<PAGE>
As filed with the Securities and Exchange Commission on September 15, 1997
Registration No. 333-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES 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
Gaithersburg, Maryland 20878
(Address of Principal Executive Offices) (Zip Code)
(301) 979-4000
(Registrant's telephone number, including area code)
---------------------------
Securities to be registered
pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
Securities to be registered
pursuant to Section 12(g) of the Act:
NONE
================================================================================
<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
Item Locations in Information Statement
- ---- ----------------------------------
<S> <C>
Item 1. Business.................................... SUMMARY; INTRODUCTION; THE
DISTRIBUTION; SPECIAL FACTORS;
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDI-
TION AND RESULTS OF OPERA-
TIONS; BUSINESS; CONSOLIDATED
FINANCIAL STATEMENTS
Item 2. Financial Information....................... SUMMARY; SPECIAL FACTORS;
PRO FORMA CAPITALIZATION;
PRO FORMA FINANCIAL DATA;
SELECTED HISTORICAL FINAN-
CIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RE-
SULTS OF OPERATIONS; CONSOLI-
DATED FINANCIAL STATEMENT
Item 3. Properties.................................. BUSINESS
Item 4. Security Ownership of Certain Bene-
ficial Owners and Management................ SECURITY OWNERSHIP OF CER-
TAIN BENEFICIAL OWNERS; BENE-
FICIAL OWNERSHIP OF MANAGE-
MENT
Item 5. Directors and Executive Officers............ MANAGEMENT; LIABILITY AND
INDEMNIFICATION OF DIRECTORS
AND OFFICERS
Item 6. Executive Compensation...................... MANAGEMENT; SECURITY OWN-
ERSHIP OF CERTAIN BENEFICIAL
OWNERS
Item 7. Certain Relationships and Related
Transactions................................ SUMMARY; THE DISTRIBUTION;
RELATIONSHIP BETWEEN MANOR
CARE REALTY AND THE COMPA-
NY AFTER THE DISTRIBUTION;
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2
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<TABLE>
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CERTAIN RELATIONSHIPS AND
TRANSACTIONS
Item 8. Legal Proceedings........................... BUSINESS
Item 9. Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters................. SUMMARY; THE DISTRIBUTION;
SPECIAL FACTORS; SECURITY
OWNERSHIP OF CERTAIN BENE-
FICIAL OWNERS; BENEFICIAL
OWNERSHIP OF MANAGEMENT;
DESCRIPTION OF CAPITAL STOCK
Item 10. Recent Sales of Unregistered Securities..... NONE
Item 11. Description of Registrant's Securities
to be Registered............................ SPECIAL FACTORS; DESCRIPTION
OF CAPITAL STOCK; PURPOSES
AND EFFECTS OF CERTAIN PROVI-
SIONS OF THE CHARTER AND BY-
LAW PROVISIONS
Item 12. Indemnification of Directors and Officers... LIABILITY AND INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Item 13. Financial Statements and Supplementary
Data........................................ SUMMARY; MANAGEMENT'S DIS-
CUSSION AND ANALYSIS OF FI-
NANCIAL CONDITION AND RE-
SULTS OF OPERATIONS; CONSOLI-
DATED FINANCIAL STATEMENTS
Item 14. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure.................................. NONE
Item 15. Financial Statements and Exhibits
</TABLE>
(a) Financial Statements--See Index to Consolidated Financial Statements
(b) Exhibits:
3
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<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 Form of Distribution Agreement, dated as of __, 1997, between Manor Care, Inc.
("Manor Care") and the Registrant.*
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
10.1 Form of Tax Sharing Agreement, dated as of ________, 1997, between Manor Care and
the Registrant.*
10.2 Form of Tax Administration Agreement, dated as of __________, 1997, between Manor
Care and the Registrant.*
10.3 Form of Corporate Services Agreement, dated as of ___________, 1997, between
Manor Care and the Registrant.*
10.4 Credit Agreement, dated as of __________, 1997, among the Registrant and
[ ].*
10.5 Form of Assisted Living Facility Management Agreement, dated as of ___________,
1997, between the Registrant and Manor Care.
10.6 Form of Master Development Agreement, dated as of ___________, 1997, between the
Registrant and Manor Care.*
10.7 Form of Lease Agreement between Manor Care, and the Registrant.*
10.8 Form of Non-Competition Agreement, dated as of ________, 1997, between the Regis-
trant and Manor Care.*
10.9 Form of Employee Benefits and Other Employment Matters Allocation Agreement,
dated as of ________, 1997, between the Registrant and Manor Care.*
10.10 Form of Employee Benefits Administration Agreement, dated as of ________, 1997,
between the Registrant and Manor Care.*
10.11 Form of Office Lease Agreement, dated as of ________, 1997, between the Registrant
and Manor Care.*
10.12 Form of Trademark Agreement, dated as of ________, 1997, between the Registrant
and Manor Care.*
10.13 Form of Cash Management Agreement, dated as of ________, 1997, between the Regis-
trant and Manor Care.*
10.14 Form of Risk Management Consulting Services Agreement, dated as of ________, 1997,
between the Registrant and Manor Care.*
</TABLE>
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* To be filed by amendment.
4
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10.15 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Compen-
sation Plan.*
10.16 Form of New ManorCare Health Services, Inc. Long-term Incentive Plan.*
10.17 Form of New ManorCare Health Services, Inc. Supplemental Executive Retirement
Plan.*
10.18 Form of New ManorCare Health Services, Inc. Non-Employee Director and Deferred
Compensation Stock Purchase Plan.*
10.19 Form of Employment Agreement, dated as of _______, 1997, between Stewart Bainum, Jr.
and the Registrant.*
21.1 Subsidiaries of the Registrant.*
27.01 Financial Data Schedule.
99.01 Schedule II - Valuation and Qualifying Accounts.
</TABLE>
- ----------------------
* To be filed by amendment
5
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
NEW MANORCARE HEALTH SERVICES, INC.
By: /s/ James H. Rempe
------------------------------------------
Name: James H. Rempe
Title: Senior Vice President,
General Counsel and
Secretary
Date: September 15, 1997
6
<PAGE>
[Manor Care, Inc. Letterhead]
, 1997
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 ________________, 1997 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
Manor Care's skilled nursing facilities, 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 focus on its real estate development business through the
construction and development of skilled nursing and assisted living facilities.
In addition, Manor Care will continue to own its skilled nursing facilities and
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 a $250
million intercompany note. 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 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.
<PAGE>
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.
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. The Development Agreement contemplates pricing
arrangements which will include compensation to Manor Care Realty for short-term
start-up costs and expenses intended to eliminate any dilutive effects of the
development program on Manor Care Realty's results of operations. In addition to
the income from these sales, Manor Care Realty will also benefit from a Lease
Agreement, 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
development program. In addition, Manor Care anticipates calling the
outstanding $150 million 9 1/2% Senior Subordinated Notes due 2002 on or about
the first call date of November 15, 1997.
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]
, 1997
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 , 1997.
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 171 skilled nursing facilities 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
<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 SEPTEMBER 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 ______, 1997
(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
_________ __, 1997 (the "Effective Date"). It is expected that certificates
representing the shares of Common Stock will be mailed to stockholders on or
about ________ __, 1997.
The Company is a newly formed company which, as a result of the
transactions entered into in connection with the Distribution, will own the
businesses and assets of, and be responsible for the liabilities associated
with, Manor Care's assisted living business and operate and manage the skilled
nursing facilities owned by Manor Care. 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 will be made to list the
shares of Common Stock on the New York Stock Exchange under the symbol "[ ]."
In reviewing this Information Statement, you should carefully consider
the matters described under the caption "SPECIAL FACTORS."
------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DIS-
TRIBUTION. 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 ________, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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SUMMARY .................................................................. 1
SUMMARY FINANCIAL INFORMATION ............................................ 4
INTRODUCTION ............................................................. 5
THE DISTRIBUTION ......................................................... 6
Reasons for the Distribution ........................................ 6
Manner of Effecting the Distribution ................................ 6
Solvency Opinion .................................................... 7
Federal Income Tax Consequences of the Distribution ................. 7
Listing and Trading of the Shares of Common Stock ................... 8
Future Management of the Company .................................... 9
SPECIAL FACTORS .......................................................... 10
Forward-Looking Information ......................................... 10
Operating History and Future Prospects .............................. 10
Dependence by the Company on Related Party Agreements ............... 10
Dependence on Manor Care Realty ..................................... 11
Potential Conflicts with Manor Care Realty .......................... 11
Fraudulent Transfer Considerations; Legal Dividend Requirements ..... 12
Competition ......................................................... 12
Regulation .......................................................... 12
Staffing and Labor Costs ............................................ 14
Dependence on Attracting Seniors with Sufficient Resources to Pay ... 14
Payment by Third-Party Payors ....................................... 15
Environmental Matters ............................................... 15
Absence of Prior Trading Market for the Common Stock ................ 15
Significant Bainum Family Interest .................................. 16
Certain Tax Considerations .......................................... 16
Common Stock Dividend Policy ........................................ 16
RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY
AFTER THE DISTRIBUTION ................................................. 17
Lease Agreements .................................................... 17
Development Agreement ............................................... 18
Non-Competition Agreement ........................................... 19
Assisted Living Facility Management Agreement ....................... 19
Employee Benefits and Other Employment Matters Allocation Agreement . 19
Employee Benefits Administration Agreement .......................... 20
Office Lease Agreement .............................................. 20
Distribution Agreement .............................................. 20
Tax Sharing Agreement ............................................... 20
Tax Administration Agreement ........................................ 21
Corporate Services Agreement ........................................ 21
Trademark Agreement ................................................. 21
Cash Management Agreement ........................................... 21
Risk Management Consulting Services Agreement ....................... 22
Realty Note ......................................................... 22
FINANCING ................................................................ 22
The Capital Contribution ............................................ 22
The Credit Facility ................................................. 22
7 1/2% Senior Notes ................................................. 23
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i
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PAGE
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PRO FORMA CAPITALIZATION .................................................. 24
PRO FORMA FINANCIAL DATA .................................................. 25
SELECTED HISTORICAL FINANCIAL DATA ........................................ 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ...................................... 30
Introduction ......................................................... 30
Overview And Outlook ................................................. 30
Results of Operations ................................................ 30
Liquidity and Capital Resources ...................................... 31
Property and Acquisitions ............................................ 32
Forward-Looking and Cautionary Statements ............................ 32
Impact of Recently Issued Accounting Standards ....................... 32
BUSINESS .................................................................. 34
Overview ............................................................. 34
Industry Trends ...................................................... 34
Business Strategy .................................................... 36
Skilled Nursing Services ............................................. 38
Assisted Living Services ............................................. 39
Institutional Pharmacy Services ...................................... 40
Home Health Care Services ............................................ 41
Employees ............................................................ 42
Properties ........................................................... 42
Competition .......................................................... 48
Government Funding ................................................... 48
Government Regulation ................................................ 50
Insurance ............................................................ 52
Legal Proceedings .................................................... 52
MANAGEMENT ................................................................ 53
Executive Officers of the Company .................................... 53
Compensation of Executive Officers ................................... 55
Retirement Plans ..................................................... 57
Option and Stock Purchase Plans ...................................... 59
Employment Agreements ................................................ 59
THE BOARD OF DIRECTORS .................................................... 60
Directors of the Company ............................................. 60
Committees of the Board of Directors ................................. 61
Non-Employee Director Plan ........................................... 62
CERTAIN RELATIONSHIPS AND TRANSACTIONS .................................... 62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ........................... 63
BENEFICIAL OWNERSHIP OF MANAGEMENT ........................................ 65
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY ............................... 67
Common Stock ......................................................... 67
Preferred Stock ...................................................... 67
Preemptive Rights .................................................... 67
PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS ............. 68
General .............................................................. 68
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LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS................... 69
Elimination of Liability in Certain Circumstances.................... 69
Indemnification and Insurance........................................ 69
INDEPENDENT ACCOUNTANTS................................................... 69
ADDITIONAL INFORMATION.................................................... 69
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" refers to New ManorCare Health
Services, Inc. (to be renamed ManorCare Health Services, Inc.) after the
Distribution.
MANORCARE HEALTH SERVICES
The Company 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 during the
next five years. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY
AFTER THE DISTRIBUTION -- Development Agreement." The Company's 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 171 skilled
nursing facilities in 28 states containing approximately 24,050 beds. These
facilities provide skilled nursing services principally for residents over the
age of 65. Within its skilled nursing facilities, the Company operates 141
Arcadia special care units which provide care to individuals in the middle to
late stages of Alzheimer's disease and 22 MedBridge high acuity units which
focus on short-term, post-hospital care for medically complex residents and
those in need of aggressive physical rehabilitation. The Company owns and
operates 34 assisted living facilities in 12 states containing 3,755 units.
These facilities include 14 Arden Courts, serving persons with early to middle-
stage Alzheimer's disease or related memory impairment, and 21 Springhouse
senior residences, serving the general assisted living population. To enhance
the array of services it provides, the Company also has majority control of
Vitalink, the second largest public institutional pharmacy company, and In Home
Health, a national home health care services company. Vitalink operates 57
institutional pharmacies in 32 states, serving approximately 174,000 beds. In
Home Health provides home health services in 14 states. See "BUSINESS."
The Company's principal offices are located at 11555 Darnestown Road,
Gaithersburg, Maryland, 20878, and its telephone number is (301) 979-4000.
<PAGE>
THE DISTRIBUTION
<TABLE>
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Distributing Company.............. Manor Care, Inc., a Delaware corporation.
Distributed Company............... New ManorCare Health Services, Inc., a
Delaware corporation (to be renamed
ManorCare Health Services, Inc.), a newly
formed company which will on the Effective
Date (i) own all of the business and
assets of, and be responsible for the
liabilities associated with, the assisted
living business conducted by Manor Care
and certain of its subsidiaries (the
"Assisted Living Business"), (ii) operate
and manage the skilled nursing facilities
owned by Manor Care (the "Skilled Nursing
Facilities"), (iii) own approximately 51%
of Vitalink, a public company that
operates institutional pharmacies, and
(iv) own approximately 64% of the voting
power of In Home Health, a public company
that provides health care services to
clients in their homes.
Primary Purposes of the
Distribution................... The Board of Directors and management of
Manor Care believe that the separation
into two public companies of Manor Care's
health care services business and the
operation of its health care real estate
development activities, including site and
market selection for the development of
skilled nursing and assisted living
facilities and construction related
activities (the "Real Estate Development
Business"), by means of the Distribution
will provide Manor Care with better access
to the equity capital markets and improve
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. 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 competitive
position. 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. See "THE
DISTRIBUTION-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 requested a private letter
ruling (the "Ruling") from the Internal
Revenue Service ("IRS") that the receipt
of shares of Common Stock will be tax-free
for Federal income tax purposes to the
stockholders of Manor Care and that Manor
Care will not recognize income, gain or
loss as a result of the Distribution. See
"THE DISTRIBUTION--Federal Income Tax
Consequences of the Distribution."
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 __________, 1997. The
shares to
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2
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<S> <C>
be distributed will constitute 100% of the
outstanding shares of Common Stock of the
Company.
Listing and Trading Market........ Application will be made to list the
shares of Common Stock on the New York
Stock Exchange, Inc. ("NYSE") under the
symbol "[ ]."
Record Date....................... Close of business on _______ __, 1997.
Effective Date.................... __________, 1997.
Mailing Date...................... Certificates representing the shares of
Common Stock will be mailed to Manor Care
stockholders on or about __________, 1997.
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 modest quarterly cash dividends
on the shares of Common Stock. The payment
of dividends on the Common Stock will be
subject to the discretion of the Board of
Directors 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 relevant. See "SPECIAL
FACTORS--Common Stock Dividend 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 Company 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 and various other agreements
with respect to among other things,
employee benefits, risk management and
corporate and administrative services. See
"RELATIONSHIP BETWEEN MANOR CARE REALTY
AND THE COMPANY AFTER THE DISTRIBUTION."
The Company and Manor Care Realty will
share two common directors. In addition,
upon completion 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 beneficially 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 potential conflicts of
interest. See "SPECIAL FACTORS--Potential
Conflicts with Manor Care Realty" and
"SPECIAL FACTORS--Significant Bainum
Family Interest."
Special Factors................... Stockholders should carefully consider the
matters discussed under the section
entitled "SPECIAL FACTORS" in this
Information Statement.
</TABLE>
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth a summary of selected historical and pro
forma financial data for the Company. The historical financial data relates to
the businesses of the Company 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 the Company had been a separate,
independent company during the periods shown nor necessarily indicative of
ManorCare Health Services' future performance as an independent company. See
"SPECIAL FACTORS -- Operating History and Future Prospects." The historical
statements of income data for the fiscal years ended May 31, 1995, 1996 and 1997
and the historical balance sheet data for the fiscal years ended May 31, 1996
and 1997 are derived from the audited combined financial statements of the
Company. 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 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. 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
OPERATIONS AND FINANCIAL CONDITION." The summary pro forma financial data make
adjustments to the historical balance sheet and the historical statement of
income, as if the Distribution had occurred on May 31, 1997 for purposes of the
pro forma balance sheet, and on June 1, 1996 for purposes of the pro forma
statement of income. See "PRO FORMA FINANCIAL DATA" and the accompanying
footnotes for a discussion of the principal adjustments made in the preparation
of the pro forma financial information. The pro forma financial statements of
the Company may not reflect the future results of operations or financial
position of the Company or what the results of operations would have been if the
Company 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 operations from June 1, 1996 to
January 31, 1997 (the portion of the fiscal year prior to the TeamCare Merger
(as defined herein)), the assumption of the 7 1/2% Senior Notes due 2006, and
the related income tax effects of these adjustments. See "PRO FORMA FINANCIAL
DATA."
<TABLE>
<CAPTION>
Fiscal Years Ended May 31,
----------------------------------------------------- Pro Forma
1995 1996 1997 1997
----------- ----------- ----------- -----------
(In thousands)
Statements of Income Data:
<S> <C> <C> <C> <C>
Revenues $ 125,987 $ 263,047 $ 471,152 $ 1,681,966
Expenses:
Operating expenses 99,011 227,410 413,762 1,494,809
Depreciation and amortization 6,090 11,583 20,135 27,797
General corporate and other 2,957 9,195 8,385 70,592
Provision for asset impairment -- 1,200 -- --
----------- ----------- ----------- -----------
Total expenses 108,058 249,388 442,282 1,593,198
----------- ----------- ----------- -----------
Income before other income and
(expenses) and income taxes 17,929 13,659 28,870 88,768
----------- ----------- ----------- -----------
Other income and (expenses):
Gain on issuance of Vitalink stock -- -- 50,271 50,271
Interest expense (3,898) (11,387) (17,317) (25,113)
Other income (expenses), net (1,152) 276 (1,719) 30,590
----------- ----------- ----------- -----------
Income before income taxes 12,879 2,548 60,105 144,516
Income taxes 6,055 1,437 23,917 60,824
----------- ----------- ----------- -----------
Net income $ 6,824 $ 1,111 $ 36,188 $ 83,692
=========== =========== =========== ===========
Other Financial Data:
Cash provided by operating activities $ 16,701 $ 8,043 $ 4,401 $ N/A
Investment in property and equipment 25,020 32,001 39,974 N/A
Total assets 134,502 334,880 787,377 1,385,847
Long-term debt 1,837 51,387 180,843 330,843
Investments and advances from Manor Care 90,020 193,807 277,066 --
Common stock and paid-in-capital -- -- -- 682,026
</TABLE>
4
<PAGE>
INFORMATION STATEMENT
for the
STOCKHOLDERS OF MANOR CARE, INC.
------------------------------------
INTRODUCTION
On ______, 1997, 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 _______, 1997 (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 (which will be renamed ManorCare
Health Services, Inc.) (the "Company" or "ManorCare Health Services"), for every
share of Manor Care common stock outstanding on the Record Date. The
Distribution will occur on __________ __, 1997 (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 ___________ __, 1997.
The Company is a subsidiary of Manor Care. On the Effective Date, the
Company will own all of the assets and will have assumed certain liabilities
relating to the assisted living business previously conducted by Manor Care and
certain of its subsidiaries (the "Assisted Living Business"). In addition, the
Company will own all of Manor Care's stock in Vitalink Pharmacy Services, Inc.,
a public company that owns and operates pharmacies ("Vitalink") and In Home
Health, Inc., a public company that provides comprehensive health care services
to clients in their homes ("In Home Health"). The Company will also enter into
the Lease Agreements (as defined herein) pursuant to which ManorCare Health
Services will operate and manage the skilled nursing facilities owned by Manor
Care (the "Skilled Nursing Facilities"). In addition, the Company will enter
into the Development Agreement (as defined herein) pursuant to which Manor Care
Realty will develop assisted living facilities for the Company and retain
ownership of such facilities until occupancy has stabilized at 80% or more for a
period of 30 days or until such earlier date as the Company opts to purchase
such facility provided that if such stabilized occupancy occurs within two years
of commencing operations, the Company will be obligated to purchase such
facilities. 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 will enter into the
Non-Competition Agreement, the Assisted Living Facility Management Agreement,
the Distribution Agreement, the Tax Sharing Agreement (each as defined herein)
and various other agreements with respect to among other things, employee
benefits, risk management and corporate and administrative services. See
"BUSINESS" and "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION."
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.
5
<PAGE>
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 "Real Estate Development Business").
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 __________ __, 1997 (the "Distribution
Agreement"), between Manor Care and the Company. 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; and (iii) the shares of Common and Preferred Stock of In Home Health
owned by Manor Care (the "Contribution of Assets").
Also pursuant to the Distribution Agreement, 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 after the Effective Date,
(ii) the operation of the Skilled Nursing Facilities after the Effective Date
and (iii) the ownership of stock in Vitalink and In Home Health (the "Assumption
of Liabilities"). "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER
THE DISTRIBUTION -- Distribution Agreement."
6
<PAGE>
In addition, on or prior to the Effective Date, Manor Care will make a
capital contribution (the "Capital Contribution") to ManorCare Health Services
of (i) approximately $250 million in cash and (ii) $250 million of Senior Notes
of Manor Care Realty (the "Realty Note"). 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 outstanding on the Record Date.
Based upon the number of shares of Manor Care common stock outstanding on
________ __, 1997, 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 on or about _______ __, 1997. 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 is consummated as proposed: (i) with
respect to each of Manor Care 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) 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) the excess of the value of
the aggregate assets of Manor Care, before consummation of the Distribution,
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 and ManorCare Health Services and as to the
permissibility of the Distribution under Section 170 of the DGCL (as defined).
The Company has engaged [ ] to provide such an opinion and has agreed
to pay [ ] a fee of $[ ] for its services (which fee will not be
contingent on consummation of the Distribution).
Federal Income Tax Consequences of the Distribution
Manor Care has requested a private letter ruling (the "Ruling") from the
IRS which would provide, among other things, that the Distribution will qualify
as a tax-free transaction under Sections 355 and 368 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Ruling, while generally binding on
the IRS, would be based upon certain factual representations and assumptions. If
any of such factual representations or assumptions are incorrect or untrue in
any material respect, the ability to rely on the Ruling may be adversely
affected. If the Distribution is held to be taxable, both Manor Care and its
stockholders could be subject to a material amount of income tax.
7
<PAGE>
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
Sections 355 and 368 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 will be made to list the shares of Common Stock on the New York
Stock Exchange, Inc. ("NYSE") under the symbol "[ ]." 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 _____ __, 1997.
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 "SPECIAL 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.
8
<PAGE>
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 six principal executive officers of the Company
have an average of more than 16 years of industry experience. See "MANAGEMENT --
Executive Officers of the Company."
9
<PAGE>
SPECIAL 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 "Special 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 "Special 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 Assisting Living Business and the
stock of Vitalink and In Home Health previously owned and conducted by Manor
Care and will operate and manage the Skilled Nursing Facilities previously
operated and managed by Manor Care. On an historical basis, for the three fiscal
years ended May 31, 1997, 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.
Dependence by the Company on Related Party Agreements
In connection with the Distribution, the Company will enter into agreements
with Manor Care, including the Development Agreement, the Lease Agreements and
the Assisted Living Facility Management Agreement. Pursuant to the Development
Agreement, Manor Care Realty will develop assisted living facilities for
ManorCare Health Services and retain ownership of such facilities for up to two
years until occupancy has stabilized at 80% or more for a period of 30 days or
until such earlier date as ManorCare Health Services opts to purchase such
facility. Accordingly, the risks related to construction and the initial
operation of the assisted living facilities developed by Manor Care Realty will
be borne by Manor Care Realty. Pursuant to the Lease Agreements, Manor Care
Realty will lease to ManorCare Health Services all of its
10
<PAGE>
Skilled Nursing Facilities, and Manor Care Realty will grant to ManorCare
Health Services, pursuant to the Lease Agreements or by separate agreement, the
right to operate and manage all of Manor Care Realty's current and future
skilled nursing facilities; and pursuant to the Assisted Living Facility
Management Agreement, ManorCare Health Services will manage assisted living
facilities for Manor Care Realty for a fixed monthly fee during the two-year
stabilization period under the Development Agreement. ManorCare Health Services'
revenues will be dependent on the operations of the skilled nursing facilities
under the Lease Agreements and the Assisted Living Facility Management
Agreement. Manor Care Realty's development strategy will require substantial
capital resources. The inability of Manor Care Realty to secure all necessary
financing for the development and construction of the assisted living facilities
on acceptable terms and conditions could have a material adverse effect on 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."
Dependence on Manor Care Realty
The Company's core strategy contemplates the acquisition of 170 new Arden
Courts facilities and 38 new Springhouse facilities over the next five years.
Under the Development Agreement, Manor Care Realty will locate, develop and
build these facilities for sale to 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. Moreover, Manor Care Realty will be a highly
leveraged company which may make it more difficult to secure short-term
construction financing for these facilities and which will make it more
immediately vulnerable to adverse changes in prevailing interest rates and in
general business conditions, as well as conditions in the real estate
development industry. The failure of Manor Care Realty to maintain substantial
compliance with its schedule for completing these new assisted living facilities
or to build them at a cost substantially as planned or to secure all necessary
financing for development and construction of the facilities on acceptable terms
could have a material adverse effect on the Company. See "RELATIONSHIP BETWEEN
MANOR CARE REALTY AND THE COMPANY AFTER THE DISTRIBUTION."
Potential Conflicts with Manor Care Realty
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing relationships
between the companies. Such sources of conflict include the fact that after the
Distribution, (i) ManorCare Health Services will lease, manage and operate Manor
Care Realty's skilled nursing facilities pursuant to the Lease Agreements, (ii)
Manor Care Realty will develop assisted living facilities for ManorCare Health
Services and ManorCare Health Services will manage each of those facilities
until certain sustained occupancy targets are achieved, at which point ManorCare
Health Services will be obligated to purchase the facility pursuant to the
Development Agreement, (iii) pending the possible purchase of an assisted living
facility by ManorCare Health Services pursuant to the terms of the Development
Agreement, ManorCare Health Services will manage the facility for a fixed
monthly fee to be agreed upon with Manor Care Realty, (iv) Manor Care Realty
will be indebted to ManorCare Health Services as a result of the Realty Note,
(v) ManorCare Health Services and Manor Care Realty will enter into the Non-
Competition Agreement that will limit the competition between the companies and
(vi) ManorCare Health Services may manage assisted living facilities not
developed by Manor Care Realty. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND
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. Nevertheless, ManorCare Health
Services believes that there will be sufficient mutuality of interest between
the two companies to result in a mutually productive relationship. In addition,
ManorCare Health Services and Manor Care Realty will have two common directors,
Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs. Bainum, Jr. and
Simmons, as well as certain other officers and directors of ManorCare Health
Services and Manor Care Realty will also own shares (and/or options or other
rights to acquire shares) in both companies following the Distribution.
Appropriate policies and procedures will be followed by the board of directors
of each company to limit the involvement of the overlapping directors (and if
appropriate, relevant officers of such companies) in conflict situations,
including requiring them to abstain from voting as directors of either ManorCare
Health Services or Manor Care Realty. Such procedures will include requiring
Messrs. Bainum, Jr. and
11
<PAGE>
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. It will be the principal responsibility of the general
counsel of each company to monitor this issue in consultation with the Audit
Committee of the Board of Directors of the company in question.
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 Distribution under the requirements of Section 170 of the Delaware
General Corporation Law ("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 (for example, in a lawsuit by an unpaid creditor or
representatives of creditors) were to find that, at the time Manor Care effected
the Distribution of ManorCare Health Services, Manor Care or ManorCare Health
Services, as the case may be, (i) was insolvent, (ii) was rendered insolvent by
reason of the Distribution, (iii) was engaged in a business or transaction for
which Manor Care's or ManorCare Health Services' remaining assets, as the case
may be, constituted unreasonably small capital, or (iv) intended to incur, or
believed it would incur, debts beyond its ability to pay as such debts matured,
such court may be asked to void the Distribution (in whole or in part) as a
fraudulent conveyance and require that the stockholders return the distribution
(in whole or in part) to Manor Care, or require Manor Care or ManorCare Health
Services, as the case may be, to fund certain liabilities of the other company
for the benefit of creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the jurisdiction whose law is being applied.
Generally, however, Manor Care or ManorCare Health Services, as the case may be,
would be considered insolvent if the fair value of their respective assets were
less than the amount of their respective liabilities or if they incurred debt
beyond their ability to repay such debt as it matures. In addition, under
Section 170 of the DGCL (which is applicable to Manor Care in the Distribution)
a corporation generally may make distributions to its stockholders only out of
its surplus (net assets minus capital) and not out of capital.
Competition
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
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
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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. 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.
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.
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. 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.
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"
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which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients or the purchasing, leasing, ordering or arranging for any
goods, facility services or items for which payment can be made under Medicare
and Medicaid. The Federal government, private insurers and various state
enforcement agencies have increased their scrutiny of providers, business
practices and claims in an effort to identify and prosecute fraudulent and
abusive practices. In addition, the Federal government has issued recent fraud
alerts concerning nursing services, double billing, home health services and the
provision of medical supplies to nursing facilities; accordingly, these areas
may come under closer scrutiny by the government. Furthermore, some states
restrict certain business relationships between physicians and other providers
of health care services. Many states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs and
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
There can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of the Company. See "BUSINESS--Government
Regulation."
Many states have adopted Certificate of Need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
and determine that a need exists for certain bed additions, new services and
capital expenditures or other changes prior to beds and/or new services being
added or capital expenditures being undertaken. To the extent that Certificates
of Need or other similar approvals are required for the expansion of 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.
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."
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 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.
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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 years ended May 31, 1995, 1996 and 1997, respectively, the Skilled
Nursing Facilities to be operated by the Company and the Assisted Living
Business derived approximately 59%, 59% and 57% of their patient service revenue
from private pay sources, 18%, 18% and 18% from Medicare and 23%, 23% and 25%
from various state Medicaid agencies in each case as they were operated by Manor
Care. Both governmental and private third-party payors have employed cost
containment measures designed to limit payments made to health care providers
such as 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 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 will be 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.
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Significant Bainum Family Interest
Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.20% and 22.86%,
respectively, of the Common Stock, in each case including shares with respect to
which voting power is shared with other individuals or entities. In addition,
Mr. Bainum, Jr. will be Chairman of the Board of 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 requested the Ruling from the IRS which would provide, among
other things, that the Distribution will qualify as a tax-free transaction under
Sections 355 and 368 of the Code and that neither the stockholders of Manor Care
nor Manor Care will recognize any income, gain or loss as a result of the
Distribution. Nevertheless, if Manor Care engages in the Distribution and the
Distribution is held to be taxable, both Manor Care and its stockholders could
be subject to a material amount of income tax.
Common Stock Dividend Policy
It is currently contemplated that following the Distribution, the Company
will pay modest quarterly cash dividends on the shares of Common Stock. Subject
to the Company's financial results and declaration by the Board of Directors,
the Company currently intends to pay its first dividend in , 1997.
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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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 Cash
Management Agreement, the Risk Management Consulting Services Agreement, and the
Realty Note. This summary does not purport to be complete. Reference is made to
the complete provisions of, and such summary is qualified in its entirety by
reference to, such agreements, copies of which are filed as exhibits to the
Registration Statement of which this Information Statement forms a part. See
"SPECIAL FACTORS--Potential Conflicts With Manor Care Realty."
Lease Agreements
On the Effective Date, 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 Realty,
and Manor Care Realty will grant to ManorCare Health Services, pursuant to a
separate agreement, the right to operate and manage all of Manor Care Realty's
current and 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. Manor Care Realty and ManorCare Health
Services will also enter into Lease Agreements or similar arrangements pursuant
to which ManorCare Health Services will also lease and operate skilled nursing
facilities in which Manor Care Realty is a substantial equity investor by joint
venture, common ownership or otherwise.
Under the Lease Agreements ManorCare Health Services will be responsible
for operating and managing the facilities and will be subject to substantially
all the risks of operations with respect to the facilities. Under the Lease
Agreement for each facility Manor Care Health Services will be obligated to pay
Manor Care Realty annual rent ("Premises Rent") equal to the greater of (i) 77%
of Net Operating Profit and (ii) 10% of a value of the subject facility agreed
upon by ManorCare Health Services and Manor Care Realty (the "Priority Basis");
provided that the Premises Rent for a specific Lease Year may be reduced below
these two amounts as a result of the deferral mechanism described below. The
Premises Rent on a facility is payable in arrears in 12 monthly installments
(each "Monthly Premises Rent"), with each due on the 15th day of the calendar
month succeeding the month for which the installment is owed. Each installment
of Monthly Premises Rent shall be equal to (A) the greater of (i) 77% of Net
Operating Profit of the subject facility for the Lease Year through and
including the end of the month in respect of which the Monthly Premises Rent is
payable, and (ii) 10% of the Priority Basis (the "Priority Sum") multiplied by a
fraction, the numerator of which is the number of days in the Lease Year through
and including the end of the month in respect of which the Monthly Premises Rent
is due and payable and the denominator of which is 360, minus (B) the aggregate
amount of Monthly Premises Rent previously paid by ManorCare Health Services for
the Lease Year. 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, to the extent available,
ManorCare Health Services is entitled to retain without reduction.
In the event that Monthly Premises Rent for a particular month is the
Priority Sum and Net Operating Profit is insufficient to pay all or a portion of
the Priority Sum, the amount of any deficiency (the "Deferred Premises Rent")
may be deferred until such time as Net Operating Profit is available to pay it;
provided that as of the first day of each new Lease Year all Deferred Premises
Rent for the prior Lease Year which has not become due and payable shall be
deemed cancelled and extinguished and shall not thereafter be due and payable.
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In addition to Premises Rent, ManorCare Health Services will also be
obligated to reimburse Manor Care Realty for the aggregate annual amount payable
in respect of real and personal property taxes on the facility and premiums for
insurance coverage.
Each facility will be operated pursuant to an Operating Budget (as defined
in the Lease Agreements). The initial Operating Budget for each facility will be
agreed upon by Manor Care Realty and ManorCare Health Services. Thereafter, each
Operating Budget will not be subject to Manor Care Realty's approval unless (i)
the Net Operating Profit for the Lease Year (as defined in the Lease Agreements)
immediately prior to the Lease Year with respect to which the Operating Budget
in question is being prepared was less than the greater of (A) the Priority Sum
and (B) 90% of budgeted Net Operating Profit for such Lease Year or (ii)
budgeted Net Operating Profit for the current Lease Year is less than the
greater of (A) the Priority Sum for the current Lease Year and (B) 90% of
budgeted Net Operating Profit for the prior Lease Year. In addition, ManorCare
Health Services will have the right to use 3% of aggregate Project Revenues
(aggregated across all facilities under all Lease Agreements) for capital
expenditures at each facility. Major capital expenditures for repairs and
otherwise will be budgeted by ManorCare Health Services and paid for by Manor
Care Realty.
The Lease Agreements provide that ManorCare Health Services will have the
right to enter into service agreements with its affiliates, provided, among
other conditions, that such services are competitively priced. In addition,
Manor Care Realty will have the right to mortgage its interest in each facility
to the extent of 75% of the Priority Basis. Each Lease Agreement will have an
initial term of 5 years with up to thirty-five 1 (one) year renewals at the
option of ManorCare Health Services; provided that in certain states total lease
terms will not exceed the maximum term permitted by statute such that such Lease
Agreement will not be deemed a change of ownership for real estate transfer tax
purposes.
Manor Care Realty will have the right to terminate a Lease Agreement in the
event that (A) either (i) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive years or (ii) Net Operating
Profit fails to exceed the Priority Sum for two consecutive years, subject to
ManorCare Health Services' right to cure with respect to one year only by making
a cash payment to Manor Care Realty of 105% of the amount by which budgeted Net
Operating Profit or the Priority Sum, as applicable, exceeds actual Net
Operating Profit, (B) the facility is decertified as a skilled nursing facility,
is disqualified from participation in Medicare or Medicaid or ManorCare Health
Services loses its license to operate the subject facility as a skilled nursing
facility or (C) any one of certain additional defaults occurs, such as monetary
default, breach of covenant and bankruptcy defaults. All termination rights will
be subject to "right to cure" provisions, except that ManorCare Health Services
will have no right to cure if the subject facility is disqualified from Medicare
or Medicaid or decertified or if ManorCare Health Services loses its license to
operate a skilled nursing facility.
In 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
financial calculations based on the performance of the subject facility, in
accordance with the formula therefor set forth in the Lease Agreements. 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.
Development Agreement
On the Effective Date, Manor Care and ManorCare Health Services will enter
into a Development Agreement (the "Development Agreement") pursuant to which
Manor Care Realty will develop assisted living facilities for ManorCare Health
Services and retain ownership of such facilities until occupancy has stabilized
at 80% or more for a period of 30 days or until such earlier date as ManorCare
Health Services opts to purchase such facility. Under the Development Agreement,
if stabilized occupancy of 80% or more is achieved within two years of
commencing operations, ManorCare Health Services will be obligated to purchase
the facility. The purchase price for each facility will be at a premium to the
total development costs, which will be based upon the number of months elapsed
since the opening of the facility. If stabilized occupancy is not achieved
within two years of commencing operations, ManorCare Health Services may, but
will be not obligated to, purchase the facility. Pursuant to the Assisted Living
Facility Management Agreement, during the two-year stabilization peri-
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od, ManorCare Health Services will manage the facility for Manor Care
Realty for a fixed monthly fee. 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 7 years and may be terminated for
cause by either Manor Care Realty or ManorCare Health Services under certain
circumstances. See "--Assisted Living Facility Management Agreement."
Non-Competition Agreement
On the Effective Date, 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.
Restrictions on Manor Care Realty. Subject to certain exceptions, Manor
Care Realty may not enter into management agreements with third parties with
respect to its acquired or developed skilled nursing properties unless ManorCare
Health Services has declined to manage such facility. Manor Care Realty may not,
subject to certain exceptions, enter, or make a significant investment in any
entity engaged in, the institutional pharmacy or home health care business.
Subject to certain exceptions, Manor Care Realty will be prohibited from making
assisted living acquisitions and will not be allowed to compete in the business
of managing either skilled nursing or assisted living facilities, except in
cases in which it is managing a facility that it owns and which Manor Care
Health has declined to manage. Manor Care Realty will only be permitted to
develop new assisted living facilities for anyone other than ManorCare Health
Services insofar as ManorCare Health Services has previously declined to pursue
such opportunities and such facilities are not within a five-mile radius of an
assisted living facility owned by or being developed for ManorCare Health
Services.
Restrictions on ManorCare Health Services. ManorCare Health Services will
be prohibited from developing or acquiring skilled nursing facilities and,
subject to certain exceptions, will be prohibited from entering the hospital
management business. ManorCare Health Services will only be permitted to develop
new assisted living facilities insofar as Manor Care Realty has previously
declined to pursue such opportunities and such facilities are not within a
five-mile radius of an assisted living facility owned or being constructed by
Manor Care Realty. ManorCare Health Services will not without Manor Care
Realty's consent (which consent will not be unreasonably withheld) be permitted
to manage skilled nursing facilities owned by anyone but Manor Care Realty
(other than certain skilled nursing facilities held by joint ventures in which
ManorCare Health Services holds an interest) within a five-mile radius of any
Manor Care Realty-affiliated/ManorCare Health Services-operated skilled
nursing facility. ManorCare Health Services will be free to manage any assisted
living facility without regard to the identity of its ownership.
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.
Employee Benefits and Other Employment Matters Allocation Agreement
On the Effective Date, the Company and Manor Care 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 subsequent to the Distribution
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("Manor Care Realty Employees") and the employee benefits of employees who are
employed by the Company after the Distribution ("Company Employees") will be
allocated.
The Employee Benefits Allocation Agreement will also provide for the
adjustment of outstanding stock options of the Company. In connection with the
Distribution, it is contemplated that options to purchase Manor Care common
stock will be converted to options to purchase a combination of ManorCare Health
Services Common Stock and Manor Care Realty common stock. In all cases, however,
the exercise prices of the options will be adjusted to maintain the same
financial value to the option holder before and after the Distribution.
Employee Benefits Administration Agreement
On or prior to the Effective Date, the Company and Manor Care will enter
into a Employee Benefits Administration Agreement (the "Employee Benefits
Administration Agreement"), pursuant to which the Company will administer the
employee benefits plans and programs of Manor Care Realty following the
Distribution on a time and materials and/or fixed-fee basis as specified in the
Employee Benefits Administration Agreement.
Office Lease Agreement
On or prior to the Effective Date, the Company and Manor Care will enter
into a lease agreement with respect to the building complex in Gaithersburg,
Maryland at which the Company's principal executive offices are located (the
"Office Lease Agreement").
Distribution Agreement
On the Effective Date, Manor Care and the Company will enter into a
Distribution Agreement (the "Distribution Agreement") which will provide for,
among other things, the principal corporate transactions required to effect the
transition to the Company's status as a company separate and independent from
Manor Care and the assumption by the Company, of certain liabilities relating to
the Assisted Living Business, the stock of Vitalink and In Home Health and the
operation and management of the skilled nursing facilities and the allocation
between the Company and Manor Care of certain other liabilities and certain
other agreements with respect to the Distribution. The Distribution Agreement
also provides for the Capital Contribution by Manor Care to the Company. In
addition, the Distribution Agreement provides that the Distribution is subject
to the satisfaction of certain conditions, including, among other things, the
transfer of the Assisted Living Business and the stock of Vitalink and In Home
Health to the Company and the execution of the agreements governing the
relationship of Manor Care Realty and the Company following the Distribution,
certain of which are described herein. Subject to certain exceptions, the
Company has agreed to indemnify Manor Care and Manor Care has agreed to
indemnify the Company against any loss, liability or expense incurred or
suffered by the indemnified party arising out of or related to the failure by
the indemnifying party, as the case may be, to perform or otherwise discharge
liabilities allocated to and assumed by the indemnifying party under the
Distribution Agreement. The Distribution Agreement also includes procedures for
notice and payment of indemnification claims and generally provides that the
indemnifying party may assume the defense of a claim or suit brought by a third
party.
None of the foregoing indemnities applies to tax claims or liabilities,
which are addressed in the Tax Sharing Agreement described below.
Tax Sharing Agreement
On or prior to the Effective Date, Manor Care and the Company 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 and its subsidiaries, on the one hand, and the
Company and its subsidiaries, on the other hand. In general, under the Tax
Sharing Agreement, Manor Care will be responsible for paying all income taxes
shown to be due on any Manor Care 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 or any
of its subsidiaries for any tax-
20
<PAGE>
able period. The Company will be responsible for paying all income taxes
shown to be due on any tax return filed with respect to the Company or any of
its subsidiaries for any taxable period beginning on or after the Effective
Date.
The Company 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
the Company following the Distribution. Conversely, Manor Care Realty will
indemnify the Company from and against any additional income tax liability of
the Company 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 following the
Distribution. In addition, Manor Care Realty, on the one hand, and the Company,
on the other hand, will each be entitled to any income tax refund received from
any taxing authority to the extent that such refund relates to the businesses
conducted by that party following the Distribution.
The Tax Sharing Agreement also provides that if the Distribution (including
certain related transactions) fails to qualify as a tax-free transaction under
Sections 355 and 368 of the Code as a result of either party taking or failing
to take certain specified actions, then that party will be liable for and will
indemnify the other party from and against all taxes and other damages resulting
from such failure to qualify. If the failure to qualify as a tax-free
transaction results from both parties taking or failing to take certain
specified actions or neither party taking or failing to take such actions, then
the parties will each be responsible for one-half of any taxes and other damages
resulting from such failure to qualify.
Tax Administration Agreement
On or prior to the Effective Date, Manor Care and the Company will enter a
tax administration agreement (the "Tax Administration Agreement"). The Tax
Administration Agreement sets forth the arms-length terms and conditions
pursuant to which the Company will provide certain tax-related administrative
services to Manor Care Realty following the Distribution. Such services will
include audit and compliance work related to income, real estate, personal
property and sales and use taxes.
Corporate Services Agreement
On the Effective Date, Manor Care 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 for Manor Care Realty certain corporate services, including
administrative, payroll and accounting systems on a time and materials and/or
fixed-fee basis as specified in the Corporate Services Agreement. The Corporate
Services Agreement will expire on [ ].
Trademark Agreement
On the Effective Date, Manor Care and ManorCare Health Services will enter
into a Trademark Agreement (the "Trademark Agreement") pursuant to which Manor
Care Realty will assign approximately 50 registrations and applications to
ManorCare Health Services representing all of the marks necessary for the
operation of the business of ManorCare Health Services. ManorCare Health
Services, under a separate agreement, will license to Manor Care Realty the
right to use certain marks in the business of Manor Care Realty.
Cash Management Agreement
On or prior to the Effective Date, the Company and Manor Care will enter
into a Cash Management Agreement (the "Cash Management Agreement"), pursuant to
which the Company will perform cash management services for Manor Care Realty
after the Distribution for a fee, payable quarterly, based on the time incurred
by the Company to perform such services. The Cash Management Agreement will
expire on [ ].
21
<PAGE>
Risk Management Consulting Services Agreement
On the Effective Date, Manor Care and ManorCare Health Services will enter
into a Risk Management Consulting Services Agreement (the "Risk Management
Consulting Services Agreement"), pursuant to which ManorCare Health Services
will provide to Manor Care Realty risk management services for an annual fee of
$[ ]. The Risk Management Consulting Services Agreement will expire
on [ ].
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 the Capital
Contribution (as herein defined). As part of the Capital Contribution, Manor
Care will contribute to the Company the Realty Note (as herein defined). The
Company expects that the Realty Note will have the same general terms (including
interest rate and maturity) as certain senior notes proposed to be sold by Manor
Care Realty in connection with the Distribution, except that ManorCare Health
Services will have the right to require Manor Care Realty to redeem the Realty
Note at a redemption price equal to 100% of the principal amount thereof. Manor
Care Realty's obligation to redeem the Realty Note is conditioned on Manor Care
Realty's ability to finance the redemption at an interest rate that does not
exceed the interest rate on the Realty Note plus 2%. If Manor Care Realty is
unable to refinance the Realty Note the interest rate on the Realty Note will
increase by 2% per annum. See "FINANCING."
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 a capital
contribution (the "Capital Contribution") to the Company of (i) approximately
$250 million in cash and (ii) $250 million of Senior Notes (the "Realty Note").
In order to make the cash portion of the Capital Contribution, Manor Care
expects to use the net proceeds from a concurrent offering of senior notes and
borrowings under a new credit facility to be entered into by Manor Care in
connection with the Distribution. For a summary of the terms of the Realty Note,
see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION -- Realty Note."
The Credit Facility
In addition, the Company anticipates entering into a new $100-200 million
revolving credit facility (the "Credit Facility"). The Company expects that the
Credit Facility will be unsecured and will be available for general corporate
and working capital purposes, including acquisitions. ManorCare Health Services
expects that the Credit Facility will have a maturity of five years and that
interest on the outstanding balances under the Credit Facility will accrue on a
variable rate basis. The Company expects that the Credit Facility will contain
certain customary affirmative and negative covenants, including, without
limitation, covenants that will restrict, subject to certain exceptions, (i)
incurrence of additional indebtedness and other obligations, (ii) certain
mergers and consolidations, (iii) asset sales, (iv) a change in control, (v)
granting of liens to secure indebtedness, (vi) prepayment or modification of the
terms of other indebtedness, and (vii) engaging in transactions with affiliates.
The Company also expects that it will be required to satisfy certain financial
ratios and tests under the Credit Facility.
22
<PAGE>
7 1/2% Senior Notes
In connection with the Distribution, Manor Care is offering to exchange
$1,000 principal amount of 7 1/2% Senior Notes due June 15, 2006 to be issued by
ManorCare Health Services (the "7 1/2% Senior Notes") for each $1,000 principal
amount of 7 1/2% Senior Notes due June 15, 2006 of Manor Care (the "Old Senior
Notes") properly tendered (the "Exchange Offer"). Concurrently with the Exchange
Offer, Manor Care is soliciting consents to certain amendments (the "Proposed
Amendments") to the Indenture pursuant to which the Old Senior Notes were
issued. Consummation of the Exchange Offer will result in the effective
assumption by ManorCare Health Services of all or a part of the obligations of
Manor Care under the Old Senior Notes substantially as they existed prior to the
Distribution. Obligations with respect to the Old Senior Notes not exchanged
will remain obligations of Manor Care Realty following the Distribution.
Consummation of the Exchange Offer is conditioned on, among other things,
acceptance of the Exchange Offer by holders of at least a majority in principal
amount of the outstanding Old Senior Notes.
The 7 1/2% 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. The 7 1/2% Senior Notes will be issued pursuant to an indenture between
the Company and [ ], as trustee.
The aggregate principal amount of the 7 1/2% Senior Notes will be limited
to $150 million. The 7 1/2% Senior Notes will mature on June 15, 2006 and will
bear interest at the rate of 7 1/2% per annum.
The 7 1/2% 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 7 1/2% 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.
23
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
the Company at May 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 May 31, 1997. See "PRO FORMA FINANCIAL DATA."
<TABLE>
<CAPTION>
May 31, 1997
-----------------------------------------------------------
Historical Adjustment Pro Forma
------------- -------------- ----------------
(In thousands, except shares)
Long-term debt:
<S> <C> <C> <C>
7 1/2 Senior Notes -- $150,000/(1)/ $150,000
Long-term debt $180,843 -- 180,843
-------- -------- ----------
Total long-term debt 180,843 150,000 330,843
Equity:
Investments and advances from Manor Care 277,066 (277,066) --
Common stock, par value $.01,
authorized 160.0 million shares,
outstanding 66.8 million shares -- 668/(2)/ 668
Additional paid-in capital -- 681,358/(2)/ 681,358
-------- -------- ----------
Total capitalization $457,909 $554,960 $1,012,869
======== ======== ==========
</TABLE>
- -----------------------------
(1) Reflects the assumption by the Company of the 7 1/2% 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. See
"FINANCING -- 7 1/2% Senior Notes."
(2) Reflects the contribution of the net assets from Manor Care in
connection with the Distribution Agreement.
24
<PAGE>
PRO FORMA FINANCIAL DATA
The Company has been formed by Manor Care for the purpose of effecting the
Distribution and has no operating history as a separate, independent company.
The historical combined financial statements of the Company reflect periods
during which the Company did not operate as a separate, independent company and
certain assumptions were made in preparing such financial statements. The
historical combined financial statements of the Company 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 such periods.
The unaudited pro forma combined condensed statement of income for the
fiscal year ended May 31, 1997 gives effect to (i) the Distribution and related
transactions including the Exchange Offer, (ii) the terms of the Lease
Agreements, (iii) the terms of the Assisted Living Facility Management Agreement
as if in each case the Distribution and related transactions occurred on June 1,
1996 and (iv) to the Vitalink merger ("TeamCare Merger") with and into TeamCare,
Inc. ("TeamCare") as if it had occurred on June 1, 1996. The condensed statement
of income has been prepared by adjusting the historical combined statement of
income to reflect the Distribution and related transactions as if they had been
effected on June 1, 1996.
The unaudited pro forma combined condensed balance sheet at May 31, 1997
gives effect to (i) the Distribution and related transactions including the
Exchange Offer and (ii) the terms of the Lease Agreements as if in each case the
Distribution 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 May 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 the Company or what the results of operations or financial position would
have been had the Company operated as an independent, public company during such
periods.
25
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Team Pro Forma Pro
Historical Care Subtotal Adjustments Forma
---------- -------- -------- ---------------------------------------- -----------
Lease Management
Distribution Agreements Agreement
------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $471,152 $192,364 (h) $663,516 $(1,603)(a) $1,017,570 (c) $ 2,483 (e) $1,681,966
Expenses:
Operating expenses 413,762 170,681 (h) 584,443 (2,081)(a) 733,362 (c) 2,081 (e) 1,494,809
177,004 (d)
Depreciation and amortization 20,135 8,027 (h) 28,162 (365)(a) 27,797
General corporate and other 8,385 8,385 (77)(a) 59,774 (b) 70,592
2,510 (b)
-------- -------- -------- ------- ---------- ------- ----------
Total expenses 442,282 178,708 620,990 (13) 970,140 2,081 1,593,198
Income before other income and
(expenses) and income taxes 28,870 13,656 (h) 42,526 (1,590) 47,430 402 88,768
-------- -------- -------- ------- ---------- ------- ----------
Other income and (expenses):
Gain on issuance of Vitalink stock 50,271 50,271 50,271
Minority interest expense (3,881) (4,068)(h) (7,949) (7,949)
Interest expense (17,317) (7,737)(h) (25,054) (11,250)(f) (25,113)
11,191 (a)
Other expenses, net 2,162 127 (h) 2,289 36,250 (g) 38,539
-------- -------- -------- ------- ---------- ------- ----------
Income before income taxes 60,105 1,978 62,083 34,601 47,430 402 144,516
Provision for income taxes 23,917 4,175 (h) 28,092 13,840 (i) 18,684 (i) 208 (i) 60,824
-------- -------- -------- ------- ---------- ------- ----------
Net income (loss) $ 36,188 $ (2,197) $ 33,991 $20,761 $ 28,746 $ 194 $ 83,692
======== ======== ======== ======= ========== ======= ==========
Outstanding shares of common stock 63,257
Earnings per share $ 1.32
==========
</TABLE>
The accompanying notes are an integral part of this combined pro forma income
statement.
26
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MAY 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------ --------------------- ----------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,486 $ 250,000 (a) $ 246,978
(17,508)(b)
Other current assets 131,939 107,526 (d) 239,392
(73)(b)
----------- ----------- -----------
Total current assets 146,425 339,945 486,370
Property and Equipment 221,778 (27,016)(b) 209,333
14,571 (a)
Goodwill, net 346,981 -- 346,981
Note Receivable from Manor Care Realty -- 250,000 (a) 250,000
Other assets 72,193 22,166 (a) 93,163
(1,196)(b)
----------- ----------- -----------
Total Assets $ 787,377 $ 598,470 $ 1,385,847
=========== =========== ===========
Liabilities and Stockholders' equity
Current liabilities $ 70,495 $ (1,215)(b) $ 120,476
51,196 (d)
Long-term debt 105,283 150,000 (c) 255,283
Due to Manor Care 75,560 (45,560)(c) 30,000
Mortgage Notes -- 45,560 (c) 45,560
Deferred income taxes 51,799 (6,471)(b) 45,328
Minority Interest 184,729 -- 184,729
Other noncurrent liabilities 22,445 -- 22,445
Equity 277,066 356,737 (a) 682,026
(11,272)(b)
3,165 (b)
56,330 (d)
----------- ----------- -----------
Total liabilities and equity $ 787,377 $ 598,470 $ 1,385,847
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this combined pro forma balance
sheet.
27
<PAGE>
Notes to Pro Forma Combined Condensed Statement of Income
- ---------------------------------------------------------
(a) Reflects the elimination of revenues, income and expenses associated with
facilities which opened during fiscal year 1997 (the "Developed
Properties"). These facilities would not have been purchased by the Company
under the terms of the Development Agreement until such facilities achieved
80% occupancy.
(b) Reflects net additional costs associated with staffing of human resources,
finance, legal, information technology, cash management, accounting
personnel and directors costs.
(c) Reflects revenues and operating expenses of skilled nursing facilities
owned by Manor Care Realty and leased by the Company under the terms of the
Lease Agreements.
(d) Reflects lease payments to Manor Care Realty for skilled nursing facilities
under the terms of the Lease Agreements.
(e) Reflects revenues and expenses associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreement.
(f) Reflects interest expense associated with the assumption of $150.0 million
of 7 1/2% Senior Notes due 2006.
(g) Reflects interest income earned on cash of $250.0 million at 5.75% and the
Realty Note at 8.75% contributed to ManorCare Health Services on the
Effective Date.
(h) Reflects TeamCare operations from June 1, 1996 to January 31, 1997, the
portion of the fiscal year which represents the time period prior to the
TeamCare Merger.
(i) Reflects tax effect of adjustments made pursuant to notes (a) through (h).
Notes to Pro Forma Combined Condensed Balance Sheet
- ---------------------------------------------------
(a) Reflects additional cash of $250.0 million, the Realty Note and certain
other assets contributed to the Company at the Effective Date.
(b) Reflects the elimination of assets and liabilities attributable to the
Developed Properties and payment of transaction fees.
(c) Reflects the assumption of $150.0 million of 7 1/2% Senior Notes due 2006
and of mortgages associated with certain Company properties.
(d) Reflects the working capital of the management of skilled nursing
facilities under the terms of the Lease Agreements.
28
<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 the
Company. 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 the
Company that, in the opinion of the Company, reflect all adjustments consisting
of normal recurring adjustments necessary to present fairly the information set
forth below. The following selected historical financial data of the Company
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 the Company may not necessarily
reflect the results of operations or financial position that would have been
obtained had the Company 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>
Fiscal Years Ended May 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands) (unaudited)
Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Revenues $ 471,152 $ 263,047 $ 125,987 $ 106,374 $ 73,444
Expenses:
Operating expenses 413,762 227,410 99,011 85,598 57,663
Depreciation and amortization 20,135 11,583 6,090 4,339 2,738
General corporate and other 8,385 9,195 2,957 837 894
Provision for asset impairment -- 1,200 -- -- --
--------- --------- --------- --------- ---------
Total expenses 442,282 249,388 108,058 90,774 61,295
--------- --------- --------- --------- ---------
Income before other income and (expenses)
and income taxes 28,870 13,659 17,929 15,600 12,149
--------- --------- --------- --------- ---------
Other income and (expenses):
Gain on issuance of Vitalink stock 50,271 -- -- -- --
Interest expense (17,317) (11,387) (3,898) (1,698) (1,684)
Other income (expenses), net (1,719) 276 (1,152) (934) (446)
--------- --------- --------- --------- ---------
Income before income taxes 60,105 2,548 12,879 12,968 10,019
Income taxes 23,917 1,437 6,055 6,271 4,488
--------- --------- --------- --------- ---------
Net income $ 36,188 $ 1,111 $ 6,824 $ 6,697 $ 5,531
========= ========= ========= ========= =========
Other Financial Data:
Cash provided by operating activities $ 4,401 $ 8,043 $ 16,701 -- --
Investment in property and equipment 39,974 32,001 25,020 -- --
Total assets 787,377 334,880 134,502 $ 80,850 $ 64,380
Long-term debt 180,843 51,387 1,837 106 134
Investments and advances from Manor Care 277,066 193,807 90,020 43,345 31,343
</TABLE>
29
<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.
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. 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.
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 174,000 institutional beds as well as to home infusion
patients through 57 pharmacies. In Home Health is a publicly traded company
which provides a broad range of professional and support services to clients
requiring medical and personal assistance in their homes. Services provided
include nursing care, infusion therapy, rehabilitation, and personal care.
Results of Operations
Comparison of Fiscal Year Results
Net income was $36.2 million for fiscal year 1997, an increase of $35.1
million compared to fiscal year 1996. Excluding the impact of the gain on the
issuance of Vitalink stock, fiscal year 1997 net income increased by $4.7
million. Fiscal year 1996 net income decreased by $5.7 million to $1.1 million,
a decrease from fiscal year 1995 net income of $6.8 million. This decrease
resulted primarily from start-up losses and depreciation and amortization
related to the five new assisted living facilities opened during fiscal year
1996.
Revenues increased $208.1 million (79%) to $471.2 million in fiscal year
1997, while operating expenses increased $186.4 million (82%) to $413.8 million.
This compares to an increase in revenues of $137.1 million (109%) and an
increase in operating expenses of $128.4 million (130%) in fiscal year 1996.
Operating margin compression in fiscal year 1997 was principally due to lower
margin operations at TeamCare and In Home Health, as well as new assisted living
development. Operating margin compression in 1996 was principally due to the
inclusion of home health operations relating to the Company's investment in In
Home Health as well as a significant level of new assisted living development.
Revenue increases in fiscal year 1997 reflect the impact of Vitalink's
merger with TeamCare ($94.6 million), the reflection of a full year's revenues
for In Home Health ($50.2 million), capacity increases ($37.8 million),
increases in rates ($11.5 million) at existing assisted living facilities,
Vitalink's acquisition of a pharmacy ($12.4 million) and occupancy
30
<PAGE>
increases ($3.6 million). Fiscal year 1996 revenue growth was driven by the
Company's entry into the home health market through the acquisition of a
majority interest in In Home Health ($74.2 million, which represents the period
of ownership from October 1995 to May 1996), capacity growth ($31.1 million),
occupancy increases ($3.8 million), rate increases ($10.4 million), and an
acquired pharmacy and infusion business and pharmacy by Vitalink ($5.1 million).
The Company acquired six assisted living facilities and opened five Arden Courts
in fiscal year 1996.
The fiscal year 1997 operating expense increase of $186.4 million reflects
Vitalink's Merger with TeamCare ($82.4 million), the impact of a full year of
expenses from In Home Health ($53.3 million), increases in patient acuity as
well as operating expenses relating to the five assisted living facilities
opened in fiscal year 1997 and the increases in occupancy and capacity at
existing facilities. Fiscal year 1996 operating expense growth was driven by the
consolidation of In Home Health ($73.9 million), an acquired pharmacy and
infusion business and pharmacy by Vitalink ($4.1 million) as well as increases
in occupancy and capacity.
General corporate and other expense of $8.4 million, $9.2 million and $3.0
million in fiscal years 1997, 1996 and 1995, respectively, represented 1.8% of
revenues in fiscal year 1997, 3.5% of revenues in fiscal year 1996, and 2.3% of
revenues in fiscal year 1995. General corporate and other expense includes all
indirect operating expenses as well as risk management, information systems,
treasury, accounting, legal and other administrative support for the Company and
its subsidiaries. The decline in general corporate and other expense in fiscal
year 1997 is directly related to a reduction in the level of support services
provided to In Home Health ($2.0 million). Exclusive of the impact of this
reduction, general corporate and other expense represented 2.2% of revenues in
fiscal year 1997. The decline in general corporate and other expense as a
percentage of revenues in fiscal year 1997 is directly related to improving
economies of scale resulting from the addition of new and acquired assisted
living facilities, pharmacies, and the home health business.
Interest expense increased $3.2 million (107%) to $6.1 million in fiscal
year 1997 primarily as a result of the assumption of $106.4 million of TeamCare
debt in February 1997 as well as additional borrowings in connection with newly
developed facilities as discussed above. The interest expense increase of $2.8
million in fiscal year 1996 as compared to fiscal year 1995 was primarily
attributable to additional borrowings in connection with newly developed
properties and acquisitions.
The Company recorded a provision of $1.2 million in fiscal year 1996
related to the impairment of certain capitalized systems development costs.
Liquidity and Capital Resources
In connection with the Distribution, the Company will receive cash of
approximately $250 million and the Realty Note of $250.0 million, which will be
used primarily to finance the acquisition of assisted living facilities
developed by Manor Care Realty. See "FINANCING" and "THE DISTRIBUTION -- Manner
of Effecting the Distribution."
Historically, all cash received by the assisted living and pharmacy
facilities has been deposited in or combined with Manor Care's corporate funds
as part of Manor Care's cash management system. Following the Distribution, the
Company will maintain its own cash balances and will implement an internal cash
management system. In addition, the Company expects to have access to a
revolving credit facility.
The Company's working capital ratio at May 31, 1997, and 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 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.
31
<PAGE>
On a short-term and long-term basis, the Company believes that its cash
flows from operations, together with the proceeds of the Capital Contribution
and available borrowings under the Credit Facility will provide it with
sufficient resources to meet its working capital needs, to finance projected
capital expenditures and to meet its foreseeable liquidity requirements.
Property and Acquisitions
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. ("GranCare"). Vitalink issued 11.4 million
shares in exchange for all of the outstanding shares of GranCare. In addition,
Vitalink funded the redemption of $98.2 million of GranCare's 9 3/8% Senior
Subordinated Notes and assumed approximately $100 million of additional GranCare
indebtedness. On May 21, 1997, 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 conversions. 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
Vitalink purchased two pharmacies for $6.3 million. 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 Company's five-year strategic plan includes the acquisition of 170
Arden Courts and 38 Springhouse facilities. The Company expects the majority of
these acquisitions will be newly developed facilities open less than two years.
The Company estimates capital expenditures to acquire Arden Courts and
Springhouse facilities of approximately $25 million and $160 million in fiscal
years 1998 and 1999, respectively. Additionally, the Company expects to incur
minor expenditures for routine renovation and maintenance of existing
properties. The Company plans to finance these capital expenditures with cash
flow from operations and the Capital Contribution.
Forward-Looking and Cautionary Statements
Certain statements included in this Information Statement including the
words "plans," "anticipates," "intends," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. 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 has not determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of comprehensive
income and its components. The Company plans to adopt SFAS 130 in fiscal year
1999 and has not determined the impact of adoption.
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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 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 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 171 skilled nursing
facilities in 28 states containing approximately 24,050 beds. These facilities
provide skilled nursing services principally for residents over the age of 65.
Within its skilled nursing facilities, the Company operates 141 Arcadia
special-care units which provide care to individuals in the middle to late
stages of Alzheimer's disease and 22 MedBridge high acuity units which focus on
short-term, post-hospital care for medically complex residents and those in need
of aggressive physical rehabilitation. The Company owns and operates 35 assisted
living facilities in 12 states containing 3,755 units. These facilities include
14 Arden Courts, serving persons with early to middle-stage Alzheimer's disease
or related memory impairment, and 21 Springhouse senior residences, serving the
general assisted living population. To enhance the array of services it
provides, the Company also has majority control of Vitalink, one of the largest
public institutional pharmacy company and In Home Health, a national home health
care services company. Vitalink operates 57 institutional pharmacies in 32
states, serving approximately 174,000 beds. In Home Health provides home health
services in 14 states.
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.
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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 sup-
port their elderly relatives outside the home.
The attractive demographics and future growth opportunities have encouraged
existing market participants to increase their product offerings and have
encouraged new entrants such as real estate developers to offer continuing care
retirement communities and assisted living facilities which are focused on the
frail elderly care market. In addition, more options geared towards maximizing
the individual's ability to live independently in their homes are becoming
available. These industry participants are expanding the set of senior support
health care options for the elderly. The level of care selected by the elderly
and their families depends on the needs of the individual. The range of health
services available for the elderly includes:
. Home health care -- the provision of health care service to the
elderly in their homes, including nursing, infusion therapy,
hospice, rehabilitation, personal care, companion care and home
making;
. Senior support services -- emerging new services geared towards the
elderly, including geriatric care management, financial management
and planning, transportation services and other services that
support the elderly living at home;
. Physician services -- geriatric centers and physicians who
specialize in geriatric care and outpatient disease management;
. Short-term care -- adult day care and respite care;
. Residential care -- congregate care facilities, continuing care
retirement communities, assisted living facilities and skilled
nursing facilities;
. Alzheimer's disease care -- facilities focused on individuals with
Alzheimer's disease or related memory impairment; and
. Acute care -- medical treatment in hospital facilities as well as
sub-acute care in hospitals and skilled nursing facilities.
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Business Strategy
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 the Company and
retain ownership of such facilities until occupancy has stabilized at
80% or more or until such earlier date as the Company elects to purchase
such facility. In addition, ManorCare Health Services will make
acquisitions of other assisted living properties on an opportunistic
basis. 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, Heritage and Arcadia 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.
. 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 de-
mentia 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
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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 provide "best in
class" services to its residents and reinforce its reputation as the
leading provider of high quality, personalized senior support health
care services. ManorCare Health Services relies on its product
management organization to develop Company-wide care protocols,
standards of operation and training programs, which ensure that
ManorCare Health Services delivers superior and consistent care in all
of its facilities. In addition to providing high quality and consistent
services on a Company-wide basis, 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
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
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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 171 skilled
nursing facilities in 28 states pursuant to Lease Agreements under which
ManorCare Health Services pays monthly fees to Manor Care Realty. 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 nursing facilities, the
Company operates 141 Arcadia special-care units providing services to
individuals in the middle to late stages of Alzheimer's disease or afflicted
with related memory impairment. The Company also operates 22 dedicated MedBridge
high acuity units featuring high staff-to-patient ratios, sophisticated clinical
capabilities and state-of-the-art rehabilitation
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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 48 to 278 beds and had an aggregate bed capacity of 24,050 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 the Company and retain ownership of such facilities until occupancy has
stabilized at 80% or more for a period of 30 days or until such earlier date as
the Company elects to purchase such facility. The purchase price for each
facility will be at a premium to Manor Care Realty's total development costs.
This premium will be amortized over a 20 to 30-year period and represents a much
smaller annual dilution to earnings than would have been the case had ManorCare
Health Services absorbed the initial start-up costs associated with each Arden
Courts or Springhouse facility. Prior to the acquisition of an assisted living
facility, ManorCare Health Services will be responsible for the operation,
management and occupancy of such facility. 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."
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 8 hours of meaningful interactive
activity per day. In addition, the Company utilizes special
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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 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
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provision of pharmacy services to institutional clients with 174,000 related
institutional beds is indicative of the implementation of Vitalink's growth
strategy.
Vitalink, which is the second largest publicly traded institutional
pharmacy in the country, is a high quality, value-added partner with health care
providers and payors and provides four types of services:
. Customized filling of prescription and non-prescription medications
for individual patients pursuant to physician orders delivered to
nursing facilities.
. Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.
. Infusion therapy services, consisting of the administration of a
product (nutrient, antibiotic, chemotherapy or other drugs or fluids)
by tube, catheter or intravenously. Vitalink prepares and delivers
the product which is administered by the nursing center staff.
. Integrated data systems such as VitalCONSULT, an integrated
consultant software package that allows pharmacists and nurses to
record outcome events, laboratory data, and patient status updates
and administer disease management programs and formularies more
efficiently, and OPTIMA (Optimizing Patient Theory in Medication
Administration), a state-of-the-art patient care management system
designed to identify individuals who are at high risk for certain
diseases, which focuses on treatment protocols and incorporates a
disease-specific drug formulary. These innovative systems increase
efficiency, enhance clinical support and result in superior outcomes.
Vitalink operates 57 institutional pharmacies located in 32 states and four
regional infusion pharmacies, which specialize in pharmaceutical dispensing of
individual medications, pharmacy consulting and infusion therapy products. In
the 1997 fiscal year, approximately 13% of the beds serviced by Vitalink were
Manor Care-affiliated. Net revenue from Manor Care and its patients (including
revenues received from government reimbursement programs) accounted for
approximately 29%, 48% and 49% of total net revenues in fiscal years 1997, 1996
and 1995, respectively. The balance came from unrelated third parties.
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 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.
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 has received Medicare
certification to offer hospice services in 15 new markets. 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
41
<PAGE>
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 3 and 4 acres and
has a capacity of 52 to 56 residents. Each Springhouse facility ranges in size
from 65,000 to 70,000 square feet, is built to target a site ranging between 5
and 6 acres and has a capacity of 105 to 110 residents. Approximately 30-40% of
each facility is devoted to common areas and amenities, including reading rooms,
family or living rooms and other areas designed to promote interaction among
residents. The ground level typically contains a kitchen and common dining area,
administrative offices, a laundry room, a library or living room, a wellness
center, barber shop, crafts room, spa and a snack room. The Company's assisted
living facilities are usually 1 to 3 stories and are functionally arranged to
provide a home-like atmosphere. The architectural and interior design concepts
incorporate the ManorCare Health Services operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of choice,
encouraging independence and fostering individuality in a home-like setting.
The skilled nursing facilities operated by the Company range in bed
capacity from 48 to 278 beds and have an aggregate bed capacity of 24,050 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 table below summarizes certain information regarding the Company's
facilities as of the Effective Date:
<TABLE>
<CAPTION>
Assisted Living Services -- Springhouse
Facility Location State Units Status
- ----------------- ----- ----- ------
<S> <C> <C> <C>
Dunedin FL 110 owned
Sarasota FL 106 owned
Boynton Beach - Village FL 104 owned
Boynton Beach FL 127 owned
Bethesda MD 92 owned
Silver Spring MD 118 owned
Brea CA 92 owned
Whittier CA 73 owned
Bethesda MD 62 leased
Westlake OH 97 owned
Southfield MI 101 owned
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Facility Location State Units Status
- ----------------- ----- ----- ------
<S> <C> <C> <C>
Naples FL 210 owned
Laguna CA 190 owned
Peoria IL 249 owned
Carmel IN 205 owned
Fairfield OH 200 owned
Port Charlotte FL 84 owned
Kensington MD 201 managed
Tucson AZ 107 owned
West Reading Residential PA 55 owned
Pottstown Residential PA 55 owned
Total Springhouse Facilities 21
Total Springhouse Units 2,998
</TABLE>
All of the Springhouse facilities are owned with the exception of the
leased 62-unit Bethesda facility and the managed Kensington facility.
<TABLE>
<CAPTION>
Assisted Living Services -- Arden Courts
Facility Location State Units Status
- ----------------- ----- ----- ------
<S> <C> <C> <C>
Potomac MD 48 owned
Silver Spring MD 49 owned
Yardley PA 52 owned
King of Prussia PA 54 owned
Allentown PA 56 owned
Elk Grove IL 55 owned
West Palm Beach FL 56 owned
Sterling Heights MI 54 owned
Cherry Hill NJ 53 owned
North Hills PA 56 owned
Westlake OH 56 owned
South Holland IL 56 owned
Fair Oaks VA 56 owned
Farmington CT 56 owned
Total Arden Courts Facilities 14
Total Arden Courts Units 757
</TABLE>
43
<PAGE>
Skilled Nursing Services
<TABLE>
<CAPTION>
Facility Location Beds Facility Location Beds
- ----------------- ---- ----------------- ----
<S> <C> <C> <C>
Arizona
Tucson 116
- ------ ---
Total 116
California
Citrus Heights 146 Fountain Valley 147
Sunnyvale 139 Hemet 176
Walnut Creek 154 Palm Desert 178
Encinitas 98 Rancho Bernardo 94
Rossmoor 129
- -------- ---
Total 1,261
Colorado
Denver 155 Boulder 149
- ------ ---
Total 304
Delaware
Pike Creek 151 Wilmington 138
- ---------- ---
Total 289
Florida
Palm Harbor 179 Naples 118
Carrollwood 117 Dunedin 120
Sarasota 179 Boca Raton 180
Boynton Beach 179 Plantation 119
Winter Park 132 Jacksonville 113
West Palm Beach 119 Venice 129
- --------------- ---
Total 1,684
Georgia
Decatur 128 Marietta 116
- ------- ---
Total 244
Illinois
South Holland 176 Orchard Manor 53
Naperville 112 Libertyville 150
Palos Heights 176 Elgin 79
Hinsdale 191 Oak Lawn 179
Elk Grove 178 Rolling Meadows 156
Normal 96 Peoria 122
Decatur 93 Kankakee 103
Urbana 98 Champaign 99
Wilmette 74 Palos Heights West 120
Arlington Heights 151 Oak Lawn Americana 141
Westmont 115
- -------- ---
Total 2,662
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Facility Location Beds Facility Location Beds
- ----------------- ---- ----------------- ----
<S> <C> <C> <C>
Indiana
Anderson 225 Kokomo 99
Indianapolis North 184 Indianapolis South 117
- ------------------ ---
Total 625
Iowa
Waterloo 95 Cedar Rapids 104
Davenport 101 Dubuque 94
- --------- ---
Total 394
Kansas
Topeka 119 Overland Park 173
Wichita 123
- ------- ---
Total 415
Maryland
Silver Spring 118 Towson 126
Ruxton 222 Largo 128
Potomac 136 Chevy Chase 92
Bethesda 151 Wheaton 98
Baltimore 176 Roland Park 71
- --------- ---
Total 1,318
Missouri
Fremont 222 Florissant 97
- ------- ---
Total 319
Michigan
Kingsford 105 Michigan 188
- --------- ---
Total 293
Nevada
Reno 151
- ---- ---
Total 151
New Jersey
Cherry Hill 105 West Deptford 136
Mountainside 148
- ------------ ---
Total 389
New Mexico
Camino Vista 133 Northeast Heights 138
Sandia 176
- ------ ---
Total 447
North Carolina
Pinehurst 115
- --------- ---
Total 115
North Dakota
Minot 105 Fargo 108
- ----- ---
Total 213
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Facility Location Beds Facility Location Beds
- ----------------- ---- ----------------- ----
<S> <C> <C> <C>
Ohio
Woodside 143 Cincinnati 150
Barberton 117 Lake Shore 199
Rocky River 208 Oregon 108
Westerville 179 Willoughby 154
Akron 102 Belden Village 143
Sycamore Gen 98 Mayfield Heights 149
North Olmstead 178 Centerville 141
- -------------- ---
Total 2,069
Oklahoma
Northwest Oklahoma City 111 Warr Acres 100
Midwest City 108 Norman 110
Southwest Oklahoma City 110 Tulsa 107
- ----------------------- ---
Total 646
Pennsylvania
North Hill 200 Carlisle 160
McMurray 150 Bethel Park 170
Chambersburg 210 Harrisburg 250
Camp Hill 130 Allentown 164
Bethlehem-I 221 Laureldale 185
Bethlehem-II 217 Easton 222
Sinking Spring 211 West Reading 175
Jersey Shore 118 Kingston East 175
Pottsville 175 Sunbury 121
Williamsport North 151 Williamsport South 125
King of Prussia 145 Yardley 139
Lansdale 169 Yeadon 195
Dallastown 200 Lebanon 157
Pottstown Nursing 157 Whitehall 169
Manor Care North 160 Manor Care South 121
Elizabethtown 95 Manor Care Kingston Court 125
Pittsburgh 146 Huntingdon Valley 118
Devon Manor 261 Fitzgerald Mercy 120
Monroeville 116
- ----------- ---
Total 6,123
South Carolina
Columbia 116 Lexington 130
Charleston 117
- ---------- ---
Total 363
South Dakota
Aberdeen 98
- -------- ---
Total 98
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Facility Location Beds Facility Location Beds
- ----------------- ---- ----------------- ----
<S> <C> <C> <C>
Texas
Dallas 201 Fort Worth NRH 159
Forth Worth NW 104 San Antonio-Babcock 208
San Antonio-North 92 San Antonio-Northwest 144
San Antonio-Windcrest 185 Temple 101
Webster 110 Temple Care 140
Sharpview 129
- --------- ---
Total 1,573
Utah
Ogden 134
- ----- ---
Total 134
Virginia
Stratford Hall 231 Arlington 191
Fair Oaks 116 Imperial 127
- --------- ---
Total 665
Washington
Lynwood 112 Spokane 124
Meadow Park 125 Gig Harbor 120
- ----------- ---
Total 481
Wisconsin
Green Bay-East 78 Green Bay-West 105
Fond du Lac 107 Madison 171
Appleton 100
- -------- ---
Total 561
Total skilled nursing
facilities 171
Total skilled nursing
beds 24,050
</TABLE>
All of the facilities listed in the above table are leased by the Company
except for certain facilities which Manor Care Realty has an ownership interest
pursuant to joint venture agreements. Manor Care Realty owns 35% of the Winter
Park facility, 94% of the Decatur facility, and 50% of each of the Sycamore Glen
facility, the Centerville facility and the Fitzgerald Mercy facility.
Other Properties. Vitalink, with corporate offices in Naperville, Illinois,
operates 57 pharmacies in 32 states, and In Home Health, with corporate offices
in Minnetonka, Minnesota, leases 42 offices and 11 pharmacies. The Company's
corporate headquarters are located at 11555 Darnestown Road, Gaithersburg,
Maryland, 20878.
47
<PAGE>
Competition
The senior housing and health care industries are highly competitive and
the Company expects that the assisted living business in particular will become
more competitive in the future. The Company's 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. The Company 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, the Company
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 low-income elderly eligible
for nursing home placement (a "Medicaid Waiver Program"). Under a
48
<PAGE>
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 "SPECIAL 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 certain
information concerning occupancy and revenues of the Company's businesses as
they were operated by Manor Care during fiscal year 1997:
Nursing and Assisted Living Facilities
--------------------------------------
<TABLE>
<CAPTION>
% of % of
Occupancy Revenues
--------- --------
<S> <C> <C>
Private Patients 56% 57%
Medicare Patients 10% 18%
Medicaid Patients 34% 25%
---- ----
Total 100% 100%
---- ----
</TABLE>
49
<PAGE>
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
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 "SPECIAL FACTORS -- Regulation."
Certificate of Need. Many of the states in which the Company operates 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. 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.
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 (i.e.,
furnishing covered items or services to beneficiaries of) the Medicare and
Medicaid programs.
Billing Regulation. Certain provisions in the Social Security Act authorize
penalties, including exclusion from participation in Medicare and Medicaid, for
various billing-related offenses. The Department of Health and Human Services
can also initiate permissive exclusion actions for improper billing practices
such as submitting claims "substantially in excess" of the provider's usual
costs or charges, failure to disclose ownership and officers, or failure to
disclose subcontractors and suppliers.
Federal and State Assistance Programs. 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 agency from the Company or amounts due the Company from the
government agency. The
50
<PAGE>
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.
In order to participate in the Medicare program, the Company's skilled
nursing facilities must be licensed and certified as a provider of skilled
nursing services. Effective October 1, 1990, the Omnibus Budget Reconciliation
Act of 1987 eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under the Medicare program in favor of a
single "nursing facility" standard. This standard requires, among other things,
that the Company have at least one registered nurse on each day shift and one
licensed nurse on each other shift, and increases training requirements for
nurse's aides by requiring a minimum number of training hours and a
certification test before a nurse's aide can commence work.
False Claim Regulation. False claims are prohibited pursuant to criminal
and civil statues. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit
filing false claims or making false statements to receive payment or
certification under Medicare or Medicaid, or failing to refund overpayments or
improper payments; offenses for violation are felonies punishable by up to five
years imprisonment, and/or $25,000 fines. Civil 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.
Environmental Regulation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be held liable for the cost of removal or
remediation of certain hazardous or toxic substances, that could be located on,
in or under such property. Such laws and regulation often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of the hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulation and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances at a disposal
site may also be liable for the costs of any required remediation or removal of
the hazardous or toxic substances at the disposal site. In connection with the
ownership or operation of its properties, the Company could be liable for these
costs, as well as certain other costs, including governmental fines and injuries
to persons or properties.
51
<PAGE>
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.
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 it has
meritorious defenses to the claims pending against it in such proceedings and
that the outcome of such proceedings should not, individually or in the
aggregate, have a material adverse effect on the results of operations or
financial condition of the Company.
52
<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
H. David Lundgren 46 Senior Vice President, Human Resources
James H. Rempe 67 Senior Vice President, General Counsel
and Secretary
Scott J. Van Hove 40 Executive Vice President, Operations
Wolfgang von Maack 57 President and Chief Executive Officer of
In Home Health
</TABLE>
Stewart Bainum, Jr. Chairman of the Board of Manor Care and ManorCare
Health Services, Inc. (a subsidiary of Manor Care which prior to the
Distribution owned and operated Manor Care's assisted living and skilled nursing
facilities) ("Old ManorCare Health Services") since March 1987; Chief Executive
Officer of Manor Care since March 1987 and President since June 1989; Chairman
of the Board of Vitalink since February 1997; Vice Chairman of the Board of
Vitalink from February 1995 to February 1997; Chairman of the Board of Choice
since November 1996; Vice Chairman of the Board of Manor Care and subsidiaries
from June 1982 to March 1987; Director of Manor Care since August 1981, of
Vitalink since September 1991, of Old ManorCare Health Services since 1976 and
of Choice and its predecessors since 1977; Chief Executive Officer of Old
ManorCare Health Services since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987 to
June 1990.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996 and
a Director of Old ManorCare Health Services since June 1991; President and Chief
Operating Officer of Old ManorCare Health Services from May 1991 to February
1995; Chairman and Chief Executive Officer of Vitalink from February 1995 to
February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years, including
as Executive Vice President/General Manager of the Roy Rogers Division; Director
of In Home Health since October 1995.
H. David Lundgren. Vice President, Organizational Strategy and Development
of Aetna, Inc. from 1996 to April 1997; Vice President, Human Resources of Aetna
Inc. from 1992 to 1996.
James H. Rempe. Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981, of Choice and its predecessors from February 1981
to November 1996 and of Old ManorCare Health Services since December 1980;
Secretary of Vitalink from January 1993 to January 1997 and a Director
53
<PAGE>
since September 1994; Senior Vice President and a Director of Vitalink from
January 1983 to September 1991; Director of In Home Health since October 1995.
Scott J. Van Hove. Senior Vice President and Chief Administrative Officer
of Manor Care since December 1995; Executive Vice President, Operations of Old
ManorCare Health Services since February 1997; Senior Vice President of Old
Manor Care Health from December 1995 to January 1997; Vice President of
Operations, of Manor Care from March 1990 to December 1995.
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.
54
<PAGE>
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
------------------------------- -------------------------------------------------
Name and Principal Position
- --------------------------- Restricted
Fiscal Stock Stock Option All Other
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 Secre- 1995 267,349 133,675 (4) - - 9,000
tary
Scott J. Van Hove 1997 240,192 116,753 (4) - 50,000 14,542
Executive Vice President, 1996 210,310 89,754 (4) - 40,000 8,690
Operations 1995 183,393 68,311 (4) - - 6,750
Wolfgang von Maack 1997 238,992 81,182 (4) - 14,000 10,588
President and Chief Executive 1996 227,677 76,727 (4) - 10,000 10,245
Officer, In Home Health, Inc. 1995 225,219 66,665 (4) - - 6,750
</TABLE>
- --------------
(1) Represents options to purchase shares of Manor Care Common Stock. For a
discussion of the treatment of options in connection with the
Distribution, see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND 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
announced its intention to separate its franchising business and its
lodging business through a special dividend to its shareholders (the
"Sunburst Spin-off"). After the Sunburst Spin-off, Choice's franchising
business will be conducted by a separate public company which will be
named Choice Hotels International, Inc. ("Choice Hotels") and Choice's
lodging business will be conducted by a separate public company which
will be named Sunburst Hospitality Corporation ("Sunburst"). It is
expected that he will devote 12.5% of his time to Choice Hotels, 12.5%
of his time to Sunburst, 37.5% of his time to 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.
55
<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>
Potential Realizable Value
of Assumed Annual Rate of Stock
Price
Appreciation for
Individual Grants Option Term(2)
-------------------------------------------------- -------------------------------
Percentage of
Total Options
Number of Granted to all Exercise
Options Employees in Base Price Expiration
Name Company Granted(1) Fiscal Year 1997 Per Share Date 5%(3) 10%(4)
- ---- ------- --------------- ------------------ ------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. (5) MNR 60,000 6.3% $25.0505 7/1/06 $ 945,246 $2,395,440
CHI 60,000 (6) $14.5095 7/1/06 547,494 1,387,474
------ --------- ----------
Total 120,000 1,492,750 3,783,904
Donald C. Tomasso (5) MNR 55,272 3.7%(7) $25.0505 7/1/06 $ 870,760 $2,206,679
CHI 0 - - - -
------ --------- ----------
Total 55,272 870,760 2,206,679
James H. Rempe (5) MNR 20,430 1.6%(7) $25.0505 7/1/06 $ 321,856 $ 815,647
CHI 5,625 (6) $14.5095 7/1/06 52,327 130,075
------ --------- ----------
Total 26,055 373,183 945,722
Scott J. Van Hove (5) MNR 39,480 2.6%(7) $25.0505 7/1/06 $ 621,972 $1,576,199
MNR 25,000 2.6% $27.0000 1/15/07 424,500 1,075,750
CHI 0 - -
------ --------- ----------
Total 64,480 1,046,472 2,651,949
Wolfgang von Maack (5) MNI 22,108 1.47%(7) $25.0505 7/1/06 $ 348,285 $ 882,623
CHI 0
------
Total 22,108
</TABLE>
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) All of the options shown, except for Mr. Van Hove's 25,000 MNR options,
were granted prior to the Choice Spin-off. In connection with the
Choice Spin-off, the existing options were converted, in some cases,
into options to purchase Manor Care Common Stock and options to
purchase Choice common stock. In all cases, the exercise prices were
adjusted to maintain the same financial value to the option holder
before and after the Choice Spin-off. The number of options set forth
in the above table present the number and exercise prices of the
options after the Choice Spin-off.
(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.
56
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money Options
Options at May 31, 1997 at May 31, 1997
------------------------------ ------------------------------
Shares
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:
57
<PAGE>
<TABLE>
<CAPTION>
Current Years Years of Service
Name of Individual of Service at Age 65
- ------------------ -------------------- ------------------------
<S> <C> <C>
Stewart Bainum, Jr. 23.5 38
Donald C. Tomasso 6 19
Scott J. Van Hove 10 35
</TABLE>
Mr. Rempe has twenty-seven current years of service and had twenty-five
years of service at age sixty-five.
The table below sets forth estimated annual benefits payable upon
retirement to persons in specified compensation and years of service
classifications. These benefits are straight life annuity amounts, although
participants have the option of selecting a joint and 50% survivor annuity or
ten-year certain payments. The benefits are not subject to offset for social
security and other amounts.
Years of Service/Benefit as
Percentage of Final Average Salary
<TABLE>
<CAPTION>
25 or
Remuneration 15/15% 20/22.5% more/30%
------------ ----------------- ---------------- ------------------
<S> <C> <C> <C>
$300,000 $45,000 $67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
Prior to the Distribution, it is expected that the existing Manor Care
Retirement Savings and Investment Plan (the "401(k) Plan"), a defined
contribution retirement, savings and investment plan for its employees and the
employees of its participating affiliated companies, will be amended to cover
both Manor Care Realty and ManorCare Health Services. The 401(k) Plan will be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and will include a cash or deferred arrangement under Section
401(k) of the Code. All employees age 21 or over who have worked for 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
58
<PAGE>
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.
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 [ ] 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 of the first and second anniversary dates of the Employment
Agreement. The Employment Agreement will provide that Mr. Bainum, Jr. will
devote 12.5% of his professional time to the affairs of Sunburst, 12.5% of his
professional time to the affairs of Choice Hotels, 37.5% of his professional
time to the affairs of Manor Care Realty and the remaining 37.5% of his
professional time to the affairs of the Company. The Employment Agreement
provides for a base salary of $258,443.25 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.
59
<PAGE>
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. Chairman of the Board of Manor Care and Old
ManorCare Health Services since March 1987; Chief Executive Officer of Manor
Care since March 1987 and President since June 1989; Chairman of the Board of
Vitalink since February, 1997; Vice Chairman of the Board of Vitalink from
February 1995 to February 1997; Chairman of the Board of Choice since November,
1996; Vice Chairman of the Board of Manor Care and subsidiaries from June 1982
to March 1987; Director of Manor Care since August 1981, of Vitalink since
September 1991, of Old ManorCare Health Services since 1976 and of Choice and
its predecessors since 1977; Chief Executive Officer of Old ManorCare Health
Services since June 1989 and President from May 1990 to May 1991; Chairman of
the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991; Chairman of the Board of Choice from March 1987 to June 1990.
Regina E. Herzlinger. Nancy R. McPherson Professor of Business
Administration, Harvard Business School, since 1971. Director: C.R. Bard, Inc.,
Deere & Company, Cardinal Health Care, Inc., Schering-Plough Corporation and
Total Renal Care Inc.
William H. Longfield. Chairman and Chief Executive Officer of C.R.
Bard, Inc. (medical devices) since September 1995; President and Chief Executive
Officer from June 1994 to September 1995; President and Chief Operating Officer
of C.R. Bard, Inc. from September 1991 to June 1994; Executive Vice President
and Chief 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.
60
<PAGE>
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.
Committees of the Board of Directors
Upon consummation of the Distribution, the Board of Directors is
expected to consist of eight members. Following the Distribution Date,
additional non-employee directors may be elected to the Board of Directors. The
additional non-employee directors have not yet been determined. It is expected
that the Board of Directors will hold five meetings during the fiscal year and
that the standing committees of the Board will include the Audit Committee, the
Finance Committee, the Compensation/Key Executive Stock Option Plan Committee
and the Nominating/Governance Committee. The members of the committees have not
yet been determined.
The Compensation/Key Executive Stock Option Plan Committee will
administer the Company's stock option plans and grant options thereunder, will
review compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive plans,
pensions and retirement, and will review other employee fringe benefit programs.
The Compensation/Key Executive Stock Option Committee No. 2, will be
formed to comply with certain provisions of the Omnibus Budget Reconciliation
Act of 1993 and Rule 16b-3 under the Exchange Act. The 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.
61
<PAGE>
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.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
For a description of certain contracts to be executed between the
Company and Manor Care Realty in connection with the Distribution, 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.
See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND THE COMPANY AFTER THE
DISTRIBUTION -- Employee Benefits and Other Employee Matters Allocation
Agreement."
62
<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/(1)/
---------------- -------------- -----------------
<S> <C> <C>
Stewart Bainum/(2)/ 10,140,743 15.20%
Stewart Bainum, Jr./(3)/ 15,269,851 22.86%
Barbara Bainum/(4)/ 5,485,815 8.22%
Bruce Bainum/(5)/ 5,482,302 8.21%
Ronald Baron/(6)/ 7,976,459 11.96%
</TABLE>
- -----------------------
(1) Percentages are based on 66,709,912 shares outstanding on August 5,
1997 plus shares which would be issued assuming that the person
exercises all options which are exercisable within 60 days thereafter.
(2) Includes 3,765,478 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum;
his joint interest in 895,466 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,082,857 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his
wife as a limited partner and as such has the right to acquire at any
time a number of shares equal in value to the liquidation preference of
their limited partnership interest; 3,567,869 shares held direct by
Realty Investment Company, Inc. ("Realty Investment"), a real estate
investment and management company in which Mr. Bainum and his wife have
shared voting authority; and 40,305 shares held by the Commonweal
Foundation of which Mr. Bainum is Chairman of the Board of Directors
and has shared voting authority. Also includes 792 shares of restricted
stock granted pursuant to the Manor Care, Inc. Non-Employee Director
Stock Compensation Plan. Also includes 798,711 shares held by the Jane
L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife. Also includes 3,665 shares which Mr. Bainum has the
right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997. Does not include shares owned beneficially by Stewart Bainum, Jr,
Mr. Bainum's son, whose interests are stated in the above table, except
shares owned by Bainum Associates, MC Investments and the Commonweal
Foundation in which Mr. Bainum has a beneficial interest. Also does not
include shares held by his other three adult children.
(3) Includes 20,598 shares held directly by Mr. Bainum, Jr.; also includes
5,417,761 shares owned by Bainum Associates and 4,415,250 shares owned
by MC Investments, in both of which Mr. Bainum, Jr. is managing general
partner with the sole right to dispose of the shares. Authority to vote
such shares is held by the voting general partner, Mr. B. Houston
McCeney. Also includes 1,779,628 shares owned by Mid Pines, in which
Mr. Bainum, Jr. is a managing general partner and has shared voting
authority; 3,567,869 shares held by Realty Investment in which Mr.
Bainum, Jr. has shared voting authority. Also includes 88,000 shares
which Mr. Bainum, Jr. has the right to acquire pursuant to stock
options which are presently exercisable or which become exercisable
within 60 days after August 5, 1997, and 350 shares and 993 shares,
respectively, which Mr. Bainum, Jr. has the right to receive upon
termination of his employment
63
<PAGE>
with the Company pursuant to the terms of the Manor Care, Inc.
Retirement Savings and Investment Plan (the "401(k) Plan") and the
Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan
(the "Nonqualified Savings Plan") (based upon a report of each plan's
trustee for June 1997).
(4) Includes 98,013 shares held directly by Ms. Bainum; 3,567,869 shares
held by Realty Investment, and 1,779,628 shares held by Mid Pines, in
both of which Ms. Bainum has shared voting authority. Also includes
40,305 shares held by the Commonweal Foundation in which Ms. Bainum has
shared voting authority.
(5) Includes 94,500 shares held directly by Mr. Bainum; 3,567,869 shares
held by Realty Investment, 1,779,628 shares held by Mid Pines and
40,305 shares held by the Commonweal Foundation, all of which Mr.
Bainum has shared voting authority in.
(6) Includes 163,620 shares owned directly by Mr. Baron. Also includes
705,000 shares owned by Baron Capital Partners, L.P. and Baron
Investment Partners, L.P., investment partnerships of which Mr. Baron
is General Partner; 5,950,000 shares owned by two investment companies
registered under the Investment Company Act of 1940, Baron Asset Fund
and Baron Growth & Income Fund, which are advised by BAMCO, Inc., a
registered investment adviser which is controlled by Mr. Baron;
1,157,839 shares held for the accounts of investment advisory clients
of Baron Capital Management, Inc., a registered investment adviser
controlled by Mr. Baron.
64
<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 _________ __, 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 20,598 shares held directly by Mr. Bainum, Jr.; also includes
5,417,761 shares owned by Bainum Associates Limited Partnership and
4,415,250 shares owned by MC Investments Limited Partnership, limited
partnerships in both of which Mr. Bainum, Jr. is managing general partner
with the sole right to dispose of the shares. Authority to vote such
shares is held by the voting general partner, Mr. B. Houston McCeney. Also
includes 1,779,628 shares owned by Mid Pines, in which Mr. Bainum, Jr. is
a managing general partner and has shared voting authority; 3,567,869
shares held by Realty Investment Company, Inc., a real estate investment
and management company in which Mr. Bainum, Jr. has shared voting
authority. Also includes 88,000 shares which Mr. Bainum, Jr. has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after August 5, 1997, and 350
shares and 993 shares, respectively, which Mr. Bainum, Jr. has the right
to receive upon termination of his employment with the Company pursuant to
the terms of the ManorCare Health Services Retirement Savings and
Investment Plan (the "401(k) Plan") and the ManorCare Health Services
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified
Savings Plan").
(3) Includes 3,159 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(4) Includes 5,791 shares which Mr. Longfield has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
65
<PAGE>
(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 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.
66
<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
________ __, 1997, 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 [ ]
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 "SPECIAL 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.
67
<PAGE>
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.
68
<PAGE>
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.
69
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................... F-2
Combined Balance Sheets as of May 31, 1997 and 1996 ................................... F-3
Combined Statements of Income for the fiscal years ended May 31, 1997, 1996
and 1995....................................................................... F-4
Combined Statements of Cash Flows for the fiscal years ended May 31, 1997,
1996 and 1995.................................................................. F-5
Notes to Combined Financial Statements................................................. F-6
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To the Shareholder of New ManorCare Health Services, Inc.:
We have audited the accompanying combined balance sheets of New
ManorCare Health Services, Inc. (a Delaware Corporation) and subsidiaries, as
described under "Basis of Presentation" in the Notes to Combined Financial
Statements, as of May 31, 1997 and 1996, and the related combined statements of
income and cash flows for each of the three years in the period ended May 31,
1997. These combined financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of New ManorCare Health
Services, Inc. and subsidiaries as of May 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in 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 (In thousands of dollars) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 14,486 $ 23,590
Receivables (net of allowances for doubtful
accounts of $6,179 and $3,141) 89,148 33,709
Inventories 26,451 8,211
Deferred income taxes 9,773 1,182
Other 6,567 4,667
-------- --------
Total current assets 146,425 71,359
-------- --------
PROPERTY AND EQUIPMENT, AT COST (NET OF
ACCUMULATED DEPRECIATION OF $31,953 AND $22,410) 221,778 181,169
-------- --------
GOODWILL (NET OF ACCUMULATED AMORTIZATION
OF $5,705 AND $2,146) 346,981 49,348
-------- --------
PHARMACY CONTRACTS (NET OF ACCUMULATED
AMORTIZATION OF $4,579 AND $3,044) 39,313 6,187
-------- --------
LONG-TERM RECEIVABLES 21,984 19,143
-------- --------
OTHER ASSETS 10,896 7,674
-------- --------
Total assets $787,377 $334,880
======== ========
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 5,821 $ 4,294
Accounts payable 28,995 12,092
Accrued expenses 35,679 17,660
Income taxes payable -- 725
-------- --------
Total current liabilities 70,495 34,771
-------- -------
DUE TO MANOR CARE 75,560 49,946
LONG-TERM DEBT 105,283 1,441
DEFERRED INCOME TAXES 51,799 15,435
MINORITY INTEREST 184,729 32,285
OTHER LONG-TERM LIABILITIES 22,445 7,195
-------- --------
Total liabilities 510,311 141,073
-------- --------
INVESTMENTS AND ADVANCES FROM MANOR CARE 277,066 193,807
-------- --------
Total liabilities and equity $787,377 $334,880
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
New ManorCare Health Services, Inc.
Combined Statements of Income
<TABLE>
<CAPTION>
Years Ended May 31 (In thousands of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $471,152 $263,047 $125,987
EXPENSES
Operating expenses 413,762 227,410 99,011
Depreciation and amortization 20,135 11,583 6,090
General corporate and other 8,385 9,195 2,957
Provision for asset impairment -- 1,200 --
-------- -------- --------
Total expenses 442,282 249,388 108,058
-------- -------- --------
INCOME BEFORE OTHER INCOME AND (EXPENSES)
AND INCOME TAXES 28,870 13,659 17,929
-------- -------- --------
OTHER INCOME AND (EXPENSES)
Gain on issuance of Vitalink stock 50,271 -- --
Interest income and other 2,162 1,827 895
Minority interest expense (3,881) (1,551) (2,047)
Interest expense (6,126) (2,966) (117)
Intercompany interest expense (11,191) (8,421) (3,781)
-------- -------- --------
Total other income and (expenses), net 31,235 (11,111) (5,050)
-------- -------- --------
INCOME BEFORE INCOME TAXES 60,105 2,548 12,879
INCOME TAXES 23,917 1,437 6,055
-------- -------- --------
NET INCOME $ 36,188 $ 1,111 $ 6,824
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-4
<PAGE>
New ManorCare Health Services, Inc.
Combined Statements Of Cash Flows
<TABLE>
<CAPTION>
Years Ended May 31 (In thousands of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,188 $ 1,111 $ 6,824
Reconciliation of net income to net cash
provided by operating activities:
Gain on issuance of Vitalink stock (50,271) -- --
Minority interest expense 3,881 1,551 2,047
Depreciation and amortization 20,135 11,583 6,090
Provision for bad debts 4,899 2,414 1,864
Increase in deferred taxes 24,662 1,656 721
Provision for asset impairment -- 1,200 --
Changes in assets and liabilities (excluding sold
facilities and acquisitions):
Change in receivables (17,543) (12,534) (1,845)
Change in inventories and other current assets (4,157) (4,318) (997)
Change in current liabilities (6,306) 4,561 2,349
Change in income taxes payable (725) 1,677 (83)
Change in other liabilities (6,362) (858) (269)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,401 8,043 16,701
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (39,974) (32,001) (25,020)
Acquisition of assisted living facilities -- (19,050) (30,185)
Acquisition of pharmacies (5,291) (6,270) (2,451)
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)
--------- --------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (185,602) (86,603) (59,183)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of long-term debt 127,981 -- 1,810
Principal payments of debt (5,393) (3,149) (38)
Cash transfers from Manor Care, net 49,509 105,057 40,300
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 172,097 101,908 42,072
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,104) 23,348 (410)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 23,590 242 652
--------- --------- ---------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 14,486 $ 23,590 $ 242
========= ========= =========
NON-CASH ACTIVITIES:
Liabilities assumed in connection with acquisition
of properties $ 172,778 $ 55,250 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-5
<PAGE>
Notes to Combined Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On September 15, 1997, Manor Care, Inc., ("Manor Care") announced its
intention to proceed with the separation of its assisted living, pharmacy and
home health businesses (collectively, the "Business") from its skilled nursing,
real estate and health care facility development business via a spin-off of the
Business (the "Distribution"). Manor Care's Board of Directors voted to approve,
in principle, the Distribution subject to the receipt of other approvals and
consents and satisfactory implementation of the arrangements for the
Distribution. Manor Care anticipates consummating the Distribution by the end of
the 1997 calendar year through a special dividend to its shareholders of one
share of common stock of New ManorCare Health Services, Inc. (the "Company") for
each share of Manor Care common stock. The Distribution is conditional upon
certain matters, including receipt of a ruling from the Internal Revenue Service
that the spin-off will be tax-free and declaration of the special dividend by
Manor Care's Board of Directors. Following the Distribution, the Company will
lease the skilled nursing facilities from Manor Care, to be renamed Manor Care
Realty, Inc. ("Manor Care Realty"). Additionally, Manor Care Realty will develop
assisted living facilities for the Company, which will be renamed ManorCare
Health Services, Inc. ("ManorCare Health Services").
The Company was formed on August 29, 1997 to facilitate the proposed
Distribution of the Business. The operations of the Company will consist
principally of the pharmacy operations, assisted living operations and home
health operations formerly conducted by Manor Care directly or through Manor
Care's subsidiaries. The Company has assisted living operations under the brand
names "Springhouse" and "Arden Courts." The Company owns and manages 34 assisted
living facilities in 12 states. The Company operates pharmacy activities under
its approximately 51% owned subsidiary, Vitalink Pharmacy Services, Inc.
("Vitalink") and home health operations under In Home Health, Inc. ("IHHI"), a
separate public company of which Manor Care owns approximately 64% of the voting
stock.
The combined financial statements present the financial position,
results of operations and cash flows of the Company as if it were formed as a
separate entity of Manor Care which conducted the Business for all periods
presented. Manor Care's historical basis in the assets and liabilities of the
Company has been carried over to the combined financial statements. All material
intercompany transactions and balances between the Company and its subsidiaries
have been eliminated. Changes in the investments and advances from Manor Care
represent the net income of the Company plus the net advances to the Company
from Manor Care.
F-6
<PAGE>
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>
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>
(In thousands of dollars) 1997 1996
- ------------------------------------------------------------------------------------------------
<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:
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
F-7
<PAGE>
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.
Minority Interest
The Company has controlling investments in certain entities which are
not wholly owned. Amounts reflected as minority interest represent the minority
owners' share of income in these entities. Minority interest liability
represents the cumulative minority owners' share of equity in these entities.
Self-Insurance Programs
Prior to the Distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs of
these programs are accrued at present values based on actuarial projections for
known and anticipated claims. All accrued self-insurance costs have been treated
as paid to Manor Care, and as such, amounts paid to Manor Care have been charged
directly to investments and advances from Manor Care. Subsequent to the
Distribution, the Company will establish and maintain its own insurance program.
Pro Forma Information (Unaudited)
After giving effect to the Distribution and related transactions (see
"Basis of Presentation"), pro forma revenues, net income and net equity for
fiscal year 1997 would have been $1.7 billion, $83.7 million, and $682.0
million.
Per share data is not presented on a historical basis because the
Company was not a publicly-held company during the periods presented. Pro forma
income per share for 1997, after giving effect to the transaction described in
the pro forma combined financial statements, would have been $1.32. Pro forma
income per common share is computed by dividing pro forma net income by the pro
forma weighted average number of outstanding common shares, aggregating 63.3
million in 1997. The pro forma weighted average number of outstanding common
shares is based on Manor Care's weighted average number of outstanding common
shares.
F-8
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported or disclosed in its financial
statements and the notes related thereto. Actual results could differ from those
estimates.
Revenue Recognition
Revenues are recognized at the time the service is provided to the
patient. The Company records revenue for services to Medicare beneficiaries at
the time the services are rendered and based on the Medicare cost reimbursement
principles. Under those principles, Medicare reimburses the Company for the
reasonable costs (as defined) incurred in providing care to Medicare
beneficiaries. The Company reports as reimbursable costs in the Medicare cost
reports only those costs it believes to be reimbursable under the applicable
Medicare cost reimbursement principles. In determining the amount of revenue to
be recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement principles in
effect at that time. Accordingly, this process results in recording revenue only
for the costs that the Company believes are reasonably assured of recovery.
Refer to "Commitments and Contingencies" footnote for additional information.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" ("SFAS 128"), which is effective for fiscal years ending after December
15, 1997, including interim periods. Earlier adoption is not permitted. However,
an entity is permitted to disclose pro forma earnings per share amounts computed
under SFAS 128 in the notes to the financial statements in periods prior to
adoption. The statement requires restatement of all prior-period earnings per
share data presented after the effective date. The Company plans to adopt SFAS
128 in 1998 and the impact is not expected to be significant.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes standards for
reporting and display of comprehensive income and its components. The Company
plans to adopt SFAS 130 in fiscal year 1999 and has not determined the impact of
adoption.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997.
The Company plans to adopt SFAS 131 in fiscal year 1999 and has not determined
the impact of adoption.
LONG-TERM RECEIVABLES
Long-term receivables of $21,984 and $19,143 at May 31, 1997 and 1996,
respectively, represent accounts receivable from Medicare at IHHI, relating
primarily to the reimbursement of disputed costs from prior years. In August
1997, IHHI received three court decisions relating to certain of these amounts.
IHHI has, on a preliminary basis, evaluated these decisions on its recorded
accounts receivable and accordingly, will record a reserve of $13.0 million in
the first quarter of fiscal year 1998. The net impact to the Company is expected
to be approximately $3 million.
F-9
<PAGE>
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>
(In thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<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>
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
(In thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<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>
F-10
<PAGE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the combined statements of income follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<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.
F-11
<PAGE>
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1997 1996
- --------------------------------------------------------------------
<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>
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal Year (In thousands of dollars)
--------------------------------------------------------
<S> <C>
1998 $ 5,821
1999 5,523
2000 4,593
2001 4,076
2002 3,870
2003 and thereafter 162,781
--------
$186,664
========
</TABLE>
Long-term debt consisting of amounts due to Manor Care for mortgages on
assisted living facilities and for amounts drawn on Manor Care's credit facility
related to the Vitalink tender offer was $75.6 million and $49.9 million at May
31, 1997 and 1996, respectively. During fiscal year 1997 interest rates on
mortgages ranged from 2.475% to 10.75%. The weighted average interest rate in
fiscal year 1997 was 6.4%. Interest paid was $1.5 million in fiscal year 1997,
$0.1 million in fiscal year 1996 and $0.1 million in fiscal year 1995.
Mortgages on assisted living facilities are held by Manor Care and will
be transferred to ManorCare Health Services on the Distribution Date. Certain
covenants in the loan documents will be modified as a result of this transfer.
The Company does not expect changes in loan covenants to have a significant
impact.
During fiscal year 1997, Vitalink entered into a $200 million revolving
credit facility (the "Credit Facility"), which expires February 12, 2002 with
Chase Manhattan Bank. Amounts totaling $97.4 million were drawn under the Credit
Facility to redeem $98.2 million of GranCare, Inc.'s ("GranCare") $100.0 million
Senior Subordinated Notes (see "Acquisitions and Divestitures"). Borrowings
under the Credit Facility are at an interest rate of LIBOR plus 25 basis points.
Vitalink is subject to a 0.15% facility fee for the total amount of the Credit
Facility payable on a quarterly basis. Borrowings under the Credit Facility are
classified as long-term as Vitalink has the ability and intention to refinance
the amount drawn. The terms of the Credit Facility contain, among other
provisions, requirements for maintaining defined levels of net worth, annual
capital expenditures, and interest coverage and consolidated leverage ratios.
Vitalink was in compliance with the terms of the Credit Facility for the fiscal
year ended May 31, 1997. In conjunction with Vitalink's merger with TeamCare,
Vitalink assumed $1.8 million of GranCare's 9 3/8% Senior Subordinated Notes due
September 15, 2005. The notes require semi-annual interest payments. A $0.6
million premium has been recorded on the Senior Subordinated Notes to reflect
the fair market value as of the merger date of February 12, 1997.
F-12
<PAGE>
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
(In thousands of dollars) Leases Leases
- ------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 8,335 $1,589
1999 6,808 764
2000 5,351 515
2001 4,355 395
2002 2,922 84
Thereafter 9,498 --
------- ------
Total minimum lease payments $37,269 $3,347
Less: Amount representing interest 549
------
Present value of lease payments 2,798
Less: Current portion 1,346
------
Lease obligations included in long-term debt $1,452
======
</TABLE>
Rental expense under noncancelable operating leases was $8.0 million in 1997,
$3.5 million in 1996 and $1.3 million in 1995.
ACQUISITIONS AND DIVESTITURES
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare. Vitalink issued 11.4 million shares in exchange
for all of the outstanding shares of GranCare. In addition, Vitalink funded the
redemption of $98.2 million of GranCare's 9 3/8% Senior Subordinated Notes and
assumed approximately $10.0 million of additional GranCare indebtedness. As a
result of the excess of fair value of Vitalink shares over the book value of
TeamCare, Vitalink recorded approximately $292.5 million of goodwill. As a
result of the merger, the Company's ownership interest in Vitalink decreased to
45%. On May 21, 1997, the Company successfully completed its tender offer to
purchase 1.5 million shares of Vitalink common stock. As a result of the tender
offer, the Company's interest in Vitalink was increased to approximately 51%.
The Company's net pretax gain resulting from these transactions was $50.3
million.
During fiscal year 1997, Vitalink purchased a pharmacy in California
which services 5,100 institutional beds for a total of $5.3 million. Through new
construction, the Company opened six assisted living facilities.
During fiscal year 1996, the Company acquired six assisted living
facilities, with five attached skilled nursing units for $74.3 million, of which
$19.0 million was cash and the remainder was assumed liabilities. In October
1995, the Company purchased for $22.9 million approximately 41% of the common
stock of IHHI, and invested another $20.0 million for 100% of its outstanding
voting convertible preferred stock and for warrants to purchase an additional
6.0 million shares of common stock. As a result of this transaction, the Company
currently has effective control of approximately 64% of the voting stock of
IHHI. Vitalink purchased a pharmacy servicing 2,200 institutional beds and an
infusion therapy business for a total of $6.3 million.
F-13
<PAGE>
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>
(In thousands, except per share data)
Year Ended May 31, 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Total net revenues $663,516 $495,409
Income before income taxes 62,083 5,485
Net income 33,991 (1,979)
Net income per share $ 0.54 $ (0.03)
======== ========
</TABLE>
PROVISION FOR ASSET IMPAIRMENT
The Company periodically reviews the net realizable value of its long-term
assets and makes adjustments accordingly. The Company recorded a provision of
$1.2 million in fiscal year 1996 related to the impairment of certain
capitalized systems development costs. The impairment of the property and
equipment was recorded in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company, the
ultimate outcome of such litigation will not have a material adverse effect on
the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies (see
"Revenue Recognition" footnote disclosure). For fiscal years 1997, 1996 and
1995, these revenues amounted to $188.0 million, $108.5 million and $39.9
million, respectively. In the opinion of management, any difference between
revenues recorded and final determination will not be significant.
Vitalink has a limited guarantee to Health Retirement Properties Trust
("HRPT") of up to $15.0 million for default mortgage payments of GranCare
facility leases assumed in connection with the TeamCare merger. In return,
Vitalink is the beneficiary of a $15.0 million line of credit from GranCare in
the event that any of the facilities defaults on its mortgage to HRPT.
F-14
<PAGE>
TRANSACTIONS WITH MANOR CARE
The pharmacy and assisted living facilities participate in a cash
concentration system with Manor Care and as such maintain no significant cash
balances or banking relationships. Substantially all cash received by these
operations has been immediately deposited in and combined with Manor Care's
corporate funds through its cash management system. Similarly, operating
expenses, capital expenditures and other cash requirements of these facilities
have been paid by Manor Care and charged to the Company. The net result of all
these intercompany transactions with the exception of amounts relating to the
acquisition of Company-operated assisted living facilities is reflected in the
combined balance sheets as investments and advances from Manor Care. Interest
expense on investments and advances from Manor Care for the years ended May 31,
1997, 1996 and 1995 was $11.2 million, $8.4 million and $3.8 million,
respectively. Following the Distribution, the Company will maintain its own cash
balances and will implement an internal cash management system.
Manor Care has historically provided various services to the Company
including, among others, cash management, payroll and payables processing,
employee benefit plans, legal, accounting, tax, information systems and certain
administrative services, as required. Manor Care charges the Company fees for
general management, staff support and rental of office space on the basis of
such factors as employee time incurred and square footage. This is essentially
the same basis Manor Care utilized to charge its other operating entities for
such services. General corporate and other expenses of $8.4 million, $11.6
million and $3.0 million, respectively, were charged to the Company's operations
for the years ended May 31, 1997, 1996 and 1995. Management believes that the
foregoing charges are reasonable allocations of the costs incurred by Manor Care
on the Company's behalf. The Company has estimated that after the Distribution
annual general corporate and other expenses will increase by approximately $2.5
million.
For purposes of providing an orderly transition after the Distribution,
Manor Care Realty and the Company will enter into various agreements, including,
among others, Lease Agreements, Development Agreement, Assisted Living Facility
Management Agreement, Tax Sharing Agreement, Tax Administration Agreement,
Corporate Services Agreement, Employee Benefits and Other Employment Matters
Allocation Agreement and Employee Benefits Administration Agreement. Effective
at the Distribution Date, these agreements will provide, among other things,
that the Company (i) will perform certain corporate and support services, such
as accounting, risk management and computer systems support, (ii) will establish
or participate in pension, profit sharing and incentive plans similar to those
in place at Manor Care, (iii) will receive certain miscellaneous administrative
services and (iv) will lease skilled nursing facilities from Manor Care Realty.
These agreements will extend from the Distribution Date until such time as the
Company or Manor Care Realty has arranged to provide such services in-house or
through another unrelated provider of such services. These agreements are
attached as exhibits to the Company's Registration Statement on Form 10.
Lease Agreements
On the Distribution Date, Manor Care Realty and the Company will enter into
Lease Agreements, pursuant to which Manor Care Realty will lease to ManorCare
Health Services all of its skilled nursing facilities. Under each Lease
Agreement, ManorCare Health Services' use of the subject facility will be
limited to skilled nursing operations.
Manor Care Realty will be responsible for paying all real property taxes
and insurance costs. ManorCare Health Services will be obligated to pay to Manor
Care Realty under each Lease Agreement an annual amount equal to the Owner's
Priority ("Land Rent"). In addition, each Lease Agreement will provide for
ManorCare Health Services to retain a base fee monthly of 6% of Project Revenues
(as defined in the Lease Agreement) and an incentive fee of up to 23% of Net
Operating Profit (as defined in the Lease Agreement).
F-15
<PAGE>
Under each Lease Agreement, Manor Care Realty will have the right to
terminate if certain financial results are not achieved or due to ManorCare
Health Services' fault, the facility is decertified as a skilled nursing
facility or is disqualified from participation in Medicare or Medicaid. The
Lease Agreements will also provide for termination in the event of additional
defaults such as monetary default, breach of covenant and bankruptcy defaults.
Manor Care Realty will be obligated to pay to ManorCare Health Services a
termination fee in certain situations.
Development Agreement
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into a development agreement (the "Development Agreement") pursuant to
which Manor Care Realty will develop assisted living facilities for ManorCare
Health Services and retain ownership of such facilities until occupancy has
stabilized at 80% or more for a period of 30 days or until such earlier date as
ManorCare Health Services determines to purchase such facility. The purchase
price for each facility will be at a premium to the total development costs,
which will be based upon the time elapsed since the opening of the facility. If
stabilized occupancy is not achieved within two years of commencing operations,
ManorCare Health Services may, but will be not obligated to, purchase the
facility.
Assisted Living Facility Management Agreement
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into an assisted living facility management agreement (the "Assisted
Living Facility Management Agreement") pursuant to which during the two-year
stabilization period under the Development Agreement, ManorCare Health Services
will manage the facility for Manor Care Realty. During the management period,
ManorCare Health Services will be reimbursed for all operating costs and will
receive a fixed monthly fee.
7 1/2% Senior Notes
In connection with the Exchange Offer, the Company will assume $150.0
million of 7 1/2% Senior Notes due 2006 from Manor Care. These notes will be
redeemable at the option of the Company at any time at a price equal to the
greater of (a) the principal amount or (b) the sum of the present values of the
remaining scheduled payments of principal and interest, discounted with an
applicable treasury rate plus 15 basis points, plus accrued interest to the date
of redemption.
Interest Rate Hedging
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2%
Senior Notes, Manor Care also entered into a series of interest rate swap and
treasury lock agreements having a total notional principal amount of $150.0
million. Agreements with a total notional principal amount of $100.0 million
were terminated concurrent with the pricing of the notes offering on May 30,
1996 with a $2.7 million cash gain. The remaining agreement, with a total
notional principal amount of $50.0 million was terminated on October 23, 1996
with a $1.4 million cash gain. The gains on the termination of the agreements
were deferred and are being amortized against interest expense over the life of
the 7 1/2% Senior Notes.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
Employees of the Company participate in various retirement and profit
sharing plans. The retirement savings and investment plan and the non-qualified
retirement savings and investment plan are jointly sponsored by the Company and
Manor Care and are thus multiple employer plans. The costs of these plans are
allocated to the Company based on the size of its payroll relative to the total
payroll. Costs allocated to the Company were $1.1 million in 1997, $0.7 million
in 1996 and $0.4 million in 1995.
F-16
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term debt instruments were determined by discounting
future cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the balance sheet. The balance sheet
carrying amounts of cash, cash equivalents, receivables, inventories and other
current assets approximate fair value due to the short-term nature of these
items.
BUSINESS SEGMENT INFORMATION
The Company operates principally in three segments: pharmacy services,
assisted living operations and home health services. Intersegment sales for the
pharmacy segment consist of sales to assisted living facilities which are
subsequently eliminated in consolidation.
Income (loss) from operations consists of total revenues less total
operating, depreciation and amortization, and general corporate and other
expenses.
<TABLE>
<CAPTION>
1997 Pharmacy Assisted Living Home Health Eliminations Total
- ---- -------- --------------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated parties $273,396 $ 73,402 $124,354 $ -- $471,152
Intersegment sales 642 -- -- (642) --
Income (loss) from operations 33,109 (1,237) (3,002) -- 28,870
Identifiable assets 515,752 211,218 60,407 -- 787,377
Depreciation and amortization 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 operations 22,301 (5,998)/(a)/ (2,644) -- 13,659
Identifiable assets 79,013 183,269 72,598 -- 334,880
Depreciation and amortization 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 operations 18,726 (797) -- -- 17,929
Identifiable assets 63,825 70,677 -- -- 134,502
Depreciation and amortization 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-17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 Form of Distribution Agreement, dated as of __, 1997, between Manor Care, Inc.
("Manor Care") and the Registrant.*
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
10.1 Form of Tax Sharing Agreement, dated as of ________, 1997, between Manor Care and
the Registrant.*
10.2 Form of Tax Administration Agreement, dated as of __________, 1997, between Manor
Care and the Registrant.*
10.3 Form of Corporate Services Agreement, dated as of ___________, 1997, between
Manor Care and the Registrant.*
10.4 Credit Agreement, dated as of __________, 1997, among the Registrant and
[ ].*
10.5 Form of Assisted Living Facility Management Agreement, dated as of ___________,
1997, between the Registrant and Manor Care.
10.6 Form of Master Development Agreement, dated as of ___________, 1997, between the
Registrant and Manor Care.*
10.7 Form of Lease Agreement between Manor Care, and the Registrant.*
10.8 Form of Non-Competition Agreement, dated as of ________, 1997, between the Regis-
trant and Manor Care.*
10.9 Form of Employee Benefits and Other Employment Matters Allocation Agreement,
dated as of ________, 1997, between the Registrant and Manor Care.*
10.10 Form of Employee Benefits Administration Agreement, dated as of ________, 1997,
between the Registrant and Manor Care.*
10.11 Form of Office Lease Agreement, dated as of ________, 1997, between the Registrant
and Manor Care.*
10.12 Form of Trademark Agreement, dated as of ________, 1997, between the Registrant
and Manor Care.*
10.13 Form of Cash Management Agreement, dated as of ________, 1997, between the Regis-
trant and Manor Care.*
10.14 Form of Risk Management Consulting Services Agreement, dated as of ________, 1997,
between the Registrant and Manor Care.*
</TABLE>
- ----------------------------
* To be filed by amendment.
4
<PAGE>
<TABLE>
<S> <C>
10.15 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Compen-
sation Plan.*
10.16 Form of New ManorCare Health Services, Inc. Long-term Incentive Plan.*
10.17 Form of New ManorCare Health Services, Inc. Supplemental Executive Retirement
Plan.*
10.18 Form of New ManorCare Health Services, Inc. Non-Employee Director and Deferred
Compensation Stock Purchase Plan.*
10.19 Form of Employment Agreement, dated as of _______, 1997, between Stewart Bainum, Jr.
and the Registrant.*
21.1 Subsidiaries of the Registrant.*
27.01 Financial Data Schedule.
99.01 Schedule II - Valuation and Qualifying Accounts.
</TABLE>
- ----------------------
* To be filed by amendment.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 14,486
<SECURITIES> 0
<RECEIVABLES> 95,327
<ALLOWANCES> 6,179
<INVENTORY> 26,451
<CURRENT-ASSETS> 146,425
<PP&E> 253,731
<DEPRECIATION> 31,953
<TOTAL-ASSETS> 787,377
<CURRENT-LIABILITIES> 70,495
<BONDS> 180,843
0
0
<COMMON> 0
<OTHER-SE> 277,066
<TOTAL-LIABILITY-AND-EQUITY> 787,377
<SALES> 0
<TOTAL-REVENUES> 471,152
<CGS> 0
<TOTAL-COSTS> 408,863
<OTHER-EXPENSES> 20,135
<LOSS-PROVISION> 4,899
<INTEREST-EXPENSE> 17,317
<INCOME-PRETAX> 60,105
<INCOME-TAX> 23,917
<INCOME-CONTINUING> 36,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,188
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.01
-------------
NEW MANORCARE HEALTH SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Profit End
Description of Period and Loss Other Write-off of Period
- --------------------------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997
Allowance for doubtful
accounts $3,141 $4,899 $0 ($1,861) $6,179
Year ended May 31, 1996
Allowance for doubtful
accounts $1,379 $2,414 $1,030* ($1,682) $3,141
Year ended May 31, 1995
Allowance for doubtful
accounts $1,181 $1,864 $0 ($1,666) $1,379
</TABLE>
* Represents reserves of acquired companies.
