and/or a
loss of licensure. The Company's assisted living facilities are subject to
varying degrees of regulation and licensing by local and state health and
social health and social service agencies and other regulatory authorities
specific to their location. While regulations and licensing requirements often
vary significantly from state to state, they typically address, among other
things: personnel education, training and records; facility services, including
administration of medication, assistance with supervision of medication
management and limited nursing services; physical plant specifications;
furnishing of resident units; food and housekeeping services; emergency
evacuation plans; and resident rights and responsibilities. In most states,
assisted living facilities also are subject to state or local building codes,
fire codes and food service licensure or certification requirements. In
addition, since the assisted living industry is relatively new, the manner and
extent to which it is regulated at the Federal and state levels are evolving.
Changes in the laws or new interpretations of existing laws as applied to the
Assisted Living Business may have a significant impact on the Company's methods
and costs of doing business. Failure of the assisted living facilities to be in
compliance with licensing requirements could result in loss of licensure.
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Licensing. The Company's 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 the Company. 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 the Company.
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 the Company. See "BUSINESS--Government
Regulation."
Medicare Payment System. 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. Under 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
the Company. See "BUSINESS--Government Regulation."
Anti-Remuneration Laws. The Company is also subject to Federal and state laws
which govern financial and other arrangements between health care providers.
These laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the Federal
"Stark Legislations" which prohibit, with limited exceptions, the referral of
patients for certain services, including home health services, physical therapy
and occupational therapy, by a physician to an entity in which the physician
has an ownership interest and the Federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients or
the purchasing, leasing, ordering or arranging for any goods, facility services
or items for which payment can be made under Medicare and Medicaid. The Federal
government, private insurers and various state enforcement agencies have
increased their scrutiny of providers, business practices and claims in an
effort to identify and prosecute fraudulent and abusive practices. In addition,
the Federal government has issued recent fraud alerts concerning nursing
services, double billing, home health services and the provision of medical
supplies to nursing facilities; accordingly, these areas may come under closer
scrutiny by the government. Furthermore, some states restrict certain business
relationships between physicians and other providers of health care services.
Many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs
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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 the Company. Failure
to comply with such laws can result in civil money penalties, exclusion from
the Medicare and Medicaid programs, and criminal convictions. See "BUSINESS--
Government Regulation."
Certificate of Need Laws. Many states have adopted Certificate of Need or
similar laws which generally require that the appropriate state agency approve
certain acquisitions and determine that a need exists for certain bed
additions, new services and capital expenditures or other changes prior to beds
and/or new services being added or capital expenditures being undertaken. To
the extent that Certificates of Need or other similar approvals are required
for the expansion of Company operations, either through facility acquisitions
or expansion or provision of new services or other changes, such expansion
could be adversely affected by the failure or inability to obtain the necessary
approvals, changes in the standards applicable to such approvals and possible
delays and expenses associated with obtaining such approvals. Manor Care has
extensive experience filing for CONs. During the period from 1987 to the
present, Manor Care completed 64 new skilled nursing facilities, most of which
required CON applications. During the past four fiscal years, Manor Care
received CON approval for 13 skilled nursing facilities and 18 assisted living
facilities. See "BUSINESS--Government Regulation."
Medicaid Waiver Program. Certain states provide for Medicaid reimbursement
for assisted living services pursuant to Medicaid Waiver Programs permitted by
the Federal government. In the event the Company elects to provide services in
states with a Medicaid Waiver Program, the Company may then elect to become
certified as a Medicaid provider in such states. As a provider of services
under the Medicaid Waiver Program, the Company 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. The Company 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
the Company's business, results of operations or financial condition. See
"BUSINESS--Government Regulation."
Related Party Rule. The Medicare related party rule applies to companies that
are associated or affiliated with or have control of, or are controlled by, a
Medicare provider. The Medicare program may consider Vitalink and In Home
Health to be related parties with the Company. Consequently, unless there is a
qualification for a waiver of the related party rule, the Medicare program will
only reimburse for the cost incurred by the related party in providing products
or services, rather than their charges. An organization can qualify for an
exception from the related party rule by meeting the following criteria: (i)
the entities are bona-fide separate organizations; (ii) a substantial part of
the supplying organization's business activity is conducted with non-related
organizations and there is an open, competitive market for such services or
products; (iii) the services or products are commonly obtained by a provider
from other organizations and are not a basic element of patient care ordinarily
furnished directly to patients by the provider; and (iv) the charge to the
provider is in line with the charge for such services and products in the open
market and no more than the charge made under comparable circumstances to
others. The Medicare related party rule could materially affect the
relationship among the Company, Manor Care Realty, Vitalink and In Home Health.
Home Health Care Moratorium. On September 15, 1997, President Clinton issued
a Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be proposed to combat fraud.
Given the short duration of the moratorium and the fact that the moratorium
only pertains to new home health providers, the Company does not believe that
there will be any material adverse affect on either In Home Health or on the
Company as a result thereof.
STAFFING AND LABOR COSTS
The Company competes with various health care providers, including other
assisted living and skilled nursing providers, with respect to attracting and
retaining qualified or skilled personnel. The Company also
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depends on the available labor pool of low-wage employees. A shortage of nurses
or other trained personnel or general inflationary pressures may require the
Company to enhance its wage and benefits package in order to compete. There can
be no assurance that the Company's labor costs will not increase or, if they
do, that such costs can be matched by corresponding increases in revenues. Any
significant failure by the Company 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 the
Company's business, operating results and financial condition. See "BUSINESS--
Employees."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently, and for the foreseeable future, expects to rely
primarily on the ability of the residents of its assisted living facilities to
pay the Company's 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 the Company's assisted living facilities
are located are expected to be able to afford the Company's fees. Inflation or
other circumstances that adversely affect the ability of seniors to pay for the
Company's services could have an adverse effect on the Company. If the Company
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.
PAYMENT BY THIRD-PARTY PAYORS
A portion of the Company's revenues from the services it provides for the
Skilled Nursing Facilities will be dependent upon reimbursement from third-
party payors, including Medicare, state Medicaid programs and private insurers.
For the fiscal year ended May 31, 1997, the Skilled Nursing Facilities to be
operated by the Company derived approximately 55% of their patient service
revenue from private pay sources, 19% from Medicare and 26% from various state
Medicaid agencies in each case as they were operated by Manor Care. As of May
31, 1997, all of the patients at Manor Care's assisted living facilities were
private pay. Both governmental and private third-party payors have employed
cost containment measures designed to limit payments made to health care
providers such as the Company. 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 the Company 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 the Company, now or in the future will initially meet or continue to meet
the requirements for participation in such programs. The Company 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. The Company 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 the Company. 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
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these laws to fines, criminal penalties and other enforcement actions. The
Company 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. The Company believes that it is in
material compliance with applicable laws and regulations governing medical,
infectious and hazardous waste. See "BUSINESS--Government Regulation--
Environmental Regulation."
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public trading for the Common Stock,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. Application has been made to list the Common Stock on
the NYSE. There can be no assurance either as to the prices at which the Common
Stock will trade before or after the Effective Date. Until the Common Stock is
fully distributed and an orderly market develops, the prices at which such
shares trade may fluctuate significantly. Prices for shares of Common Stock
will be determined in the marketplace and may be influenced by many factors,
including the depth and liquidity of the market for the shares, investor
perception of the Company, changes in economic conditions in the assisted
living and skilled nursing industries and general economic and market
conditions. In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations, as well as economic
conditions, may adversely affect the market price of the shares of Common
Stock.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.22% and 22.86%,
respectively, of the Common Stock, in each case including shares with respect
to which voting power is shared with each other and other individuals or
entities. Collectively, members of the Bainum family are expected to own
beneficially approximately 29.95% of the Common Stock. In addition, Mr. Bainum,
Jr. will be Chairman of the Board of the Company. As a result, the Bainum
family may be in a position to influence significantly the affairs of the
Company, including the election of directors. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS."
CERTAIN TAX CONSIDERATIONS
Manor Care has received the Ruling from the IRS which provides, among other
things, that the Distribution will qualify as a tax-free transaction under
Section 355 of the Code and that neither the stockholders of Manor Care nor
Manor Care will recognize any income, gain or loss as a result of the
Distribution. The Ruling is based upon various factual representations that
were made to the IRS. If any such factual representations are determined to be
inaccurate, absent the receipt of a supplemental ruling from the IRS, the
Ruling generally cannot be relied upon by any party. There can be no assurance
that, in such an event, Manor Care Realty would be able to obtain a
supplemental ruling from the IRS. If Manor Care engages in the Distribution and
the Distribution is held to be taxable, both Manor Care Realty and stockholders
of Manor Care could recognize income or gain and thus become liable for the
payment of a material amount of income tax.
COMMON STOCK DIVIDEND POLICY
It is currently contemplated that following the Distribution, the Company
will pay quarterly cash dividends on the shares of Common Stock of $0.022 per
share. Adjusted for stock splits, Manor Care has paid a quarterly dividend of
$0.022 per share since 1987. Subject to the Company's financial results and
declaration by the Board of Directors, the Company currently intends to pay its
first dividend in , 1998. Although the Company currently intends to declare
and pay dividends, the declaration and payment of dividends is at the
discretion of the Company's Board of Directors. The Delaware General
Corporation Law also prohibits the Company from paying dividends or otherwise
distributing funds to its stockholders, except out of legally available funds.
The declaration of dividends and the amount thereof will depend on a number of
factors, including the Company's financial condition, capital requirements,
funds from operations, future business prospects and such other factors as the
Board of Directors of the Company may deem relevant. No assurance can be given
that the Company will pay any dividends.
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THE YEAR 2000 ISSUE
The Company has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue,
which affects most corporations, concerns the inability of information systems,
primarily computer software programs, to properly recognize and process date
sensitive information relating to the year 2000 and beyond. The Company is in
the process of determining the costs and expenditures associated with the Year
2000 Issue and has several information system improvement initiatives underway
to ensure that the Company's computer systems will be Year 2000 compliant. The
Company is expected to incur expenditures of approximately $6 to $8 million
over the next few years to address this issue. The failure by third party
payors, such as private issuers, managed care organizations, health maintenance
organizations, preferred provider organizations and federal and state
government agencies that administer Medicare and/or Medicaid, to adequately
address their year 2000 Issues could adversely affect ManorCare Health
Services.
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RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY
AFTER THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between Manor
Care Realty and the Company 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 the Company 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
License Agreement, the Design Services 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, the forms of such agreements, copies of which are filed as
exhibits to the Registration Statement of which this Information Statement
forms a part. See "RISK FACTORS--Conflicts With Manor Care Realty."
LEASE AGREEMENTS RELATING TO SKILLED NURSING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into Lease
Agreements (each a "Lease Agreement," and collectively the "Lease
Agreements"), pursuant to which Manor Care Realty will lease to ManorCare
Health Services all the Skilled Nursing Facilities owned by Manor Care, and
Manor Care Realty will grant to ManorCare Health Services, the right to
operate and manage, pursuant to the Lease Agreements, all of Manor Care
Realty's current skilled nursing facilities and, by separate agreement, its
future skilled nursing facilities. Under each Lease Agreement, ManorCare
Health Services' use of the subject facility will be limited to operating a
skilled nursing facility together with such other ancillary uses as exist on
the Effective Date at such facility. Manor Care Realty and ManorCare Health
Services will also enter into Lease Agreements or similar arrangements
pursuant to which ManorCare Health Services will also lease and operate two
skilled nursing facilities in which Manor Care Realty is a substantial equity
investor by joint venture, common ownership or otherwise.
Under the Lease Agreements, ManorCare Health Services will operate and
manage the facilities and will collect all revenues from the facilities. Under
the Lease Agreement for each facility, ManorCare Health Services will be
obligated to pay Manor Care Realty annual rent ("Premises Rent") equal to the
greater of (i) 77% of Net Operating Profit and (ii) a value of the subject
facility agreed upon by ManorCare Health Services and Manor Care Realty (the
"Priority Basis") multiplied by 10%; provided that the Premises Rent for a
specific Lease Year may be reduced below these two amounts as a result of the
deferral mechanism described below. Manor Care Realty and ManorCare Health
Services have determined that Premises Rent for the fiscal year ended May 31,
1998 will be paid on an aggregate portfolio basis, not on a facility by
facility basis. The Premises Rent on a facility is payable in installments
(each "Monthly Premises Rent"), as follows: (i) on the first day of each
calendar month of each Lease Year, commencing with the first day of the month
following the month in which the commencement date of the Lease Agreement
occurs, ManorCare Health Services shall pay to Manor Care Realty an amount
equal to one-twelfth of 10% of the Priority Basis (the "Monthly Priority
Sum"); and (ii) on or before the fifteenth day of each calendar month of each
Lease Year, commencing with the fifteenth day of the month following the month
in which the commencement date of the Lease Agreement occurs, if 77% of the
Net Operating Profit for the Lease Year to date is greater than 10% of the
Priority Basis (the "Priority Sum") multiplied by a fraction the numerator of
which is the number of days that have passed in the applicable Lease Year and
the denominator of which is 365, ManorCare Health Services shall pay to Manor
Care Realty an amount equal to such excess; and (iii) on or before the
fifteenth day of each calendar month of each Lease Year, commencing with the
fifteenth day of the month following the month in which the commencement date
of the Lease Agreement occurs, if the Net Operating Profit for the Lease Year
to date is less than the Priority Sum allocable to the Lease Year to date,
Manor Care Realty shall repay to ManorCare Health Services an amount
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equal to such deficiency. Such deficiency amounts paid by Manor Care Realty to
ManorCare Health Services are referred to as "Deferred Premises Rent." The
Priority Basis for each skilled nursing facility will be a predetermined
dollar value for each facility agreed upon by ManorCare Health Services and
Manor Care Realty and will not be subject to increase based upon increases in
the cost of living or inflation. In determining the Priority Basis for each
facility, the parties reviewed, among other things, historical and projected
cash flows, costs of recent capital improvements, the location of the facility
and relevant market conditions. The computation of Net Operating Profit
includes as a Project Expense an amount equal to 6% of Project Revenues
("Tenant's Base Fee"), which is in effect a base fee out of Project Revenues
which ManorCare Health Services is entitled to retain without reduction.
Project Revenues generally include all revenues and income derived by
ManorCare Health Services from the facilities. Project Expenses generally
include all expenses incurred by ManorCare Health Services to comply with its
obligations under the Lease Agreements including Tenant's Base Fee; provided
however that Project Expenses do not include Premises Rent.
Deferred Premises Rent may be deferred until such time as Net Operating
Profit is available to pay it; provided that as of the first day of each new
Lease Year all Deferred Premises Rent for the prior Lease Year which has not
become due and payable shall be deemed cancelled and extinguished and shall
not thereafter be due and payable. To the extent that Net Operating Profit
supports less than all Monthly Premises Rent and Deferred Premises Rent then
due, payments made with respect thereto shall be deemed to be made first to
Deferred Premises Rent (from longest to shortest outstanding) and then to
Monthly Premises Rent. The total amount of fiscal 1997 rent which could have
been deferred and ultimately canceled is approximately $10.3 million relating
to 23 facilities. Approximately $6.6 million of this amount relates to 12
recently acquired, renovated or developed facilities which are anticipated to
pay rent at least equal to Priority Sum within the next two fiscal years.
Each facility will be operated pursuant to an Operating Budget (as defined
in the Lease Agreements). The Operating Budget for the period ending May 31,
1998 will be attached to each of the Lease Agreements as an exhibit. The
Operating Budget for each facility for the period from June 1, 1998 through
May 31, 1999 will be agreed upon by Manor Care Realty and ManorCare Health
Services. Thereafter, each Operating Budget will not be subject to Manor Care
Realty's approval unless (i) the Net Operating Profit for the Lease Year (as
defined in the Lease Agreements) immediately prior to the Lease Year with
respect to which the Operating Budget in question is being prepared was less
than the greater of (a) the Priority Sum and (b) 90% of budgeted Net Operating
Profit for such Lease Year or (ii) budgeted Net Operating Profit for the
current Lease Year is less than the greater of (a) the Priority Sum for the
current Lease Year and (b) 90% of budgeted Net Operating Profit for the prior
Lease Year. ManorCare Health Services will have the right to use 2.75% of
aggregate Project Revenues (aggregated across all facilities under all Lease
Agreements) for maintenance capital expenditures at the facilities. Manor Care
Realty shall reimburse ManorCare Health Services for all such maintenance
capital expenditures. In addition, each year, ManorCare Health Services must
prepare and submit to Manor Care Realty for approval a budget setting forth
ManorCare Health Services' estimate of the cost of performing proposed revenue
generating alterations, additions and improvements of the facilities (i.e.,
major capital expenditures). Manor Care Realty may withhold its approval in
its absolute discretion. Manor Care Realty will reimburse ManorCare Health
Services for all approved expenditures. If Manor Care Realty withholds its
approval and ManorCare Health Services believes that the proposed revenue
generating items are reasonably necessary to the maintenance of the facility
as a competitive, efficient and economical operation, ManorCare Health
Services may elect to terminate the subject Lease Agreement effective as of
the first anniversary of the date of ManorCare Health Services' election. If
Manor Care Realty disputes ManorCare Health Services' belief, the dispute
shall be resolved by arbitration. In the event the arbitrator decides in favor
of Manor Care Realty, ManorCare Health Services' notice of termination will be
deemed void ab initio.
The Lease Agreements provide that ManorCare Health Services, on behalf of
the underlying property, will have the right to enter into service agreements
with its affiliates, provided, among other conditions, that such services are
competitively priced. In addition, Manor Care Realty will have the right to
mortgage all or any part of its interest in each facility if such financing is
a financing secured by more than [ ] facilities. If such financing is secured
by less than [ ] facilities, Manor Care Realty will have the right to mortgage
its interest in each facility
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to the extent of 90% of the Priority Basis with respect to each facility. The
foregoing limitations will not apply to any indebtedness to the extent secured
by certain properties held directly by Manor Care Real Estate Corp. in
Pennsylvania. Any such mortgage will be superior to the Lease Agreements;
provided that the holder of any such mortgage will deliver to ManorCare Health
Services a non-disturbance agreement. Each Lease Agreement will have an
initial term of five years with up to thirty-four one year renewals at the
option of ManorCare Health Services; provided that in certain states total
lease terms will not exceed the maximum term permitted by statute such that
such Lease Agreement will not be deemed a change of ownership for real estate
transfer tax purposes.
Manor Care Realty will have the right to terminate a Lease Agreement in the
event that (i) either (a) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive twelve-month Lease Years or
(b) actual Net Operating Profit fails to exceed the Priority Sum for two
consecutive twelve-month Lease Years, subject to ManorCare Health Services'
right to cure with respect to one year only by making a cash payment to Manor
Care Realty of such deficiency plus 5% of 90% of budgeted Net Operating Profit
or 5% of the Priority Sum, as applicable, (ii) the facility is decertified as
a skilled nursing facility, is disqualified from participation in Medicare or
Medicaid or ManorCare Health Services loses its license to operate the subject
facility as a skilled nursing facility or (iii) any one of certain additional
defaults occurs, such as monetary default, breach of covenant and bankruptcy
defaults. All termination rights will be subject to "right to cure"
provisions, except that ManorCare Health Services will have no right to cure
if the subject facility is disqualified from Medicare or Medicaid or
decertified or if ManorCare Health Services loses its license to operate a
skilled nursing facility. Finally, ManorCare Health Services will have the
right to terminate a Lease Agreement in the event a facility is damaged and
either (i) the insurance proceeds are insufficient to cover the restoration
costs or (ii) the restoration could not reasonably be completed within 12
months following the damage. A Lease Agreement will automatically terminate
upon the condemnation of so much of a facility that, in ManorCare Health
Services' reasonable judgment, the conduct of its business would be
substantially prevented or impaired.
In the event that Manor Care Realty terminates a Lease Agreement based upon
actual Net Operating Profit being less than 90% of budgeted Net Operating
Profit for two consecutive Lease Years, Manor Care Realty will be obligated to
pay to ManorCare Health Services a termination fee, which fee will be based on
the performance of the subject facility, in accordance with the formula
therefor set forth in the Lease Agreements. Unless ManorCare Health Services
consents to the sale, Manor Care Realty will also be obligated to pay to
ManorCare Health Services a termination fee upon the sale of a facility. The
termination fee is formula-based and intended to approximate ManorCare Health
Services' future income from the operation of that facility.
ManorCare Health Services is prohibited from assigning a Lease Agreement or
subletting any facility without Manor Care Realty's approval, which it may
withhold in its sole discretion, except that Manor Care Realty's consent is
not required for assignments or sublettings (i) in connection with ManorCare
Health Services' sale of its business operations as a going concern or with
its merger or consolidation into or with another company or (ii) to an
affiliate succeeding to ManorCare Health Services' business operations.
The Lease Agreements provide that ManorCare Health Services is obligated to
comply with all applicable laws and must obtain and keep in full force and
effect all licenses and permits necessary to operate the facilities. Pursuant
to the Lease Agreements, with respect to ManorCare Health Services' use,
occupancy and operation of the Skilled Nursing Facilities, Manor Care Realty
will not be liable, and ManorCare Health Services will, whether or not
available insurance proceeds are sufficient therefor, indemnify, defend and
hold Manor Care Realty harmless from and against any and all loss, cost,
expense, liability and claims of liability for damage or injury to person or
property on or about the facilities, or otherwise, arising from ManorCare
Health Services' negligence or willful misconduct. Other than such
indemnification obligation, ManorCare Health Services will not have any
liability, personal or otherwise, in connection with any of its obligations
under the Lease Agreements except to the extent of (i) Project Revenues, (ii)
proceeds of insurance and awards for condemnation applicable to the skilled
nursing facilities and actually received by ManorCare Health Services and
(iii) ManorCare Health Services' interest, if any, in the improvements on the
skilled nursing facilities and leasehold estate created under the Lease
Agreements.
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The payments from ManorCare Health Services to Manor Care Realty under the
Lease Agreements will not have any effect on the revenues of ManorCare Health
Services. The lease payments will be reflected as operating expenses of
ManorCare Health Services and revenues of Manor Care Realty.
DEVELOPMENT AGREEMENT RELATING TO ASSISTED LIVING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into a Master
Development Agreement (the "Development Agreement") pursuant to which Manor
Care Realty will develop assisted living facilities for sale to ManorCare
Health Services. Neither Manor Care Realty nor ManorCare Health Services is
obligated to proceed under development of a facility unless and until
ManorCare Health Services has approved the project budget. Each facility will
be built by Manor Care Realty based upon ManorCare Health Services' then
existing prototype designs. Under the Development Agreement, if stabilized
occupancy of 75% or more is achieved for a period of five days within two
years of commencing operations, ManorCare Health Services will be obligated to
purchase the facility. The purchase price for each facility will be equal to
(i) the actual project costs (but in no event in excess of an amount equal to
the amount of the project budget approved by ManorCare Health Services plus
5%) plus (ii) such actual project costs multiplied by the applicable premium
percentage plus (iii) Manor Care Realty's portion of shared cost savings, if
any, plus (iv) an agreed amount for inventory items. Manor Care Realty's
portion of shared cost savings is an amount equal to 50% of the excess of the
amount of the approved project budget over the amount of the actual project
costs. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two-year stabilization period. The premium percentage is the percentage
set forth below opposite the month during which notice of the purchase of the
facility occurs is given by ManorCare Health Services to Manor Care Realty:
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the eighth
full calendar month thereafter....................................... 15.0%
Ninth calendar month.................................................. 16.6%
Tenth calendar month.................................................. 18.2%
Eleventh calendar month............................................... 19.7%
Twelfth calendar month................................................ 21.3%
Thirteenth calendar month............................................. 22.5%
Fourteenth calendar month............................................. 23.6%
Fifteenth calendar month.............................................. 24.9%
Sixteenth calendar month.............................................. 25.9%
Seventeenth calendar month............................................ 27.0%
Eighteenth calendar month............................................. 28.0%
Nineteenth calendar month............................................. 29.1%
Twentieth calendar month.............................................. 30.0%
Twenty-first calendar month........................................... 31.3%
Twenty-second calendar month.......................................... 32.2%
Twenty-third calendar month........................................... 33.2%
Twenty-fourth calendar month.......................................... 34.3%
</TABLE>
The purchase price for each facility is formula-based and may or may not
approximate the fair market value of a particular facility. Given that
pursuant to the Development Agreement, Manor Care Realty's primary activity
will be developing assisted living facilities for ManorCare Health Services,
which facilities ManorCare Health Services will be obligated to buy if certain
conditions are met, Manor Care believes that over time the aggregate
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purchase prices for the facilities should approximate the aggregate purchase
prices that would be available from a similarly situated unaffiliated third
party.
The Development Agreement provides that prior to presentation to any other
party and prior to proceeding by itself for its own account, ManorCare Health
Services shall present to Manor Care Realty for evaluation any assisted living
facility development opportunity that ManorCare Health Services desires to
have pursued. Within thirty (30) days after Manor Care Realty has received
such reports and studies as Manor Care Realty deems necessary in order to
evaluate such opportunity, Manor Care Realty shall elect whether or not to
proceed with the opportunity. In the event that Manor Care Realty elects (or
is deemed to have elected) not to proceed with the opportunity, ManorCare
Health Services shall be free, subject to any applicable restrictions set
forth in the Non-Competition Agreement, to pursue such assisted living
facility development opportunity with others.
Pursuant to the Assisted Living Facility Management Agreement, during the
two-year stabilization period, ManorCare Health Services will manage the
facility for Manor Care Realty for a fixed monthly fee. See "--Assisted Living
Facility Management Agreement." If ManorCare Health Services does not acquire
a facility developed by Manor Care Realty during the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. ManorCare Health Services will, however, retain the rights to the Arden
Courts or Springhouse brand name in the event of a third-party sale. The
Development Agreement will have a term of seven years and may be terminated
for cause by either Manor Care Realty or ManorCare Health Services under
certain circumstances.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
Prior to the commencement of the development of an assisted living facility,
Manor Care Realty and ManorCare Health Services will execute and deliver an
Assisted Living Facility Management Agreement (the "Assisted Living Facility
Management Agreement") pursuant to which ManorCare Health Services will manage
the assisted living facility for the period from the first day of the calendar
month in which the subject facility is opened to the earlier of (a) the date
of the sale of the subject facility by Manor Care Realty to ManorCare Health
Services or (b) the second anniversary of the date on which the subject
facility opened for business. ManorCare Health Services will manage each
facility for Manor Care Realty for a fixed monthly fee. The monthly management
fee for each Arden Court facility will be $5,000 and the monthly management
fee for each Springhouse facility will be $8,500. The fixed monthly fee
payable to ManorCare Health Services represents an approximation of ManorCare
Health Services' general and administrative costs for managing the facilities.
All operating costs relating to the managed facilities will be borne by Manor
Care Realty as the owner of the facilities.
If stabilized occupancy of 75% or more is not achieved within two years of
commencing operations, upon request by Manor Care Realty made no later than
thirty (30) days prior to the second anniversary of the commencement of
operations, ManorCare Health Services will continue to manage the facility for
a period ending no later than the third anniversary of the commencement of
operations. During any such extended term, Manor Care Realty will be obligated
to pay to ManorCare Health Services a management fee equal to 6% of gross
revenues on a monthly basis and Manor Care Realty will have the right to
terminate the Assisted Living Facility Management Agreement as of the last
calendar day of any month upon not less than thirty (30) days prior written
notice.
NON-COMPETITION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Non-
Competition Agreement (the "Non-Competition Agreement"), which will impose
certain non-competition restrictions on each of Manor Care Realty and
ManorCare Health Services. The Non-Competition Agreement will terminate on the
date the Development Agreement expires or is terminated; provided that if
Manor Care Realty is actively developing Assisted Living Facilities pursuant
to the Development Agreement, the restrictions set forth below relating to
Manor Care Realty's ability to acquire assisted living facilities and
ManorCare Health Services' ability to
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develop or manage assisted living facilities will continue until the earlier
of (i) the second anniversary of the expiration of the term of the Development
Agreement or (ii) the date on which ManorCare Health Services acquires the
last of such facilities.
Agreements with Respect to the Skilled Nursing Business. The Non-Competition
Agreement provides that Manor Care Realty will be a health care real estate
company focused on the ownership, construction, development and acquisition of
health care properties. The Non-Competition Agreement provides that in the
event that ManorCare Health Services identifies a skilled nursing facility
development opportunity or a skilled nursing facility acquisition opportunity,
ManorCare Health Services will notify Manor Care Realty of such opportunity
and if Manor Care Realty does not respond within a specified time or rejects
the opportunity to acquire or develop such facility, ManorCare Health Services
will have the right to present such development or skilled nursing facility
acquisition opportunity to a non-affiliated third-party; provided that
ManorCare Health Services will not, without the prior consent of Manor Care
Realty (which consent may be given or withheld in the sole discretion of Manor
Care Realty), present such development or skilled nursing facility acquisition
opportunity to such non-affiliated third party if such development or
acquisition would result in the acquisition or development of a skilled
nursing facility that is within a five mile radius of a Manor Care Realty
owned Skilled Nursing Facility that is leased or managed by ManorCare Health
Services.
In the event that Manor Care Realty determines to proceed with the
development of a skilled nursing facility or a skilled nursing facility
acquisition, Manor Care Realty will notify ManorCare Health Services of such
determination indicating the material terms on which Manor Care Realty is
prepared to permit ManorCare Health Services to manage and lease such skilled
nursing facility (or facilities) and ManorCare Health Services will have a
specified time after the receipt of such notice to notify Manor Care Realty of
its interest in entering into a management and lease agreement with Manor Care
Realty with respect to such skilled nursing facility (or facilities). In the
event that ManorCare Health Services so notifies Manor Care Realty, ManorCare
Health Services and Manor Care Realty will negotiate in good faith for a
specified time period to enter into a management agreement and lease with
respect to such skilled nursing facility (or facilities), but if (i) ManorCare
Health Services does not respond to such notice within such specified time
period or rejects the opportunity to negotiate with Manor Care Realty with
respect to such skilled nursing facility (or facilities) or (ii) ManorCare
Health Services negotiates with Manor Care Realty but the parties are unable
to reach an agreement during such specified time period, Manor Care Realty
will have the right to enter into a management agreement and/or a lease
agreement relating to such skilled nursing facility (or facilities) with a
non-affiliated third party on terms no more favorable in the aggregate to such
third party than those offered to ManorCare Health Services or manage such
facility itself for a period not to exceed 18 months following commencement of
operations of a Manor Care Realty developed skilled nursing facility or
consummation of the skilled nursing facility acquisition, as the case may be.
In the event Manor Care Realty elects to manage such skilled nursing facility
(or facilities), Manor Care Realty will enter into a management agreement
and/or lease agreement with respect to such skilled nursing facility (or
facilities) with an non-affiliated third party following the expiration of
such 18 month period. The terms of such management agreement and/or a lease
agreement will be no more favorable in the aggregate to such third party than
those offered to ManorCare Health Services. In the event that ManorCare Health
Services desires to acquire a business which also includes one or more skilled
nursing facilities, the ownership or possession of which by ManorCare Health
Services would otherwise be prohibited by the Non-Competition Agreement,
ManorCare Health Services must offer Manor Care Realty the right to purchase
such skilled nursing facilities at a price to be agreed upon by the parties;
provided, however that if the parties are unable to agree on such purchase
price, the parties shall submit the issue to binding arbitration. In the event
Manor Care Realty elects not to purchase such skilled nursing facilities at
such purchase price or the parties have been unable to agree on the purchase
price and have submitted the dispute to arbitration, ManorCare Health Services
nonetheless may complete such acquisition but will use its commercially
reasonable efforts to divest itself of such skilled nursing facilities within
one year of the closing of such acquisition. In the event that ManorCare
Health Services determines to sell the skilled nursing facilities for a price
less than the purchase price offered to Manor Care Realty or determined by the
arbitrator, as the case may be, ManorCare Health Services will notify Manor
Care Realty and Manor Care Realty will have the irrevocable and exclusive
option, to buy on the terms set forth in
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such notice, such skilled nursing facilities. If Manor Care Realty does not
notify ManorCare Health Services within a specified time period of its
intention to purchase such facilities, Manor Care Realty will be deemed to
have declined to purchase such skilled nursing facilities and ManorCare Health
Services will be free to sell such skilled nursing facilities at a price equal
to or exceeding the price and on the terms specified in such notice.
In addition, the Non-Competition Agreement provides that ManorCare Health
Services will not, without the prior consent of Manor Care Realty (which
consent will not be unreasonably withheld), engage in the lease, operation or
management of any skilled nursing facility owned by a third party that is
within a five-mile radius of a Manor Care Realty owned skilled nursing
facility that is leased or managed by ManorCare Health Services and, subject
to certain exceptions, ManorCare Health Services will not own a skilled
nursing facility.
The Non-Competition Agreement also provides that Manor Care Realty will not
engage, either directly or indirectly, in the management of skilled nursing
facilities, except as set forth above and except as may be permitted with
respect to a particular skilled nursing facility by the Lease Agreement or
other agreement between Manor Care Realty and ManorCare Health Services
pursuant to which ManorCare Health Services manages such skilled nursing
facility.
Agreements with Respect to the Assisted Living Business. Except as provided
below and except pursuant to the terms of the Development Agreement, the Non-
Competition Agreement provides that Manor Care Realty will not acquire any
assisted living facility, provided, that Manor Care Realty will not be deemed
to have acquired an assisted living facility by reason of the acquisition of a
mixed use facility in which not more than the greater of 20% of the units in
the facility or 30 units are designated for assisted living.
In the event that Manor Care Realty identifies an assisted living facility
acquisition opportunity, Manor Care Realty will notify ManorCare Health
Services of such opportunity and ManorCare Health Services will have a
specified time to notify Manor Care Realty of its interest in pursuing such
opportunity. In the event that ManorCare Health Services does not respond
within such time period or rejects the opportunity to acquire such facility,
Manor Care Realty will have the right to make such assisted living facility
acquisition; provided, however, that if any such assisted living facility is
within a five mile radius of any Manor Care Realty developed assisted living
facility that is owned or managed by ManorCare Health Services, Manor Care
Realty will not be permitted to proceed with such acquisition without the
prior written consent of ManorCare Health Services (which consent will not to
be unreasonably withheld or delayed).
The Non-Competition Agreement provides that in the event that Manor Care
Realty desires to acquire a business which also includes one or more assisted
living facilities, the ownership or possession of which by Manor Care Realty
would otherwise be prohibited by the Non-Competition Agreement, Manor Care
Realty must offer ManorCare Health Services the right to purchase such
assisted living facilities at a price to be agreed to by the parties; provided
that if the parties are unable to agree on such purchase price, the parties
will submit the dispute to binding arbitration. In the event ManorCare Health
Services elects not to purchase such assisted living facilities at such
purchase price or the parties have been unable to agree on the purchase price
and have submitted the dispute to arbitration, Manor Care Realty nonetheless
may complete such acquisition but will use its commercially reasonable efforts
to divest itself of such assisted living facilities within one year of the
closing such acquisition.
In the event that Manor Care Realty determines to sell the assisted living
facilities for a price less than the purchase price offered to ManorCare
Health Services or determined by the arbitrator, as the case may be, Manor
Care Realty will notify ManorCare Health Services and ManorCare Health
Services will have the irrevocable and exclusive option, to buy such assisted
living facilities on the terms set forth in such notice. If ManorCare Health
Services does not notify Manor Care Realty within a specified time period,
ManorCare Health Services will be deemed to have declined to purchase such
assisted living facilities and Manor Care Realty shall be free to sell such
assisted living facilities at a price equal to or exceeding the price and on
the terms specified in such notice. In the event Manor Care Realty acquires an
assisted living facility (or facilities) in such a transaction, Manor Care
Realty will offer ManorCare Health Services the opportunity to manage and
lease such assisted
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<PAGE>
living facility (or facilities) and ManorCare Health Services and Manor Care
Realty will negotiate in good faith to enter into a management agreement with
respect to such assisted living facility (or facilities). In the event that
ManorCare Health Services does not respond to such offer within a specified
time period or rejects the opportunity to negotiate with Manor Care Realty
with respect to such assisted living facility (or facilities) or ManorCare
Health Services negotiates with Manor Care Realty but the parties are unable
to reach an agreement after such time period, Manor Care Realty will have the
right to enter into a management agreement relating to such assisted living
facility (or facilities) with a non-affiliated third party on terms no more
favorable in the aggregate to such third party than those offered to ManorCare
Health Services or manage such facility itself for a period not to exceed 18
months following consummation of the acquisition of such assisted living
facility (or facilities). In the event Manor Care Realty elects to manage such
assisted living facility (or facilities), Manor Care Realty will enter into a
management agreement with a non-affiliated third party following the
expiration of such 18 month period. The terms of such management agreement
shall be no more favorable in the aggregate to such third party than those
offered to ManorCare Health Services.
The Non-Competition Agreement also provides that except as provided therein,
Manor Care Realty will not engage, either directly or indirectly, in the
management of assisted living facilities.
The Non-Competition Agreement also provides that ManorCare Health Services
will not be permitted to enter into a management agreement with a non-
affiliated third party in connection with an assisted living facility that is
located within a five-mile radius of an assisted living facility (i) developed
by Manor Care Realty pursuant to the terms of the Development Agreement and
still owned by Manor Care Realty or (ii) under development by Manor Care
Realty pursuant to the Development Agreement or (iii) still covered by the
terms of the Development Agreement, unless Manor Care Realty specifically
consents thereto (which consent will not be unreasonably withheld). The Non-
Competition Agreement also provides that ManorCare Health Services will not
develop assisted living facilities except as may be permitted pursuant to the
terms of the Development Agreement.
Agreements with Respect to the Other Businesses. The Non-Competition
Agreement provides that Manor Care Realty will not, either directly or
indirectly, (i) own, manage, operate, finance or participate in the ownership,
management, operation or financing of any entity engaged in the institutional
pharmacy business or the home health care business or otherwise in the
continuum of care (other than the hospital management business) (the "Manor
Care Realty Restricted Business") or (ii) engage in any other manner or make
any investment in any entity engaged in the Manor Care Realty Restricted
Business; provided, however, that Manor Care Realty will be entitled to
acquire a business that includes a Manor Care Realty Restricted Business so
long as Manor Care Realty provides ManorCare Health Services with same notices
and rights concerning the Manor Care Realty Restricted Business as
contemplated by the Non-Competition Agreement with respect to the acquisition
by Manor Care Realty of a business that includes certain assisted living
facilities. The Non-Competition Agreement provides that the provisions of the
agreement relating to the institutional pharmacy business will terminate when
ManorCare Health Services no longer owns, directly or indirectly, 20% or more
of the fully diluted equity of Vitalink Pharmacy Services, Inc. (including any
successor thereto by merger, consolidation, stock purchase or sale of all or
substantially all of the assets) and the provisions of the agreement relating
to the home health business will terminate when ManorCare Health Services no
longer owns, directly or indirectly, 20% or more of the fully diluted equity
of In Home Health, Inc. (including any successor thereto by merger,
consolidation, stock purchase or sale of all or substantially all of the
assets).
The Non-Competition Agreement also provides that ManorCare Health Services
will not, either directly or indirectly, (i) own, manage, operate, finance or
participate in the ownership, management, operation or financing of any entity
engaged in the hospital management business (the "ManorCare Health Services
Restricted Business") or (ii) engage in any other manner or make any
investment in any entity engaged in the hospital management business;
provided, however that such restrictions will not apply to skilled nursing
facilities or assisted living facilities or units thereof that are located
within or are adjacent to hospitals; provided, further, however, that
ManorCare Health Services will be entitled to acquire a business that includes
a ManorCare Health Services Restricted Business so long as ManorCare Health
Services provides Manor Care Realty with the same notices and rights
concerning the ManorCare Health Services Restricted Business as contemplated
by the Non-Competition Agreement with respect to the acquisition by ManorCare
Health Services of a business that includes
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certain skilled nursing facilities. The Non-Competition Agreement provides
that the provisions of the agreement relating to the hospital management
business will terminate when Manor Care Realty no longer owns, directly or
indirectly, 20% or more of the fully diluted equity of Community Hospital of
Mesquite, Inc. (including any successor thereto by merger, consolidation,
stock purchase or sale of all or substantially all of the assets). In
addition, the Non-Competition Agreement provides that, if ManorCare Health
Services enters into a new line of business involving the ownership of real
estate, ManorCare Health Services must offer for sale such real estate to
Manor Care Realty with the same notices and rights concerning such real estate
as contemplated by the Non-Competition Agreement with respect to the
acquisition by ManorCare Health Services of a business that includes certain
skilled nursing facilities.
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement (the "Employee
Benefits Allocation Agreement"), pursuant to which the employee benefits with
respect to employees who remain employed by Manor Care Realty or its
subsidiaries immediately after the Distribution ("Manor Care Realty
Employees") and the employee benefits of employees who are employed by
ManorCare Health Services immediately after the Distribution ("ManorCare
Health Services Employees") will be allocated.
The Employee Benefits Allocation Agreement provides that all of the vested
and non-vested Incentive Stock Options ("ISOs") of employees of Manor Care who
will be employed by ManorCare Health Services will be converted into ISOs of
ManorCare Health Services. The ISOs of employees who remain employed by Manor
Care Realty will be converted into ISOs of Manor Care Realty. In addition,
both employees who will be employed by ManorCare Health Services and employees
who remain employed by Manor Care Realty will have the right to elect to
convert their vested Manor Care Non-Qualified Stock Options ("NQSOs") into any
percentage combination of Manor Care Realty NQSOs and ManorCare Health
Services NQSOs. The Employee Benefits Allocation Agreement also provides that
one-half of the non-vested NQSOs of any employee who will be employed by
ManorCare Health Services will be converted into NQSOs of ManorCare Health
Services, and one-half of the non-vested NQSOs of any employee who remains
employed by Manor Care Realty will be converted into NQSOs of Manor Care
Realty. The remaining non-vested NQSOs will be converted into any percentage
combination of ManorCare Health Services NQSOs and Manor Care Realty NQSOs at
the election of the employee. Notwithstanding the foregoing, the NQSOs of one
executive officer will be converted on a pro rata basis to ManorCare Health
Services NQSOs and Manor Care Realty NQSOs based on their relative stock
values. Another executive officer will have the option to convert NQSOs to
ManorCare Health Services NQSOs and Manor Care Realty NQSOs such that such
officer's overall option holdings are converted on a pro rata basis to
ManorCare Health Services options and Manor Care Realty options based on their
relative stock values.
The Employee Benefits Allocation Agreement also provides that employees of
Choice Hotels International, Inc. ("Choice Hotels") and Sunburst Hospitality
Corporation ("Sunburst") can elect to convert their Manor Care NQSOs into any
percentage combination of ManorCare Health Services NQSOs and Manor Care
Realty NQSOs.
The Employee Benefits Allocation Agreement also addresses the treatment of
Manor Care NQSOs owned by non-employee directors of Manor Care. The NQSOs of
non-employee directors who become directors of both Manor Care Realty and
ManorCare Health Services will be converted on a pro rata basis to ManorCare
Health Services NQSOs and Manor Care Realty NQSOs based on their relative
stock values. The Employee Benefits Allocation Agreement also provides that
all NQSOs of non-employee directors who remain with Manor Care Realty or who
become directors of ManorCare Health Services will be converted to NQSOs of
Manor Care Realty or ManorCare Health Services, respectively.
The Employee Benefits Allocation Agreement will provide that the adjustment
in stock options will be based upon a predetermined formula related to (i)
stock prices on the first day the shares in the companies are independently
traded and (ii) the election of the optionees. In all cases, however, the
exercise price and the number of the options will be adjusted to maintain the
same financial value to the option holder before and after the Distribution.
The ratio of the exercise price per option to the market value per share will
not be reduced, and the vesting provisions and option period of the original
grant will remain the same.
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EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Employee
Benefits Administration Agreement (the "Employee Benefits Administration
Agreement"), pursuant to which ManorCare Health Services will administer the
employee benefits plans and programs of Manor Care Realty following the
Distribution.
ManorCare Health Services shall provide such services for a fee which shall
include any or a combination of the following: (i) activity-based charges;
(ii) fixed-fee based charges; (iii) usage-based charges; and (iv) time and
materials charges, as specified in the Corporate Services Agreement. The
Employee Benefits Administration Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Employee Benefits
Administration Agreement.
OFFICE LEASE AGREEMENT
Manor Care, Inc. leases the building complex in Gaithersburg, Maryland (the
"Complex") from Gaithersburg Realty Trust at which the principal executive
offices of ManorCare Health Services and Manor Care Realty are located.
ManorCare Health Services, as Tenant, and Manor Care Realty, as Landlord, will
enter into a sublease agreement with respect to the Complex (the "Office Lease
Agreement"). The Complex consists of an office building (the "Office
Building") containing approximately 377,126 gross square feet of space, a
warehouse and distribution building (the "Warehouse Building") containing
approximately 200,000 gross square feet of space, and approximately 98.7974
acres of land.
Manor Care Realty will lease to ManorCare Health Services approximately
202,458 rentable square feet in the Office Building, for a base term expiring
on August 30, 2002, with an option to renew for an additional ten years at
fair market rental determined by appraisal. As Basic Rent for each Lease Year,
ManorCare Health Services will pay Tenant's Pro Rata Share of all Operating
Expenses for such Lease Year. "Tenant's Pro Rata Share" means the ratio of (i)
the number of rentable square feet in the Office Building occupied by
ManorCare Health Services as of the commencement of such Lease Year, to (ii)
the total number of rentable square feet in the Office Building occupied by
Manor Care Realty and ManorCare Health Services as of the commencement of such
Lease Year. "Operating Expenses" means all expenses incurred by Manor Care
Realty (net of rental income paid by third parties and net of the after-tax
value of depreciation taken by Manor Care Realty on the buildings in the
Complex) in connection with the operation and maintenance of the Complex
(including vacant space and common areas), including real estate taxes,
insurance, utilities, structural and non-structural repairs, capital
expenditures, property management, and debt service. Manor Care Realty will be
responsible for "Landlord's Pro Rata Share" of Operating Expenses for each
Lease Year, meaning the ratio of (i) the number of rentable square feet in the
Office Building occupied by Manor Care Realty as of the commencement of such
Lease Year, to (ii) the total number of rentable square feet in the Office
Building occupied by Manor Care Realty and ManorCare Health Services as of the
commencement of such Lease Year. It is expected that Manor Care Realty will
occupy approximately 58,714 rentable square feet in the Office Building as of
the commencement of the Lease. Accordingly, based on a total of 261,172
rentable square feet in the Office Building occupied by Manor Care Realty and
ManorCare Health Services, ManorCare Health Services' Pro Rata Share would be
78% and Manor Care Realty's Pro Rata Share would be 22%.
ManorCare Health Services' right to exercise its renewal option is
conditional upon Manor Care Realty's continuing control over the Complex
through an extension of the existing lease with Gaithersburg Realty Trust or
otherwise. Any income derived from the Complex will be shared by ManorCare
Health Services and Manor Care Realty in proportion to their Pro Rata Shares.
The Office Lease Agreement will also cover approximately 5,000 square feet
to be leased to ManorCare Health Services in the Warehouse Building. Space
leased to ManorCare Health Services in the Warehouse Building will not be
included in the calculation of Tenant's Pro Rata Share. ManorCare Health
Services will pay a market rate for warehouse space and such rental payments
will be treated as third party rental income for purposes of calculating
Operating Expenses.
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DISTRIBUTION AGREEMENT
Pursuant to the Distribution Agreement, on or prior to the Effective Date,
Manor Care will convey or cause to be conveyed to ManorCare Health Services
all of the right, title and interest of Manor Care and its subsidiaries in:
(i) all of the business and assets of the Assisted Living Business; (ii) the
shares of Common Stock of Vitalink owned by Manor Care; (iii) the shares of
Common and Preferred Stock of In Home Health owned by Manor Care; (iv) the
shares of common stock of The Tidewater Healthcare Shared Services Group, Inc.
("Tidewater"); (v) the partnership interests (the "Joint Venture Interests")
owned by Manor Care in the partnerships owning the Sycamore Glen, Centerville
and Fitzgerald Mercy skilled nursing facilities and (vi) certain of the
contracts entered into in connection with the November 1, 1996 spin-off of
Choice Hotels International, Inc. (the "Choice Spinoff") (the "Contribution of
Assets").
Pursuant to the Distribution Agreement, ManorCare Health Services will
assume, and indemnify and hold Manor Care Realty harmless against certain
liabilities (the "Assumed Liabilities"), including: (i) liabilities arising
after the Effective Date relating to (x) the ownership, operation and
management of the assisted living facilities and (y) the operation and
management of the Skilled Nursing Facilities; (ii) liabilities arising out of
the ownership of the stock of Vitalink, In Home Health, Tidewater and the
Joint Venture Interests, whether arising before or after the Effective Date;
(iii) liabilities arising out of information contained in or omitted from the
Registration Statement on Form 10 (the "Form 10") filed by ManorCare Health
Services with the Commission in connection with the Distribution; (iv)
liabilities set forth or referenced in the ManorCare Health Services financial
statements or the notes thereto contained in the Form 10; (v) liabilities
arising out of information contained in or omitted from the information
contained in the Registration Statement on Form S-4 filed by ManorCare Health
Services in connection with the Exchange Offer; (vi) liabilities under
indemnification agreements in effect as of the Effective Date between Manor
Care and certain employees and directors with respect to services rendered by
any such employee or director to ManorCare Health Services or the Assisted
Living Business or in connection with Vitalink or In Home Health; (vii) third-
party claims relating to the operation and management of the assisted living
facilities prior to the Effective Date and the operation and management of the
Skilled Nursing Facilities prior to the Effective Date (in each case, only to
the extent such claims are not covered by insurance or self-insurance of Manor
Care in effect immediately prior to the Effective Date and are of the type set
forth on a schedule to the Distribution Agreement); (viii) environmental
liabilities arising out of or in connection with the Assisted Living
Facilities, (ix) environmental liabilities to the extent such liabilities
arose by reason of ManorCare Health Services' negligent operation or
management of an assisted living facility or Skilled Nursing Facility; (x)
after ManorCare Health Services acquires an assisted living facility pursuant
to the terms of the Development Agreement, environmental liabilities arising
out of or in connection with such acquired assisted living facility; (xi)
liabilities arising out of or in connection with the handling of biomedical
waste at the Assisted Living Facilities or the Skilled Nursing Facilities;
(xii) all accounts payable relating exclusively to the Skilled Nursing
Facilities or the Assisted Living Business; (xiii) the $30 million aggregate
principal amount of indebtedness incurred under the Existing Revolving Credit
Facility in connection with the acquisition of additional equity securities of
Vitalink (the "Vitalink Borrowings"); and (xiv) certain obligations of Manor
Care arising out of the contracts entered into in connection with the Choice
Spin-off.
After giving pro forma effect to the Distribution and related transactions
as if they occurred on August 31, 1997 (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care's
indebtedness, (ii) liabilities relating to benefits and workers' compensation
of approximately $49.8 million, (iii) current liabilities of the skilled
nursing facilities of approximately $55.5 million, and (iv) deferred tax
liabilities of approximately $38.4 million. In addition, ManorCare Health
Services will assume certain contingent liabilities of Manor Care pursuant to
the terms of the Distribution Agreement. However, the assumption of such
liabilities will not release Manor Care Realty therefrom if ManorCare Health
Services should fail, for any reason, to perform its obligations pursuant to
such assumed liabilities.
Pursuant to the Distribution Agreement, Manor Care Realty will retain, and
indemnify and hold ManorCare Health Services harmless against, certain
liabilities (the "Retained Liabilities"), including: (i) any liabilities of
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Manor Care for money borrowed (other than the Vitalink Borrowings); (ii)
third-party claims arising out of the operation and management of the assisted
living facilities prior to the Effective Date and the operation and management
of the Skilled Nursing Facilities prior to the Effective Date (in each case,
only to the extent such claims are covered by insurance or self-insurance of
Manor Care in effect immediately prior to the Effective Date and the operation
and management of the Skilled Nursing Facilities prior to the Effective Date
and are of the type set forth on a schedule to the Distribution Agreement);
(iii) (x) certain pending environmental claims, including a variety of actions
relating to waste disposal sites in which one or more subsidiaries of
affiliates of Manor Care have been identified as potentially responsible
parties arising out of activities of Cenco Incorporated and its subsidiary and
affiliated corporations (the "Actions"), as specified in a schedule to the
Distribution Agreement; (y) any and all currently unknown but potential
environmental and other claims arising out of the activities of Cenco
Incorporated, and its subsidiary and affiliated companies, and any and all of
Cenco Incorporated's predecessor corporations and affiliates ("Cenco"),
including new claims arising out of the sites identified in a schedule to the
Distribution Agreement, and (z) all other claims arising out of Cenco's
discontinued operations; (iv) all environmental liabilities arising out of the
Skilled Nursing Facilities, other than liabilities arising by reason of
ManorCare Health Services' negligent operation or management of a Skilled
Nursing Facility; (v) prior to the time ManorCare Health Services acquires an
assisted living facility pursuant to the terms of the Development Agreement,
environmental liabilities arising out of or in connection with such assisted
living facility other than any such liabilities arising by reason of ManorCare
Health Services' negligent operation or management of any such assisted living
facility; (vi) liabilities arising out of information contained in or omitted
from the Registration Statement on Form S-3 filed by Manor Care Real Estate
Corp.; and (vii) any tax liabilities (which will be governed by the Tax
Sharing Agreement).
The potential liability exposure for currently pending environmental claims
and litigation, without regard to insurance coverage, cannot be quantified
with precision because of the inherent uncertainties of litigation in the
Actions and the fact that the ultimate cost of the remedial actions for some
of the waste disposal sites where Manor Care is alleged to be a potentially
responsible party has not yet been quantified. Manor Care believes that the
potential environmental liability exposure, after consideration of insurance
coverage, is approximately $3 million. Future liabilities for the pending
environmental claims and litigation, without regard to insurance, currently
are not expected to exceed approximately $46 million.
The Distribution Agreement provides that all cash and cash balances in
depository accounts as of the Distribution Date will be remitted to Manor Care
Realty. All petty cash accounts of Manor Care will be allocated on the
Distribution Date to ManorCare Health Services. The Distribution Agreement
also provides that all other current assets and liabilities (the "Noncash
Working Capital") will be conveyed (or in the case of certain government
receivables, deemed to have been conveyed) to ManorCare Health Services.
Promptly after the Distribution Date, ManorCare Health Services and Manor Care
Realty will calculate the amount of the Noncash Working Capital so conveyed
(or deemed to have been conveyed) and ManorCare Health Services will pay to
Manor Care Realty an amount equal to 50% of the Noncash Working Capital up to
$25 million (i.e., in no circumstances will such payment to Manor Care Realty
exceed $12.5 million).
In addition, pursuant to the Distribution Agreement, on or prior to the
Effective Date, Manor Care will make or cause to be made the Capital
Contribution to ManorCare Health Services. See "--The Realty Note."
Manor Care Realty and ManorCare Health Services have agreed in the
Distribution Agreement to share on an equal basis all costs and expenses
incurred in connection with the Distribution and the related transactions,
except that any fees paid in connection with any financings entered into in
conjunction with the Distribution will be paid by the party undertaking such
financings.
Manor Care Realty has agreed to indemnify and hold harmless ManorCare Health
Services and ManorCare Health Services has agreed to indemnify and hold
harmless Manor Care Realty, against any loss, liability or expense incurred or
suffered by the indemnified party arising out of or relating to the failure by
the indemnifying party, as the case may be, to perform or otherwise discharge
the Retained Liabilities, in the case of Manor Care Realty and the Assumed
Liabilities in the case of ManorCare Health Services. The Distribution
Agreement
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provides that the indemnifying party may assume the defense of a claim or suit
brought by a third party (unless the claim involves both ManorCare Health
Services and Manor Care Realty as defendants and the parties reasonably
believe there is a conflict of interest in which case an independent counsel
will be selected). In addition, the Distribution Agreement provides that the
indemnifying party may settle or compromise the claim without the prior
consent of the indemnified party; provided that the indemnified party may not
agree to a settlement unless as a condition to such settlement the indemnified
party receives a written release from any and all liability relating to such
third party claim and such settlement does not include any relief other than
monetary damages.
To the extent that the Distribution Agreement provides for indemnification
by ManorCare Health Services of Manor Care Realty and by Manor Care Realty of
ManorCare Health Services from liabilities arising under the Securities Act of
1933 and the Securities Exchange Act of 1934, Manor Care and ManorCare Health
Services have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy and is, therefore,
unenforceable.
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
Section 355 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, then the first party taking or failing to take any of such
actions shall be liable for and will indemnify the other party from and
against all taxes and other damages resulting from such failure to qualify.
TAX ADMINISTRATION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Administration Agreement (the "Tax Administration Agreement"). The Tax
Administration Agreement sets forth the terms and conditions pursuant to which
ManorCare Health Services will provide certain tax-related administrative
services to Manor
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Care Realty following the Distribution. Such services will include audit and
compliance work related to income, real estate, personal property and sales
and use taxes. The Tax Administration Agreement will remain in effect for one
year from the Effective Date, after which it will renew automatically for one-
year periods unless terminated pursuant to the terms of the Tax Administration
Agreement.
CORPORATE SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Corporate
Services Agreement (the "Corporate Services Agreement") pursuant to which,
following the Distribution, ManorCare Health Services will provide certain
corporate services to Manor Care Realty including administrative, payroll and
accounting systems. ManorCare Health Services shall provide such services for
a fee which shall include any or a combination of the following: (i) activity-
based charges; (ii) fixed-fee based charges; (iii) usage-based charges; and
(iv) time and materials charges, as specified in the Corporate Services
Agreement. The Corporate Services Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Corporate Services
Agreement.
TRADEMARK AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Trademark
Agreement (the "Trademark Agreement") pursuant to which Manor Care Realty will
assign to ManorCare Health Services approximately 40 U.S. trademarks and
service marks registered and pending (and all federal, state and foreign
registrations and all other rights and privileges related thereto). These
registrations and applications represent all of the trademarks necessary for
the operations of the business of ManorCare Health Services. Pursuant to the
Trademark Agreement, ManorCare Health Services will assume all obligations
related to such trademarks and trademark applications.
LICENSE AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a License
Agreement (the "License Agreement") pursuant to which ManorCare Health
Services will license to Manor Care Realty the right to use approximately 20
U.S. trademarks and service marks; and certain other marks, trade names,
copyrights, designs and trade dress in connection with the operation of Manor
Care Realty's business. The license granted under the License Agreement
relating to Manor Care Realty's skilled nursing facilities will terminate
within 45 days of the termination of all the Lease Agreements. The license
granted under the License Agreement relating to Manor Care Realty's assisted
living facilities will terminate within a reasonable time after the
termination of the Development Agreement and all the Assisted Living Facility
Management Agreements.
DESIGN SERVICES AGREEMENT
Manor Care and ManorCare Health Services will enter into a Design Services
Agreement (the "Design Services Agreement") pursuant to which Manor Care
Realty will provide certain interior design and architectural services in
connection with capitalized renovation projects. The fee for these services
will be $48,000 per month until May 31, 1998, after which the fee will be paid
annually and will be based on the percentage of Manor Care Realty's design
department budget required to provide services to ManorCare Health Services.
Fees under the Design Services Agreement will be credited against the 2.75% of
aggregate annual Project Revenues from all the skilled nursing facilities
leased under Lease Agreements applied toward reasonable repairs, replacements
and renewals to be made in the ordinary course of operations as set forth in
the Lease Agreements. The Design Services Agreement will remain in effect
until May 31, 1999, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Design Services
Agreement.
CASH MANAGEMENT AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
after the Distribution ManorCare Health Services will perform cash management
services for Manor Care Realty, including but not limited to bank relationship
management, bank account administration, daily cash flow position management
and settlement, bank account
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analysis review, electronic fund transfers, and deposits of cash and checks.
For these services, Manor Care Realty will pay ManorCare Health Services a
quarterly fee determined by multiplying ManorCare Health Services' cash
management department expenses by a percentage estimate of time spent
providing services to Manor Care Realty as well as reimbursement for direct
expenses incurred. The Cash Management Agreement will remain in effect for one
year from the Effective Date, after which it will renew automatically for one-
year periods unless terminated pursuant to the terms of the Cash Management
Agreement.
RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Risk
Management Consulting Services Agreement (the "Risk Management Consulting
Services Agreement"), pursuant to which ManorCare Health Services will provide
to Manor Care Realty risk management consulting services, including but not
limited to insurance renewals, insurance, indemnity and bond contract review,
surety bond procurement, regulatory compliance services, environmental
management, and risk management services. Manor Care Realty will pay ManorCare
Health Services a fixed annual fee for such services as well as reimbursement
for insurance and self-insurance plans. The Risk Management Consulting
Services Agreement will remain in effect for one year from the Effective Date,
after which it will renew automatically for one-year periods unless terminated
pursuant to the terms of the Risk Management Consulting Services Agreement.
REALTY NOTE
In connection with the Distribution and in order to fund the Company's
capital expenditures in connection with the expansion of the Assisted Living
Business, on or prior to the Effective Date, Manor Care will make or cause to
be made the Capital Contribution. In order to fund the cash portion of the
Capital Contribution, Manor Care Real Estate will utilize part of the proceeds
of its public offering of $350 million aggregate principal amount of %
senior notes due 2008 and borrowings under the Credit Facilities. As part of
the Capital Contribution, Manor Care will contribute or cause to be
contributed to ManorCare Health Services the Realty Note to be issued by Manor
Care Real Estate and guaranteed by Manor Care Realty. Manor Care may reduce
the principal amount of the Realty Note prior to issuance or reduce the amount
of the cash portion of the Capital Contribution to the extent Old Senior Notes
remain outstanding upon consummation of the Exchange Offer. The Realty Note
will have the same general terms (including interest rate and maturity, and
parent and subsidiary guarantees) as the Manor Care Notes except that Manor
Care Realty may redeem the Realty Note after three years at a redemption price
equal to 100% of the principal amount thereof plus accrued and unpaid
interest. In addition, ManorCare Health Services has agreed not to transfer
the Realty Note on or prior to the sixth month anniversary of the date of
issuance thereof. After such date, ManorCare Health Services may transfer the
Realty Note without restriction subject to Manor Care Realty's right to redeem
the Realty Note. ManorCare Health Services will have certain demand
registration rights with respect to all or any portion of the Realty Note.
Upon receipt of any such demand, Manor Care Realty is required to use
reasonable efforts to register the portion of the Realty Note reflected in the
demand of ManorCare Health Services.
On or after such third anniversary of the issuance of the Realty Note,
ManorCare Health Services may request that Manor Care Realty redeem the Realty
Note. In the event that ManorCare Health Services requests that Manor Care
Realty redeem the Realty Note and Manor Care Realty does not redeem the Realty
Note, the interest rate on the Realty Note will increase by 200 basis points;
provided that such interest rate will not be so increased unless, as of the
time such request for redemption is made, the aggregate amount of rent paid by
ManorCare Health Services under the Lease Agreements with respect to all
properties subject to such Lease Agreements shall equal or exceed the
aggregate Priority Sum for all such properties on a cumulative basis from the
Effective Date through the third anniversary thereof (such aggregate amount of
rent being herein referred to as the "Threshold Rent"). Solely for purposes of
calculating the Threshold Rent, (i) the aggregate Priority Sum for the fiscal
year ended May 31, 1999 shall be deemed to be the aggregate Priority Sum
calculated pursuant to the Lease Agreements plus $5 million and (ii) the
aggregate Priority Sum for the fiscal year ended May 31, 2000 and thereafter
shall be deemed to be the aggregate Priority Sum calculated pursuant to the
Lease Agreements plus $10 million.
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Manor Care Realty's high degree of leverage could adversely affect Manor
Care Realty's ability to pay principal and interest on or to redeem the Realty
Note and may adversely affect the ability of ManorCare Health Services to sell
the Realty Note. Manor Care Realty may not have adequate funds to effect the
redemption of the Realty Note and in such case may seek to obtain such funds
through additional debt or equity financing. There can be no assurance that
Manor Care Realty would be able to obtain such funds.
The terms of the Realty Note will not limit in any way ManorCare Health
Services' use of the proceeds thereof. ManorCare Health Services intends to
use the proceeds of the Realty Note for general corporate purposes, which may
include debt service, working capital or acquisition financing. The failure of
Manor Care Realty to pay principal and interest on the Realty Note in a timely
manner or the inability of ManorCare Health Services to sell the Realty Note
to a third party for its principal amount could have a material adverse effect
on ManorCare Health Services.
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FINANCING
THE CAPITAL CONTRIBUTION
In connection with the Distribution and in order to fund the Company's
capital expenditures in connection with the expansion of the Assisted Living
Business, on or prior to the Effective Date, Manor Care will make or cause to
be made the Capital Contribution. In order to fund the cash portion of the
Capital Contribution, Manor Care Real Estate will utilize part of the proceeds
of its public offering of $350 million aggregate principal amount of the Manor
Care Notes and borrowings under the Credit Facilities. As part of the Capital
Contribution, Manor Care will contribute or cause to be contributed to
ManorCare Health Services the Realty Note which will be issued by Manor Care
Real Estate and guaranteed by Manor Care Realty. For a description of the
Realty Note, see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER
THE DISTRIBUTION--The Realty Note."
CONCURRENT MANOR CARE REAL ESTATE FINANCINGS
In connection with the Distribution, Manor Care Real Estate is offering $350
million aggregate principal amount of the Manor Care Notes. The Manor Care
Notes will be fully and unconditionally guaranteed on a senior and joint and
several basis by Manor Care Realty's present and future subsidiaries, other
than certain unrestricted subsidiaries. In addition, Manor Care Real Estate is
negotiating a commitment letter with Chase and CSI relating to a $150 million
term loan facility and a $300 million revolving credit facility (the "Credit
Facilities"). It is anticipated that the Credit Facilities will be secured by
a majority of the assets of Manor Care Realty and Manor Care Real Estate, by a
pledge of the capital stock of Manor Care Real Estate and Manor Care Realty's
other subsidiaries and by an assignment of certain agreements with ManorCare
Health Services, and, subject to the terms and conditions thereof, will be
available for general corporate purposes and working capital purposes. In
addition, Manor Care anticipates that the Credit Facilities will be fully and
unconditionally guaranteed by Manor Care Realty and substantially all of Manor
Care Realty's present and future subsidiaries. Manor Care will utilize part of
the proceeds from the sale of the Manor Care Notes and borrowings under the
Credit Facilities to fund the cash portion of the Capital Contribution. In the
event that the commitment letter is executed, Chase and CSI will commit to
purchase a portion of such facility and will use their commercially reasonable
efforts to arrange the balance of such facility with other lenders.
THE MCHS CREDIT FACILITY
The Company is negotiating a commitment letter (the "Commitment Letter")
with Chase and CSI pursuant to which Chase will agree to act as administrative
agent for a syndicate of financial institutions for the MCHS Credit Facility
described below and CSI will agree to act as arranger for such credit
facilities. The following summary of the anticipated provisions of the
Commitment Letter does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Commitment Letter.
It is anticipated that the Commitment Letter provides for a five-year
$100,000,000 revolving credit facility, a portion of which may be used for the
issuance of letters of credit.
It is anticipated that the loans under the MCHS Credit Facility (the
"Revolving Loans") will bear interest, at the Company's option, at LIBOR or
Chase's adjusted base rate, in each case plus a variable margin which will be
adjusted depending on the Company's senior, unsecured long-term debt rating by
Standard & Poor's Corporation and Moody's Investor's Service. The Company
anticipates paying a variable quarterly facility fee on the full amount of the
MCHS Credit Facility, irrespective of usage.
The Company expects that the MCHS Credit Facility will be used for general
corporate purposes, including working capital, capital expenditures and
acquisitions.
The Company expects that the Credit Agreement will contain covenants
customary for transactions of this type, including, without limitation,
restrictions on indebtedness; liens and sale-leaseback transactions;
investments, loans and advances; mergers and consolidations; asset sales;
transactions with affiliates; business of the Company and subsidiaries; and
agreements restricting dividends, intercompany loans and advances by
subsidiaries. The Credit Agreement will also contain financial covenants
including ratio of consolidated EBITDA to consolidated interest and rent
expenses and ratio of total debt to consolidated EBITDA.
It is anticipated that events of default under the MCHS Credit Facility will
include, without limitation, and subject to certain cure periods and
exceptions: (i) the nonpayment of principal, interest, fees and other amounts
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payable when due; (ii) the failure to observe or perform any covenant or
undertaking contained in the documentation for the MCHS Credit Facility; (iii)
any representation or warranty shall prove to have been incorrect in any
material respect when made; (iv) a change of control of the Company; (v) the
existence of defaults with respect to any material indebtedness of the Company;
(vi) the occurrence of certain material adverse events with respect to ERISA
plans; (vii) the imposition of certain judgment defaults on the Company or the
commencement of a voluntary or involuntary bankruptcy of the Company or any of
its subsidiaries; and (viii) material default by the Company under material
agreements with Manor Care Realty. In the event that the commitment letter is
executed, Chase and CSI will commit to purchase a portion of such facility and
will use their commercially reasonable efforts to arrange the balance of such
facility with other lenders.
NEW MCHS SENIOR NOTES
In connection with the Distribution, ManorCare Health Services plans to offer
$1,000 principal amount of its 7 1/2% Senior Notes due June 15, 2006 (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 (the "Old Senior
Notes"). Concurrently with the Exchange Offer, Manor Care plans to solicit (the
"Solicitation") consents ("Consents") to certain amendments (the "Proposed
Amendments") to the indenture governing the Old Senior Notes (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 (the "Requisite
Consents"), the Old Indenture will be amended in accordance with the Proposed
Amendments. As a result of the Exchange Offer, ManorCare Health Services, not
Manor Care Realty, will be the obligor on the New MCHS Senior Notes; and Manor
Care Realty, not ManorCare Health Services, will remain the obligor on the Old
Senior Notes. 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 (the "Minimum Tender
Condition") and consummation of the Distribution. Manor Care may in its
reasonable discretion waive any such conditions and accept for exchange any Old
Senior Notes properly tendered. 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 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 nonexchanging holder of the
New MCHS Senior Notes will be bound by such amendment even though such holder
did not consent to the Proposed Amendment. The principal amount of the Realty
Note may be decreased to the extent that Old Senior Notes remain outstanding
upon consummation of the Exchange Offer.
The New MCHS Senior Notes will be senior unsecured obligations of the Company
and will rank pari passu in right of payment with all senior debt of the
Company. After giving pro forma effect to the Distribution and related
transactions as if they occurred on August 31, 1997, ManorCare Health Services
would have had approximately $45.6 million of secured indebtedness, principally
mortgage bond indebtedness. The New MCHS Senior Notes will be issued pursuant
to an indenture between the Company and the Wilmington Trust Company, as
trustee.
The aggregate principal amount of the New MCHS Senior Notes will be limited
to $150 million. The New MCHS Senior Notes will mature on June 15, 2006 and
will bear interest at the rate of 7 1/2% per annum.
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 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, at the
Treasury Rate (as defined in the indenture), plus 15 basis points, plus accrued
interest thereon to the date of redemption.
The New MCHS Senior Notes Indenture contains certain covenants which impose
certain limitations and restrictions on the ability of the Company to (i)
create, incur or assume liens, (ii) enter into sale leaseback transactions and
(iii) enter into affiliated transactions.
The Exchange Offer will expire at 12:00 midnight, New York City time, on
, 1998 or at any later time and date to which the Exchange Offer may be
extended by Manor Care.
46
<PAGE>
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 Information Statement.
The pro forma capitalization table has been derived from the historical
financial statements and reflects certain pro forma adjustments as if the
Distribution had been consummated as of August 31, 1997. See "PRO FORMA
FINANCIAL DATA OF MANORCARE HEALTH SERVICES."
<TABLE>
<CAPTION>
AUGUST 31, 1997
----------------------------------
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt:
New MCHS Senior Notes..................... -- $149,500 (1) $149,500
Long-term debt............................ $193,308 (30,000)(3) 163,308
-------- -------- --------
Total long-term debt.................... 193,308 119,500 312,808
Equity:
Investments and advances from Manor Care.. 277,235 (277,235) --
Common stock, par value $.01, authorized
160.0 million shares, outstanding 63.7
million shares........................... -- 637 (2) 637
Additional paid-in capital................ -- 680,816 (2) 680,816
-------- -------- --------
Total capitalization........................ $470,543 $523,718 $994,261
======== ======== ========
</TABLE>
- --------
(1) Reflects the issuance by ManorCare Health Services of the New MCHS Senior
Notes pursuant to the Exchange Offer and assumes that all of the holders
of the Old Senior Notes accept the Exchange Offer. The consummation of the
Exchange Offer is conditioned on, among other things, acceptance of the
Exchange Offer by holders of at least a majority in principal amount of
the outstanding Old Senior Notes. Obligations with respect to Old Senior
Notes not exchanged will remain obligations of Manor Care Realty following
the Distribution. Manor Care may reduce the principal amount of the Realty
Note prior to issuance or reduce the amount of the cash portion of the
Capital Contribution to the extent Old Senior Notes remain outstanding
upon consummation of the Exchange Offer.
(2) Reflects the contribution of the net assets from Manor Care in connection
with the Distribution Agreement.
(3) Reflects the payment of ManorCare Health Services' allocated portion of
the amounts drawn on Manor Care's Existing Revolving Credit Facility
related to the Vitalink tender offer.
47
<PAGE>
PRO FORMA FINANCIAL DATA
ManorCare Health Services was formed by Manor Care for the purpose of
effecting the Distribution and has no operating history as a separate,
independent company. The historical combined financial statements of ManorCare
Health Services reflect periods during which ManorCare Health Services did not
operate as a separate, independent company, and certain assumptions were made
in preparing such financial statements. The historical combined financial
statements of ManorCare Health Services may not necessarily reflect the
consolidated results of operations or financial position of ManorCare Health
Services or what the results of operations would have been if ManorCare Health
Services had been a separate, independent company during such periods.
The unaudited pro forma combined condensed statements of income for the
fiscal year ended May 31, 1997 and the three month period ended August 31,
1997 give effect to the Distribution and related transactions (including the
Exchange Offer, the Lease Agreements, and the Assisted Living Facility
Management Agreement) as if such transactions occurred on June 1, 1996 and
June 1, 1997, respectively and the Vitalink merger ("TeamCare Merger") with
and into TeamCare, Inc. ("TeamCare") as if it had occurred on June 1, 1996.
The unaudited pro forma combined condensed statements of income for the fiscal
year ended May 31, 1997 and the three month period ended August 31, 1997 have
been prepared by adjusting the historical combined statements of income to
reflect the Distribution and related transactions as if they had been effected
on June 1, 1996 and June 1, 1997, respectively.
The unaudited pro forma combined condensed balance sheet at August 31, 1997
gives effect to the Distribution and related transactions (including the
Exchange Offer and the Lease Agreements) as if such transactions had occurred
at that date. Such balance sheet has been prepared by adjusting the historical
combined balance sheet to reflect the Distribution and related transactions as
if they had been effected on August 31, 1997.
The unaudited pro forma financial statements should be read in conjunction
with the financial data presented elsewhere in this Information Statement. The
pro forma financial data are presented for informational purposes only and may
not reflect the future results of operations or financial position of
ManorCare Health Services or what the results of operations or financial
position would have been had ManorCare Health Services operated as a separate,
independent company during such periods.
48
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------
TEAM LEASE MANAGEMENT PRO
HISTORICAL CARE SUBTOTAL DISTRIBUTION AGREEMENTS AGREEMENT FORMA
---------- -------- -------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $471,152 $192,364 (h) $663,516 $ (1,603)(a) $1,017,570(c) $2,483(e) $1,681,966
Expenses:
Operating expenses..... 413,762 170,681 (h) 584,443 (2,081)(a) 733,362(c) 2,081(e) 1,494,809
177,004(d)
Depreciation and
amortization.......... 20,135 8,027 (h) 28,162 (365)(a) 27,797
General corporate and
other................. 8,385 -- 8,385 (77)(a) 59,774(b) 70,592
2,510 (b)
-------- -------- -------- -------- ---------- ------ ----------
Total expenses......... 442,282 178,708 620,990 (13) 970,140 2,081 1,593,198
-------- -------- -------- -------- ---------- ------ ----------
Income before other
income and (expenses)
and income taxes....... 28,870 13,656 (h) 42,526 (1,590) 47,430 402 88,768
Other income and
(expenses):
Gain on issuance of
Vitalink stock........ 50,271 -- 50,271 50,271
Minority interest
expense............... (3,881) (4,068)(h) (7,949) (7,949)
Interest expense....... (17,317) (7,737)(h) (25,054) (11,250)(f) (25,113)
11,191 (a)
Interest income and
other................. 2,162 127 (h) 2,289 21,875 (g) 24,164
-------- -------- -------- -------- ---------- ------ ----------
Income before income
taxes.................. 60,105 1,978 62,083 20,226 47,430 402 130,141
Provision for income
taxes.................. 23,917 4,175 (h) 28,092 8,090 (i) 18,684(i) 208(i) 55,074
-------- -------- -------- -------- ---------- ------ ----------
Net income (loss)....... $ 36,188 $ (2,197) $ 33,991 $ 12,136 $ 28,746 $ 194 $ 75,067
======== ======== ======== ======== ========== ====== ==========
Outstanding shares of
common stock........... 63,257
Earnings per share...... $ 1.19
==========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
condensed income statement.
49
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------
LEASE MANAGEMENT PRO
HISTORICAL DISTRIBUTION AGREEMENTS AGREEMENT FORMA
---------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $158,696 ($1,035)(a) $278,102 (c) $1,169(e) $436,932
Expenses:
Operating expenses..... 153,619 (1,099)(a) 205,385 (c) 1,099(e) 403,446
44,442 (d)
Depreciation and
amortization........... 7,199 (260)(a) 6,939
General corporate and
other.................. 3,292 (73)(a) 9,895 (b) 13,921
807 (b)
-------- ------- -------- ------ --------
Total expenses......... 164,110 (625) 259,722 1,099 424,306
-------- ------- -------- ------ --------
Income before other
income and (expenses)
and income taxes....... (5,414) (410) 18,380 70 12,626
Minority interest
expense................ 7,301 7,301
Interest expense........ (4,527) 3,112 (a) (4,228)
(2,813)(f)
Interest income and
other.................. 426 5,469 (g) 5,895
-------- ------- -------- ------ --------
Income before income
taxes.................. (2,214) 5,358 18,380 70 21,594
Provision for income
taxes.................. 750 2,143 (i) 6,920 (i) 28(i) 9,841
-------- ------- -------- ------ --------
Net income (loss)....... $ (2,964) $ 3,215 $ 11,460 $ 42 $ 11,753
======== ======= ======== ====== ========
Outstanding shares of
common stock........... 63,708
Earnings per share...... $ 0.18
========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
condensed income statement.
50
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........... $ 23,631 $ 250,000 (a) $ 222,126
(9,005)(b)
(30,000)(a)
(12,500)(d)
Other current assets................ 132,617 119,586 (d) 277,939
25,901 (e)
(165)(b)
-------- -------------- ----------
Total current assets................ 156,248 343,817 500,065
Property and Equipment................ 222,772 14,605 (a) 218,829
(18,548)(b)
Goodwill, net......................... 351,668 -- 351,668
Realty Note........................... -- 250,000 (a) 250,000
Other assets.......................... 52,079 28,516 (a) 91,830
(759)(b)
11,994 (e)
-------- -------------- ----------
Total assets.......................... $782,767 $ 629,625 $1,412,392
======== ============== ==========
LIABILITIES AND EQUITY
Current liabilities................... $ 62,845 $ (509)(b) $ 158,351
55,496 (d)
24,326 (e)
16,193 (f)
Long-term debt........................ 117,748 149,500 (c) 267,248
Due to ManorCare...................... 75,560 (45,560)(c) --
(30,000)(a)
Mortgage Notes........................ -- 45,560 (c) 45,560
Other noncurrent liabilities.......... 71,951 25,500 (e) 82,352
(14,440)(f)
(659)(b)
Minority interest..................... 177,428 -- 177,428
-------- -------------- ----------
Total liabilities..................... 505,532 225,407 730,939
Total equity.......................... 277,235 543,121 (a) 681,453
(27,309)(b)
(149,500)(c)
51,590 (d)
(11,931)(e)
(1,753)(f)
-------- -------------- ----------
Total liabilities and equity.......... $782,767 $ 629,625 $1,412,392
======== ============== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma combined
condensed balance sheet.
51
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Reflects the elimination of revenues, income and expenses associated with
facilities which opened during fiscal year 1997 (the "Developed
Properties") and the reversal of intercompany interest allocated to
ManorCare Health Services. These facilities would not have been purchased
by ManorCare Health Services under the terms of the Development Agreement
until such facilities achieved 75% occupancy.
(b) Reflects net additional annual costs of $2.5 million, or $0.8 million per
quarter, associated with staffing of human resources, finance, legal,
information technology, cash management and accounting personnel;
directors costs and the transfer of expenses to ManorCare Health Services.
Transferred expenses of $59.8 million for the fiscal year ended May 31,
1997 and $9.9 million for the three months ended August 31, 1997 are
related to functions which will be transferred to ManorCare Health
Services. These functions include finance and accounting, information
resources, legal, human resources, community and program development,
product management, and acquisitions. Costs are transferred based on the
historical costs incurred for these functions by Manor Care, Inc.
(c) Reflects revenues and operating expenses of skilled nursing facilities
owned by Manor Care Realty and leased by ManorCare Health Services under
the terms of the Lease Agreements.
(d) Reflects lease payments to Manor Care Realty for skilled nursing
facilities under the terms of the Lease Agreements.
(e) Reflects revenues and expenses associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreement. The income from operations of the Developed Properties totaled
a loss of $0.9 million for fiscal year 1997. Income from operations of the
Developed Properties equals revenues ($1.6 million) less operating
expenses ($2.1 million), general corporate and other expenses ($0.1
million) and depreciation and amortization ($0.4 million). If the
Distribution had taken place on June 1, 1996, the income from operations
of the Developed Properties would have been equal to the management fee
income of $0.4 million; operating expenses of $2.1 million would have been
unchanged; and general corporate and other expenses and depreciation and
amortization would have been booked by the developer, Manor Care Realty.
Accordingly, if the Distribution had taken place on June 1, 1996, revenues
would have been equal to $2.5 million, the sum of the management fee
income of $0.4 million plus reimbursement of the operating expenses of
$2.1 million. The income from operations of the Developed Properties
totaled a loss of $0.4 million for the three months ended August 31, 1997.
Income from operations is equal to historical revenues ($1.0 million) less
operating expenses (1.1 million), general corporate and other expenses
($0.1 million) and depreciation and amortization ($0.3 million). If the
Distribution had taken place on June 1, 1997, the income from operations
of the Developed Properties would have been equal to the management fee
income of $0.1 million; operating expenses of $1.1 million would have been
unchanged; and general corporate and other expenses and depreciation and
amortization would have been booked by the developer, Manor Care Realty.
Accordingly, if the Distribution had taken place on June 1, 1997, revenues
would have been equal to $1.2 million, the sum of the management fee
income of $0.1 million plus reimbursement of the operating expenses of
$1.1 million.
(f) Reflects interest expense associated with the issuance of $149.5 million
of New MCHS Senior Notes.
(g) Reflects interest income earned at an estimated 8.75% on the Realty Note
contributed to ManorCare Health Services on the Effective Date. The final
rate will be fixed and will be the same as that on the $350 million of
Manor Care Notes. The effect of a 1/8% change in rate is $0.3 million.
(h) Reflects TeamCare operations from June 1, 1996 to January 31, 1997, the
portion of the fiscal year prior to the TeamCare Merger.
(i) Reflects tax effect of adjustments made pursuant to notes (a) through (h).
52
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects additional cash of $250.0 million, the Realty Note and certain
other assets contributed to ManorCare Health Services at the Effective
Date, as well as the repayment of ManorCare Health Services' portion of
the revolver related to the Vitalink tender offer.
(b) Reflects the elimination of assets and liabilities attributable to the
Developed Properties and payment of transaction fees totaling $9.0
million.
(c) Reflects the issuance of $149.5 million of New MCHS Senior Notes and of
mortgages associated with certain ManorCare Health Services properties.
(d) Reflects the non-cash working capital of the skilled nursing facilities to
be transferred to ManorCare Health Services pursuant to the terms of the
Distribution Agreement. The working capital will be transferred to
ManorCare Health Services, as lessee, operator and manager of these
facilities pursuant to the Lease Agreements. Accordingly, the functions of
cash collections and payments will be assumed by ManorCare Health Services
after the Distribution. Manor Care Realty will dividend the working
capital to ManorCare Health Services at the date of Distribution;
ManorCare Health Services will reimburse Manor Care Realty for up to $12.5
million of this amount.
(e) Reflects the assumption of benefits and workers' compensation liabilities
by the Company pursuant to the Employee Benefits Allocation Agreement.
(f) Reflects the allocation of deferred tax liabilities to the Company
pursuant to the Tax Allocation Agreement.
53
<PAGE>
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, 1997 and 1996 and the balance sheet data as of August 31, 1997 are derived
from the unaudited combined financial statements of ManorCare Health Services.
The following selected historical financial data of ManorCare Health Services
should be read in conjunction with the historical combined financial
statements and notes thereto included elsewhere in this Information 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." Earnings per share data are presented
elsewhere in this Information Statement and on a pro forma basis only. See
"PRO FORMA FINANCIAL DATA."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, FISCAL YEARS ENDED MAY 31,
-------------------- -----------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- -------- -------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $ 158,696 $ 86,253 $471,152 $263,047 $125,987 $106,374 $73,444
Expenses:
Operating expenses.... 153,619 74,533 413,762 227,410 99,011 85,598 57,663
Depreciation and
amortization......... 7,199 3,718 20,135 11,583 6,090 4,339 2,738
General corporate and
other................ 3,292 1,814 8,385 9,195 2,957 837 894
Provision for asset
impairment........... -- -- -- 1,200 -- -- --
--------- -------- -------- -------- -------- -------- -------
Total expenses...... 164,110 80,065 442,282 249,388 108,058 90,774 61,295
--------- -------- -------- -------- -------- -------- -------
Income before other
income and (expenses)
and income taxes....... (5,414) 6,188 28,870 13,659 17,929 15,600 12,149
Other income and
(expenses):
Gain on issuance of
Vitalink stock....... -- -- 50,271 -- -- -- --
Interest expense...... (4,527) (3,840) (17,317) (11,387) (3,898) (1,698) (1,684)
Other income
(expenses), net...... 7,727 150 (1,719) 276 (1,152) (934) (446)
--------- -------- -------- -------- -------- -------- -------
Income before income
taxes.................. (2,214) 2,498 60,105 2,548 12,879 12,968 10,019
Income taxes............ 750 1,273 23,917 1,437 6,055 6,271 4,488
--------- -------- -------- -------- -------- -------- -------
Net income.............. $ (2,964) $ 1,225 $ 36,188 $ 1,111 $ 6,824 $ 6,697 $ 5,531
========= ======== ======== ======== ======== ======== =======
<CAPTION>
AS OF AUGUST 31, AS OF MAY 31,
-------------------- -----------------------------------------------
1997 1997 1996 1995 1994 1993
-------------------- -------- -------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $782,767 $787,377 $334,880 $134,502 $ 80,850 $64,380
Long-term debt.......... 193,308 180,843 51,387 1,837 106 134
Investments and advances
from Manor Care........ 277,235 277,066 193,807 90,020 43,345 31,343
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, FISCAL YEARS ENDED MAY 31,
-------------------- -------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)............... $ 1,785 $ 9,906 $ 49,005 $ 26,442 $ 24,019 $ 19,939 $ 14,887
EBITDA margin........... 1.12% 11.48% 10.40% 10.05% 19.06% 18.74% 20.27%
Ratio of EBITDA to
interest expense....... 0.39x 2.58x 2.83x 2.32x 6.16x 11.74x 8.84x
Cash provided (used) by
operating activities... (11,015) 8,793 4,401 8,043 16,701 n/a n/a
Cash provided by (used
in) investing
activities............. 6,938 (20,083) (185,602) (86,603) (59,183) n/a n/a
Cash provided by
financing activities... 13,222 8,663 172,097 101,908 42,072 n/a n/a
Investment in property
and equipment.......... 4,246 9,527 39,974 32,001 25,020 n/a n/a
</TABLE>
- --------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including the addition of
$1.2 million in fiscal year 1996 relating to the impairment of assets.
EBITDA is presented to assist in understanding ManorCare Health Services'
operating results. Additionally, certain covenants in the MCHS Credit
Facility are expected to be calculated based on EBITDA. EBITDA is not
intended to represent cash flows for the period, is not presented as an
alternative to operating income as an indicator of operating performance,
may not be comparable to other similarly titled measures of other
companies and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. The items excluded from the calculation of EBITDA
are significant components in understanding and assessing the financial
performance of ManorCare Health Services. EBITDA is included herein to
provide additional information with respect to the ability of ManorCare
Health Services to meet future debt service, capital expenditures and
working capital requirements. See ManorCare Health Services' consolidated
financial statements and the notes thereto appearing elsewhere in this
Information Statement.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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 the
Company during the three fiscal years ended May 31, 1997, May 31, 1996 and May
31, 1995 and the three months ended August 31, 1997. This discussion should be
read in conjunction with the Combined Financial Statements and notes thereto
for such fiscal years included elsewhere in this Information Statement. The
Company's results of operations, liquidity and capital resources are derived
from the combined financial statements of ManorCare Health Services, Inc. The
combined financial statements include the results of operations of Vitalink
Pharmacy Services, Inc. ("Vitalink"), In Home Health, Inc. ("In Home Health")
and the Company's assisted living operations as they were operated by Manor
Care. However, since the Company was operated as part of Manor Care during the
periods presented, these financial statements may not necessarily reflect the
consolidated results of operations or financial position of the Company or
what the results of operations would have been if the Company had been an
independent, public company during those periods.
The health care industry is highly regulated by federal, state and local
law. See "Risk Factors--Regulation" and "Business--Government Regulation."
Certain of these regulations apply to the relationship between ManorCare
Health Services and Manor Care Realty, Vitalink and In Home Health, including
the provisions of the Medicare related party rule and the federal and state
anti-remuneration laws. The Medicare related party rules limit the amount the
Medicare program will reimburse for products and services provided by a
related party. See "Business--Government Regulation--Related Party Rule."
Manor Care has treated Vitalink and In Home Health as related parties in
compliance with these rules. ManorCare Health Services intends to continue to
treat Vitalink and In Home Health as related parties and also plans to treat
Manor Care Realty as a related party. Accordingly, ManorCare Health Services
does not expect that the Medicare related party rule will have a material
effect on the conduct of its business. The anti-remuneration laws govern
certain financial arrangements among health care providers and others who may
be in a position to refer or recommend patients to such providers. See
"Business--Government Regulation--Anti-remuneration laws." Manor Care has
treated Vitalink and In Home Health as separate entities for purpose of the
anti-remuneration laws. ManorCare Health Services intends to continue to treat
Vitalink and In Home Health as separate entities and also plans to treat Manor
Care Realty as a separate entity. Accordingly, ManorCare Health Services does
not expect that the anti-remuneration laws will have a material effect on the
conduct of its business.
OVERVIEW AND OUTLOOK
The Company owns and operates assisted living facilities serving primarily
the private pay elderly market. The Company's assisted living facilities
operate under the brand names "Springhouse" and "Arden Courts." Springhouse
facilities serve the general assisted living population of frail elderly,
while Arden Courts facilities are specifically focused on providing care to
persons suffering from early to middle-stage Alzheimer's disease and related
memory impairment. These assisted living facilities provide housing,
personalized support and health care services in a non-institutional setting
designed to address the individual needs of the elderly or Alzheimer's
afflicted requiring 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.
The Company also owns approximately 51% of Vitalink and 64% of the voting
stock of In Home Health. Vitalink is a publicly traded institutional pharmacy
company which provides medications, consulting, infusion and other ancillary
services to approximately 172,000 institutional beds as well as to home
infusion patients through 57 pharmacies. In Home Health is a publicly traded
company which provides a broad range of professional and support services to
clients requiring medical and personal assistance in their homes. Services
provided include nursing care, infusion therapy, rehabilitation, and personal
care.
56
<PAGE>
The Company's sources of revenues consist of assisted living revenues,
pharmacy revenues generated through the ownership and operations of
institutional pharmacies, and home health revenues generated through nursing,
infusion therapy, hospice, rehabilitation, personal care and homemaking. The
Company's operating expenses consist of operating and payroll expenses
relating to the assisted living facilities and all of the costs of the
pharmacy and home health operations.
Manor Care has increased skilled nursing capacity by approximately 2.5%
annually over the last five fiscal years. Overall occupancy has remained
relatively stable during this period. Occupancy for mature facilities--those
facilities owned by Manor Care for a full two-year period--decreased from
90.3% to 89.8%, between fiscal year 1996 and fiscal year 1997. This decline in
occupancy has resulted in an annual decrease in revenues of approximately $5
million. During the five-year period from fiscal year 1993 to fiscal year
1997, the Company has increased assisted living capacity substantially, from 3
facilities with 321 beds to 31 facilities with 3,173 beds.
Despite increasing competition for private pay customers, Manor Care has
consistently maintained a high ratio of private pay revenues. The slight
decline in Manor Care's private pay mix over the past four years can be
attributed primarily to the inroads that assisted living providers have
achieved in this market segment.
RESULTS OF OPERATIONS
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies (see
"Revenue Recognition" footnote disclosure). For fiscal years 1997, 1996 and
1995, these revenues amounted to $188.0 million, $108.5 million and $39.9
million, respectively. In the opinion of management, any difference between
revenues recorded and final determination will not be significant. The
increase in revenues subject to audit adjustment is due, in large part, to
acquisitions made by Vitalink and, in fiscal year 1996, to the investment in
In Home Health. The Company does not anticipate a material effect on revenues
as a result of the Balanced Budget Act of 1997. However, the regulations
pertaining to this Act have neither been proposed nor implemented, and
therefore, this preliminary conclusion may change as a result. If the
regulations do have a material effect on the Company, the Company will
disclose any such material effect as may be required.
Comparison of Three Months Ended August 31, 1997 vs. Three Months Ended
August 31, 1996
PHARMACY. Pharmacy revenues increased $78.9 million or 200% for the three
month period ended August 31, 1997, primarily due to the contribution from
TeamCare, which was acquired in February, 1997. Excluding TeamCare revenues,
net revenues for the three months ended August 31, 1997 increased $8.6 million
or 21.9% over the earlier period. The increase is due to revenues contributed
by the acquisition of Medisco effective July 31, 1996, an increase in beds
obtained through marketing and sales efforts and increased revenues per bed.
Gross profit for the three months ended August 31, 1997 was $56.9 million,
an increase of $37.5 million or 193.8% over the same period last year. The
gross profit margin was 48.1% for the three months ended August 31, 1997,
compared to 49.2% for the same period last year. The reduction in gross margin
percentage was due to a variety of pricing related factors, including certain
third party reimbursement reductions and changes in customer base.
Operating expenses (excluding costs of goods sold) increased $34.4 million
or 256% for the three month period ended August 31, 1997. Included in
operating expense is an unusual item representing a non-recurring charge of
$2.7 million relating to costs associated with the August 1997 resignation of
Vitalink's Chief Executive Officer and $0.4 million for the consolidation of
all corporate functions in Naperville, IL. Excluding the unusual item,
operating expenses increased $31.3 million to $44.7 million or 37.8% of net
revenues in first quarter of 1998 compared to $13.4 million or 34.0% of net
revenues in the year ending period. The increase is primarily attributable to
the inclusion of TeamCare results effective February 1, 1997. The increase in
operating costs as a percentage of net revenue is attributable to a variety of
factors, including TeamCare's higher payroll costs as a percentage of
revenues, TeamCare's higher selling, general and administration costs and the
amortization of goodwill and pharmacy contracts arising from the TeamCare
Merger ($1.7 million).
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ASSISTED LIVING BUSINESS. Assisted living revenues increased by $3.6 million
or 21% from $17.1 million to $20.7 million for the three month period ended
August 31, 1997 due to capacity ($3.3 million) and rate ($0.3 million)
increases.
Operating expenses increased by $3.2 million or 24% to $16.5 million for the
three month period ended August 31, 1997 compared to $13.3 million for the
three month period ended August 31, 1996, as a result of increases in capacity
and inflation.
HOME HEALTH. Home health revenues decreased $10.1 million, primarily due to
the adjustment to Medicare receivables reserved in connection with recently
received Medicare reimbursement decisions related to the allowableness of
community liaison costs and required documentation to support allowable costs.
Revenues recorded under the Medicare programs are subject to adjustment upon
audit by government intermediaries. As a result of these decisions, In Home
also increased recorded reserves for other, unresolved cost disputes by
approximately $14 million.
Operating expenses increased $3.1 million or 10.4% for the three month
period ended August 31, 1997 primarily due to a restructuring charge of $2.0
million related to lease costs and related equipment write-offs associated
with vacated office sites and to severance agreements with involuntarily
terminated employees. This charge was a result of a plan to restructure In
Home Health's field operations and reduce its cost structure.
Comparison of Fiscal Year Results
PHARMACY. Pharmacy revenues and income from operations increased 94% for
fiscal year 1997 or $132.6 million and 48% or $10.8 million, respectively,
primarily as a result of the TeamCare Merger ($94.6 million), Vitalink's
acquisition of a pharmacy ($12.4 million), and capacity and rate changes at
existing pharmacies ($25.6 million). Pharmacy revenues and income from
operations increased $28.6 million or 26% and $3.5 million or 19% in fiscal
1996 due to capacity increases ($17.4 million) and Vitalink's acquisition of a
pharmacy and infusion business ($5.1 million).
Operating expenses increased $52.8 million to $100.5 million or 36.8% of net
revenues in fiscal 1997 compared to $47.7 million or 33.9% of net revenues in
fiscal 1996. The increase was principally attributable to the inclusion of
TeamCare results effective February 1, 1997. The increase in operating costs
as a percentage of revenues is attributable to a variety of factors, including
TeamCare's higher payroll cost as a percentage of net revenues (25.3% for
TeamCare v. 20.9% for Vitalink), TeamCare's higher selling, general and
administration costs (10.7% v. 8.4%) and the amortization of goodwill and
pharmacy contracts arising from the TeamCare Merger ($3 million).
Gross profit for fiscal 1997 was $133.6 million, an increase of $64.6
million or 90.9% over fiscal 1996. The increase was largely attributable to
the TeamCare Merger. The gross profit margin declined to 48.9% from 49.7%
principally resulting from comparably less profitable new accounts and
reimbursement reductions from certain state Medicaid programs.
Gross profit for fiscal 1996 was $70.0 million, an increase of $14.0
million, or 25.0% over fiscal 1995. The gross profit margin decreased slightly
to 49.7% in fiscal 1996 compared to 49.9% in fiscal 1995.
Operating expenses (excluding cost of goods sold) increased $10.4 million to
$47.7 million or 33.9% of net revenues in fiscal 1996 compared to $37.3
million or 33.2% of net revenues in fiscal 1995. Both payroll and selling,
general and administrative expenses increased to support the growth in beds
serviced. Payroll as a percentage of net revenues increased to 20.7% from
19.7%, primarily resulting from investments in staff for information systems
and selling efforts. The increase in depreciation and amortization is the
result of the amortization of pharmacy contracts, goodwill and noncompete
agreements obtained in connection with acquired businesses as well as
depreciation on capital expenditures from existing pharmacies.
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ASSISTED LIVING. Assisted living revenues increased for fiscal year 1997 by
52.5% or $25.3 million due to increases in rates at existing facilities ($1.9
million), capacity increases ($20.2 million) and occupancy increases ($3.2
million). Assisted living revenues increased $34.3 million or 250% in 1996 due
to capacity growth and rate increases. The Company acquired six assisted
living facilities and opened five Arden Courts in fiscal year 1996.
Operating expenses increased $19.1 million to $59.1 million or 80.6% of net
revenues in fiscal year 1997 compared to $40.1 million or 83.2% of net
revenues in fiscal 1996 as a result of increases in capacity and inflation.
Operating expenses increased $30.2 million to $40.1 million or 83.2% of net
revenues in fiscal year 1996 compared to $9.9 million or 71.4% of net revenues
in fiscal 1995, as a result of increases in capacity and inflation. The
increase in operating expenses as a percentage of revenue is due to a
significant level of new assisted living development.
HOME HEALTH. Home Health revenues increased 67.7% or $50.2 million for the
fiscal year 1997, reflecting a full year of home health operations. The
Company's entry into the home health business with the acquisition of In Home
Health in October 1995 contributed $74.2 million of revenue or 28% of total
fiscal 1996 revenue and represents revenue earned from October 1995 to May
1996.
Operating expenses increased $50.6 million to $124.5 million or 100.1% of
net revenues in fiscal year 1997 compared to $73.9 million or 99.6% of net
revenues in fiscal 1996. The increase from 1996 to 1997 represents a full year
of expenses in fiscal year 1997 versus eight months of expenses for the fiscal
year 1996.
There were no home health revenue or operating expenses in fiscal year 1995,
as the Company entered into the Home Health business as a result of the
acquisition of In Home Health on October 24, 1995.
SKILLED NURSING OPERATIONS
Subsequent to the Distribution, ManorCare Health Services will lease and
operate the Skilled Nursing Facilities owned by Manor Care Realty.
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO AUGUST 31, 1996
Revenues increased from $250.2 million to $274.1 million ($23.8 million or
9.5%) in the three months ended August 31, 1997 as compared to the three
months ended August 31, 1996. The increase in revenue is partially
attributable to increases in rates of 5.8% ($14.5 million) and a 3.2% net
increase in bed capacity. The increase in rates includes the incremental
impact of settlements with government agencies related to prior period
cost reports of approximately $4 million. The growth in bed capacity is
attributable to the purchase of 2 nursing facilities (279 beds), openings of
newly constructed facilities (497 beds) and is net of the sale of four
facilities (498 beds) in the second quarter of 1997.
Operating expenses increased from $191.5 million to $208.2 million ($16.7
million, or 8.7%). The increase in operating expenses is attributable to
additional capacity ($4.4 million) and increased staffing, necessitated by
higher patient acuity and more complex product and service offerings. This
increase is net of a reduction in operating expenses associated with the sale
of the skilled nursing facilities, discussed above. As a result, the gross
profit associated with the operation of the skilled nursing facilities
increased to $65.8 million from $58.7 million in the previous period. Gross
margin as a percentage of sales increased from 23.5% to 24.0%.
Depreciation and amortization increased from $14.6 million to $16.0 million
($1.4 million or 9.6%) for the three month period ended August 31, 1997 from
the same period last year as a result of acquisitions, new construction and
increases in property and equipment resulting from the additions and
renovations to existing facilities during the past twelve months.
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General corporate and other expense decreased from $14.2 million to $11.3
million ($2.9 million or 20.5%) for the three months ended August 31, 1997
when compared to the same period last year. This decrease was primarily
because of downsizing due to reengineering efforts in both organizational and
financial systems. General corporate and other expenses represented 4.1% of
revenues during the three months ended August 31, 1997 compared to 5.7% for
the same period last year. General corporate and other expense includes risk
management, information systems, treasury, accounting, legal, human resources
and other administrative support functions.
Interest income from advances to the discontinued lodging operations
decreased from $5.1 million to $2.6 million ($2.5 million or 48.7%) for the
three months ended August 31, 1997 when compared to the same period last year.
This reduction was attributable to the prepayment of approximately $110.0
million of indebtedness due from discontinued lodging operations in the fourth
quarter of 1997. Interest income and other increased to $2.6 million from $1.7
million in the prior year.
Interest expense increased from $5.3 million to $6.8 million ($1.5 million
or 28.8%) for the three months ended August 31, 1997 when compared to the same
period last year. The increase was attributable to the increase in the average
outstanding balance of the Existing Revolving Credit Facility during the
current period when compared to the same period last year. Interest
capitalized in conjunction with construction programs amounted to $0.8 million
and $1.1 million in the three months ended August 31, 1997 and 1996,
respectively.
The effective income tax rate of 38.2% in the quarter ended August 31, 1997
is consistent with 39.3% effective tax rate in the comparable period in the
prior year.
Income from continuing operations was $22.8 million ($0.36 per share)
compared to $19.0 million ($0.30 per share) in the prior period.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues increased from $985.2 million to $1.1 billion ($71.0 million or 7%)
in fiscal 1997 compared to the prior year. The increase in revenues is
attributable to an increase in average daily rates of approximately 6% ($61
million) and an increase in bed capacity of approximately 5.7%. The increase
in average rates includes the incremental impact of settlements with
government agencies related to prior period cost reports of $4 million. The
growth in bed capacity is attributable to the purchase of two nursing
facilities (279 beds), openings of newly constructed facilities (398 beds),
and additional bed development at existing centers (467 beds) and is net of
the sale of four facilities (498 beds) in the second quarter of 1997.
Operating expenses increased from $735.7 million in 1996 to $789.1 million
in 1997 ($53.4 million or 7%). Additional capacity accounts for $20.5 million
of this increase. The remainder of the increase is caused by increased
staffing, necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales was flat at 25.3% in
fiscal years 1997 and 1996.
Depreciation and amortization increased from $56.5 million to $60.2 million
($3.7 million or 6.6%) in fiscal year 1997. The increase was attributable to
investments in property and equipment.
General corporate and other expenses represent 5.7% of revenue in fiscal
year 1997 compared to 6.4% of revenue in fiscal 1996. This represents a
decrease of approximately $2.9 million from fiscal year 1996 to fiscal year
1997. The reduction of general corporate and other expenses is partially due
to a reduction in employees related to the discontinued lodging segment and
reengineering efforts in both organizational and financial systems.
Additionally, general corporate and other expenses for fiscal year 1997
included a gain of $7.3 million from the sale of four nursing centers and
charitable contributions expense of $5.0 million.
Interest income from advances to the discontinued lodging operations
increased to $21.2 million from $19.7 million in the same period last year.
This increase was attributable to the prepayment penalty of $1.9 million in
connection with the prepayment by the discontinued lodging operations of
approximately $110.0 million of the indebtedness in the fourth quarter of
1997. Interest income and other increased from $3 million in 1996 to $6
million in 1997.
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Interest expense increased by $6 million to $25 million from $19 million.
The increase was primarily attributable to the June 1996 issuance of the $150
million 7 1/2% Senior Notes. This increase was offset by the use of a portion
of those proceeds to reduce borrowings under the revolver.
The effective income tax rate of 40.6% is consistent with the prior year
effective income tax rate of 40.9%.
Income from continuing operations was $88.9 million ($1.40 per share)
compared to $64.4 million ($1.03 per share).
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased from $893.5 million to $985.2 million in fiscal year 1996
($91.7 million or 10.3%). The increase in revenues is attributable to an
increase in average daily rates of approximately 6% ($59 million) and an
increase in bed capacity of approximately 3.3%. The increase in rates includes
the incremental impact of settlements with government agencies related to
prior period cost reports of approximately $7 million. The growth in bed
capacity is attributable to the purchase of four nursing facilities (569
beds), openings of newly constructed facilities (360 beds) and additional bed
development at existing centers (35 beds).
Operating expenses increased from $671.0 million in 1995 to $735.7 million
in 1996 ($64.7 million or 9.6%). The increase in operating expenses was
attributable to additional capacity of $8.3 million as well as increased
staffing, necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales increased slightly
from 24.9% to 25.3% from fiscal year 1995 to 1996.
Depreciation and amortization increased from $48.3 million to $56.5 million
($8.2 million or 17.0%). The increase was attributable to investments in
property and equipment.
General corporate and other expenses represent 6.4% of revenue in fiscal
year 1996 compared to 6.7% of revenue in fiscal 1995. General corporate
expense includes all indirect operating expenses as well as risk management,
information systems, treasury, accounting, legal and other administrative
support for the Company and its various subsidiaries.
Interest income from advances to the discontinued lodging operations
increased to $19.7 million in fiscal 1996 from $15.5 million in the previous
year. This increase was attributable to the increase in balance of Advances to
the Discontinued Lodging Segment during fiscal year 1996. Interest income and
other decreased from $6.4 million in 1995 to $3.5 million in 1996.
Interest expense remained level at $18.9 million for fiscal years 1996 and
1995.
The effective income tax rate of 40.9% is consistent with the prior year
effective income tax rate of 39.4%.
Income from continuing operations was $64.4 million ($1.03 per share) for
fiscal year 1996 compared to $70.9 million ($1.13 per share) for fiscal year
1995.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Distribution, the Company will receive cash of
approximately $250 million and the Realty Note in an aggregate principal
amount of up to $250.0 million. ManorCare Health Services has agreed not to
transfer the Realty Note on or prior to the sixth month anniversary of the
date of issuance thereof. In addition, on or after the third anniversary of
the issuance of the Realty Note, ManorCare Health Services may request that
Manor Care Realty redeem the Realty Note. Manor Care Realty may not have
adequate funds to effect such redemption and in such case may seek to obtain
funds therefor through additional debt or equity financing. There can be no
assurance that Manor Care Realty would be able to obtain such financing. In
addition, the terms of Manor Care Realty's outstanding indebtedness may
prohibit such redemption. In the event that ManorCare Health Services requests
that Manor Care Realty redeem the Realty Note and Manor Care Realty
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does not redeem the Realty Note, the interest rate on the Realty Note will
increase by 200 basis points; provided that such interest rate will not be so
increased unless, as of the time such request for redemption is made, the
aggregate amount of rent paid by ManorCare Health Services under the Lease
Agreements with respect to all properties subject to such Lease Agreements
shall be equal to or exceed the aggregate Priority Sum for all such properties
on a cumulative basis from the Effective Date through the third anniversary
thereof (such aggregate amount of rent being herein referred to as the
"Threshold Rent"). Solely for purposes of calculating the Threshold Rent, (i)
the aggregate Priority Sum for the fiscal year ended May 31, 1999 shall be
deemed to be the aggregate Priority Sum calculated pursuant to the Lease
Agreements plus $5 million and (ii) the aggregate Priority Sum for the fiscal
year ended May 31, 2000 and thereafter shall be deemed to be the aggregate
Priority Sum calculated pursuant to the Lease Agreements plus $10 million.
Manor Care Realty's high degree of leverage could adversely affect Manor Care
Realty's ability to pay principal and interest on or to redeem the Realty Note
and may adversely effect the ability of ManorCare Health Services to sell the
Realty Note. The failure of Manor Care Realty to pay principal and interest on
the Realty Note in a timely manner or the inability of ManorCare Health
Services to sell the Realty Note to a third party for its principal amount
could have a material adverse effect on ManorCare Health Services and could
require ManorCare Health Services to seek alternate sources of liquidity for
its operations. There can be no assurances that such alternate sources of
liquidity will be available. For a description of the Realty Note, see
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION--The Realty Note."
Historically, all cash received by the assisted living facilities and
pharmacy operations has been deposited in or combined with Manor Care's
corporate funds as part of Manor Care's cash management system. Following the
Distribution, the Company will maintain its own cash balances and will
implement an internal cash management system. In addition, the Company is
negotiating a commitment letter with respect to the MCHS Credit Facility. See
"FINANCING" for a description of the anticipated terms of the MCHS Credit
Facility.
The Company's working capital ratio at May 31, 1997 and at May 31, 1996, was
2 to 1. The Company attempts to minimize its investment in net current assets.
Total long term debt totaled $180.8 million at May 31, 1997, and $51.4
million at May 31, 1996. These amounts are comprised of bank debt associated
with Vitalink's merger with TeamCare, amounts due to Manor Care relating to
mortgages on certain assisted living properties, bank debt associated with
Manor Care's tender offer for Vitalink stock, and obligations under capitalized
leases. The current portion of debt at May 31, 1997 amounted to $5.8 million.
The Company's long-term debt totaled $193.3 million as of August 31, 1997. The
long-term debt as of August 31, 1997, is comprised of $111.0 million of bank
debt associated with Vitalink's merger with TeamCare, $45.6 million due to
Manor Care relating to mortgages on assisted living properties, $30.0 million
of bank debt associated with Manor Care's tender offer for Vitalink stock, and
$6.7 million of other debt, including obligations under capitalized leases.
Following the Distribution, all of such indebtedness (other than $30.0 million
of bank debt) will remain outstanding.
The Company believes that cash flows from operations, together with the
proceeds from the Capital Contribution and available borrowings under the MCHS
Credit Facility, will provide it with sufficient resources to meet its working
capital needs, to finance projected capital expenditures and to meet its
liquidity requirements through fiscal year 2001.
PROPERTY AND ACQUISITIONS
On February 12, 1997, Vitalink completed a merger with TeamCare, the pharmacy
subsidiary of GranCare, Inc. ("GranCare"). Vitalink issued 11.4 million shares
in exchange for all of the outstanding shares of GranCare. In addition,
Vitalink funded the redemption of $98.2 million of GranCare's 9 3/8% Senior
Subordinated Notes and assumed approximately $100 million of additional
GranCare indebtedness. The net $1.8 million of untendered GranCare 9 3/8%
senior subordinated notes are due September 15, 2005. The notes require semi-
annual interest payments. A premium of $600,000 has been recorded to reflect
the fair market value of the notes at the date of the TeamCare merger. Also
assumed in the TeamCare merger were various notes payable totaling
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$5.2 million issued in connection with previously acquired pharmacy businesses.
The weighted average interest rate on the notes is 7.03% and their annual
maturities over the next five fiscal years are as follows: $1.8 million, $1.9
million, $0.9 million, $0.2 million and $0.2 million. On May 21, 1997, 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 net pretax gain
resulting from these transactions in Vitalink stock was $50.3 million. Vitalink
also purchased a pharmacy for $5.3 million.
Investment in property and equipment includes routine capital expenditures
and specialty product conversion. During the first quarter of fiscal years 1997
and 1996, investment in property and equipment amounted to $4.2 million and
$9.5 million, respectively. During fiscal years 1997 and 1996, investment in
property and equipment amounted to $40.0 million and $31.6 million,
respectively. Additionally, during fiscal year 1996, $74.3 million was spent to
acquire six assisted living centers with five attached skilled nursing units
and $6.3 million was spent by Vitalink to purchase two pharmacies. In October
1995, the Company purchased approximately 41% of In Home Health's common stock
for $22.9 million and invested another $20.0 million for 100% of its
outstanding voting convertible preferred stock and for warrants to purchase an
additional 6.0 million shares of common stock. The In Home Health redeemable
preferred stock may be redeemed in cash at the option of the Company or In Home
Health on and after October 24, 2000. The In Home Health redeemable preferred
stock ranks senior to the In Home Health common stock, has voting rights on an
as-if converted basis, and is initially convertible into 10 million shares of
In Home Health common stock at a conversion price of $2.00 per share. The In
Home Health redeemable preferred stock bears dividends at 12% per annum and has
a liquidation preference of $100.00 per share. The In Home Health redeemable
preferred stock will accrete over five years from its fair value of $18,500,000
on the date of issuance to its redemption price of $20,000,000 as of the
redemption date. The In Home Health warrants purchased by the Company have an
exercise price of $3.75 per share and expire in October 1998.
The Company's five-year strategic plan includes the acquisition of 170 Arden
Courts and 61 Springhouse facilities. The Company expects that the majority of
these acquisitions will be newly developed facilities open less than two years.
The aggregate capital required to complete these acquisitions is estimated at
[$1.7 billion]. Principal capital sources planned to fund the acquisitions
include $500 million of cash and notes received in connection with the
Distribution and cash provided from operations. The Company's plans call for
the acquisition of 24 Arden Courts and eight Springhouse facilities during the
period from the date of Distribution to May 31, 1999. Total expenditures for
these acquisitions are projected to be approximately $10.0 million and $200.0
million in fiscal years 1998 and 1999, respectively. Additionally, the Company
expects to incur minor expenditures for routine renovation and maintenance of
existing properties.
PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances, which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net realizable
value, an impairment loss is recorded in the period the impairment is
determined. In fiscal year 1996, the Company incurred costs in excess of the
original amount expected to be incurred for the development of Arden Courts
billing and receivables systems. Intensive testing during a six month pilot
identified over 100 major system problems which led to the determination that
the newly developed system was not functional and that a major system re-write
was needed. Therefore, the Company compared the estimated net realizable value
of the systems, based on the fair value of similar assets, to the carrying
amount of these costs and determined that the carrying amount was in excess of
the fair value. Accordingly, the Company recorded a provision of $1.2 million.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Information Statement including the words
"plans," "anticipates," "intends," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from
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those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
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. The Company plans to adopt SFAS 128 in
fiscal year 1998 and does not expect the impact to be significant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of comprehensive
income and its components. 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 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. The Company plans to adopt SFAS 131 in
fiscal year 1999 and has not determined the impact of adoption.
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BUSINESS
OVERVIEW
ManorCare Health Services believes that it is a leading provider of a full
range of senior support health care services. The Company provides an array of
services that includes skilled nursing, assisted living, institutional
pharmacy and home health care and additional support services for the frail
elderly living at home. ManorCare Health Services is striving to become the
nation's foremost provider of high-quality senior support health care services
within the private pay segment. In order to achieve this goal, ManorCare
Health Services is planning to focus on the rapid acquisition of assisted
living facilities in cluster markets pursuant to the Development Agreement
with Manor Care Realty. Under the Development Agreement, ManorCare Health
Services intends to acquire from Manor Care Realty approximately 170 Arden
Courts and 38 Springhouse senior residences to be newly developed by Manor
Care Realty during the next five years. See "RELATIONSHIP BETWEEN MANOR CARE
REALTY AND THE COMPANY 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. The skilled
nursing facilities are located in 28 states and contain approximately 24,079
beds. These facilities provide skilled nursing services principally for
residents over the age of 65. Within its skilled nursing facilities, the
Company operates 143 Arcadia special-care units which provide care to
individuals in the middle to late stages of Alzheimer's disease and 21
MedBridge high acuity units which focus on short-term, post-hospital care for
medically complex residents and those in need of aggressive physical
rehabilitation. The Company owns and operates 35 assisted living facilities in
12 states containing 3,757 units. These facilities include 14 Arden Courts,
serving persons with early to middle-stage Alzheimer's disease or related
memory impairment, and 21 Springhouse senior residences, serving the general
assisted living population. The Company also has majority control of Vitalink,
one of the largest public institutional pharmacy companies, and In Home
Health, a national home health care services company. Vitalink operates 57
institutional pharmacies in 36 states, serving approximately 172,000 beds. In
Home Health provides home health services in 14 states.
On October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration include strategic mergers, joint ventures or other
business combinations that could enhance Vitalink's strategic position in its
markets, better enable it to serve its customers and increase Vitalink's
shareholder value. Vitalink has retained SBC Warburg Dillon Read Inc. to act
as financial advisor in connection with the exploration of strategic
alternatives with respect to Manor Care's interest in Vitalink. Manor Care has
no present commitments or agreements with respect to any such transaction and
there can be no assurance that Manor Care (or ManorCare Health Services after
the Distribution) will decide to enter into any such transaction or, should it
decide to do so, will be able to reach an agreement with respect to any such
transaction on terms acceptable to it.
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INDUSTRY TRENDS
There are several trends affecting the long-term care industry. First, the
competitive landscape is changing. The industry is consolidating as smaller,
local operators are being acquired by larger operators. In addition, several
large multi-unit operators have merged to form even larger chains. By 1995,
54% of the skilled nursing homes in the country were part of a chain, up from
28% in 1977. Finally, some long term care providers have recognized the need
to diversify by expanding into assisted living, home health care, and
ancillary services.
Second, many hospitals have developed their own post-acute care capabilities
in response to cost containment pressures. These integrated delivery systems
place a premium on keeping patients within their systems. The development of
post-acute care capabilities by hospitals impacts providers of long-term care,
as these providers have historically received a large number of referrals from
clinical networks, including hospitals, physicians and managed care
organizations. However, shifts away from cost-based reimbursement to
prospective pay systems may cause hospitals to rethink their strategy and
create new opportunities for partnerships with home care and skilled nursing
providers.
Third, the number of elderly in America is expanding faster than the overall
population. As the senior population continues to expand, the demand for
health related services targeted specifically at serving their needs is
increasing. The number of people aged 75 and older, the primary consumer of
senior support health care services, is growing more quickly than the overall
population. According to the U.S. Bureau of the Census, the number of seniors
75 and older is estimated to increase by approximately 37% from 13 million in
1990 to an estimated 17.8 million in 2005. The U.S. Bureau of the Census data
predicts that total U.S. population will only increase by approximately 15%
during the same period.
Other market trends contributing to change in the long-term care industry
include:
. a continued increase in the number of frail, elderly individuals living
alone who require assistance with their activities of daily living
("ADLs") such as dressing, bathing, eating, and medication management;
. the increase in the net worths of older people, which enables a greater
number of individuals to privately pay for support services, home health
care, assisted living and skilled nursing care; and
. the growth in the number of dual-career families who may find it more
difficult to care for their elderly relatives in their homes and who may
also have greater financial resources to better support their elderly
relatives outside the home.
The attractive demographics and future growth opportunities have encouraged
existing market participants to increase their product offerings and have
encouraged new entrants such as real estate developers to offer continuing
care retirement communities and assisted living facilities which are focused
on the frail elderly care market. In addition, more options geared towards
maximizing the individual's ability to live independently in their homes are
becoming available. These industry participants are expanding the set of
senior support health care options for the elderly. The level of care selected
by the elderly and their families depends on the needs of the individual. The
range of health services available for the elderly includes:
. Home health care--the provision of health care service to the elderly in
their homes, including nursing, infusion therapy, hospice,
rehabilitation, personal care, companion care and home making;
. Senior support services--emerging new services geared towards the
elderly, including geriatric care management, financial management and
planning, transportation services and other services that support the
elderly living at home;
. Physician services--geriatric centers and physicians who specialize in
geriatric care and outpatient disease management;
. Short-term care--adult day care and respite care;
. Residential care--congregate care facilities, continuing care retirement
communities, assisted living facilities and skilled nursing facilities;
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. Alzheimer's disease care--facilities focused on individuals with
Alzheimer's disease or related memory impairment; and
. Acute care--medical treatment in hospital facilities as well as sub-acute
care in hospitals and skilled nursing facilities.
BUSINESS STRATEGY
The Company's goal is to become the nation's foremost provider of high-
quality senior support health care services within the private pay segment.
The Company 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 the Company 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 be obligated to purchase
each such facility if occupancy reaches 75% for a period of five days
during the two-year period measured from the time a particular facility
opens. In addition, ManorCare Health Services will make acquisitions of
other assisted living properties on an opportunistic basis. The Non-
Competition Agreement limits ManorCare Health Services' ability to
develop or enter into management agreements with respect to assisted
living facilities located near assisted living facilities being developed
by Manor Care Realty; however, it does not restrict ManorCare Health
Services' ability to acquire new assisted living facilities. The Company
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, the Company 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, the Company believes
that continuing to focus on private pay patients enables it to reduce its
exposure to anticipated changes in government reimbursement practices and
enables the Company to achieve more attractive profit margins. Private
pay patients accounted for approximately 60% of the Company's skilled
nursing and assisted living revenues in fiscal 1997 compared to a 1996
industry average of approximately 30% for for-profit nursing care
providers. The Company believes that its high-end specialty products such
as Williamsburg (luxurious accommodations including upgraded furnishings
and decor, concierge services and a private dining area with a gourmet
menu), Heritage (luxurious accommodations including upgraded furnishings
and decor, a private lounge and other amenities) and Arcadia (a secure,
self-contained unit designed specifically for Alzheimer's and other
related memory disorder patients) will enable the Company to continue to
attract upper income, service sensitive residents who pay directly for
services without the benefit of any government assistance program.
The Company has set a goal of dedicating a significant portion of its
skilled nursing beds to specialty products. The Company believes that this
drive and the Company's aggressive expansion into the assisted living
industry will further enhance its leadership position in the private pay
segment. The Company 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.
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. Extend Leadership Position as Provider of the Most Innovative Alzheimer's
Services in the Industry. The Company 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. The Company's Arcadia special-care units in its skilled nursing
facilities meet the needs of individuals in the middle to late stages of
Alzheimer's disease. The Company plans to continue to develop Arcadia
special-care units throughout its existing markets. The Company's Arden
Courts assisted living facilities serve individuals in the earlier stages
of the disease process. The Company plans to open approximately 170 Arden
Courts in the next five years. The Company also serves individuals
suffering from Alzheimer's and other forms of dementia through its
Springhouse facilities which offer specialized programs for this
population. The Company believes that its proprietary Alzheimer's care
protocols are integral to the high quality of care it provides to its
Alzheimer's residents. The Company's integrated continuum of care allows
ManorCare Health Services to meet the needs of its Alzheimer's customers
from diagnosis to home-based care through assisted living to high acuity
facility-based care. For example, for an individual moving through the
stages of Alzheimer's disease, this continuum of care would begin with a
memory assessment program followed by home health care. The individual
would then reside in an Arden Courts assisted living facility for the
early to middle stages of the disease and would ultimately, during the
middle to late stages of the disease, move into an Arcadia special-care
unit.
. Maintain Focus on High Quality Personalized Care and Services. The
Company is dedicated to delivering the highest level of service quality
and patient satisfaction, striving to provide its residents with
personalized care and services. The Company believes that delivering the
highest product integrity standards will enable it to achieve the
Company's goal of delivering "best in class" services to its residents--
services which are considered superior by the Company's customers, as
well as industry experts, to those services offered by the Company's
competitors. The Company believes that providing "best in class" services
will reinforce its reputation as the leading provider of high quality,
personalized senior support health care services. ManorCare Health
Services relies on its product management organization to develop
Company-wide care protocols, standards of operation and training
programs, which ensure that ManorCare Health Services delivers superior
and consistent care in all of its facilities. In addition to providing
high quality and consistent services on a Company-wide basis, the Company
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. The Company 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. The Company 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,
the Company created a unified national brand name for all the elements in
its continuum of care: "ManorCare Health Services." The Company 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, the Company
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. The Company
is leveraging its premier brand name through partnership arrangements
with complementary elder health care providers. The Company's 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. The Company 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, the
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Company plans to expand its continuum of care by providing senior support
services to the frail elderly still living at home. The Company 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. The Company is pursuing a strategy to develop information
systems technology to efficiently track its customers and create superior
cost-effective clinical protocols. The Company believes that the
information gathered about these customers coupled with the relationship
formed with them and their families will increase their awareness of and
confidence in the quality of services provided by ManorCare Health
Services.
. Focus on Development of Cluster Markets. The Company 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, the Company believes it can leverage its cost
structure and build on its brand image. In addition, the Company is
centralizing certain corporate functions, including accounting, billing
and other non-care related functions at the cluster level. The Company
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, the Company 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. The Company 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
The Company believes it is the premier operator of skilled nursing
facilities in the United States. Through a cohesive framework of proprietary
care protocols the Company'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 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.
The Company 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.
The Company leases, operates and manages Manor Care Realty's 168 skilled
nursing facilities in 28 states pursuant to Lease Agreements under which
ManorCare Health Services pays 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. The Company 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 the Company 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 the Company'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. The Company believes that the Heritage and
Williamsburg design concepts support the Company's reputation as the premier
provider of skilled nursing care and contributes to the Company's high
percentage of private pay residents as compared to the rest of the industry.
Within its skilled
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nursing facilities, the Company operates 143 Arcadia special-care units
providing services to individuals in the middle to late stages of Alzheimer's
disease or afflicted with related memory impairment. The Company also operates
21 dedicated MedBridge high acuity units featuring high staff-to-patient
ratios, sophisticated clinical capabilities and state-of-the-art
rehabilitation departments. In addition, the Company's facilities offer
specially designed wound care programs, oncology and orthopedic rehabilitation
programs. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY--Lease
Agreements."
The Company believes these high-end specialty products will facilitate
marketing efforts to attract longer stay (1-3 years) private pay residents.
The Company-managed skilled nursing and rehabilitation facilities range in bed
capacity from 53 to 265 beds and had an aggregate bed capacity of 24,079 beds
during the 1997 fiscal year. The Company's 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. The Company has an acquisition plan pursuant to which it
intends to acquire from Manor Care Realty approximately 170 Arden Courts and
38 Springhouse senior residences during the next five years. Pursuant to the
Development Agreement, Manor Care Realty will develop assisted living
facilities for sale to ManorCare Health Services. ManorCare Health Services
will be obligated to purchase each such facility if occupancy reaches 75% for
a period of five days during the two-year stabilization period measured from
the time a particular facility opens. The purchase price for each facility
will be at a premium to Manor Care Realty's total development costs, such
premium ranging from 15% to 34%, based on the number of months elapsed since
the opening of the relevant facility. Total approved development costs include
expenses incurred in connection with the development and construction of the
facilities, but do not include operating losses incurred during the two-year
stabilization period. The premium to total approved development costs is
intended to compensate Manor Care Realty for the increasing value of its
investment over time as well as for the risks it takes in connection with
developing assisted living facilities, including the risks inherent in
operating the facilities during the two-year stabilization period. 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. The Company 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 THE COMPANY AFTER THE DISTRIBUTION--Development
Agreement."
In a strategy similar to that employed in the Company's skilled nursing
facilities, the Company's 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. The Company also believes that it offers more security to its
customers by including these health-related services as part of its care
delivery. The Company 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."
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The Company's 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. The Company's specially designed social activities
provide Arden Courts residents with a minimum of eight hours of meaningful
interactive activity per day. In addition, the Company utilizes special
nutritional programs to help assure that caloric intake is maintained in its
residents. The Company's Arden Courts assisted living facilities also offer
education, counseling and support to the residents' families.
The Company's Springhouse senior residences are freestanding, residential-
style facilities designed to meet the needs of the general assisted living
population. The Company's 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.
The Company 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, the Company's 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, the Company utilizes a current
physician's report to ascertain the health status and needs of the resident.
The Company 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. The Company utilizes the plan of care as the basis for determining
the monthly charges for each resident's care and services. In addition, the
Company 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, the Company also makes available third-party specialized
health care services to patients when necessary.
The Company's facilities accept residents for respite care (short term
placement for several days to several months) to accommodate short-term
exigencies. The Company 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
The Company owns 51% of Vitalink, a publicly traded company that provides
institutional pharmacy services to nursing facilities, assisted living
facilities and other institutions. The Company believes it will benefit
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from increased revenues generated through Vitalink's growth strategy,
including (i) expansion of market share through selective industry
acquisitions which should permit Vitalink to leverage its critical mass,
access new customers and realize operational efficiencies through
consolidation of the combined entities' infrastructure; (ii) continued
penetration of existing markets through targeting of non-ManorCare Health
Services institutional facilities to maximize pharmaceutical facility output;
(iii) further growth from meeting the pharmacy requirements of new or acquired
ManorCare Health Services skilled nursing and assisted living facilities;
(iv) geographically targeting dominant infusion service home care companies to
drive sales of infusion products; (v) development of proprietary information
and database systems to provide state of the art patient care and disease
management capabilities; and (vi) development of new services to provide
support to the elderly while they still reside in their homes, such as disease
management or patient education and compliance programs. Vitalink's recent
acquisition of GranCare's institutional pharmacy business, TeamCare, and the
resultant expansion of the scope of its business to include the provision of
pharmacy services to institutional clients with 172,000 related institutional
beds is indicative of the implementation of Vitalink's growth strategy.
Vitalink, which is the second largest publicly traded institutional pharmacy
in the country, is a high quality, value-added partner with health care
providers and payors and provides four types of services:
. Customized filling of prescription and non-prescription medications for
individual patients pursuant to physician orders delivered to nursing
facilities.
. Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.
. Infusion therapy services, consisting of the administration of a product
(nutrient, antibiotic, chemotherapy or other drugs or fluids) by tube,
catheter or intravenously. Vitalink prepares and delivers the product
which is administered by the nursing center staff.
. Integrated data systems such as VitalCONSULT, an integrated consultant
software package that allows pharmacists and nurses to record outcome
events, laboratory data, and patient status updates and administer
disease management programs and formularies more efficiently, and OPTIMA
(Optimizing Patient Theory in Medication Administration), a state-of-the-
art patient care management system designed to identify individuals who
are at high risk for certain diseases, which focuses on treatment
protocols and incorporates a disease-specific drug formulary. These
innovative systems increase efficiency, enhance clinical support and
result in superior outcomes.
Vitalink operates 57 institutional pharmacies located in 36 states and four
regional infusion pharmacies, which specialize in pharmaceutical dispensing of
individual medications, pharmacy consulting and infusion therapy products. In
the 1997 fiscal year, approximately 13% of the beds serviced by Vitalink were
Manor Care-affiliated. Net revenue from Manor Care and its patients (including
revenues received from government reimbursement programs) accounted for
approximately 29%, 48% and 49% of total net revenues in fiscal years 1997,
1996 and 1995, respectively. The balance came from unrelated third parties. On
October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration include strategic mergers, joint ventures or other
business combinations that could enhance Vitalink's strategic position in its
markets, better enable it to serve its customers and increase Vitalink's
shareholder value. Manor Care does not believe that any of the strategic
alternatives that it is exploring will have a material effect on the
operations of the skilled nursing business and the assisted living business.
Vitalink has retained SBC Warburg Dillon Read Inc. to act as financial advisor
in connection with the exploration of strategic alternatives with respect to
Manor Care's interest in Vitalink. Manor Care has no present commitments or
agreements with respect to any such transaction and there can be no assurance
that Manor Care (or ManorCare Health Services after the Distribution) will
decide to enter into any such transaction or, should it decide to do so, be
able to reach an agreement with respect to any such transaction on terms
acceptable to it.
HOME HEALTH CARE SERVICES
The Company provides home health care services through its majority owned
subsidiary, In Home Health. In those markets in which In Home Health does not
participate, the Company is expanding its relationships with other regional
home health care service providers. Through In Home Health, the Company offers
its clients a
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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 the Company's integrated continuum of care. In
addition, the Company believes that its home health care businesses profit
from referrals from its assisted living and skilled nursing facilities. In
Manor Care's 1997 fiscal year, In Home Health indirectly derived approximately
$6.8 million in revenues (less than 10% of In Home Heath's fiscal 1997
revenues) from referrals from Manor Care facilities. On September 15, 1997,
President Clinton issued a Medicare moratorium on new home health agencies.
The moratorium is scheduled to last for 6 months so that new regulations can
be proposed to combat fraud. Given the short duration of the moratorium and
the fact that the moratorium only pertains to new home health providers, the
Company does not believe that there will be any material adverse affect on
either In Home Health or on the Company as a result thereof.
The home health care and support services that the Company provides through
In Home Health include skilled nursing, infusion therapy, hospice,
rehabilitation, personal and companion care and homemaking. Hospice services
are an important new area of growth, and In Home Health operates 15 Medicare
certified hospices in its 19 markets. In Home Health plans to become certified
in the four remaining geographic markets as soon as it can meet the
requirement of obtaining a Certificate of Need, either through acquisition of
an existing home health agency which has a CON or upon completion and approval
of application for a new CON. This process could take one to three years
because of the current moratorium on home health agency applications and the
long process of receiving approval for a CON. The Company also expects to
broaden the range of home health care options it offers by providing its home-
based Alzheimer's customers with specially trained companions who can provide
daily service ranging from short visits to all day care.
The Company 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, the Company 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
the Company to seek temporary employees through employment agencies at an
increased cost.
A vast majority of the Company's 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. The Company believes that it enjoys a good relationship with
its employees.
PROPERTIES
The Company's signature Arden Courts and Springhouse model facilities, first
designed in 1993 and 1994 respectively, are freestanding, residential-style
facilities. Each Arden Courts facility ranges in size from 25,000 to 28,000
square feet, is built to target a site ranging between three and four acres
and has a capacity of 52 to 56 residents. Each Springhouse facility ranges in
size from 65,000 to 70,000 square feet, is built to target a site ranging
between five and six acres and has a capacity of 105 to 110 residents.
Approximately 30-40% of each facility is devoted to common areas and
amenities, including reading rooms, family or living rooms and other areas
designed to promote interaction among residents. The ground level typically
contains a kitchen and common dining area, administrative offices, a laundry
room, a library or living room, a wellness center, barber shop, crafts room,
spa and a snack room. The Company's assisted living facilities are usually one
to three stories and are functionally arranged to provide a home-like
atmosphere. The architectural and interior design concepts incorporate the
ManorCare Health Services operating philosophy of delivering superior quality
care, protecting resident privacy, enabling freedom of choice, encouraging
independence and fostering individuality in a home-like setting.
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<PAGE>
The skilled nursing facilities operated by the Company range in bed capacity
from 53 to 265 beds and have an aggregate bed capacity of 24,079 beds. Most of
the skilled nursing facilities have been designed to permit private and semi-
private patient room accommodations. Most facilities have individually
controlled heating and air-conditioning units. Each skilled nursing facility
contains a fully equipped kitchen, day room areas, administrative offices and
in most cases a physical therapy room.
The Company has occupied its current headquarters since August 1996. The
main building is approximately 335,000 square feet and is 90% occupied at
November 30, 1997. There is another building on the property which is not used
by the company (200,000 square feet of which 180,000 square feet is storage
and 20,000 square feet is office) and of which 80,000 square feet is subleased
to an unrelated party. The buildings and the approximately 100 acres of land
on which they are situated are controlled through a lease. The property is
zoned for another 1,000,000 square feet of commercial space. Manor Care
believes that the main building will be adequate for expansion at the current
pace at least through the year 2000. For a description of the arrangements
with respect to the headquarters facility after the Distribution, see
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION--Office Lease Agreement."
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<PAGE>
The table below summarizes certain information regarding the Company's
facilities as of August 31, 1997 after giving pro forma effect to the
Distribution:
ASSISTED LIVING SERVICES--SPRINGHOUSE
<TABLE>
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Tucson........................................................ AZ 107(1)
Brea.......................................................... CA 92
Laguna Hills.................................................. CA 288(3)
Whittier...................................................... CA 73
Boynton Beach................................................. FL 127
Boynton Beach--Village........................................ FL 104
Dunedin....................................................... FL 110(1)
Naples........................................................ FL 307(3)
Port Charlotte................................................ FL 84
Sarasota...................................................... FL 106(1)
Peoria........................................................ IL 301(3)
Carmel........................................................ IN 262(3)
Bethesda...................................................... MD 92
Bethesda--Westwood............................................ MD 62(2)
Kensington.................................................... MD 201(4)
Silver Spring................................................. MD 118
Southfield.................................................... MI 101
Fairfield..................................................... OH 257(3)
Westlake...................................................... OH 97
Pottstown Residential......................................... PA 55(1)
West Reading Residential...................................... PA 57
Total Springhouse Facilities.................................. 21
-----
Total Springhouse Units....................................... 3,001
=====
ASSISTED LIVING SERVICES--ARDEN COURTS
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Farmington.................................................... CT 55
West Palm Beach............................................... FL 56(1)
Elk Grove..................................................... IL 55(1)
South Holland................................................. IL 56(1)
Potomac....................................................... MD 48(1)
Silver Spring................................................. MD 49(1)
Sterling Heights.............................................. MI 54
Cherry Hill................................................... NJ 53
Westlake...................................................... OH 56
Allentown..................................................... PA 56
King of Prussia............................................... PA 54(1)
North Hills................................................... PA 56(1)
Yardley....................................................... PA 52(1)
Fair Oaks..................................................... VA 56(1)
Total Arden Courts Facilities................................. 14
-----
Total Arden Courts Units...................................... 756
=====
</TABLE>
- --------
(1) Each parcel of land on which each of these facilities is located is
covered by a 99 year ground lease between Manor Care Realty, as landlord,
and ManorCare Health Services, as tenant. ManorCare Health Services owns
the buildings and improvements located thereon and the furniture, fixtures
and equipment located therein.
(2) This facility is leased by ManorCare Health Services from an unrelated
third party.
(3) These facilities also contain skilled nursing beds in the following
numbers: Naples (97), Laguna Hills (98), Peoria (52), Carmel (57) and
Fairfield (57).
(4) This facility is owned by an unrelated third party and managed by
ManorCare Health Services pursuant to a management agreement.
75
<PAGE>
SKILLED NURSING SERVICES
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
ARIZONA
Tucson.................. 117
-----
Total................... 117
=====
CALIFORNIA
Citrus Heights.......... 147
Encinitas............... 106
Fountain Valley......... 147
Hemet................... 175
Palm Desert............. 178
Rancho Bernardo......... 94
Rossmoor................ 119
Sunnyvale............... 139
Walnut Creek............ 154
-----
Total................... 1,259
=====
COLORADO
Boulder................. 149
Denver.................. 152
-----
Total................... 301
=====
DELAWARE
Pike Creek.............. 151
Wilmington.............. 138
-----
Total................... 289
=====
FLORIDA
Boca Raton.............. 178
Boynton Beach........... 179
Carrollwood............. 117
Dunedin................. 119
Jacksonville............ 114
Naples.................. 116
Palm Harbor............. 179
Plantation.............. 118
Sarasota................ 177
Venice.................. 128
West Palm Beach......... 120
Winter Park............. 133
-----
Total................... 1,678
=====
GEORGIA
Decatur................. 131
Marietta................ 116
-----
Total................... 247
=====
<CAPTION>
ILLINOIS
<S> <C>
Arlington Heights....... 151
Champaign............... 98
Decatur................. 95
Elgin................... 80
Elk Grove............... 179
Hinsdale................ 190
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Kankakee................ 104
Libertyville............ 149
Naperville.............. 112
Normal.................. 95
Oak Lawn................ 179
Oak Lawn Americana...... 142
Orchard Manor........... 53
Palos Heights........... 179
Palos Heights West...... 120
Peoria.................. 120
Rolling Meadows......... 154
South Holland........... 188
Urbana.................. 98
Westmont................ 115
Wilmette................ 76
-----
Total................... 2,677
=====
INDIANA
Anderson................ 225
Indianapolis North...... 185
Indianapolis South...... 119
Kokomo.................. 100
-----
Total................... 629
=====
IOWA
Cedar Rapids............ 102
Davenport............... 102
Dubuque................. 94
Waterloo................ 95
-----
Total................... 393
=====
KANSAS
Overland Park........... 173
Topeka.................. 120
Wichita................. 117
-----
Total................... 410
=====
MARYLAND
Bethesda................ 87
Chevy Chase............. 157
Largo................... 128
Potomac................. 136
Roland Park............. 74
Rossville............... 178
Ruxton.................. 221
Silver Spring........... 119
Towson.................. 126
Wheaton................. 98
-----
Total................... 1,324
=====
</TABLE>
76
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
MISSOURI
Florissant.............. 97
Fremont................. 220
-----
Total................... 317
=====
MICHIGAN
Kingsford............... 105
Windemere............... 189
-----
Total................... 294
=====
NEVADA
Reno.................... 149
-----
Total................... 149
=====
NEW JERSEY
Cherry Hill............. 107
Mountainside............ 148
West Deptford........... 135
-----
Total................... 390
=====
NEW MEXICO
Camino Vista............ 133
Northeast Heights....... 138
Sandia.................. 177
-----
Total................... 448
=====
NORTH CAROLINA
Pinehurst............... 112
-----
Total................... 112
=====
NORTH DAKOTA
Fargo................... 107
Minot................... 105
-----
Total................... 212
=====
OHIO
Akron................... 99
Barberton............... 118
Belden Village.......... 144
Centreville............. 139
Cincinnati.............. 149
Lake Shore.............. 198
Mayfield Heights........ 148
North Olmstead.......... 177
Oregon.................. 108
Rocky River............. 208
Sycamore Glen........... 97
Westerville............. 179
Willoughby.............. 154
Woodside................ 143
-----
Total................... 2,061
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
OKLAHOMA
Midwest City............. 108
Norman................... 102
Northwest Oklahoma City.. 115
Southwest Oklahoma City.. 110
Tulsa.................... 107
Warr Acres............... 100
Windsor Hills............ 102
-----
Total.................... 744
=====
PENNSYLVANIA
Allentown................ 165
Bethel Park.............. 160
Bethlehem-I.............. 224
Bethlehem-II............. 225
Camp Hill................ 119
Carlisle................. 151
Chambersburg............. 212
Dallastown............... 202
Devon Manor.............. 265
Easton................... 225
Elizabethtown............ 97
Fitzgerald Mercy......... 119
Harrisburg............... 233
Huntingdon Valley........ 120
Jersey Shore............. 121
King of Prussia.......... 147
Kingston Court........... 125
Kingston East............ 177
Lansdale................. 171
Laureldale............... 198
Lebanon.................. 159
McMurray................. 141
Monroeville.............. 119
North Hill............... 199
Pittsburgh............... 149
Pottstown Nursing........ 158
Pottsville............... 178
Sinking Spring........... 214
Sunbury.................. 124
West Reading............. 176
Whitehall................ 171
Williamsport North....... 152
Williamsport South....... 127
Yardley.................. 140
Yeadon................... 199
York North............... 162
York South............... 123
-----
Total.................... 6,147
=====
SOUTH CAROLINA
Charleston............... 117
Columbia................. 130
Lexington................ 118
-----
Total.................... 365
-----
</TABLE>
77
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
SOUTH DAKOTA
Aberdeen................ 98
-----
Total................... 98
=====
TEXAS
Dallas.................. 201
Fort Worth.............. 158
Forth Worth NW.......... 103
San Antonio-Babcock..... 210
San Antonio-North....... 89
San Antonio-Northwest... 145
San Antonio-Windcrest... 186
Sharpview............... 126
Temple.................. 102
Temple Care............. 140
Webster................. 111
-----
Total................... 1,571
=====
UTAH
Ogden................... 133
-----
Total................... 133
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- ----
VIRGINIA
Arlington............... 191
Fair Oaks............... 118
Imperial................ 127
Stratford Hall.......... 233
----
Total................... 669
====
WASHINGTON
Gig Harbor.............. 119
Lynwood................. 112
Meadow Park............. 125
Spokane................. 124
----
Total................... 480
====
WISCONSIN
Appleton................ 101
Fond du Lac............. 107
Green Bay-East.......... 78
Green Bay-West.......... 105
Madison................. 174
----
<CAPTION>
565
Total................... ====
</TABLE>
TOTAL SKILLED NURSING FACILITIES: 171
TOTAL SKILLED NURSING BEDS: 24,079
All of the facilities listed in the above table are owned or leased by Manor
Care Realty and leased by ManorCare Health Services except for five facilities
owned directly by ManorCare Health Services, two facilities in which Manor
Care Realty has an ownership interest pursuant to joint venture agreements and
three facilities in which ManorCare Health Services has an ownership interest
pursuant to joint venture agreements. Manor Care Realty owns 35% of the Winter
Park, Florida facility and 94% of the Decatur, Georgia facility. Pursuant to
management agreements with the owner/operator of the facilities, ManorCare
Health Services will manage the facilities. Each management agreement is for a
two-year term with automatic, two-year renewal periods. ManorCare Health
Services owns 50% of each of the Centreville, Ohio facility, the Sycamore
Glen, Ohio facility and the Fitzgerald Mercy, Pennsylvania facility. Pursuant
to the joint venture agreements, ManorCare Health Services will manage the
facilities on a long-term basis with the earliest expiration of such
agreements on March 2035.
Set forth below is a chart which illustrates occupancy rates for Manor
Care's skilled nursing facilities and assisted living facilities. These
occupancy rates include facilities that have been operated by Manor Care for
less than two years.
OCCUPANCY RATES
<TABLE>
<CAPTION>
12 MONTHS ENDED
5/31/97
---------------
<S> <C>
Skilled Nursing.............................................. 88.4%
Assisted Living--Arden Courts................................ 66.4%
Assisted Living--Springhouse................................. 83.9%
</TABLE>
COMPETITION
The Company's principal competitors in the skilled nursing business are
Advocat, Inc., Beverly Enterprises, Inc., Extendicare, Inc., Genesis Health
Ventures, Inc., Health Care and Retirement Corporation, Integrated Health
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<PAGE>
Services, Inc., Mariner Health Group, Inc., National HealthCare L.P., Paragon
Health Network, Inc., Sun Healthcare Group, Inc. and Vencor, Inc. The
Company's principal competitors in the assisted living business are
Alternative Living Services, Inc., ARV Assisted Living, Inc., CareMatrix
Corporation, Emeritus Corporation, Kapson Senior Quarters Corp., Karrington
Health, Inc., Marriott International, Inc. and Sunrise Assisted Living, Inc.
The Company's principal competitors in the institutional pharmacy business are
NCS Healthcare, Inc., Omnicare, Inc. and PharMerica, Inc. The Company's
principal competitors in the home health business are HealthCor Holdings,
Inc., Home Health Corporation of America, Inc., Housecall Medical Resources,
Inc., National Home HealthCare Corp., Olsten Corporation and Option Care, Inc.
The senior housing and health care industries are highly competitive and
ManorCare Health Services expects that the assisted living business in
particular will become more competitive in the future. ManorCare Health
Services' assisted living and skilled nursing facilities compete on a local
and regional basis with other senior support health care providers, some of
which have greater financial resources or operate on a nonprofit basis.
ManorCare Health Services' competes with other providers on the basis of
breadth and quality of services, reputation, location and physical appearance
of the facilities, family preferences, relationship with key referral sources
and, in the case of private patients, pricing. Accordingly, ManorCare Health
Services seeks to meet competition in each locality by establishing a
reputation within the local medical communities for high quality services and
trained, caring staff.
In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of the Company's 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 the Company. Consequently, there can be no assurance that the
Company 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 the Company 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 the Company. These competitors
provide product and service offerings similar to those provided by Vitalink
and may be larger or have greater financial resources than the Company.
The home health care business is highly competitive and many such companies
have experienced declines in performance. In Home Health competes with: (i)
hospitals and public health agencies that provide short term, intermittent
care, (ii) national specialized home care providers and (iii) other
independent home care companies. The primary competitive factors in the home
health care business are the price of the services and quality considerations
such as responsiveness, the technical ability of the professional staff and
the ability to provide comprehensive services.
GOVERNMENT FUNDING
Assisted Living. As a result of limited government funding for the assisted
living business, the Company 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 the Company's 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
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<PAGE>
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 the Company's skilled
nursing facilities come from a variety of sources, and are principally
referred by hospitals and physicians. The Company 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 the Company believes that focusing on private pay
patients helps reduce its exposure to potential changes in government
reimbursement practice and enables the Company to achieve relatively
attractive profit margins.
The Company 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 the Company's costs of providing services to
residents covered by those programs.
Private Pay Patients. As a general rule, the profit margin is higher with
private pay patients than with patients to whom services are rendered with
government assistance programs.
The following table sets forth for the periods specified, the percentage of
private patients, Medicare patients and Medicaid patients in Manor Care's
skilled nursing facilities as they were operated by Manor Care.
<TABLE>
<CAPTION>
SKILLED NURSING
FACILITIES
LATEST TWELVE
MONTHS AS OF
5/31/97
------------------
% OF % OF
OCCUPANCY REVENUES
--------- --------
<S> <C> <C>
Private Patients......................................... 51% 55%
Medicare Patients........................................ 11% 19%
Medicaid Patients........................................ 38% 26%
--- ---
Total.................................................. 100% 100%
</TABLE>
As of May 31, 1997, all of the residents at Manor Care's assisted living
facilities were private pay.
GOVERNMENT REGULATION
The Company's 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
80
<PAGE>
ordinances. The Company 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 Company
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. The Company cannot predict the ultimate timing, the
content, or the impact of future legislation and regulations affecting the
Company and the health care industry in general. See "RISK FACTORS--
Regulation."
Certificate of Need. Many of the states in which the Company will operate
have adopted Certificate of Need ("CON") statutes applicable to the assisted
living and skilled nursing services provided by the Company. CON or similar
laws generally require that approval must be obtained from the designated
state health planning agency for certain acquisitions and capital
expenditures, and determine that a need exists prior to the expansion of
existing facilities, construction of new facilities, addition of beds,
acquisition of major items of equipment or introduction of new services. CON
laws typically do not affect the operations of facilities that already are
operating. CON laws are in effect in the following states where the Company
will operate and where the Company may continue to expand: Florida, Illinois,
New Jersey, Ohio, New York, Connecticut and Kentucky. 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 the Company's future acquisitions
and/or expansions. There can be no assurance that the Company will be able to
obtain the CONs or other approvals necessary for any or all such projects.
There can be no assurance that states with CON laws may not abolish such laws
or that states without such laws will enact such CON laws. Manor Care has
extensive experience filing for CONs. During the period from 1987 to the
present, Manor Care completed 64 new skilled nursing facilities, most of which
required CON applications. During the past four fiscal years, Manor Care
received CON approval for 13 skilled nursing facilities and 18 assisted living
facilities.
Anti-remuneration Laws. The Company is subject to federal and state anti-
remuneration laws, such as the Medicare/Medicaid anti-kickback laws, which
govern certain financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to such providers.
These laws prohibit, among other things, direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of, a particular provider of health care items or
services. The Medicare/Medicaid anti-kickback law has been broadly interpreted
to apply to certain contractual relationships between health care providers
and sources of patient referral. State laws vary from state to state, are
sometimes vague and seldom have been interpreted by courts or regulatory
agencies. Violation of these laws can result in loss of licensure, civil and
criminal penalties, and exclusion of health care providers or suppliers from
participation in the Medicare and Medicaid programs. The Company plans to
continue to treat Vitalink and In Home as separate entities, and will also
treat Manor Care Realty as a separate entity. Thus, the Company does not
believe that there will be any material adverse effect to the Company as a
result of the anti-remuneration laws.
Billing Regulation. Certain provisions in the Social Security Act authorize
penalties, including exclusion from participation in Medicare and Medicaid,
for various billing-related offenses. The Department of Health and Human
Services can also initiate permissive exclusion actions for improper billing
practices such as submitting claims "substantially in excess" of the
provider's usual costs or charges, failure to disclose ownership and officers,
or failure to disclose subcontractors and suppliers.
Federal and State Assistance Programs. Funds received by the Company under
Medicare and Medicaid are subject to audit with respect to the proper
application of various payment formulas. Such audits can result in retroactive
adjustments of revenue from these programs, resulting in either amounts due to
the government
81
<PAGE>
agency from the Company or amounts due the Company from the government agency.
The Company believes that its payment formulas have been properly applied and
that any future adjustments will not have a material adverse impact on its
financial position or results of operations.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to
health care facilities. The Company 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.
For the Company, the Budget Act will be phased-in for cost report years
starting in November, 1998. Medicare is currently a retrospective payment
system in which each facility receives an interim payment during the year,
which is later adjusted to reflect actual allowable direct and indirect costs
of services based on the submission of a cost report at the end of each year.
The Budget Act will result in a shift to a prospective Medicare payment system
in which skilled nursing facilities will be reimbursed per diem for specific
covered services regardless of actual cost. Specifically, the Budget Act
provides that, over three reporting periods starting July 1, 1998, the
Medicare program will phase into this prospective payment system. During the
first reporting period, skilled nursing facilities will receive 75% of their
reimbursement based on actual costs and 25% based on a federally-scheduled per
diem rate. In the second reporting period, reimbursement will be 50% cost-
based and 50% rate-based, in the third, 25% cost-based and 75% rate-based.
Thereafter, skilled nursing facilities will be reimbursed by Medicare solely
based on a prospective payment system. Pursuant to the Balanced Budget Act of
1997, between November 1998 and June 1999, the Medicare payment system for
ManorCare Health Services will become prospective rather than retrospective.
The Budget Act also gives states greater flexibility in the administration of
their Medicaid programs in that the Budget Act repeals the requirement that
payment be reasonable and adequate to cover the costs of "efficiently and
economically operated" skilled nursing facilities. ManorCare Health Services
cannot predict the impact that this change will have on ManorCare Health
Services. ManorCare Health Services cannot predict whether any other proposals
will be adopted at the Federal or state level or, if adopted and implemented,
what effect, if any, such proposals will have on ManorCare Health Services.
ManorCare Health Services believes, however, that government and private
efforts to contain or reduce health care costs will continue and that these
trends are likely to lead to reduced or slower growth in reimbursement for
certain services it provides. A significant change in coverage, reduction in
payment rates by third-party payors or the decline in availability of funding
could have a material adverse effect on the business and financial condition
of ManorCare Health Services.
False Claim Regulation. False claims are prohibited pursuant to criminal and
civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit
filing false claims or making false statements to receive payment or
certification under Medicare or Medicaid, or failing to refund overpayments or
improper payments; offenses for violation are felonies punishable by up to
five years imprisonment, and/or $25,000 fines. Civil provisions at 31 U.S.C.
Section 3729 prohibit the knowing filing of a false claim or the knowing uses
of false statements to obtain payment; penalties for violations are fines of
not less than $5,000 nor more than $10,000, plus treble damages, for each
claim filed.
OSHA. Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on the Company with regard to
protecting employees from hazards in the workplace, including exposure to
blood-borne pathogens. The Company believes that it is in compliance with such
regulatory requirements.
Related Party Rule. The Medicare related party rule applies to companies
that are associated or affiliated with or have control of, or are controlled
by a Medicare provider. The Medicare program may consider Vitalink and In Home
Health to be related parties with the Company. Consequently, unless there is a
qualification for a waiver of the related party rule, the Medicare program
will only reimburse for the cost incurred by the related
82
<PAGE>
party in providing products or services, rather than their charges. An
organization can qualify for an exception from the related party rule by
meeting the following criteria: (i) the entities are bona-fide separate
organizations; (ii) a substantial part of the supplying organization's
business activity is conducted with non-related organizations and there is an
open, competitive market for such services or products; (iii) the services or
products are commonly obtained by a provider from other organizations and are
not a basic element of patient care ordinarily furnished directly to patients
by the provider; and (iv) the charge to the provider is in line with the
charge for such services and products in the open market and no more than the
charge made under comparable circumstances to others. For the purposes of the
Medicare related party rule, the Company plans to continue to treat Vitalink
and In Home Health as related parties, and will also treat Manor Care Realty
as a related party. Thus, the Company does not believe that there will be any
material adverse effect on the Company as a result of the Medicare related
party rule.
Home Health Care Moratorium. On September 15, 1997, President Clinton issued
a Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be proposed to combat
fraud. Given the short duration of the moratorium and the fact that the
moratorium only pertains to new home health providers, the Company does not
believe that there will be any material adverse affect on either In Home
Health or on the Company as a result thereof.
Environmental Regulation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property or an entity that arranges for the disposal or
treatment of hazardous or toxic substances at a disposal site may be held
jointly and severally liable for the cost of removal or remediation of certain
hazardous or toxic substances, that could be located on, in or under such
property. Such laws and regulation often impose liability whether or not the
owner, operator or otherwise responsible party knew of, or caused, the
presence of the hazardous of toxic substances. The costs of any required
remediation or removal of these substances can be substantial and the
liability of a responsible party as to any property is generally not limited
under such laws and regulation and could exceed the property's value and the
aggregate assets of the liable party. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property
as collateral. In connection with the ownership and leasing to third-parties
of its properties, Manor Care Realty could be liable for these costs, as well
as certain other costs, including governmental fines and injuries to persons
or properties.
INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims which are customary risks inherent in the operation
of health facilities and are generally covered by insurance. The Company
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, the Company 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
the Company's insurance coverage or are not covered by the Company's insurance
coverage. A successful claim against the Company not covered by, or in excess
of, the Company's insurance could have a material adverse effect on the
Company's financial condition and results of operations. Claims against the
Company, regardless of their merit or eventual outcome, may also have a
material adverse effect on the Company's ability to attract residents or
expand its business and would require management to devote time to matters
unrelated to the operation of the Company's business. In addition, the
Company's insurance policies must be renewed annually and there can be no
assurance that the Company 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.
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<PAGE>
LEGAL PROCEEDINGS
The Company 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 the Company cannot estimate the range of the ultimate
liability, if any, relating to these proceedings, the Company believes that
the outcome of such proceedings should not, individually or in the aggregate,
have a material adverse effect on the results of operations or financial
condition of the Company.
84
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
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 the Company are set forth below. The
business address of each of the prospective executive officers is 11555
Darnestown Road, Gaithersburg, Maryland, 20878, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. .... 51 Chairman of the Board
Donald C. Tomasso....... 52 President and Chief Executive Officer
Scott J. Van Hove....... 40 Executive Vice President, Operations
James H. Rempe.......... 67 Senior Vice President, General Counsel and Secretary
Carole Y. Prest......... 46 Senior Vice President, Strategy and Marketing
H. David Lundgren....... 46 Senior Vice President, Human Resources
Wolfgang von Maack...... 57 President and Chief Executive Officer of In Home Health
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and ManorCare Health Services, Inc. (a subsidiary
of Manor Care which prior to the Distribution owned and operated Manor Care's
assisted living and skilled nursing facilities) ("Old ManorCare Health
Services") since March 1987; Chief Executive Officer of Manor Care since March
1987 and President since June 1989; Chairman of the Board of Vitalink since
February 1997; Vice Chairman of the Board of Vitalink from February 1995 to
February 1997; Vice Chairman of the Board of Manor Care and subsidiaries from
June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink
since September 1991, of Old ManorCare Health Services since 1976 and of
Choice and its predecessors since 1977; Chief Executive Officer of Old
ManorCare Health Services since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987
to June 1990.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services from May 1991 to
February 1995; Chairman and Chief Executive Officer of Vitalink from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Scott J. Van Hove. Senior Vice President and Chief Administrative Officer of
Manor Care since December 1995; Executive Vice President, Operations of Old
ManorCare Health Services since February 1997; Senior Vice President of Old
Manor Care Health from December 1995 to January 1997; Vice President of
Operations, of Manor Care from March 1990 to December 1995.
James H. Rempe. Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981, of Choice and its predecessors from February
1981 to November 1996 and of Old ManorCare Health
85
<PAGE>
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.
Carole Y. Prest. Vice President, Corporate Strategic Planning of Manor Care
from September, 1995 to September, 1997; previously employed by GenRad, Inc.
for nine years, including Vice President and General Manager of Concord
Products Division; Chairman of Board and President of Manor Care Foundation;
Director of Sunburst Hospitality Corporation.
H. David Lundgren. Vice President, Organizational Strategy and Development
of Aetna, Inc. from 1996 to April 1997; Vice President, Human Resources of
Aetna Inc. from 1992 to 1996.
Wolfgang von Maack. President and Chief Executive Officer of In Home Health
since May 1997; Senior Vice President, Healthcare Services of Old ManorCare
Health Services since June 1990; Vice President, Operations of Old ManorCare
Health Services from March 1988 to June 1990.
The following individuals, who are currently officers or directors of Manor
Care, will be directors and/or executive officers of Manor Care Realty after
the Distribution: (i) Stewart Bainum, Jr. as Chairman of the Board and
Director, (ii) Joseph R. Buckley as Chief Executive Officer and Director,
(iii) Leigh C. Comas as Senior Vice President and Chief Financial Officer,
(iv) Larry Godla as Senior Vice President, Construction and Development, and
(v) Margarita Schoendorfer as Vice President and Controller.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the annual and
long-term compensation of those persons who, following the Distribution, will
serve as the chairman of the board and the four other most highly compensated
executive officers of the Company (the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------------
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS SHARES (#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- ----- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3)... 1997 $568,062 $340,837 (4) -- 60,000 $35,074
Chairman of the Board 1996 625,102 337,555 (4) -- 60,000 33,543
1995 572,308 343,385 (4) -- -- 9,000
Donald C. Tomasso........ 1997 428,002 235,401 (4) -- 35,000 18,760
President 1996 400,005 145,602 (4) -- 50,000 5,750
Chief Executive Officer 1995 345,737 190,155 (4) -- -- 2,250
James H. Rempe........... 1997 281,507 140,754 (4) $271,250 15,000 16,727
Senior Vice President, 1996 269,048 121,072 (4) -- 15,000 15,969
General Counsel and 1995 267,349 133,675 (4) -- -- 9,000
Secretary
Scott J. Van Hove........ 1997 240,192 116,753 (4) -- 50,000 14,542
Executive Vice
President, 1996 210,310 89,754 (4) -- 40,000 8,690
Operations 1995 183,393 68,311 (4) -- -- 6,750
Wolfgang von Maack(5).... 1997 238,992 81,182 (4) -- 14,000 10,588
President and 1996 227,677 76,727 (4) -- 10,000 10,245
Chief Executive Officer, 1995 225,219 66,665 (4) -- -- 6,750
In Home Health, Inc.
</TABLE>
- --------
(1) Represents options to purchase shares of Manor Care Common Stock. The
options shown above represent the number of options held prior to the
Choice Spin-off. In connection with the Choice Spin-off, these
86
<PAGE>
options were converted, in some cases, into options to purchase Manor Care
common stock and options to purchase Choice common stock. These conversions
are reflected in the following table of "Stock Option Grants in Fiscal
1997." For a discussion of the treatment of options in connection with the
Distribution, see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY
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 the Company
effective on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will be the Chairman of the Board of the Company and the Chairman of
the Board of Manor Care Realty. On November 1, 1996, Manor Care
distributed to its shareholders (the "Choice Spin-off") all of the shares
of its wholly owned subsidiary, Choice Hotels International, Inc.
("Choice"). Mr. Bainum, Jr. is the Chairman of the Board of Choice. In
fiscal 1997, Mr. Bainum, Jr. devoted approximately 75% of his time to
Manor Care and approximately 25% of his time to Choice. The compensation
reflected here is total compensation received for services rendered to
Manor Care and Choice prior to November 1, 1996 and the 75% of Mr. Bainum,
Jr.'s compensation received from Manor Care from November 1, 1996 through
the end of the 1997 fiscal year. Choice has separated its franchising
business and its lodging business through a special dividend to its
shareholders (the "Sunburst Spin-off"). As of the Sunburst Spin-off,
Choice's franchising business is conducted by a separate public company
named Choice Hotels International, Inc. ("Choice Hotels") and Choice's
lodging business is conducted by a separate public company named Sunburst
Hospitality Corporation ("Sunburst"). It is expected that Mr. Bainum, Jr.
will devote 12.5% of his time to Choice Hotels, 12.5% of his time to
Sunburst, 37.5% of his time to the Company and 37.5% of his time to Manor
Care Realty.
(4) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(5) As of the Effective Date, pursuant to an Employee Time Sharing Agreement
by and among Wolfgang von Maack, the Company, In Home Health and Mesquite
Community Hospital, L.P. ("Mesquite"), Mr. von Maack, who will be employed
by ManorCare Health Services, will devote 75% of his professional time to
the affairs of In Home Health and 25% of his professional time to the
affairs of Mesquite. The Employee Time Sharing Agreement provides that In
Home Health and Mesquite will provide ManorCare Health Services with 75%
and 25%, respectively, of Mr. von Maack's annual budgeted expenses and
will be reimbursed or will reimburse ManorCare Health Services in the
event that Mr. von Maack's actual costs are lower than or exceed such
annual budget.
87
<PAGE>
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
Company Common Stock. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE
COMPANY AFTER THE DISTRIBUTION--Employee Benefits Allocation Agreement."
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATE OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
NUMBER OF GRANTED TO ALL EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME COMPANY GRANTED(1) FISCAL YEAR 1997 PER SHARE DATE 5%(3) 10%(4)
---- ------- ---------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5).. MNR 60,000 6.3% $25.0505 7/1/06 $ 945,246 $2,395,440
CHI 60,000 (6) $14.5095 7/1/06 547,494 1,387,474
------- ---------- ----------
Total 120,000 $1,492,750 $3,783,904
Donald C. Tomasso(5).... MNR 55,272 3.7%(7) $25.0505 7/1/06 $ 870,760 $2,206,679
CHI 0 -- -- -- --
------- ---------- ----------
Total 55,272 $ 870,760 $2,206,679
James H. Rempe(5)....... MNR 20,430 1.6%(7) $25.0505 7/1/06 $ 321,856 $ 815,647
CHI 5,625 (6) $14.5095 7/1/06 52,327 130,075
------- ---------- ----------
Total 26,055 $ 373,183 $ 945,722
Scott J. Van Hove(5).... MNR 39,480 2.6%(7) $25.0505 7/1/06 $ 621,972 $1,576,199
MNR 25,000(1) 2.6% $27.0000 1/15/07 424,500 1,075,750
CHI 0 -- --
------- ---------- ----------
Total 64,480 $1,046,472 $2,651,949
Wolfgang von Maack(5)... MNR 22,108 1.47%(7) $25.0505 7/1/06 $ 348,285 $ 882,623
CHI 0 -- -- -- --
------- ---------- ----------
Total 22,108 $ 348,285 $ 882,623
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) All of the options shown, except for Mr. Van Hove's 25,000 MNR options,
were granted prior to the Choice Spin-off. In connection with the Choice
Spin-off, the existing options were converted, in some cases, into options
to purchase Manor Care Common Stock and options to purchase Choice common
stock. In all cases, the exercise prices were adjusted to maintain the
same financial value to the option holder before and after the Choice
Spin-off. The number of options set forth in the above table present the
number and exercise prices of the options after the Choice Spin-off.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of Manor Care's stock price. Since options are granted at market
price, a zero percent gain in the stock price will result in no realizable
value to the optionees.
(3) A 5% per year appreciation in stock price from $25.0505 per share yields
$40.8046, from $14.5095 per share yields $23.6344, from $13.8933 per share
yields $22.6344 and from $27.00 per share yields $43.98.
(4) A 10% per year appreciation in stock price from $25.0505 per share yields
$64.9745, from $14.5095 per share yields $37.6339, from $13.8933 per share
yields $36.0356 and from $27.00 per share yields $70.03.
(5) The options granted to the officers vest at the rate of 20% per year
commencing on the first through the fifth anniversary of the date of the
stock option grant.
(6) Information is not available for the total number of Choice options
granted during the fiscal year 1997.
(7) This percentage relates to the number of options granted to the officers
prior to the conversion of such options in the Choice Spin-off. The
converted number of options is listed in this table.
88
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT MAY 31, 1997 AT MAY 31, 1997
ACQUIRED VALUE ------------------------- -------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
COMPANY # $ # # EXERCISABLE UNEXERCISABLE
------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. .... MNR 329,791 $2,318,180 174,000 221,000 $3,633,404 $2,749,771
CHI 465,000 3,105,452 239,000 221,000 2,758,324 1,334,863
Donald C. Tomasso....... MNR -- -- 109,138 278,734 1,178,161 3,491,641
CHI -- -- 66,500 0 612,534 --
James H. Rempe.......... MNR 30,587 543,625 22,835 82,881 352,453 1,086,277
CHI -- -- 57,374 28,000 600,600 205,906
Scott J. Van Hove....... MNR -- -- 61,894 212,142 1,159,075 2,415,701
CHI -- -- 45,000 0 457,268 --
Wolfgang von Maack...... MNR -- -- 73,353 102,888 1,578,129 1,497,752
CHI -- -- 71,300 0 840,092 --
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) The closing price of Manor Care's common stock and for Choice common stock
as reported by the New York Stock Exchange on May 30, 1997, was $28.625
and $15.75, respectively. The value is calculated on the basis of the
difference between the option exercise price and such closing price
multiplied by the number of shares of common stock underlying the option.
RETIREMENT PLANS
Prior to the Distribution, it is expected that the Company will adopt the
Supplemental Executive Retirement Plan (the "SERP"). Participants will be
selected by the Board or any designated committee and will be at the level of
Senior Vice President or above.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment which produces the highest
average, prior to the first occurring of the early retirement date or the
normal retirement date. The normal retirement age is 65, and participants must
have a minimum of 15 years of service. Participants may retire at age 60 and
may elect to receive reduced benefits commencing prior to age 65, subject to
Board approval. All of the Named Officers who will be participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service would be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. ........................ 23.5 38
Donald C. Tomasso........................... 6 19
Scott J. Van Hove........................... 10 35
</TABLE>
Mr. Rempe has twenty-seven current years of service and had twenty-five years
of service at age sixty-five.
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<PAGE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$300,000 $45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
Prior to the Distribution, it is expected that the existing Manor Care
Retirement Savings and Investment Plan (the "401(k) Plan"), a defined
contribution retirement, savings and investment plan for its employees and the
employees of its participating affiliated companies, will be amended to cover
both Manor Care Realty and ManorCare Health Services. The 401(k) Plan will be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and will include a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over who have worked for
the Company (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. The
Company 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 the Company
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 the
Company 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.
The Company match under the 401(k) Plan and the Nonqualified Savings Plan
will be limited to a maximum aggregate of 6% of the annual salary of a
participant. Likewise, participant contributions under the two plans will not
exceed the aggregate of 15% of the annual salary of a participant.
OPTION AND STOCK PURCHASE PLANS
Prior to the Distribution, it is expected that the Company 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 the Company 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, the Company will contribute cash equal to 10% of
the purchase price of the common stock so purchased. The Company will pay the
administrative costs for the purchase of the Company common stock.
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<PAGE>
Prior to the Distribution, it is expected that the Company will adopt the
ManorCare Health Services 1997 Long-Term Incentive Plan (the "Incentive
Plan"), pursuant to which key employees of the Company and its subsidiaries
are eligible to be granted awards under the Incentive Plan. The types of
awards that may be granted under the Incentive Plan are restricted shares,
incentive stock options, nonqualified stock options, stock appreciation rights
and performance shares. A total of up to 7.1 million shares of common stock
will be reserved for issuance pursuant to the Incentive Plan.
EMPLOYMENT AGREEMENTS
The Company 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 the
Company. The Employment Agreement will have a term of three years and either
the Company or Mr. Bainum may terminate the Employment Agreement upon 30 days'
prior written notice on the first and second anniversary dates of the
Employment Agreement. The Employment Agreement will provide that Mr. Bainum,
Jr. will devote 12.5% of his professional time to the affairs of Sunburst,
12.5% of his professional time to the affairs of Choice Hotels, 37.5% of his
professional time to the affairs of Manor Care Realty and the remaining 37.5%
of his professional time to the affairs of the Company. The Employment
Agreement provides for a base salary of approximately $258,000 per annum for
services to the Company and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of the Company.
ManorCare Health Services has entered into an employment agreement, dated
July 14, 1997, with Scott Jacob Van Hove (the "Van Hove Employment
Agreement"), providing for Mr. Van Hove's employment as Executive Vice
President, Operations of ManorCare Health Services. The Van Hove Employment
Agreement will expire on July 14, 2000, after which the parties may extend the
term if they mutually desire to do so. The Van Hove Employment Agreement
provides for a base salary of approximately $263,000 per annum and a maximum
bonus of 50% of Mr. Van Hove's base compensation based upon the performance of
ManorCare Health Services.
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THE BOARD OF DIRECTORS
DIRECTORS OF THE COMPANY
The Company's 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 the Company's
stockholders; the term of the initial Class II directors will terminate on the
date of the 1999 annual meeting of the Company's stockholders; and the term of
the initial Class III directors will terminate on the date of the 2000 annual
meeting of the Company's stockholders. At each annual meeting of the Company's
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 the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. ................ 51 Chairman of the Board; Class I Director
Regina E. Herzlinger................ 53 Class II Director
William H. Longfield................ 59 Class III Director
Frederic V. Malek................... 60 Class II Director
Jerry E. Robertson, Ph.D. .......... 64 Class III Director
Kennett L. Simmons.................. 55 Class III Director
Donald C. Tomasso................... 52 Class I Director
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October,
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and Old ManorCare Health Services since March 1987;
Chief Executive Officer of Manor Care since March 1987 and President since
June 1989; Chairman of the Board of Vitalink since February, 1997; Vice
Chairman of the Board of Vitalink from February 1995 to February 1997; Vice
Chairman of the Board of Manor Care and subsidiaries from June 1982 to March
1987; Director of Manor Care since August 1981, of Vitalink since September
1991, of Old ManorCare Health Services since 1976 and of Choice and its
predecessors since 1977; Chief Executive Officer of Old ManorCare Health
Services since June 1989 and President from May 1990 to May 1991; Chairman of
the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991; Chairman of the Board of Choice from March 1987 to June 1990.
Regina E. Herzlinger. Nancy R. McPherson Professor of Business
Administration, Harvard Business School, since 1971. Director: C.R. Bard,
Inc., Deere & Company, Cardinal Health Care, Inc., Schering-Plough Corporation
and Total Renal Care Inc.
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William H. Longfield. Chairman and Chief Executive Officer of C.R. Bard,
Inc. (medical devices) since September 1995; President and Chief Executive
Officer from June 1994 to September 1995; President and Chief Operating
Officer of C.R. Bard, Inc. from September 1991 to June 1994; Executive Vice
President and Chief Operating Officer of C.R. Bard, Inc. from February 1989 to
September 1991. Director: C.R. Bard, Inc., Horizon Mental Health Management,
Inc., United Dental Care, Inc., The West Company and Atlantic Health Systems.
Frederic V. Malek. Chairman, Thayer Capital Partners since March 1993; Co-
chairman of CB Commercial Real Estate Group, Inc. from April 1989 to October
1996; Campaign Manager, Bush-Quayle '92 Campaign from January 1992 to December
1992; Vice Chairman of NWA, Inc. (airlines) from July 1990 to December 1991.
Director: American Management Systems, Inc., Automatic Data Processing Corp.,
CB Commercial Real Estate Group, Inc., Choice, FPL Group, Inc., Northwest
Airlines, Inc. and various Paine Webber mutual funds.
Jerry E. Robertson, Ph.D. Retired; Executive Vice President of 3M Life
Sciences Sector and Corporate Services from November 1984 to March 1994.
Director: Allianz Life Insurance Company of North America, Cardinal Inc.,
Choice Hotels International, Inc., Coherent, Inc., Haemonetics Corporation,
Medwave, Inc., Project Hope and Stris Corporation.
Kennett L. Simmons. Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to E.M. Warburg,
Pincus & Co. from 1991 to 1994; Chairman and Chief Executive Officer of United
Healthcare Corporation from October 1987 to February 1991. Director: United
Healthcare Corporation and Virginia Health Care Foundation.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services from May 1991 to
February 1995; Chairman and Chief Executive Officer of Vitalink from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Prior to the Effective Date, the directors of the Company 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 the Company are Stewart
Bainum, Jr., Donald C. Tomasso and James H. Rempe. Following the Distribution,
Stewart Bainum, Jr. will be Chairman of the Board of the Company and Chairman
of the Board of Manor Care Realty. Mr. Bainum, Jr. is also the Chairman of the
Board of Choice. It is expected that he will devote 12.5% of his time to
Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to the Company
and 37.5% of his time to Manor Care Realty. After the Distribution, Kennett L.
Simmons will also be a director of Manor Care Realty.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Distribution, the Board of Directors is expected to
consist of eight members. Following the Distribution Date, additional non-
employee directors may be elected to the Board of Directors. The additional
non-employee directors have not yet been determined. It is expected that the
Board of Directors will hold five meetings during the fiscal year and that the
standing committees of the Board will include the Audit Committee, the Finance
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Nominating/Governance Committee. The members of the committees have not yet
been determined.
The Compensation/Key Executive Stock Option Plan Committee will administer
the Company's stock option plans and grant options thereunder, will review
compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive
plans, pensions and retirement, and will review other employee fringe benefit
programs.
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The Compensation/Key Executive Stock Option Committee No. 2, will be formed
to comply with certain provisions of the Omnibus Budget Reconciliation Act of
1993 and Rule 16b-3 under the Exchange Act. The Committee will administer the
Company's stock option plans, grant stock options thereunder and review the
compensation of the CEO and the four most highly compensated officers (and
others potentially in that classification) for each fiscal year.
The Quality Assurance Committee will review the operations of the Company
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 the Company's
independent public accountants, will review the Company's internal accounting
controls and will review the Company's 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 the Company 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 the Company 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
the Company, the fair market value of which at the time of grant will be equal
to $30,000, which will represent the Board retainer and meeting fees. In
addition, all non-employee directors will receive $1,610 per diem for
Committee meetings attending, except where the Committee meeting is on the
same day as a Board meeting, and will be reimbursed for travel expenses and
other out-of-pocket costs incurred in attending meetings.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements
being entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Lease Agreement, the Corporate Services
Agreement, the Trademark Agreement, the License Agreement, the Cash Management
Agreement, the Design Services Agreement, and the Risk Management Consulting
Services Agreement. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE
COMPANY AFTER THE DISTRIBUTION."
Upon consummation of the Distribution, certain management employees of Manor
Care Realty will hold options to purchase shares of Company Common Stock.
Management employees of Manor Care Realty will have certain elections with
respect to the conversion of their Manor Care options into options of Manor
Care Realty or ManorCare Health Services. See "RELATIONSHIP BETWEEN MANOR CARE
REALTY AND THE COMPANY AFTER THE DISTRIBUTION--Employee Benefits and Other
Employee Matters Allocation Agreement."
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<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 the Company upon completion of the Distribution other than as
set forth below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON PERCENT OF CLASS
STOCK AS OF THE AS OF THE
NAME AND ADDRESS EFFECTIVE DATE EFFECTIVE DATE(2)
---------------- ---------------- -----------------
<S> <C> <C>
Stewart Bainum(1)(3)...................... 10,156,643 15.22%
Stewart Bainum, Jr.(1)(4)................. 15,269,851 22.86%
Barbara Bainum(1)(5)...................... 5,485,815 8.22%
Bruce Bainum(1)(6)........................ 5,482,302 8.21%
Ronald Baron(7)........................... 7,976,459 11.96%
</TABLE>
- --------
(1) Stewart Bainum, Jr., Bruce Bainum and Barbara Bainum are children of
Stewart Bainum. The total beneficial ownership of the Bainum family (set
forth in the table above in the names of Stewart Bainum, Stewart Bainum,
Jr., Barbara Bainum and Bruce Bainum) is 19,978,307 shares (which excludes
overlapping interests). Such collective interest represents 29.95% of the
outstanding Common Stock of the Company.
(2) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(3) Includes 3,765,478 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum; his
joint interest in 895,466 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,082,857 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his wife
as a limited partner and as such has the right to acquire at any time a
number of shares equal in value to the liquidation preference of their
limited partnership interest; 3,567,869 shares held directly by Realty
Investment Company, Inc. ("Realty Investment"), a real estate investment
and management company in which Mr. Bainum and his wife have shared voting
authority; 40,305 shares held by the Commonweal Foundation of which Mr.
Bainum is Chairman of the Board of Directors and has shared voting
authority; and 500 shares held by Mid-Pines Associates, L.P. ("Mid-Pines")
in which Mr. Bainum has shared voting authority. Also includes 792 shares
of restricted stock granted pursuant to the Manor Care, Inc. Non-Employee
Director Stock Compensation Plan. Also includes 798,711 shares held by the
Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife. Also includes 3,665 shares which Mr. Bainum has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after August 5, 1997. Does not
include shares owned beneficially by Stewart Bainum, Jr., Mr. Bainum's
son, whose interests are stated in the above table, except shares owned by
Bainum Associates, MC Investments, Realty Investment and Mid-Pines in
which Mr. Bainum has a beneficial interest.
(4) Includes 5,417,761 shares owned by Bainum Associates and 4,415,250 shares
owned by MC Investments, in both of which Mr. Bainum, Jr. is managing
general partner with the sole right to dispose of the shares. Authority to
vote such shares is held by the voting general partner, Mr. B. Houston
McCeney. Also includes 1,779,628 shares owned by Mid-Pines, in which Mr.
Bainum, Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment in which Mr. Bainum, Jr. has
shared voting authority. Also includes 88,000 shares which Mr. Bainum, Jr.
has the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the Manor Care, Inc. Retirement Savings
and Investment Plan (the "401(k) Plan") and the Manor Care, Inc.
Nonqualified Retirement
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Savings and Investment Plan (the "Nonqualified Savings Plan") (based upon a
report of each plan's trustee for June 1997).
(5) Includes 98,013 shares held directly by Ms. Bainum; 3,567,869 shares held
by Realty Investment, and 1,779,628 shares held by Mid-Pines, in both of
which Ms. Bainum has shared voting authority. Also includes 40,305 shares
held by the Commonweal Foundation in which Ms. Bainum has shared voting
authority.
(6) Includes 94,500 shares held directly by Mr. Bainum; 3,567,869 shares held
by Realty Investment, 1,779,628 shares held by Mid-Pines and 40,305 shares
held by the Commonweal Foundation, in all of which Mr. Bainum has shared
voting authority.
(7) Includes 163,620 shares owned directly by Mr. Baron. Also includes 705,000
shares owned by Baron Capital Partners, L.P. and Baron Investment
Partners, L.P., investment partnerships of which Mr. Baron is General
Partner; 5,950,000 shares owned by two investment companies registered
under the Investment Company Act of 1940, Baron Asset Fund and Baron
Growth & Income Fund, which are advised by BAMCO, Inc., a registered
investment adviser which is controlled by Mr. Baron; 1,157,839 shares held
for the accounts of investment advisory clients of Baron Capital
Management, Inc., a registered investment adviser controlled by Mr. Baron.
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<PAGE>
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares of
Common Stock which are expected to be beneficially owned by each director and
Named Executive Officer of the Company and by all directors and executive
officers of the Company as a group as of the Effective Date based upon their
respective holdings of Manor Care common stock as of August 5, 1997. See
"EXECUTIVE COMPENSATION."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENTAGE(1)
---- -------------------- -------------
<S> <C> <C>
Stewart Bainum, Jr.(2).................. 15,269,851 22.86%
Regina E. Herzlinger(3)................. 7,731 *
William H. Longfield(4)................. 9,207 *
Frederic V. Malek(5).................... 5,457 *
Jerry E. Robertson, Ph.D.(6)............ 19,125 *
Kennett L. Simmons...................... 792 *
Donald C. Tomasso(7).................... 143,424 *
James H. Rempe(8)....................... 61,162 *
Scott J. Van Hove(9).................... 83,181 *
All directors and executive officers of
the Company as a group
(12 persons)(10)....................... 15,599,930 22.86%
</TABLE>
- --------
* Less than 1%.
(1) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(2) Includes 5,417,761 shares owned by Bainum Associates Limited Partnership
and 4,415,250 shares owned by MC Investments Limited Partnership, limited
partnerships in both of which Mr. Bainum, Jr. is managing general partner
with the sole right to dispose of the shares. Authority to vote such
shares is held by the voting general partner, Mr. B. Houston McCeney.
Also includes 1,779,628 shares owned by Mid-Pines, in which Mr. Bainum,
Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment Company, Inc., a real estate
investment and management company in which Mr. Bainum, Jr. has shared
voting authority. Also includes 88,000 shares which Mr. Bainum, Jr. has
the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the ManorCare Health Services Retirement
Savings and Investment Plan (the "401(k) Plan") and the ManorCare Health
Services Nonqualified Retirement Savings and Investment Plan (the
"Nonqualified Savings Plan").
(3) Includes 3,159 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(4) Includes 5,791 shares which Mr. Longfield has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(5) Includes 3,665 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(6) Includes 13,500 shares held by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority; also includes 3,665 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997.
(7) Includes 40 shares held by adult children of Mr. Tomasso who share the
same household. Beneficial ownership of such shares is disclaimed. Also
includes 135,984 shares which Mr. Tomasso has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 326 shares and 574
shares, respectively, which Mr. Tomasso has the right
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<PAGE>
to receive upon termination of his employment with the Company 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 the Company 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 the Company 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 the Company pursuant to the
terms of the 401(k) Plan and the Nonqualified Savings Plan.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Under the Amended and Restated Certificate of Incorporation of the Company
(the "Charter"), which is attached as Appendix A to this Information
Statement, the total number of shares of capital stock that the Company has
authority to issue is 165,000,000 shares consisting of 160,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock (the "Preferred Stock"), par value $.01 per share.
Based on the number of shares of Manor Care Common Stock outstanding on
, 1998, it is expected that shares of the Company's Common Stock will be
issued to stockholders of Manor Care in the Distribution. All the shares of
the Company's Common Stock to be distributed to Manor Care stockholders in the
Distribution will be fully paid and non-assessable.
COMMON STOCK
The Charter designates a series of common stock consisting of 160,000,000
shares of common stock. The Company Common Stock being distributed on the
Effective Date is part of such series. Holders of the Company's Common Stock
are entitled to receive, subject to preferences that may be applicable from
time to time with respect to any outstanding Preferred Stock, such dividends
as are declared by the Board of Directors of the Company, one vote for each
share at all meetings of stockholders, and, subject to preferences that may be
applicable from time to time with respect to any outstanding Preferred Stock,
the remaining assets of the Company upon liquidation, dissolution or winding
up of the Company. The Company is authorized to issue additional shares of
common stock without further stockholder approval (except as may be required
by applicable law or stock exchange regulations).
With respect to the issuance of common shares of any additional series, the
Board of Directors of the Company is authorized to determine, without any
further action by the holders of the Company's Common Stock, among other
things, the dividend rights, dividend rate, conversion rights, voting rights
and rights and terms of redemption, as well as the number of shares
constituting such series and the designation thereof. Should the Board of
Directors of the Company elect to exercise its authority, the rights and
privileges of holders of the Company's Common Stock could be made subject to
rights and privileges of any such other series of common stock. The Company
has no present plans to issue any common stock of a series other than the
Company's Common Stock.
See "RISK FACTORS--Common Stock Dividend Policy" for a description of the
dividend policy of the Company after the Distribution.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock without further stockholder approval (except as may
be required by applicable law or stock exchange regulations) and to fix from
time to time, by resolution or resolutions, the relative powers, preferences
and rights and the qualifications, limitations or restrictions of any series
of Preferred Stock, as well as the number of shares constituting such series
and the description thereof.
PREEMPTIVE RIGHTS
Holders of shares of Company Common Stock have no preemptive rights.
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PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS
GENERAL
The provisions of the Charter and the Amended and Restated By-Laws of the
Company (the "By-Laws") described in this section, and the ability to issue
additional series of capital stock without a stockholder vote, may delay or
make more difficult acquisitions of or changes of control of the Company not
approved by the Company's Board of Directors. Such provisions enable the
Company, particularly (but not exclusively) in the initial years of its
existence as an independent, publicly owned company, to develop its business
in a manner which will foster its long term growth without disruption caused
by the threat of takeover not deemed by its Board of Directors to be in the
best interest of the Company and its stockholders.
Pursuant to the Charter the affirmative vote of the holders of shares
representing not less than two-thirds (66 2/3%) of the voting power of the
Company is required for the approval of any proposal to merge or consolidate
with any other entity (other than an entity 90% owned by the Company) or sell,
lease or exchange all or substantially all of the Company's assets. In
addition, among other things, the Charter provides that (i) stockholder action
can be taken only at an annual or special meeting of stockholders and not by
written consent in lieu of a meeting and (ii) special meetings of the
stockholders may be called only by the Chairman or the Vice Chairman of the
Board or by the Secretary of the Company within 10 calendar days after receipt
of the written request of a majority of the total number of directors of the
Company (assuming no vacancies) or, if there are no directors in office, by a
majority vote of the stockholders. The Company's By-Laws require that
stockholders desiring to bring any business, including nominations for
directors, before an annual meeting of stockholders deliver written notice
thereof to the Secretary of the Company not later than 60 days in advance of
the meeting of stockholders; provided, however, that in the event that the
date of the meeting is not publicly announced by the Company by press release
or inclusion within a report filed with the Commission or furnished to
stockholders more than 75 days prior to the meeting, notice by the stockholder
to be timely must be delivered to the secretary of the Company not later than
the close of business on the tenth day following the day on which such
announcement of the date of the meeting was so communicated. The By-Laws
further require that the notice by the stockholder set forth a description of
the business to be brought before the meeting and the reasons for conducting
such business at the meeting and certain information concerning the
stockholder proposing such business and the beneficial owner, if any, on whose
behalf the proposal is made, including their names and addresses, the class
and number of shares of the Company that are owned beneficially and of record
by each of them, and any material interest of either of them in the business
proposed to be brought before the meeting. The recipient of a revocable proxy
is not deemed to be a beneficial owner of the shares underlying such proxy,
and the foregoing provisions do not affect the granting or receipt of a
revocable proxy.
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LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES
Pursuant to authority conferred by Delaware General Corporation Law Section
102, the Charter provides that no director of the Company will be liable to
the Company 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
Company 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. This
provision is intended to eliminate the risk that a director might incur
personal liability to the Company or its stockholders for breach of the duty
of care. 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
Company will be further limited to the fullest extent permitted by Delaware
law as so amended.
INDEMNIFICATION AND INSURANCE
Delaware General Corporation Law Section 145 contains provisions permitting
and, in some situations, requiring Delaware corporations, such as the Company,
to provide indemnification to their officers and directors for losses and
litigation expense incurred in connected with their service to the corporation
in those capacities. The Charter contains provisions requiring indemnification
by the Company 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 any payment of fees and expenses
reasonably incurred by the director or officer in defense of any such lawsuit
or proceeding.
INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has appointed Arthur Andersen LLP as
the firm's independent accountants to audit the Company's financial statements
for the fiscal year 1998. Arthur Andersen LLP has served as Manor Care's
auditors throughout the periods covered by the financial statements included
in this Information Statement.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
10 (the "Registration Statement," which term includes any amendments or
supplements thereto) under the Exchange Act with respect to the shares of
Common Stock being received by Manor Care stockholders in the Distribution.
This Information Statement does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance reference is made to the
copy of such document so filed. Each such statement is qualified in its
entirety by such reference. For additional information, reference is made to
the Registration Statement and the exhibits thereto, which are on file at the
offices of the Commission and may be inspected and copied as set forth below.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission
at Northwest Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661, and 7 World Trade Center, 13th floor, New York, New York 10048. Copies
of such information 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. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission.
102
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
NEW MANORCARE HEALTH SERVICES, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Combined Balance Sheets as of May 31, 1997 and 1996 and August 31, 1997
(unaudited).............................................................. F-3
Combined Statements of Income for the fiscal years ended May 31, 1997,
1996 and 1995 and the three months ended August 31, 1997 and 1996 (unau-
dited)................................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1997,
1996 and 1995 and the three months ended August 31, 1997 and 1996 (unau-
dited)................................................................... F-5
Notes to Combined Financial Statements.................................... F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDER OF NEW MANORCARE HEALTH SERVICES, INC.:
We have audited the accompanying combined balance sheets of New ManorCare
Health Services, Inc. (a Delaware Corporation) and subsidiaries, as described
under "Basis of Presentation" in the Notes to Combined Financial Statements,
as of May 31, 1997 and 1996, and the related combined statements of income and
cash flows for each of the three years in the period ended May 31, 1997. These
combined financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New ManorCare Health
Services, Inc. and subsidiaries as of May 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1997 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in the Company's
Registration Statement on Form 10 as Exhibit 99.01 is presented for the
purpose of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Washington, D.C.
September 14, 1997
F-2
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
----------------- ----------------
1997 1996 1997
-------- -------- ----------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 14,486 $ 23,590 $ 23,631
Receivables (net of allowances for doubt-
ful accounts of $6,179, $3,141 and
$8,108).................................. 89,148 33,709 93,057
Inventories............................... 26,451 8,211 27,692
Deferred income taxes..................... 9,773 1,182 9,773
Other..................................... 6,567 4,667 2,095
-------- -------- --------
Total current assets.................... 146,425 71,359 156,248
-------- -------- --------
Property and equipment, at cost (net of
accumulated depreciation of $31,953,
$22,410 and $34,868)....................... 221,778 181,169 222,772
-------- -------- --------
Goodwill (net of accumulated amortization of
$5,705, $2,146 and $8,466)................. 346,981 49,348 351,668
-------- -------- --------
Pharmacy contracts (net of accumulated amor-
tization of $4,579, $3,044 and $5,250)..... 39,313 6,187 38,843
-------- -------- --------
Long-term receivables....................... 21,984 19,143 3,881
-------- -------- --------
Other assets................................ 10,896 7,674 9,355
-------- -------- --------
Total assets............................ $787,377 $334,880 $782,767
======== ======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......... $ 5,821 $ 4,294 $ 3,445
Accounts payable.......................... 28,995 12,092 22,644
Accrued expenses.......................... 35,679 17,660 36,756
Income taxes payable...................... -- 725 --
-------- -------- --------
Total current liabilities............... 70,495 34,771 62,845
Due to Manor Care........................... 75,560 49,946 75,560
Long-term debt.............................. 105,283 1,441 117,748
Deferred income taxes....................... 51,799 15,435 49,956
Minority interest........................... 184,729 32,285 177,428
Other long-term liabilities................. 22,445 7,195 21,995
-------- -------- --------
Total liabilities....................... 510,311 141,073 505,532
-------- -------- --------
Investments and advances from Manor Care.... 277,066 193,807 277,235
-------- -------- --------
Total liabilities and equity............ $787,377 $334,880 $782,767
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
---------------------------- --------------------
1997 1996 1995 1997 1996
-------- -------- -------- --------- ---------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues................... $471,152 $263,047 $125,987 $ 158,696 $ 86,253
Expenses:
Operating expenses....... 413,762 227,410 99,011 153,619 74,533
Depreciation and
amortization............ 20,135 11,583 6,090 7,199 3,718
General corporate and
other................... 8,385 9,195 2,957 3,292 1,814
Provision for asset
impairment.............. -- 1,200 -- -- --
-------- -------- -------- --------- --------
Total expenses......... 442,282 249,388 108,058 164,110 80,065
-------- -------- -------- --------- --------
Income before other income
and (expenses) and income
taxes..................... 28,870 13,659 17,929 (5,414) 6,188
-------- -------- -------- --------- --------
Other income and (expenses)
Gain on issuance of
Vitalink stock.......... 50,271 -- -- -- --
Interest income and
other................... 2,162 1,827 895 426 394
Minority interest
expense................. (3,881) (1,551) (2,047) 7,301 (244)
Interest expense......... (6,126) (2,966) (117) (1,415) (1,042)
Intercompany interest
expense................. (11,191) (8,421) (3,781) (3,112) (2,798)
-------- -------- -------- --------- --------
Total other income and
(expenses), net....... 31,235 (11,111) (5,050) 3,200 (3,690)
-------- -------- -------- --------- --------
Income before income
taxes..................... 60,105 2,548 12,879 (2,214) 2,498
Income taxes............... 23,917 1,437 6,055 750 1,273
-------- -------- -------- --------- --------
Net income................. $ 36,188 $ 1,111 $ 6,824 $ (2,964) $ 1,225
======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-4
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
----------------------------- -------------------
1997 1996 1995 1997 1996
--------- -------- -------- --------- ---------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............... $ 36,188 $ 1,111 $ 6,824 $ (2,964) $ 1,225
Reconciliation of net
income to net cash
provided (utilized) by
operating activities:
Gain on issuance of
Vitalink stock........ (50,271) -- -- -- --
Minority interest ex-
pense................. 3,881 1,551 2,047 (7,301) 244
Depreciation and amor-
tization.............. 20,135 11,583 6,090 7,199 3,718
Provision for bad
debts................. 4,899 2,414 1,864 2,851 1,022
Increase in deferred
taxes................. 24,662 1,656 721 (1,843) 60
Provision for asset im-
pairment.............. -- 1,200 -- -- --
Changes in assets and
liabilities (excluding
sold facilities and
acquisitions):
Change in receivables.. (17,543) (12,534) (1,845) (6,746) 4,625
Change in inventories
and other current as-
sets.................. (4,157) (4,318) (997) 3,642 644
Change in current lia-
bilities.............. (6,306) 4,561 2,349 (5,403) (892)
Change in income taxes
payable............... (725) 1,677 (83) -- --
Change in other liabil-
ities................. (6,362) (858) (269) (450) (1,853)
--------- -------- -------- -------- ---------
Net cash provided
(utilized) by operating
activities................ 4,401 8,043 16,701 (11,015) 8,793
--------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in property
and equipment........... (39,974) (32,001) (25,020) (4,246) (9,527)
Acquisition of assisted
living facilities....... -- (19,050) (30,185) -- --
Acquisition of pharma-
cies.................... (5,291) (6,270) (2,451) (5,590) (5,291)
Purchase of home health
business................ -- (22,950) -- -- --
Acquisition of pharmacy
business................ (97,400) -- -- -- --
Acquisition of Vitalink
stock................... (30,000) -- -- -- --
Other items, net......... (12,937) (6,332) (1,527) 16,774 (5,265)
--------- -------- -------- -------- ---------
Net cash (utilized) pro-
vided by investing activi-
ties...................... (185,602) (86,603) (59,183) 6,938 (20,083)
--------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowing of long-term
debt.................... 127,981 -- 1,810 10,391 --
Principal payments of
debt.................... (5,393) (3,149) (38) (302) (483)
Cash transfers from Manor
Care, net............... 49,509 105,057 40,300 3,133 9,146
--------- -------- -------- -------- ---------
Net cash provided by fi-
nancing activities........ 172,097 101,908 42,072 13,222 8,663
--------- -------- -------- -------- ---------
Net change in cash and cash
equivalents............... (9,104) 23,348 (410) 9,145 (2,627)
Cash and cash equivalents,
at beginning of year...... 23,590 242 652 14,486 23,590
--------- -------- -------- -------- ---------
Cash and cash equivalents,
at end of year............ $ 14,486 $ 23,590 $ 242 $ 23,631 $ 20,963
========= ======== ======== ======== =========
NON-CASH ACTIVITIES:
Liabilities assumed in
connection with acquisi-
tion of properties...... $ 172,778 $ 55,250 $ -- $ -- $ --
========= ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-5
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On September 15, 1997, Manor Care, Inc., ("Manor Care") announced its
intention to proceed with the separation of its assisted living, pharmacy and
home health businesses (collectively, the "Business") from its skilled
nursing, real estate and health care facility development business via a spin-
off of the Business (the "Distribution"). Manor Care's Board of Directors
voted to approve, in principle, the Distribution subject to the receipt of
other approvals and consents and satisfactory implementation of the
arrangements for the Distribution. Manor Care anticipates consummating the
Distribution by the end of the third fiscal quarter of 1998 through a special
dividend to its shareholders of one share of common stock of New ManorCare
Health Services, Inc. (the "Company") for each share of Manor Care common
stock. The Distribution is conditional upon certain matters, including the
receipt of a solvency opinion and the declaration of the special dividend by
Manor Care's Board of Directors. Following the Distribution, the Company will
lease the skilled nursing facilities from Manor Care, to be renamed Manor Care
Realty, Inc. ("Manor Care Realty"). Additionally, Manor Care Realty will
develop assisted living facilities for the Company, which will be renamed
ManorCare Health Services, Inc. ("ManorCare Health Services").
The Company was formed on August 29, 1997 to facilitate the proposed
Distribution of the Business. The operations of the Company will consist
principally of the pharmacy operations, assisted living operations and home
health operations formerly conducted by Manor Care directly or through Manor
Care's subsidiaries. The Company has assisted living operations under the
brand names "Springhouse" and "Arden Courts." The Company owns and manages 34
assisted living facilities in 12 states. The Company operates pharmacy
activities under its approximately 51% owned subsidiary, Vitalink Pharmacy
Services, Inc. ("Vitalink"), and home health operations under In Home Health,
Inc. ("IHHI"), a separate public company of which Manor Care owns
approximately 64% of the voting stock.
The combined financial statements present the financial position, results of
operations and cash flows of the Company as if it were formed as a separate
entity of Manor Care which conducted the Business for all periods presented.
Manor Care's historical basis in the assets and liabilities of the Company has
been carried over to the combined financial statements. All material
intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Changes in the investments and advances
from Manor Care represent the net income of the Company plus the net advances
to the Company from Manor Care.
An analysis of the activity in the "Investments and advances from Manor
Care" account for the three years ended May 31, 1997 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Balance, May 31, 1994.......................................... $ 43,345
Advances from Manor Care, net.................................. 53,499
Net income..................................................... (6,824)
--------
Balance, May 31, 1995.......................................... 90,020
Advances from Manor Care, net.................................. 104,898
Net income..................................................... (1,111)
--------
Balance, May 31, 1996.......................................... 193,807
Advances from Manor Care, net.................................. 119,447
Net income..................................................... (36,188)
--------
Balance, May 31, 1997.......................................... $277,066
========
</TABLE>
F-6
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Included in Investments and Advances from Manor Care is the Company's
portion of equity in its combined majority-owned subsidiaries, Vitalink and
IHHI, of approximately $200.0 million at May 31, 1997. Interest has been
charged based on annual rates of 11.1%, 9.0% and 12.3% for fiscal years ended
1997, 1996, and 1995, respectively, applied to these balances net of the
Company's equity in Vitalink and IHHI.
CASH
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, were:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Land..................................................... $ 21,439 $ 17,915
Building and improvements................................ 156,000 127,911
Furniture, fixtures and equipment........................ 66,246 47,968
Facilities in progress................................... 10,046 9,785
-------- --------
253,731 203,579
Less: Accumulated depreciation and amortization.......... (31,953) (22,410)
-------- --------
$221,778 $181,169
======== ========
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
<TABLE>
<S> <C>
Building and improvements........................................ 10-40 years
Furniture, fixtures and equipment................................ 3-20 years
</TABLE>
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs, and minor
replacements are charged to expense.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
certain acquisitions over the recorded fair value of the net assets. Goodwill
is being amortized over 40 years. Such amortization amounted to $4.3 million,
$0.9 million and $0.6 million in each of the years ended May 31, 1997, 1996
and 1995, respectively.
PHARMACY CONTRACTS
Pharmacy contracts, principally representing the estimated value of acquired
contracts to service customers, are amortized over their estimated useful
lives, not to exceed 20 years. The recoverability of these assets is evaluated
annually. Amortization expense charged to operations for pharmacy contracts
was $1.5 million in 1997, $0.9 million in 1996 and $0.9 million in 1995.
F-7
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
MINORITY INTEREST
The Company has controlling investments in certain entities which are not
wholly owned. Amounts reflected as minority interest represent the minority
owners' share of income in these entities. Minority interest liability
represents the cumulative minority owners' share of equity in these entities.
SELF-INSURANCE PROGRAMS
Prior to the Distribution, the Company participated in Manor Care's self-
insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs
of these programs are accrued at present values based on actuarial projections
for known and anticipated claims. All accrued self-insurance costs have been
treated as paid to Manor Care, and as such, amounts paid to Manor Care have
been charged directly to investments and advances from Manor Care. The costs
relating to these programs totaled $0.4 million, $4.0 million and $5.1 million
in fiscal years 1995, 1996, and 1997, respectively. Subsequent to the
Distribution, the Company will establish and maintain its own insurance
program.
PRO FORMA INFORMATION (UNAUDITED)
After giving effect to the Distribution and related transactions (see "Basis
of Presentation"), pro forma revenues, net income and net equity for the three
months ended August 31, 1997 would have been $436.9 million, $11.8 million,
and $681.5 million.
Per share data is not presented on a historical basis because the Company
was not a publicly-held company during the periods presented. Pro forma income
per share for the three months ended August 31, 1997, after giving effect to
the transaction described in the pro forma combined financial statements,
would have been $0.18. Pro forma income per common share is computed by
dividing pro forma net income by the pro forma weighted average number of
outstanding common shares, aggregating 63.7 million at August 31, 1997. The
pro forma weighted average number of outstanding common shares is based on
Manor Care's weighted average number of outstanding common shares.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported or disclosed in its financial
statements and the notes related thereto. Actual results could differ from
those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet as of August 31, 1997 and the
combined statements of income and cash flows for the three month periods ended
August 31, 1997 and August 31, 1996 have been prepared by the Company without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been omitted. The Company believes the disclosures
made are adequate to make the information presented not misleading. In the
opinion of the Company, the accompanying unaudited combined financial
statements reflect all adjustments, including only normal recurring
adjustments, necessary to present fairly the financial position of the Company
at August 31, 1997 and the results of operations and cash flows for the three
months ended August 31, 1997 and August 31, 1996. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal variations.
F-8
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the patient.
The Company records revenue for services to Medicare beneficiaries at the time
the services are rendered and based on the Medicare cost reimbursement
principles. Under those principles, Medicare reimburses the Company for the
reasonable costs (as defined) incurred in providing care to Medicare
beneficiaries. The Company reports as reimbursable costs in the Medicare cost
reports only those costs it believes to be reimbursable under the applicable
Medicare cost reimbursement principles. In determining the amount of revenue
to be recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement principles
in effect at that time. Accordingly, this process results in recording revenue
only for the costs that the Company believes are reasonably assured of
recovery. Refer to "Commitments and Contingencies" footnote for additional
information.
ACCOUNTING FOR CAPITALIZED SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the estimated useful
lives of the related systems of not more than five years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS
128"), which is effective for fiscal years ending after December 15, 1997,
including interim periods. Earlier adoption is not permitted. However, an
entity is permitted to disclose pro forma earnings per share amounts computed
under SFAS 128 in the notes to the financial statements in periods prior to
adoption. The statement requires restatement of all prior-period earnings per
share data presented after the effective date. The Company plans to adopt SFAS
128 in 1998 and the impact is not expected to be significant.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes standards
for reporting and display of comprehensive income and its components. The
Company plans to adopt SFAS 130 in fiscal year 1999 and has not determined the
impact of adoption.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997.
The Company plans to adopt SFAS 131 in fiscal year 1999 and has not determined
the impact of adoption.
LONG-TERM RECEIVABLES
Long-term receivables of $21,984 and $19,143 at May 31, 1997 and 1996,
respectively, represent accounts receivable from Medicare at IHHI, relating
primarily to the reimbursement of disputed costs from prior years.
Approximately 55% of IHHI's revenue is derived from services provided to
Medicare beneficiaries through cost reimbursement programs. Virtually all of
the payments for these services are based on the Medicare program's
reimbursable costs incurred in rendering the services. Cost reports are filed
annually and are subject to audit and retroactive adjustment. IHHI reports
revenue for those costs that it believes are probable of recovery under
applicable Medicare statutes and regulations.
F-9
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Over the years Medicare auditors have claimed that certain costs were not
reimbursable under the Medicare program. These positions are based on
interpretations promulgated after the period covered by the cost reports that
are contrary to IHHI's interpretation or on what IHHI believes is the
misapplication of specific reimbursement principles.
As of May 31, 1997, IHHI has received reports challenging $18.9 million of
these costs. An additional $18.8 million of costs similar to the costs which
have been challenged have been incurred through May 31, 1997 related to open
cost reporting years. Of this $37.7 million, approximately $22.5 million
relates to the treatment of certain community liaison personnel costs, which
Medicare alleges are unreimbursable sales costs. Other significant disputed
costs relate to physical therapists employed by IHHI and certain other branch
and corporate expenses.
As of May 31, 1997 total IHHI accounts receivable due from Medicare were
approximately $40.5 million including the disputed costs of $37.7 million. On
a consolidated basis, the Company had established reserves against these
disputed costs of $9.8 million. The Company does not believe that the
resolutions of these disputed costs will be accomplished in the next year.
Therefore, they have been classified as a non-current asset. Additionally, as
of May 31, 1997, IHHI had received approximately $12.5 million in payments
from Medicare for disputed costs. Because Medicare may seek repayment of these
amounts, the potential liability is recorded in Accrued Liabilities. In August
1997, IHHI received three court decisions relating to certain of these
amounts. IHHI has, on a preliminary basis, evaluated these decisions on its
recorded accounts receivable and, accordingly, will record a reserve of $13.6
million in the quarter ended August 1997. The net impact to the Company after
taxes and minority interest was approximately $3 million.
INCOME TAXES
Because of the relative ownership percentages, the Company files separate
income tax returns for Vitalink (effective February 1, 1997) and IHHI. An
agreement exists whereby the Company (with the exception of Vitalink and IHHI)
joins with Manor Care in the filing of a consolidated Federal tax return. The
consolidated provision of Manor Care is allocated among its subsidiaries on a
separate company basis. Accordingly, the Company accrues taxes payable to or
benefits receivable from Manor Care in the investments and advances from Manor
Care account, based on the statutory rate applied to income before taxes after
considering appropriate tax credits. Deferred taxes are recorded for the tax
effect of temporary differences between book and tax income. The Company does
not record deferred income taxes on the undistributed earnings of Vitalink and
IHHI.
The allocation of the consolidated provisions for income taxes follows for
the years ended May 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Current tax expense:
Federal........................................... $ (1,170) $ (236) $4,303
State............................................. 425 17 1,031
Deferred tax expense:
Federal........................................... 20,229 1,361 593
State............................................. 4,433 295 128
-------- ------ ------
$ 23,917 $1,437 $6,055
======== ====== ======
</TABLE>
F-10
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Depreciation and amortization................. $ (8,442) $ (5,870) $ (2,483)
Purchased intangibles......................... (18,235) (723) (269)
Gain on stock issuance........................ (37,187) (11,896) (11,896)
Other......................................... (777) (949) (75)
-------- -------- --------
Gross deferred tax liabilities................ (64,641) (19,438) (14,723)
-------- -------- --------
Reserve for doubtful accounts................. 8,208 1,418 748
Reimbursement reserve......................... 5,161 -- 68
Acquisition costs............................. 3,864 -- --
Deferred revenue.............................. 227 391 --
Vacation payments............................. 1,609 929 138
Self-insurance................................ 1,443 2,140 332
Deferred compensation......................... 1,063 -- 67
Other......................................... 1,040 307 8
-------- -------- --------
Gross deferred tax assets..................... 22,615 5,185 1,361
-------- -------- --------
Net deferred tax liabilities.................. $(42,026) $(14,253) $(13,362)
======== ======== ========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the combined statements of income follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Federal income tax rate............................. 35% 35% 35%
======= ====== ======
Federal taxes at statutory rate..................... $21,037 $ 892 $4,508
State income taxes, net of Federal tax benefit...... 3,158 203 753
Minority interest................................... 1,358 543 716
Tax credits......................................... -- -- (15)
Other............................................... (1,636) (201) 93
------- ------ ------
Income tax expense.................................. $23,917 $1,437 $6,055
======= ====== ======
</TABLE>
Income taxes paid on a combined basis for the years ended May 31, 1997, 1996
and 1995 were $6.5 million, $1.2 million and $1.1 million, respectively.
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Payroll..................................................... $13,460 $ 6,878
Taxes, other than income.................................... 1,615 734
Insurance................................................... 8,439 8,231
Interest.................................................... 1,172 629
Acquisition related accruals................................ 6,251 243
Other....................................................... 4,742 945
------- -------
$35,679 $17,660
======= =======
</TABLE>
F-11
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS
FISCAL YEAR OF DOLLARS)
- ----------- -------------
<S> <C>
1998.............................................................. $ 5,821
1999.............................................................. 5,523
2000.............................................................. 4,593
2001.............................................................. 4,076
2002.............................................................. 3,870
2003 and thereafter............................................... 162,781
--------
$186,664
========
</TABLE>
Long-term debt consisting of amounts due to Manor Care for mortgages on
assisted living facilities and for amounts drawn on Manor Care's credit
facility related to the Vitalink tender offer was $75.6 million and $49.9
million at May 31, 1997 and 1996, respectively. During fiscal year 1997
interest rates on mortgages ranged from 2.475% to 10.75%. The weighted average
interest rate in fiscal year 1997 was 6.4%. Interest paid was $1.5 million in
fiscal year 1997, $0.1 million in fiscal year 1996 and $0.1 million in fiscal
year 1995.
Mortgages on assisted living facilities are held by Manor Care and will be
transferred to ManorCare Health Services on the Distribution Date. Certain
covenants in the loan documents will be modified as a result of this transfer.
The Company does not expect changes in loan covenants to be significant.
During fiscal year 1997, Vitalink entered into a $200 million revolving
credit facility (the "Credit Facility"), which expires February 12, 2002 with
Chase Manhattan Bank. Amounts totaling $97.4 million were drawn under the
Credit Facility to redeem $98.2 million of GranCare, Inc.'s ("GranCare")
$100.0 million Senior Subordinated Notes (see "Acquisitions and
Divestitures"). Borrowings under the Credit Facility are at an interest rate
of LIBOR plus 25 basis points. Vitalink is subject to a 0.15% facility fee for
the total amount of the Credit Facility payable on a quarterly basis. The
weighted average interest rate of the Credit Facility during fiscal year 1997
was 6.05%. The terms of the Credit Facility contain, among other provisions,
requirements for maintaining defined levels of net worth, annual capital
expenditures, and interest coverage and consolidated leverage ratios. Vitalink
was in compliance with the terms of the Credit Facility for the fiscal year
ended May 31, 1997. In conjunction with Vitalink's merger with TeamCare,
Vitalink assumed $1.8 million of GranCare's 9 3/8% Senior Subordinated Notes
due September 15, 2005. The notes require semi-annual interest payments. A
$0.6 million premium has been recorded on the Senior Subordinated Notes to
reflect the fair market value as of the merger date of February 12, 1997.
F-12
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2023. The Company is
also obligated under several non-cancelable operating leases for office space
and equipment. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
1998................................................... $ 8,335 $1,589
1999................................................... 6,808 764
2000................................................... 5,351 515
2001................................................... 4,355 395
2002................................................... 2,922 84
Thereafter............................................. 9,498 --
------- ------
Total minimum lease payments........................... $37,269 $3,347
=======
Less: Amount representing interest..................... 549
------
Present value of lease payments........................ 2,798
Less: Current portion.................................. 1,346
------
Lease obligations included in long-term debt........... $1,452
======
</TABLE>
Rental expense under noncancelable operating leases was $8.0 million in
1997, $3.5 million in 1996 and $1.3 million in 1995.
ACQUISITIONS AND DIVESTITURES
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares of GranCare. In addition, Vitalink
funded the redemption of $98.2 million of GranCare's 9 3/8% Senior
Subordinated Notes and assumed approximately $10.0 million of additional
GranCare indebtedness. As a result of the excess of fair value of Vitalink
shares over the book value of TeamCare, Vitalink recorded approximately $292.5
million of goodwill. As a result of the merger, the Company's ownership
interest in Vitalink decreased to 45%. On May 21, 1997, the Company increased
its interest in Vitalink to approximately 51% through the successful
completion of its tender offer for 1.5 million shares of Vitalink common
stock. As a result of the tender offer, the Company's interest in Vitalink was
increased to approximately 51%. The Company's net pretax gain resulting from
these transactions was $50.3 million.
During fiscal year 1997, Vitalink purchased a pharmacy in California which
services 5,100 institutional beds for a total of $5.3 million. Through new
construction, the Company opened six assisted living facilities.
During fiscal year 1996, the Company acquired six assisted living facilities
with five attached skilled nursing units for $74.3 million, of which $19.0
million was cash and the remainder was assumed liabilities. In October 1995,
the Company purchased for $22.9 million approximately 41% of the common stock
of IHHI, and invested another $20.0 million for 100% of its outstanding voting
convertible preferred stock and for warrants to purchase an additional 6.0
million shares of common stock. As a result of this transaction, the Company
currently has effective control of approximately 64% of the voting stock of
IHHI. Vitalink purchased a pharmacy servicing 2,200 institutional beds and an
infusion therapy business for a total of $6.3 million.
F-13
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal year 1995, the Company purchased six assisted living
facilities for approximately $30.2 million. Vitalink purchased a pharmacy
servicing 1,300 institutional beds for $2.5 million.
Unless otherwise noted, acquisitions are accounted for as purchases.
Acquisition costs in excess of fair market value of the assets acquired are
allocated to goodwill.
The following unaudited pro forma statement of operations information gives
effect to the TeamCare merger transactions described above as though they had
occurred on June 1, 1995, after giving effect to certain adjustments,
including amortization of goodwill, additional depreciation and amortization
expense, increased interest expense on debt related to the merger and related
income tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the merger
occurred at the beginning of the respective years.
PRO FORMA STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------
1997 1996
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues................................. $ 663,516 $ 495,409
Income before income taxes......................... 62,083 5,485
Net income......................................... 33,991 (1,979)
Net income per share............................... $ 0.54 $ (0.03)
=========== ===========
</TABLE>
PROVISION FOR ASSET IMPAIRMENT
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances, which indicate the carrying amount of
an asset may not be recoverable. If the carrying amount exceeds the net
realizable value, an impairment loss is recorded in the period the impairment
is determined.
In fiscal year 1996, the Company incurred costs in excess of the original
amount expected to be incurred for the development of Arden Courts billing and
receivables systems. The Company compared the estimated net realizable value
of the systems development costs, based on the fair value of similar assets,
to the carrying amounts of these costs. Intensive testing during a six month
pilot identified over 100 major system problems, which led to the
determination that the newly developed system was not functional and that a
major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs and determined that the
carrying amount was in excess of fair value. As a result, the Company recorded
a provision of $1.2 million in fiscal year 1996 related to the impairment of
system development costs. The provision for asset impairment in fiscal year
1996 was recorded in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company,
the ultimate outcome of such litigation will not have a material adverse
effect on the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies (see
"Revenue Recognition" footnote disclosure). For fiscal years
F-14
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1997, 1996 and 1995, these revenues amounted to $188.0 million, $108.5 million
and $39.9 million, respectively. In the opinion of management, any difference
between revenues recorded and final determination will not be significant. The
increase in revenues subject to audit adjustment is due, in large part, to
acquisitions made by Vitalink and, in FY 1996, to the investment in In Home
Health, Inc. The Company does not anticipate a material effect on revenues as
a result of the Balanced Budget Act of 1997. However, the regulations
pertaining to this Act have neither been proposed nor implemented, and
therefore, this preliminary conclusion may change as a result.
Vitalink has a limited guarantee to Health Retirement Properties Trust
("HRPT") of up to $15.0 million for default mortgage payments of GranCare
facility leases assumed in connection with the TeamCare merger. In return,
Vitalink is the beneficiary of a $15.0 million line of credit from GranCare in
the event that any of the facilities defaults on its mortgage to HRPT.
Pursuant to the Distribution Agreement, the Company will assume the
following environmental liabilities: (i) environmental liabilities arising out
of or in connection with the existing assisted living facilities; (ii)
environmental liabilities to the extent such liabilities arose by reason of
the Company's negligent operation or management of an assisted living facility
or skilled nursing facility; (iii) environmental liabilities arising out of or
in connection with an assisted living facility after it is acquired by the
Company from Manor Care Realty pursuant to the terms of the Development
Agreement and (iv) liabilities arising out of or in connection with the
handling of biomedical waste at the assisted living facilities or the skilled
nursing facilities. The Company currently is not aware of the existence of any
such liabilities.
TRANSACTIONS WITH MANOR CARE
The pharmacy and assisted living facilities participate in a cash
concentration system with Manor Care and as such maintain no significant cash
balances or banking relationships. Substantially all cash received by these
operations has been immediately deposited in and combined with Manor Care's
corporate funds through its cash management system. Similarly, operating
expenses, capital expenditures and other cash requirements of these facilities
have been paid by Manor Care and charged to the Company. The net result of all
these intercompany transactions with the exception of amounts relating to the
acquisition of Company-operated assisted living facilities is reflected in the
combined balance sheets as investments and advances from Manor Care. Interest
expense on investments and advances from Manor Care for the years ended May
31, 1997, 1996 and 1995 was $11.2 million, $8.4 million and $3.8 million based
on annual rates of 11.1%, 9.0%, and 12.3%, respectively. Following the
Distribution, the Company will maintain its own cash balances and will
implement an internal cash management system.
Manor Care has historically provided various services to the Company
including, among others, cash management, payroll and payables processing,
employee benefit plans, legal, accounting, tax, information systems and
certain administrative services, as required. Manor Care charges the Company
fees for general management, staff support and rental of office space on the
basis of such factors as employee time incurred and square footage. This is
essentially the same basis Manor Care utilized to charge its other operating
entities for such services. General corporate and other expenses of $8.4
million, $11.6 million and $3.0 million, respectively, were charged to the
Company's operations for the years ended May 31, 1997, 1996 and 1995.
Management believes that the foregoing charges are reasonable allocations of
the costs incurred by Manor Care on the Company's behalf. The Company has
estimated that after the Distribution annual general corporate and other
expenses will increase by approximately $2.5 million.
For purposes of providing an orderly transition after the Distribution,
Manor Care Realty and the Company will enter into various agreements,
including, among others, Lease Agreements, Development Agreement,
F-15
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Assisted Living Facility Management Agreement, Tax Sharing Agreement, Tax
Administration Agreement, Corporate Services Agreement, Employee Benefits and
Other Employment Matters Allocation Agreement and Employee Benefits
Administration Agreement. Effective at the Distribution Date, these agreements
will provide, among other things, that the Company (i) will perform certain
corporate and support services, such as accounting, risk management and
computer systems support, (ii) will establish or participate in pension,
profit sharing and incentive plans similar to those in place at Manor Care,
(iii) will receive certain miscellaneous administrative services and (iv) will
lease skilled nursing facilities from Manor Care Realty. These agreements will
extend from the Distribution Date until such time as the Company or Manor Care
Realty has arranged to provide such services in-house or through another
unrelated provider of such services.
LEASE AGREEMENTS
On the Distribution Date, Manor Care Realty and the Company will enter into
Lease Agreements, pursuant to which Manor Care Realty will lease to ManorCare
Health Services all of its skilled nursing facilities. Under each Lease
Agreement, ManorCare Health Services' use of the subject facility will be
limited to skilled nursing operations.
Manor Care Realty will be responsible for paying all real property taxes and
insurance costs. ManorCare Health Services will be obligated to pay to Manor
Care Realty under each Lease Agreement an annual amount equal to the Owner's
Priority ("Land Rent"). In addition, each Lease Agreement will provide for
ManorCare Health Services to retain a base fee monthly of 6% of Project
Revenues (as defined in the Lease Agreement) and an incentive fee of up to 23%
of Net Operating Profit (as defined in the Lease Agreement).
Under each Lease Agreement, Manor Care Realty will have the right to
terminate if certain financial results are not achieved or if, due to
ManorCare Health Services' fault, the facility is decertified as a skilled
nursing facility or is disqualified from participation in Medicare or
Medicaid. The Lease Agreements will also provide for termination in the event
of additional defaults such as monetary default, breach of covenant and
bankruptcy defaults. Manor Care Realty will be obligated to pay to ManorCare
Health Services a termination fee in certain situations.
DEVELOPMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into a development agreement (the "Development Agreement") pursuant to
which Manor Care Realty will develop assisted living facilities for sale to
ManorCare Health Services and retain ownership of such facilities until
occupancy has stabilized at 75% or more for a period of 5 days. The purchase
price for each facility will be at a premium to the total development costs,
which will be based upon the time elapsed since the opening of the facility.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into an assisted living facility management agreement (the "Assisted
Living Facility Management Agreement") pursuant to which during the two-year
stabilization period under the Development Agreement, ManorCare Health
Services will manage the facility for Manor Care Realty. During the management
period, ManorCare Health Services will be reimbursed for all operating costs
and will receive a fixed monthly fee.
F-16
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7 1/2% SENIOR NOTES
In connection with the Exchange Offer, the Company will assume $150 million
of 7 1/2% Senior Notes due 2006 from Manor Care. These notes will be
redeemable at the option of the Company at any time at a price equal to the
greater of (a) the principal amount or (b) the sum of the present values of
the remaining scheduled payments of principal and interest, discounted with an
applicable treasury rate plus 15 basis points, plus accrued interest to the
date of redemption.
INTEREST RATE HEDGING
In conjunction with the June 1996 issuance of $150 million of 7 1/2% Senior
Notes, Manor Care entered into a series of interest rate swap and treasury
lock agreements having a total notional principal amount of $150 million.
Agreements with a total notional principal amount of $100 million were
terminated concurrent with the pricing of the notes offering on May 30, 1996
with a $2.7 million cash gain. The remaining agreement, with a total notional
principal amount of $50 million, was terminated on October 23, 1996 with a
$1.4 million cash gain. The gains on the termination of the agreements were
deferred and are being amortized over the life of the 7 1/2% Senior Notes,
effectively reducing the related interest expense by 39 basis points.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Employees of the Company participate in various retirement and profit
sharing plans. The retirement savings and investment plan and the non-
qualified retirement savings and investment plan are jointly sponsored by the
Company and Manor Care and are thus multiple employer plans. The costs of
these plans are allocated to the Company based on the size of its payroll
relative to the total payroll. Costs allocated to the Company were $1.1
million in 1997, $0.7 million in 1996 and $0.4 million in 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term debt instruments were determined by discounting
future cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the balance sheet. The balance
sheet carrying amounts of cash, cash equivalents, receivables, inventories and
other current assets approximate fair value due to the short-term nature of
these items.
F-17
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
BUSINESS SEGMENT INFORMATION
The Company operates principally in three segments: pharmacy services,
assisted living operations and home health services. Intersegment sales for
the pharmacy segment consist of sales to assisted living facilities which are
subsequently eliminated in consolidation.
Income (loss) from operations consists of total revenues less total
operating, depreciation and amortization, and general corporate and other
expenses.
<TABLE>
<CAPTION>
1997 PHARMACY ASSISTED LIVING HOME HEALTH ELIMINATIONS TOTAL
- ---- -------- --------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated
parties................ $273,396 $ 73,402 $124,354 $ -- $471,152
Intersegment sales...... 642 -- -- (642) --
Income (loss) from oper-
ations................. 33,109 (1,237) (3,002) -- 28,870
Identifiable assets..... 515,752 211,218 60,407 -- 787,377
Depreciation and amorti-
zation................. 9,527 7,548 3,060 -- 20,135
Capital expenditures.... 4,648 35,284 42 -- 39,974
1996
- ----
Revenues to unaffiliated
parties................ $140,748 $ 48,146 $ 74,153 $ -- $263,047
Intersegment sales...... 367 -- -- (367) --
Income (loss) from oper-
ations................. 22,301 (5,998)(a) (2,644) -- 13,659
Identifiable assets..... 79,013 183,269 72,598 -- 334,880
Depreciation and amorti-
zation................. 4,363 5,472 1,748 -- 11,583
Capital expenditures.... 3,537 27,902 562 -- 32,001
1995
- ----
Revenues to unaffiliated
parties................ $112,179 $ 13,808 $ -- $ -- $125,987
Intersegment sales...... 78 -- -- (78) --
Income (loss) from oper-
ations................. 18,726 (797) -- -- 17,929
Identifiable assets..... 63,825 70,677 -- -- 134,502
Depreciation and amorti-
zation................. 3,753 2,337 -- -- 6,090
Capital expenditures.... 2,163 22,857 -- -- 25,020
</TABLE>
- --------
(a) Includes a provision for asset impairment of $1.2 million.
F-18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Form of Distribution Agreement, dated as of , 1998, between Manor Care, Inc.
("Manor Care") and the Registrant.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended Bylaws of the Registrant.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP re: Tax Matters.*
10.1 Form of Tax Sharing Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1998, between Manor Care and
the Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1998, between Manor Care
Realty and the Registrant.*
10.4 Credit Agreement, dated as of , 1998, among the Registrant, Manor Care, The
Chase Manhattan Bank and Chase Securities Inc.*
10.5 Commitment Letter, dated , 1998, among the Registrant, Manor Care, The Chase
Manhattan Bank and Chase Securities, Inc.*
10.6 Form of Assisted Living Facility Management Agreement, dated as of , 1998,
between the Registrant and Manor Care.*
10.7 Form of Master Development Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.8 Form of Lease Agreement, dated as of , 1998, between Manor Care, and the
Registrant.*
10.9 Form of Non-Competition Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.10 Form of Employee Benefits and Other Employment Matters Allocation Agreement, dated
as of , 1998, between the Registrant and Manor Care.*
10.11 Form of Employee Benefits Administration Agreement, dated as of , 1998, between
the Registrant and Manor Care Realty.*
10.12 Form of Office Lease Agreement, dated as of , 1998, between the Registrant and
Manor Care.*
10.13 Form of Trademark Agreement, dated as of , 1998, between the Registrant and
Manor Care.*
10.14 Form of Cash Management Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.15 Form of Risk Management Consulting Services Agreement, dated as of , 1998,
between the Registrant and Manor Care Realty.*
10.16 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Compensation
Plan.*
10.17 Form of New ManorCare Health Services, Inc. Long-term Incentive Plan.*
10.18 Form of New ManorCare Health Services, Inc. Supplemental Executive Retirement Plan.*
10.19 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.*
10.20 Form of Employment Agreement, dated as of , 1998, between Stewart Bainum, Jr.
and the Registrant.*
10.21 Form of Employment Agreement, dated as of , 1998, between Scott J. Van Hove and
the Registrant.*
10.22 Form of License Agreement, dated , 1998, between Manor Care Realty and the
Registrant.*
10.23 Form of % Senior Note due 2008 of Manor Care Realty (Realty Note).*
10.24 Form of Vehicle Lease Agreement, dated , 1998, between Manor Care and the
Registrant.*
10.25 Form of Design Services Agreement, dated , 1998, between Manor Care and the Reg-
istrant.*
21.1 Subsidiaries of the Registrant.*
23.01 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1).*
27.01 Financial Data Schedule.
99.01 Schedule II--Valuation and Qualifying Accounts.**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
<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>
