<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1998
REGISTRATION NO. 1-13367
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A-2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
NEW MANORCARE HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2053999
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
11555 DARNESTOWN ROAD 20878
GAITHERSBURG, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(301) 979-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES TO BE REGISTERED
PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
</TABLE>
SECURITIES TO BE REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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<PAGE>
NEW MANORCARE HEALTH SERVICES, INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM LOCATIONS IN INFORMATION STATEMENT
- ---- ----------------------------------
<TABLE>
<S> <C>
Item 1. Business.............. Summary; Introduction; The Distribution; Risk
Factors; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Consolidated Financial Statements
Item 2. Financial Summary; Risk Factors; Pro Forma Capitalization;
Information........... Pro Forma Financial Data; Selected Historical
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Consolidated Financial Statement
Item 3. Properties............ Business
Item 4. Security Ownership of
Certain Beneficial Security Ownership of Certain Beneficial Owners;
Owners and Beneficial Ownership of Management
Management............
Item 5. Directors and Management; Liability and Indemnification of
Executive Officers.... Directors and Officers
Item 6. Executive Management; Security Ownership of Certain
Compensation.......... Beneficial Owners
Item 7. Certain Relationships
and Related Summary; The Distribution; Relationship Between
Transactions.......... Manor Care Realty and ManorCare Health Services
after the Distribution; Certain Relationships
and Transactions
Item 8. Legal Proceedings..... Business
Item 9. Market Price of and
Dividends on the
Registrant's Common Summary; The Distribution; Risk Factors;
Equity and Related Security Ownership of Certain Beneficial Owners;
Stockholder Matters... Beneficial Ownership of Management; Description
of Capital Stock
Item 10. Recent Sales of
Unregistered
Securities........... None
Item 11. Description of
Registrant's Risk Factors; Description of Capital Stock;
Securities to be Purposes and Effects of Certain Provisions of
Registered........... The Charter and Bylaw Provisions
Item 12. Indemnification of
Directors and Liability and Indemnification of Officers and
Officers............. Directors
Item 13. Financial Statements
and Supplementary Summary; Management's Discussion and Analysis of
Data................. Financial Condition and Results of Operations;
Consolidated Financial Statements
Item 14. Changes in and
Disagreements With
Accountants on
Accounting and
Financial
Disclosure........... None
</TABLE>
1
<PAGE>
Item 15.Financial Statements and Exhibits
(a) Financial Statements--See Index to Consolidated Financial Statements
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
2.1 Form of Distribution Agreement, dated as of , 1998, between Manor Care, Inc.
("Manor Care") and the Registrant.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended Bylaws of the Registrant.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP re: Tax Matters.*
10.1 Form of Tax Sharing Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1998, between Manor Care and
the Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1998, between Manor Care
Realty and the Registrant.*
10.4 Credit Agreement, dated as of , 1998, among the Registrant, Manor Care, The
Chase Manhattan Bank and Chase Securities Inc.*
10.5 Commitment Letter, dated , 1998, among the Registrant, Manor Care, The Chase
Manhattan Bank and Chase Securities, Inc.*
10.6 Form of Assisted Living Facility Management Agreement, dated as of , 1998,
between the Registrant and Manor Care.*
10.7 Form of Master Development Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.8 Form of Lease Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.9 Form of Non-Competition Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.10 Form of Employee Benefits and Other Employment Matters Allocation Agreement, dated
as of , 1998, between the Registrant and Manor Care.*
10.11 Form of Employee Benefits Administration Agreement, dated as of , 1998, between
the Registrant and Manor Care Realty.*
10.12 Form of Office Sublease Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.13 Form of Trademark Agreement, dated as of , 1998, between the Registrant and
Manor Care.*
10.14 Form of Cash Management Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.15 Form of Risk Management Consulting Services Agreement, dated as of , 1998,
between the Registrant and Manor Care Realty.*
10.16 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Compensation
Plan.*
10.17 Form of New ManorCare Health Services, Inc. Long-term Incentive Plan.*
10.18 Form of New ManorCare Health Services, Inc. Supplemental Executive Retirement Plan.*
10.19 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.*
10.20 Form of Employment Agreement, dated as of , 1998, between Stewart Bainum, Jr.
and the Registrant.*
10.21 Form of Employment Agreement, dated as of , 1998, between Scott J. Van Hove and
the Registrant.*
10.22 Form of License Agreement, dated , 1998, between Manor Care Realty and the
Registrant.*
10.23 Form of % Senior Note due 2008 of Manor Care Realty (Real Estate Note).*
10.24 Form of Vehicle Lease Agreement, dated , 1998, between Manor Care and the
Registrant.*
10.25 Form of Design Services Agreement, dated , 1998, between Manor Care and the Reg-
istrant.*
21.1 Subsidiaries of the Registrant.*
23.01 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1).*
27.01 Financial Data Schedule.
99.01 Schedule II--Valuation and Qualifying Accounts.
</TABLE>
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* To be filed by amendment.
2
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED.
New ManorCare Health Services, Inc.
/s/ James H. Rempe
By: _________________________________
Name:James H. Rempe
Title: Senior Vice President,
General Counsel and
Secretary
Date: February 18, 1998
3
<PAGE>
[MANOR CARE, INC. LETTERHEAD]
, 1998
Dear Stockholder:
I am pleased to inform you that the Board of Directors of Manor Care, Inc.
has approved the separation of Manor Care into two public companies. This
separation will be achieved through a distribution to stockholders of all
outstanding shares of a new company named New ManorCare Health Services, Inc.
(to be renamed ManorCare Health Services, Inc.) ("ManorCare Health Services"),
which is being formed to own and operate Manor Care's assisted living business
and to operate and manage Manor Care's skilled nursing facilities. ManorCare
Health Services will also own Manor Care's investments in the institutional
pharmacy and home health businesses.
Holders of record of Manor Care common stock on , 1998 will receive one
share of ManorCare Health Services for every share then held of Manor Care
common stock.
ManorCare Health Services will provide a full continuum of senior support
health care services through its ownership and operation of Manor Care's
assisted living facilities, its leasing and operation of 168 skilled nursing
facilities owned by Manor Care, its ownership of Manor Care's 50% joint
venture interests in and management of three additional skilled nursing
facilities, and its controlling interests in Vitalink Pharmacy Services, Inc.
(NYSE: VTK), which owns and operates institutional pharmacies, and In Home
Health, Inc. (NASDAQ: IHHI), which provides comprehensive health care services
to clients in their homes.
Manor Care, which will be renamed Manor Care Realty, Inc. ("Manor Care
Realty"), will own 168 skilled nursing facilities and will be a leading health
care real estate company focused on the ownership, construction, development
and acquisition of health care properties, including skilled nursing and
assisted living facilities. In addition, Manor Care will continue to own
Mesquite Community Hospital.
The Board of Directors believes that the separation will significantly
improve each company's ability to raise equity capital on a cost-effective
basis to fund its expansion plans. The Board of Directors believes that
providing our shareholders the opportunity to have an investment in the growth
profiles of both these businesses, each with a distinct strategy for being a
major participant in the senior support health care industry, will offer them
significant and sustainable value.
MANORCARE HEALTH SERVICES
At the time of the distribution, Manor Care Realty will capitalize ManorCare
Health Services with approximately $250 million in cash and an intercompany
note in an aggregate principal amount of up to $250 million. This will provide
ManorCare Health Services with the financial foundation and flexibility it
needs to build itself into a leading participant in the assisted living
industry.
Over the next five years, ManorCare Health Services plans to acquire
approximately 200 new assisted living facilities to be newly developed by
Manor Care Realty. These and other potential acquisitions form the core of
ManorCare Health Services' strategy to become the nation's foremost provider
of high-quality senior support health care services within the private pay
segment.
Approximately 170 of the newly developed facilities will be Arden Courts,
which provide assistance to individuals suffering from early to middle-stages
of Alzheimer's disease or related memory impairment; approximately 38 new
facilities will be Springhouse senior residence facilities, serving the
general assisted living population.
<PAGE>
MANOR CARE REALTY
Over the past three years, Manor Care has established itself as a leader in
the high-growth, high-margin private pay segment of the assisted living
industry. The assisted living industry is currently experiencing unprecedented
market demand. Driven by America's aging population, increasing life
expectancies and health care industry trends toward greater diversity of
senior support care offerings and services, demand for assisted living
services is expected to continue to grow significantly over the next thirty
years.
Over the next five years, Manor Care Realty will focus on the site
selection, development and construction of approximately 200 assisted living
facilities for sale to ManorCare Health Services under a Development Agreement
between the two companies. If at any time during the two-year period following
the time a particular facility opens occupancy reaches 75% for a period of
five days, ManorCare Health Services will be obligated to purchase the
facility at a 12-37% premium to total approved development costs of Manor Care
Realty, based on the number of months elapsed since the opening of the
facility. In addition to the income from these sales, Manor Care Realty will
also benefit from Lease Agreements, pursuant to which ManorCare Health
Services will lease Manor Care Realty's skilled nursing facilities.
The transaction also contemplates debt and equity financing by Manor Care
Realty sufficient to provide ManorCare Health Services with funding, financial
strength and flexibility necessary to execute its accelerated property
acquisition program.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding
ManorCare Health Services. We urge you to read it carefully. Holders of Manor
Care common stock are not required to take any action to participate in the
distribution. A stockholder vote is not required in connection with this
matter and accordingly, your proxy is not being sought.
We continue to be very excited about the growth prospects for the senior
support health care industry. We believe that as contemplated this transaction
maximizes the ability of both ManorCare Health Services and Manor Care Realty
to capitalize on the opportunities this growth represents for the betterment
of our shareholders.
Sincerely,
Stewart Bainum, Jr.
Chairman of the Board and
Chief Executive Officer
2
<PAGE>
[NEW MANORCARE HEALTH SERVICES, INC. LETTERHEAD]
, 1998
Dear Stockholder:
The enclosed Information Statement includes detailed information about New
ManorCare Health Services, Inc., (to be renamed ManorCare Health Services,
Inc.) the new company of which you will become a stockholder if you own shares
of Manor Care common stock on , 1998.
ManorCare Health Services is striving to become the foremost provider of
high-quality senior support health care services in the nation by providing a
full range of services covering an integrated continuum of care in
geographically clustered facilities. ManorCare Health Services will primarily
be engaged in the ownership, operation and management of assisted living
facilities through Arden Courts, which provide assistance to individuals
suffering from early to middle-stages Alzheimer's disease and related memory
impairment, and Springhouse facilities, which are focused on serving the needs
of the general assisted living population. In addition, ManorCare Health
Services will lease and operate Manor Care's 168 skilled nursing facilities,
and will own a 50% joint venture interest in and manage three additional
skilled nursing facilities currently owned by Manor Care. ManorCare Health
Services also will provide institutional pharmacy services through its
controlling interest in Vitalink Pharmacy Services, Inc. and home health care
services through its controlling interest in In Home Health, Inc.
We are extremely excited about the growth prospects for the senior support
health care industry and our ability to develop a national reputation as the
leading provider of high quality senior support health care services.
We welcome you as a stockholder and look forward to your participation in
our future.
Sincerely,
Donald C. Tomasso
President
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN FILED +
+WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS INFORMATION STATEMENT SHALL +
+NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THESE +
+SECURITIES. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY AND SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1998
INFORMATION STATEMENT
NEW MANORCARE HEALTH SERVICES, INC.
(TO BE RENAMED MANORCARE HEALTH SERVICES, INC.)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Manor Care, Inc. ("Manor Care") to holders
of record of Manor Care common stock at the close of business on , 1998 (the
"Record Date") of one share of common stock, par value $.01 per share (the
"Common Stock"), of New ManorCare Health Services, Inc. (the "Company" or
"ManorCare Health Services"), for every share of Manor Care common stock owned
on the Record Date. The Distribution will result in 100% of the outstanding
shares of Common Stock of ManorCare Health Services being distributed to
holders of Manor Care common stock on a pro rata basis. The Distribution will
be effective on , 1998 (the "Effective Date"). Certificates representing
the shares of Common Stock will be mailed to Manor Care stockholders who so
request as soon as practicable after such request is received.
ManorCare Health Services is a newly formed company which, as a result of the
transactions entered into in connection with the Distribution, will (i) own the
businesses and assets of, and, subject to certain exceptions, be responsible
for the liabilities associated with, Manor Care's assisted living business,
(ii) operate the 168 skilled nursing facilities owned by Manor Care, and
(iii) own a 50% joint venture interest in and manage three additional skilled
nursing facilities. In addition, ManorCare Health Services owns approximately
51% of Vitalink Pharmacy Services, Inc. ("Vitalink"), a public company that
operates institutional pharmacies, and owns 41% of the outstanding common stock
and 100% of the outstanding convertible voting preferred stock (which, in the
aggregate, constitutes 64% of the voting power) of In Home Health, Inc. ("In
Home Health"), a public company that provides comprehensive health care
services to clients in their homes.
No consideration will be paid by Manor Care's stockholders for the shares of
Common Stock. There is no current public trading market for the shares of
Common Stock, although it is expected that a "when-issued" trading market will
develop on or about the Record Date. Application has been made to list the
shares of Common Stock on the New York Stock Exchange under the symbol "MRH."
In reviewing this Information Statement, you should carefully consider the
matters described under the caption "RISK FACTORS."
-----------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE NOT REQUESTED TO TAKE ANY ACTION
WITH RESPECT TO YOUR SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Information Statement is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.................................................................. 1
SUMMARY HISTORICAL FINANCIAL DATA OF MANOR CARE AND PRO FORMA FINANCIAL
DATA OF MANORCARE HEALTH SERVICES....................................... 8
INTRODUCTION............................................................. 10
THE DISTRIBUTION......................................................... 15
Reasons for the Distribution........................................... 15
Manner of Effecting the Distribution................................... 15
Solvency Opinion....................................................... 16
Federal Income Tax Consequences of the Distribution.................... 16
Listing and Trading of the Shares of Common Stock...................... 17
Future Management of ManorCare Health Services......................... 18
RISK FACTORS............................................................. 19
Forward-Looking Information............................................ 19
Operating History and Future Prospects................................. 19
Dependence by ManorCare Health Services on Related Party Agreements.... 20
Dependence on Manor Care Realty........................................ 21
Conflicts with Manor Care Realty....................................... 21
Fraudulent Transfer Considerations; Legal Dividend Requirements........ 22
Competition............................................................ 23
Regulation............................................................. 23
Staffing and Labor Costs............................................... 26
Dependence on Attracting Seniors with Sufficient Resources to Pay...... 26
Payment by Third-Party Payors.......................................... 26
Environmental Matters.................................................. 27
Absence of Prior Trading Market for the Common Stock................... 27
Significant Bainum Family Interest..................................... 28
Certain Tax Considerations............................................. 28
Common Stock Dividend Policy........................................... 28
The Year 2000 Issue.................................................... 28
RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES
AFTER THE DISTRIBUTION.................................................. 29
Lease Agreements Relating to Skilled Nursing Facilities................ 29
Development Agreement Relating to Assisted Living Facilities........... 32
Assisted Living Facility Management Agreement.......................... 33
Non-Competition Agreement.............................................. 34
Employee Benefits and Other Employment Matters Allocation Agreement ... 37
Employee Benefits Administration Agreement............................. 38
Office Sublease Agreement.............................................. 38
Distribution Agreement................................................. 39
Tax Sharing Agreement.................................................. 42
Tax Administration Agreement........................................... 42
Corporate Services Agreement........................................... 43
Trademark Agreement.................................................... 43
License Agreement...................................................... 43
Design Services Agreement.............................................. 43
Cash Management Agreement.............................................. 43
Risk Management Consulting Services Agreement.......................... 44
The Real Estate Note................................................... 44
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FINANCING................................................................ 46
The Capital Contribution............................................... 46
Concurrent Manor Care Real Estate Financings........................... 46
The MCHS Credit Facility............................................... 46
New MCHS Senior Notes.................................................. 47
PRO FORMA CAPITALIZATION................................................. 49
PRO FORMA FINANCIAL DATA................................................. 50
SELECTED HISTORICAL FINANCIAL DATA....................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION..................................................... 59
Introduction........................................................... 59
Overview And Outlook................................................... 60
Results of Operations.................................................. 60
Liquidity and Capital Resources........................................ 65
Acquisitions, Openings, Divestitures and Sales of Property............. 65
Shareholders' Equity................................................... 66
Forward-Looking and Cautionary Statements.............................. 67
Impact of New Accounting Standards..................................... 67
BUSINESS................................................................. 68
Overview............................................................... 69
Industry Trends........................................................ 69
Business Strategy...................................................... 70
Skilled Nursing Services............................................... 72
Assisted Living Services............................................... 73
Institutional Pharmacy Services........................................ 75
Home Health Care Services.............................................. 76
Employees.............................................................. 76
Properties............................................................. 77
Competition............................................................ 81
Government Funding..................................................... 82
Government Regulation.................................................. 84
Insurance.............................................................. 87
Legal Proceedings...................................................... 88
MANAGEMENT............................................................... 89
Executive Officers of ManorCare Health Services........................ 89
Compensation of Executive Officers..................................... 90
Retirement Plans....................................................... 93
Option and Stock Purchase Plans........................................ 94
Employment Agreements.................................................. 95
THE BOARD OF DIRECTORS................................................... 96
Directors of ManorCare Health Services................................. 96
Committees of the Board of Directors................................... 97
Non-Employee Director Plan............................................. 98
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANORCARE HEALTH SERV-
ICES.................................................................... 100
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BENEFICIAL OWNERSHIP OF MANAGEMENT OF MANORCARE HEALTH SERVICES............ 102
DESCRIPTION OF CAPITAL STOCK OF MANORCARE HEALTH SERVICES.................. 104
Common Stock............................................................. 104
Preferred Stock.......................................................... 104
Preemptive Rights........................................................ 104
PURPOSES AND EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS.............. 105
General.................................................................. 105
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS.................... 106
Elimination of Liability in Certain Circumstances........................ 106
Indemnification and Insurance............................................ 106
INDEPENDENT ACCOUNTANTS.................................................... 106
ADDITIONAL INFORMATION..................................................... 106
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
OVERVIEW
ManorCare Health Services believes that it is a leading provider of a full
range of senior support health care services. ManorCare Health Services
provides an array of services that includes skilled nursing, assisted living,
institutional pharmacy and home health care and additional support services for
the frail elderly living at home. ManorCare Health Services is striving to
become the nation's foremost provider of high-quality senior support health
care services within the private pay segment. In order to achieve this goal,
ManorCare Health Services is planning to focus on the rapid acquisition of
assisted living facilities in cluster markets pursuant to the Development
Agreement with Manor Care Realty. Under the Development Agreement, ManorCare
Health Services intends to acquire from Manor Care Realty approximately 170
Arden Courts and 38 Springhouse senior residences to be newly developed by
Manor Care Realty during the next five years. See "RELATIONSHIP BETWEEN MANOR
CARE REALTY AND MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--Development
Agreement." Its strategy for achieving this objective entails aggressive
implementation of the following key initiatives:
. grow through acquisition of proprietary assisted living facilities
developed by Manor Care Realty
. expand on current market leadership position in the private pay segment
. extend leadership position as provider of the most innovative Alzheimer's
services in the industry
. maintain focus on high-quality personalized care and services
. market distinctive products nationally under the ManorCare Health
Services brand name
. build on existing senior support services platform
. focus on development of cluster markets
ManorCare Health Services leases and operates 168 skilled nursing facilities
owned by Manor Care Realty and owns joint venture interests in, and manages
three additional skilled nursing facilities. ManorCare Health Services' skilled
nursing facilities are located in 28 states and contain approximately 24,089
beds. These facilities provide skilled nursing services principally for
residents over the age of 65. Within its skilled nursing facilities, ManorCare
Health Services operates 146 Arcadia special-care units which provide care to
individuals in the middle to late stages of Alzheimer's disease and 21
MedBridge high acuity units which focus on short-term, post-hospital care for
medically complex residents and those in need of aggressive physical
rehabilitation. ManorCare Health Services owns and operates 37 assisted living
facilities in 12 states containing 3,854 units. These facilities include 16
Arden Courts, serving persons with early to middle-stage Alzheimer's disease or
related memory impairment, and 21 Springhouse senior residences, serving the
general assisted living population. ManorCare Health Services also has majority
control of Vitalink Pharmacy Services, Inc, ("Vitalink"), one of the largest
public institutional pharmacy companies, and In Home Health Inc. ("In Home
Health"), a national home health care services company. Vitalink operates 57
institutional pharmacies in 36 states, serving approximately 173,000 beds. In
Home Health provides home health services in 14 states.
ManorCare Health Services' principal offices are located at 11555 Darnestown
Road, Gaithersburg, Maryland, 20878, and its telephone number is (301) 979-
4000.
1
<PAGE>
THE DISTRIBUTION
DISTRIBUTING COMPANY............ Manor Care, Inc., a Delaware corporation.
DISTRIBUTED COMPANY.............
New ManorCare Health Services, Inc., a Dela-
ware corporation (to be renamed ManorCare
Health Services, Inc.), a newly formed com-
pany which will on the Effective Date (i) own
all of the business and assets of, and, sub-
ject to certain exceptions, be responsible
for the liabilities associated with, the as-
sisted living business conducted by Manor
Care and certain of its subsidiaries (the
"Assisted Living Business"), (ii) operate the
168 skilled nursing facilities owned by Manor
Care (the "Skilled Nursing Facilities"),
(iii) own a 50% joint venture interest in and
manage three additional skilled nursing fa-
cilities, (iv) own approximately 51% of
Vitalink, a public company that operates in-
stitutional pharmacies, and (v) own approxi-
mately 64% of the voting power of In Home
Health, a public company that provides health
care services to clients in their homes.
After giving pro forma effect to the Distri-
bution and related transactions as if they
occurred on November 30, 1997, (and assuming
the holders of 100% of the Old Senior Notes
(as defined below) accept the Exchange Offer
(as defined below)), ManorCare Health Serv-
ices would have assumed approximately (i)
$195.1 million of Manor Care's indebtedness,
(ii) liabilities relating to benefits and
workers' compensation of approximately $56.0
million, (iii) current liabilities of the
skilled nursing facilities of approximately
$46.6 million, and (iv) deferred tax liabili-
ties of approximately $40.7 million. In addi-
tion, pursuant to the Distribution Agreement,
ManorCare Health Services will assume certain
contingent liabilities of Manor Care. See
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND
MANORCARE HEALTH SERVICES AFTER THE DISTRIBU-
TION - Distribution Agreement."
On the Effective Date, ManorCare Health Serv-
ices will enter into the Development Agree-
ment with Manor Care Realty pursuant to which
ManorCare Health Services intends to acquire
from Manor Care Realty approximately 170
newly developed Arden Courts and 38 newly de-
veloped Springhouse senior residences during
the next five years. See "RELATIONSHIP BE-
TWEEN MANOR CARE REALTY AND MANORCARE HEALTH
SERVICES AFTER THE DISTRIBUTION--Development
Agreement."
PRIMARY PURPOSES OF THE The Board of Directors and management of
DISTRIBUTION................... Manor Care believe that the separation into
two public companies of Manor Care's health
care services business and the operation of
its
2
<PAGE>
health care real estate development activi-
ties, including site and market selection for
the development of skilled nursing and as-
sisted living facilities and construction re-
lated activities, by means of the Distribu-
tion will provide Manor Care with better ac-
cess to the equity capital markets and im-
prove Manor Care's capital-raising efficiency
since investors will be better able to assess
the different risk profiles and operating
characteristics of both companies. Manor Care
believes that it will be able to raise needed
equity capital on a more cost-effective basis
than would be available under Manor Care's
current structure. Manor Care Realty plans to
raise approximately $100 to $150 million in
equity in 1998. Raising a significant amount
of equity capital will provide Manor Care
with the necessary flexibility in its capital
structure to enable it to fund its expansion
plans on a timely and cost-effective basis
and pursue any material acquisitions which
Manor Care believes would enhance its compet-
itive position. There can be no assurances
that Manor Care Realty will be able to con-
summate an equity offering on terms accept-
able to it. The Board of Directors and man-
agement of Manor Care also believe that the
Distribution will enable each company to fo-
cus its managerial resources on the develop-
ment 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 ManorCare
Health Services for every share of Manor Care
common stock held on the Record Date.
TAX CONSEQUENCES................ Manor Care has received a private letter rul-
ing (the "Ruling") from the Internal Revenue
Service ("IRS") which provides, among other
things, that the Distribution will qualify as
a tax-free transaction under Section 355 of
the Internal Revenue Code of 1986, as amended
(the "Code") and that neither the stockhold-
ers of Manor Care nor Manor Care will recog-
nize any income, gain or loss as a result of
the Distribution. Nevertheless, if Manor Care
engages in the Distribution and the Distribu-
tion is held to be taxable, both Manor Care
Realty and stockholders of Manor Care could
recognize income or gain and thus become lia-
ble for the payment of a material amount of
income tax. See "THE DISTRIBUTION--Federal
Income Tax Consequences of the Distribution"
and "RISK FACTORS--Certain Tax Considera-
tions."
SHARES TO BE DISTRIBUTED........
Approximately shares of Common Stock will
be distributed pursuant to the Distribution
based on approximately shares of Manor
Care common stock outstanding on ,
1998. The shares to be distributed will con-
stitute 100% of the outstanding shares of
Common Stock of ManorCare Health Services.
3
<PAGE>
LISTING AND TRADING MARKET...... Application has been made to list the shares
of Common Stock on the New York Stock Ex-
change, Inc. ("NYSE") under the symbol "MRH."
RECORD DATE..................... Close of business on , 1998.
EFFECTIVE DATE.................. , 1998.
MAILING DATE.................... Certificates representing the shares of Com-
mon Stock will be mailed to Manor Care stock-
holders who so request as soon as practicable
after such request is received.
DISTRIBUTION AGENT.............. ChaseMellon Shareholder Services, L.L.C., the
transfer agent for Manor Care.
DIVIDEND POLICY.................
It is currently contemplated that following
the Distribution, ManorCare Health Services
will pay quarterly cash dividends on the
shares of Common Stock of $0.022 per share.
Adjusted for stock splits, Manor Care has
paid a quarterly dividend of $0.022 per share
since 1987. The payment of dividends on the
Common Stock will be subject to the discre-
tion of the Board of Directors of ManorCare
Health Services and will depend upon, among
other things, ManorCare Health Services' fi-
nancial condition, capital requirements,
funds from operations, future business pros-
pects and such other factors as the Board may
deem relevant. See "RISK 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
ManorCare Health Services as a result of the
agreements being entered into between Manor
Care and ManorCare Health Services in connec-
tion 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.
Pursuant to the Lease Agreements, Manor Care
Realty will lease to ManorCare Health Serv-
ices all the Skilled Nursing Facilities owned
by Manor Care Realty and Manor Care Realty
will grant to ManorCare Health Services the
right to operate the Skilled Nursing Facili-
ties. The Lease Agreements provide that Manor
Care Realty will receive annual lease pay-
ments equal to the greater of 10% of the
value of each facility (as agreed to by Manor
Care Realty and ManorCare Health Services) or
77% of the Net Operating Profit (as defined
herein) of each facility. See "RELATIONSHIP
BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION--Lease
Agreements Relating to Skilled Nursing Facil-
ities."
4
<PAGE>
Pursuant to the Development Agreement, Manor
Care Realty will develop assisted living fa-
cilities for sale to ManorCare Health Servic-
es. If at any time during the two-year period
following the time a particular facility
opens occupancy reaches 75% for a period of
five days, ManorCare Health Services will be
obligated to purchase the facility at a 12-
37% premium to total approved development
costs of Manor Care Realty, based on the num-
ber of months elapsed since the opening of
the facility. Total approved development
costs include expenses incurred in connection
with the development and construction of the
facilities, but do not include operating
losses incurred during the two-year stabili-
zation period. The premium to total approved
development costs is intended to compensate
Manor Care Realty for the increasing value of
its investment over time as well as for the
risks it takes in connection with developing
assisted living facilities, including the
risks inherent in operating the facilities
during the two year stabilization period.
Prior to purchase by ManorCare Health Servic-
es, ManorCare Health Services will manage the
assisted living facilities for Manor Care Re-
alty for a fixed monthly fee pursuant to the
terms of the Assisted Living Facility Manage-
ment Agreement. See "RELATIONSHIP BETWEEN
MANOR CARE REALTY AND MANORCARE HEALTH SERV-
ICES AFTER THE DISTRIBUTION."
ManorCare Health Services and Manor Care Re-
alty will share two common directors. In ad-
dition, 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 Com-
mon Stock of Manor Care Realty and ManorCare
Health Services. The relationship between
Manor Care Realty and ManorCare Health Serv-
ices may be subject to certain potential con-
flicts of interest. See "RISK FACTORS--Con-
flicts with Manor Care Realty" and "RISK FAC-
TORS--Significant Bainum Family Interest."
RISK FACTORS.................... Stockholders should carefully consider the
matters discussed under the section entitled
"RISK FACTORS" in this Information Statement.
CONCURRENT FINANCINGS...........
At or prior to the Distribution, Manor Care
will make or cause to be made a capital
contribution (the "Capital Contribution") to
ManorCare Health Services consisting of
approximately $250 million in cash and an
intercompany senior note of Manor Care Real
Estate in an aggregate principal amount of up
to $250 million (the "Real Estate Note").
Manor Care will utilize part of the proceeds
from the sale of the Manor Care Real Estate
Notes (as defined below) and borrowings under
the Credit Facilities (as defined below) to
fund the cash
5
<PAGE>
portion of the Capital Contribution. Manor
Care may determine to reduce the principal
amount of the Real Estate Note prior to
issuance or to reduce the amount of the cash
portion of the Capital Contribution to the
extent that Old Senior Notes remain
outstanding upon consummation of the Exchange
Offer.
In connection with the Distribution,
ManorCare Health Services, Inc., Manor Care's
principal operating subsidiary, will change
its name to Manor Care Real Estate Corp.
("Manor Care Real Estate"). Manor Care Real
Estate is offering $350 million aggregate
principal amount of % Senior Notes due 2008
(the "Manor Care Real Estate Notes"). The
Manor Care Real Estate Notes will be fully
and unconditionally guaranteed by Manor Care
Realty and substantially all of Manor Care
Realty's present and future subsidiaries,
other than certain unrestricted subsidiaries.
See "FINANCING--Concurrent Manor Care Real
Estate Financings."
In addition, Manor Care, on behalf of Manor
Care Real Estate, is negotiating a commitment
letter with The Chase Manhattan Bank
("Chase") and Chase Securities Inc. ("CSI")
relating to an eight-year $150 million term
loan facility, subject to earlier maturity
under certain circumstances, and a five-year
$300 million revolving credit facility
(collectively, the "Credit Facilities"). See
"FINANCING--Concurrent Manor Care Real Estate
Financings."
The Real Estate Note will contain
substantially the same terms as the Manor
Care Real Estate Notes. Manor Care Real
Estate may redeem the Real Estate Note after
three years at a redemption price equal to
100% of the principal amount thereof plus
accrued and unpaid interest. In addition,
ManorCare Health Services has agreed not to
transfer the Real Estate Note on or prior to
the six-month anniversary of the date of
issuance thereof. After such date, ManorCare
Health Services may transfer the Real Estate
Note without restriction subject to Manor
Care Real Estate's right to redeem the Real
Estate Note. On or after the third
anniversary of the issuance of the Real
Estate Note, ManorCare Health Services may
request that Manor Care Real Estate redeem
the Real Estate Note. For a description of
the Real Estate Note, see "RELATIONSHIP
BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION--The
Real Estate Note." Also see "RISK FACTORS--
Dependence on Manor Care Realty" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--Liquidity and Capital Resources."
6
<PAGE>
In addition, ManorCare Health Services is
negotiating a commitment letter with Chase
and CSI relating to a five-year $100 million
revolving credit facility. ManorCare Health
Services anticipates using borrowings under
the revolving credit facility for general
corporate purposes, including funding its
working capital requirements. See
"FINANCING-- MCHS Credit Facility."
THE EXCHANGE OFFER..............
ManorCare Health Services plans to offer to
exchange $1,000 principal amount of its 7
1/2% Senior Notes due 2006 (the "New MCHS Se-
nior Notes") for each $1,000 principal amount
of 7 1/2% Senior Notes due 2006 of Manor Care
(the "Old Senior Notes") properly tendered
(the "Exchange Offer"). As of , 1998,
there were $150,000,000 aggregate principal
amount of Old Senior Notes outstanding. In
addition, consents to certain amendments of
the covenants governing the Old Senior Notes
will be sought in connection with the Ex-
change Offer. Consummation of the Exchange
Offer is conditioned upon, among other
things, acceptance of the Exchange Offer by
holders of at least a majority in principal
amount of the Old Senior Notes (the "Minimum
Tender Condition") and consummation of the
Distribution. As a result of the Exchange Of-
fer, ManorCare Health Services, not Manor
Care Realty, will be the obligor on the New
MCHS Senior Notes; and Manor Care Realty, not
ManorCare Health Services, will remain the
obligor on the Old Senior Notes. See "FINANC-
ING--New MCHS Senior Notes."
CONDITIONS TO THE
DISTRIBUTION.................... The Distribution is conditioned upon, among
other things, (i) the receipt of all
necessary regulatory approvals and consents
of third parties; (ii) the execution of the
agreements relating to the financing
necessary to consummate the Distribution and
the related transactions and the receipt of
the requisite funds pursuant to such
financing agreements; (iii) the consummation
of the Exchange Offer, which will occur
concurrently with the Distribution; (iv) the
consummation of the Credit Facilities and the
offering of the Manor Care Real Estate Notes;
and (v) the receipt by the Board of Directors
of Manor Care of an opinion of a reputable
appraisal or financial advisory firm, in a
form satisfactory to the Board of Directors,
with respect to the solvency, prior to the
Distribution, of Manor Care and, after the
Distribution, of each of Manor Care Realty
and ManorCare Health Services (the "Solvency
Opinion"). The Board of Directors has
reserved the right to waive the receipt of
the Solvency Opinion as a condition to the
consummation of the Distribution, only in the
event that the Board of Directors is
satisfied as to the solvency of Manor Care,
Manor Care Realty and ManorCare Health
Services and as to the permissibility of the
Distribution under Section 170 of the
Delaware General Corporation Law. Manor Care
has retained American Appraisal Associates,
Inc. to render the Solvency Opinion. See "THE
DISTRIBUTION--Solvency Opinion."
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF MANOR CARE AND PRO FORMA FINANCIAL DATA OF
MANORCARE HEALTH SERVICES
The following table sets forth a summary of selected historical financial
data of Manor Care and pro forma financial data for ManorCare Health Services.
Due to the fact that the majority of the current Manor Care operations will be
transferred to ManorCare Health Services in connection with the Distribution,
the Distribution will be reported for accounting purposes as a "reverse spin-
off." Accordingly, Manor Care, Inc., will continue to present consolidated
results (with no discontinued operations treatment) up to the date of the
Distribution. After the Distribution, ManorCare Health Services will present
Manor Care, Inc.'s historical consolidated results for periods prior to the
Distribution. The historical financial data are not necessarily indicative of
the results of operations or financial position that would have been obtained
if ManorCare Health Services had been a separate, independent company during
the periods shown nor necessarily indicative of ManorCare Health Services'
future performance as an independent company. See "RISK FACTORS---Operating
History and Future Prospects." The historical statements of income data for the
fiscal years ended May 31, 1995, 1996 and 1997 and the historical balance sheet
data as of May 31, 1996 and 1997 are derived from the audited financial
statements of Manor Care. The historical statements of income data for the six
month periods ended November 30, 1996 and 1997 and the historical balance sheet
data as of November 30, 1997 are derived from the unaudited consolidated
financial statements of Manor Care. The historical financial data set forth
below should be read in conjunction with Manor Care's Consolidated Financial
Statements and the notes thereto found elsewhere in this Information Statement.
The consolidated balance sheet as of November 30, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the six
months ended November 30, 1997 and 1996, have been prepared by Manor Care,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows at November 30, 1997 and for all
periods presented have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with Manor
Care's audited consolidated financial statements and notes thereto found
elsewhere in this Information Statement. The results of operations and cash
flows for the six month periods ended November 30, 1997 and 1996 are not
necessarily indicative of the operating results or cash flows for the full
year.
The summary pro forma financial data for the fiscal year ended May 31, 1997
and the six month period ended November 30, 1997 make adjustments to the
historical balance sheet and the historical statements of income, as if the
Distribution had occurred on November 30, 1997 for purposes of the pro forma
balance sheet, and on June 1, 1996 and June 1, 1997, respectively for purposes
of the pro forma statements of income. See "PRO FORMA FINANCIAL DATA OF
MANORCARE HEALTH SERVICES" and the accompanying footnotes for a discussion of
the principal adjustments made in the preparation of the pro forma financial
information. The pro forma financial statements of ManorCare Health Services
may not reflect the future results of operations or financial position of
ManorCare Health Services or what the results of operations would have been if
ManorCare Health Services had been a separate, independent company during such
period. The pro forma adjustments reflect the impact of the Distribution, Lease
Agreements, Assisted Living Facility Management Agreements, net additional
costs associated with general corporate functions, TeamCare (as defined herein)
operations from June 1, 1996 to January 31, 1997 (the portion of the fiscal
year prior to the TeamCare merger (as defined herein)), and the related income
tax effects of these adjustments. See "PRO FORMA FINANCIAL DATA OF MANORCARE
HEALTH SERVICES."
8
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
---------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
---------- ---------- ---------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $1,019,458 $1,248,197 $1,527,247 $1,681,966 $ 688,064 $ 885,623 $ 860,286
Expenses:
Operating expenses..... 769,998 963,081 1,202,836 1,494,809 541,482 723,244 781,267
Depreciation and
amortization.......... 54,374 68,086 80,378 27,797 36,877 47,818 14,600
General corporate and
other................. 63,197 72,322 68,563 70,592 31,873 28,208 32,134
Provision for asset
impairment and
restructuring......... -- 26,300 -- 6,950 -- -- 6,950
---------- ---------- ---------- ---------- --------- --------- ---------
Total expenses......... 887,569 1,129,789 1,351,777 1,600,148 610,232 799,270 834,951
---------- ---------- ---------- ---------- --------- --------- ---------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 131,889 118,408 175,470 81,818 77,832 86,353 25,335
Other income and
(expenses):
Interest income from
advances to
discontinued lodging
segment............... 15,492 19,673 21,221 -- 10,157 4,994 --
Gain on issuance of
Vitalink stock........ -- -- 50,271 50,271 -- -- --
Interest expense....... (22,769) (30,338) (41,831) (25,113) (19,168) (22,073) (10,941)
Interest income and
other................. 5,219 3,728 4,682 15,590 4,879 11,984 18,897
---------- ---------- ---------- ---------- --------- --------- ---------
Income from continuing
operations before
income taxes........... 129,831 111,471 209,813 122,566 73,700 81,258 33,291
Income taxes............ 52,156 46,000 84,700 52,856 29,400 35,692 16,721
---------- ---------- ---------- ---------- --------- --------- ---------
Income from continuing
operations............. $ 77,675 $ 65,471 $ 125,113 $ 69,710 $ 44,300 $ 45,566 $ 16,570
========== ========== ========== ========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF NOVEMBER 30,
--------------------- ---------------------
PRO FORMA
1996 1997 1997 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $1,681,840 $1,979,704 $1,995,264 $1,420,861
Long-term debt...................... 490,575 596,473 559,063 295,707
Shareholders' equity................ 707,769 690,431 729,023 695,298
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
------------------------------------------ ---------------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
--------- --------- --------- --------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided by
continuing operating
activities............. $ 120,760 $ 199,307 $ 80,151 N/A $ 28,925 $ 51,367 N/A
Cash (used in) provided
by continuing investing
activities............. (191,713) (259,118) (209,235) N/A (90,060) 12,726 N/A
Cash provided by (used
in) continuing
financing activities... 80,037 122,644 87,604 N/A 38,337 (43,943) N/A
Investment in property
and equipment and
systems development.... 91,900 136,332 183,469 N/A 83,713 110,720 N/A
</TABLE>
9
<PAGE>
INFORMATION STATEMENT
FOR THE
STOCKHOLDERS OF MANOR CARE, INC.
----------------
INTRODUCTION
On , 1998, the Board of Directors of Manor Care, Inc., a Delaware
corporation ("Manor Care"), declared a distribution (the "Distribution")
payable to the holders of record of Manor Care's common stock, par value $.10
per share, at the close of business on , 1998 (the "Record Date"), of
one share of common stock, par value $.01 per share (the "Common Stock"), of
New ManorCare Health Services, Inc., a Delaware corporation, for every share
of Manor Care common stock outstanding on the Record Date. The Distribution
will occur on , 1998 (the "Effective Date"). As a result of the
Distribution, 100% of the outstanding shares of the Common Stock of ManorCare
Health Services will be distributed to Manor Care stockholders on a pro rata
basis. Certificates representing the shares of Common Stock will be mailed to
Manor Care stockholders on or about , 1998.
New ManorCare Health Services, Inc. is currently a wholly owned subsidiary
of Manor Care. New ManorCare Health Services, Inc. was formed for the purposes
of effecting the Distribution. ManorCare Health Services, Inc. is currently
Manor Care's principal operating subsidiary, engaged in the ownership,
operation and management of assisted living facilities and skilled nursing
facilities. Following consummation of the Distribution, Manor Care will change
its name to Manor Care Realty, Inc. ("Manor Care Realty"), ManorCare Health
Services, Inc. will change its name to Manor Care Real Estate Corp. ("Manor
Care Real Estate") and New ManorCare Health Services, Inc. will change its
name to ManorCare Health Services, Inc. ("ManorCare Health Services").
THE DISTRIBUTION
The principal transactions related to the Distribution are:
. The Contribution of Assets and the Assumption of Liabilities. Manor Care
will effect the Contribution of Assets (as defined below) and Manor Care
will assign to ManorCare Health Services and ManorCare Health Services
will assume certain liabilities.
. The Financing Transactions.
. Manor Care Real Estate will enter into the Credit Facilities (as
defined below). The closing of the Credit Facilities will be
conditioned on the simultaneous consummation of the Distribution.
ManorCare Health Services will close on its five-year $100 million
revolving credit facility which closing will be conditioned on the
simultaneous consummation of the Distribution. See "--The Manor Care
Real Estate Credit Facilities."
. Manor Care Real Estate is offering (the "Debt Offering") $350
million aggregate principal of % Senior Notes due 2008 (the "Manor
Care Real Estate Notes"). See "--The Manor Care Real Estate Debt
Offering."
. The Exchange Offer. ManorCare Health Services will consummate the
Exchange Offer. The Distribution is conditioned on the consummation of
the Exchange Offer. See "--The Exchange Offer."
. The Capital Contribution. Manor Care Realty will use the proceeds of the
Debt Offering together with borrowings under the Credit Facilities to
make the cash portion of the Capital Contribution and will cause Manor
Care Real Estate to issue the intercompany note (the "Real Estate Note")
to New ManorCare Health Services.
. Related Party Agreements. Concurrently with the Distribution, Manor Care
Realty and New ManorCare Health Services will execute the related party
agreements. See "--Related Party Agreements."
10
<PAGE>
. The Distribution. Manor Care Realty will distribute to its stockholders
the stock of New ManorCare Health Services. The Distribution is
conditioned on the consummation of the Exchange Offer, the closing of
the Debt Offering and the consummation of the Credit Facilities.
It is anticipated that all of the above transactions will close
simultaneously.
Pursuant to the Distribution Agreement (the "Distribution Agreement") to be
entered into between Manor Care Realty and ManorCare Health Services, on or
prior to the Effective Date, Manor Care will convey or cause to be conveyed to
ManorCare Health Services, among other things, (i) all of the business and
assets of Manor Care's assisted living business (the "Assisted Living
Business"); (ii) the shares of Common Stock owned by Manor Care of Vitalink
Pharmacy Services, Inc., a public company that owns and operates institutional
pharmacies ("Vitalink"); (iii) the shares of Common and Preferred Stock owned
by Manor Care of In Home Health, Inc., a public company that provides
comprehensive health care services to clients in their homes ("In Home
Health"); and (iv) the 50% partnership interests (the "Joint Venture
Interests") owned by Manor Care in partnerships owning three additional
skilled nursing facilities (collectively, the "Contribution of Assets").
Manor Care will assign to ManorCare Health Services and ManorCare Health
Services will assume certain liabilities, including, subject to certain
exceptions, all liabilities arising from (i) the operation of the Assisted
Living Business or the ownership or use of assets or other activities in
connection therewith arising after the Effective Date, (ii) the operation of
Manor Care's 168 skilled nursing facilities (the "Skilled Nursing Facilities")
after the Effective Date, and (iii) the ownership of stock in Vitalink and In
Home Health and the ownership of the Joint Venture Interests, in each case
whether arising before, on or after the Distribution (collectively, the
"Assumption of Liabilities"). However, the assumption of such liabilities will
not release Manor Care Realty therefrom if ManorCare Health Services should
fail, for any reason, to perform its obligations pursuant to such assumed
liabilities. After giving pro forma effect to the Distribution and related
transactions as if they occurred on November 30, 1997, (and assuming the
holders of 100% of the Old Senior Notes accept the Exchange Offer), ManorCare
Health Services would have assumed approximately (i) $195.1 million of Manor
Care's indebtedness, consisting of $149.5 million of the New MCHS Senior Notes
and $45.6 million of facility-specific mortgages, (ii) liabilities relating to
benefits and workers' compensation of approximately $56.0 million, (iii)
current liabilities of the Skilled Nursing Facilities of approximately $46.6
million and (iv) deferred tax liabilities of approximately $40.7 million. In
addition, pursuant to the Distribution Agreement, ManorCare Health Services
will assume certain contingent liabilities of Manor Care. See "RELATIONSHIP
BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER THE
DISTRIBUTION--Distribution Agreement."
At or prior to the Distribution, Manor Care will make or cause to be made a
capital contribution (the "Capital Contribution") to ManorCare Health Services
consisting of (i) approximately $250 million in cash and (ii) an intercompany
senior note of Manor Care Real Estate in an aggregate principal amount of up
to $250 million (the "Real Estate Note"). For a description of the Real Estate
Note, see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH
SERVICES AFTER THE DISTRIBUTION--The Real Estate Note." Also see "RISK
FACTORS--Dependence on Manor Care Realty" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--Liquidity and
Capital Resources." Manor Care may determine to reduce the principal amount of
the Real Estate Note prior to issuance or to reduce the amount of the cash
portion of the Capital Contribution to the extent that Old Senior Notes remain
outstanding upon consummation of the Exchange Offer (as herein defined). See
"--The Exchange Offer."
Following the Contribution of Assets, the Assumption of Liabilities and the
Capital Contribution, Manor Care will distribute to the holders of record of
Manor Care's common stock, par value $.10 per share (the "Manor Care Common
Stock"), one share of the common stock, par value $.01 per share, of ManorCare
Health Services for every share of Manor Care Common Stock.
11
<PAGE>
As a result of the Distribution, Manor Care will have separated into two
independent publicly traded companies: Manor Care Realty and ManorCare Health
Services. Manor Care Realty will (i) be a health care real estate company
focused on the ownership, construction, development and acquisition of health
care properties, including skilled nursing and assisted living facilities and
(ii) own Mesquite Community Hospital in Mesquite Texas. ManorCare Health
Services will (i) own and operate all of the business assets of, and subject
to certain exceptions, be responsible for the liabilities associated with,
Manor Care's assisted living business, (ii) operate the Skilled Nursing
Facilities, (iii) own the Joint Venture Interests and (iv) own all of Manor
Care's stock in Vitalink and In Home Health. Following the Distribution, Manor
Care Realty's principal sources of revenue will be payments from ManorCare
Health Services under the Lease Agreements, the proceeds of the sale of
assisted living facilities to ManorCare Health Services under the Development
Agreement, and revenues derived from the operation of Mesquite Hospital.
Following the Distribution, ManorCare Health Services' principal sources of
revenue will be derived from the operation of the skilled nursing facilities
and the assisted living facilities, and revenues from Vitalink and In Home
Health.
The Distribution is conditioned upon, among other things, (i) the receipt of
all necessary regulatory approvals and consents of third parties; (ii) the
execution of the agreements relating to the financing necessary to consummate
the Distribution and the related transactions and the receipt of the requisite
funds pursuant to such financing agreements; (iii) the consummation of the
Exchange Offer which will occur concurrently with the Distribution; (iv) the
consummation of the Credit Facilities and the offering of the Manor Care Real
Estate Notes; and (v) the receipt by the Board of Directors of Manor Care of
the Solvency Opinion.
THE MANOR CARE REAL ESTATE DEBT OFFERING
In connection with the Distribution, Manor Care Real Estate is offering $350
million aggregate principal amount of the Manor Care Real Estate Notes. The
Manor Care Real Estate Notes will be fully and unconditionally guaranteed by
Manor Care Realty and substantially all of Manor Care Real Estate's present
and future subsidiaries, other than certain unrestricted subsidiaries. The
Manor Care Real Estate Notes will rank senior to subordinated indebtedness of
Manor Care Real Estate and pari passu with all other indebtedness of Manor
Care Real Estate, including borrowings under the Credit Facilities (as herein
defined) and the Real Estate Note. Manor Care will utilize part of the
proceeds from the sale of the Manor Care Real Estate Notes together with
borrowings under the Credit Facilities to fund the cash portion of the Capital
Contribution.
THE MANOR CARE REAL ESTATE CREDIT FACILITIES
Manor Care, on behalf of Manor Care Real Estate, is negotiating a commitment
letter with The Chase Manhattan Bank ("Chase") and Chase Securities Inc.
("CSI") relating to an eight-year $150 million term loan facility, subject to
earlier maturity under certain circumstances, and a five-year $300 million
revolving credit facility (collectively, the "Credit Facilities"). It is
anticipated that the Credit Facilities will be secured by a majority of the
assets of Manor Care Realty and Manor Care Real Estate, by a pledge of the
capital stock of Manor Care Real Estate and Manor Care Realty's other
subsidiaries and by an assignment of certain agreements with ManorCare Health
Services. In addition, the Credit Facilities will be fully and unconditionally
guaranteed by Manor Care Realty and substantially all of Manor Care Realty's
present and future subsidiaries. Manor Care anticipates that the Credit
Facilities will be available, subject to the terms and conditions thereof, for
general corporate purposes and working capital purposes, including funding
development and operating costs and acquisitions. Borrowings under the Credit
Facilities will also be used together with part of the proceeds from the sale
of the Manor Care Real Estate Notes to fund the cash portion of the Capital
Contribution. In the event that the commitment letter is executed, Chase will
commit to purchase a portion of such facilities and CSI will use its best
efforts to arrange the balance of such facilities with other lenders.
THE EXCHANGE OFFER
In connection with the Distribution, New ManorCare Health Services, Inc. is
offering to exchange (the "Exchange Offer") $1,000 principal amount of its 7
1/2% Senior Notes due 2006 (the "New MCHS Senior Notes"') for each $1,000
principal amount of 7 1/2% Senior Notes due 2006 of Manor Care (the "Old
Senior Notes"). In connection with the Exchange Offer, Manor Care is
soliciting consents to certain amendments of the covenants governing the Old
Senior Notes. Consummation of the Exchange Offer is conditioned upon, among
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other things, acceptance of the Exchange Offer by holders of at least a
majority in principal amount of the Old Senior Notes and consummation of the
Distribution. As a result of the Exchange Offer, ManorCare Health Services,
not Manor Care Realty, will be the obligor on the New Senior Notes. Manor Care
may determine to reduce the principal amount of the Real Estate Note prior to
issuance to the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
THE MCHS CREDIT FACILITY
ManorCare Health Services is negotiating a commitment letter with Chase and
CSI relating to a five-year $100 million revolving credit facility (the "MCHS
Credit Facility"). ManorCare Health Services anticipates using the Capital
Contribution and borrowings under the revolving credit facility for general
corporate purposes, including capital expenditures in connection with the
expansion of the Assisted Living Business. In the event that the commitment
letter is executed, Chase will commit to purchase a portion of such facility
and CSI will use its best efforts to arrange the balance of such facility with
other lenders. See "FINANCING--The MCHS Credit Facility" for a description of
the MCHS Credit Facility.
RELATED PARTY AGREEMENTS
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements
being entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Sublease Agreement, the Corporate
Services Agreement, the Trademark Agreement, the License Agreement, the Design
Services Agreement, the Cash Management Agreement, and the Risk Management
Consulting Services Agreement. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND
MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION."
Pursuant to the Lease Agreements, Manor Care Realty will lease to ManorCare
Health Services the 168 Skilled Nursing Facilities owned by Manor Care Realty
and Manor Care Realty will grant to ManorCare Health Services the right to
operate the Skilled Nursing Facilities. The Lease Agreements provide that
Manor Care Realty will receive annual lease payments equal to the greater of
10% of the value of each facility (as agreed to by Manor Care Realty and
ManorCare Health Services) or 77% of the Net Operating Profit (as defined
herein) of each facility. Pursuant to the Development Agreement, Manor Care
Realty will develop assisted living facilities for sale to ManorCare Health
Services. If at any time during the two-year period following the time a
particular facility opens occupancy reaches 75% for a period of 5 days,
ManorCare Health Services will be obligated to purchase the facility at a 12-
37% premium to total approved development costs of Manor Care Realty, based on
the number of months elapsed since the opening of the facility. If ManorCare
Health Services does not acquire a facility within the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two year stabilization period. Prior to purchase by ManorCare Health
Services, ManorCare Health Services will manage the assisted living facilities
for Manor Care Realty for a fixed monthly fee pursuant to the terms of the
Assisted Living Facility Management Agreement. The Non-Competition Agreement
will impose certain non-competition restrictions on each of ManorCare Health
Services and Manor Care Realty in connection with each entity's ability to
participate in the skilled nursing business and the assisted living business.
See "RISK FACTORS" and "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION" for a more detailed description of the
relationship between ManorCare Health Services and Manor Care Realty after the
Distribution and of the terms of the Lease Agreements, the Development
Agreement and the other agreements referred to above.
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Set forth below is a chart which illustrates the corporate structure of Manor
Care prior to the Distribution and the corporate structure of Manor Care Realty
and ManorCare Health Services after giving effect to the Distribution and
related transactions:
[CHART]
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 ManorCare Health Services with inquiries relating to the
Distribution or their investment in ManorCare Health Services should contact
the Investor Relations Department of ManorCare Health Services, 11555
Darnestown Road, Gaithersburg, Maryland, 20878. ManorCare Health Services'
telephone number is (301) 979-4000.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
Manor Care reviews the performance of its business, operations and
investments on a regular basis in order to maximize the long-term value of
Manor Care for all its stockholders. As a result of this analysis, Manor Care
has determined to separate its Assisted Living Business and investments in
Vitalink and In Home Health as well as its management of the Skilled Nursing
Facilities from the operation of its health care real estate development
activities, including site and market selection for the development of its
facilities and construction related activities.
The Distribution is designed primarily to separate two entities with
distinct operating characteristics, creating two independent public companies:
ManorCare Health Services, an assisted living and health care services
management company; and Manor Care Realty, a skilled nursing and health care
real estate development company. The Board of Directors and management of
Manor Care believe this separation will better enable the financial community
to assess the different investment profiles, operating characteristics and
credit fundamentals of each resulting entity, thus providing each of ManorCare
Health Services and Manor Care Realty with greater financial flexibility to
implement its unique business strategies through enhanced and more cost-
effective access to public sources of equity capital.
Specifically, the Distribution is intended to provide ManorCare Health
Services with the financial strength and flexibility to execute its strategy
of acquiring 170 Arden Courts and 38 Springhouse senior residences during the
next five years. ManorCare Health Services believes this acquisition plan,
which is an integral part of its effort to become the nation's foremost
provider of high-quality senior support health care services within the
private pay segment, is necessary to consolidate its leadership position and
capitalize on opportunities for continued business growth and margin
expansion. Pursuant to the Development Agreement, these facilities will be
developed by Manor Care Realty, which, by virtue of the Distribution, will be
able to focus its management expertise and financial resources primarily on
developing purpose-built real estate products that meet the unique needs of
the senior population.
The Board of Directors and management of Manor Care also believe that the
Distribution will enable each company to focus its managerial resources on the
development of its business. Finally, the Distribution will allow investors to
better evaluate the fundamentals of Manor Care Realty's and ManorCare Health
Services' respective businesses and future outlooks, which ManorCare Health
Services believes will enhance overall stockholder value.
For the reasons stated above, the Manor Care Board of Directors believes
that the Distribution is in the best interests of Manor Care and its
stockholders.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in a Distribution Agreement, dated as of , 1998 (the "Distribution
Agreement"), between Manor Care and ManorCare Health Services. Pursuant to the
Distribution Agreement, on or prior to the Effective Date, Manor Care will
effect or cause to be effected the Contribution of Assets and the Assumption
of Liabilities. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION--Distribution Agreement."
In addition, on or prior to the Effective Date, Manor Care will make or
cause to be made the Capital Contribution. See "FINANCING." Following the
Contribution of Assets, Assumption of Liabilities and Capital Contribution,
Manor Care will effect the Distribution on the Effective Date by providing for
the delivery of the shares of Common Stock to the Distribution Agent for
distribution to the holders of record of Manor Care common stock on the Record
Date. The Distribution will be made on the basis of one share of Common Stock
for every share of Manor Care common stock outstanding on the Record Date. The
actual total number of shares of Common Stock to be distributed will depend on
the number of shares of Manor Care common stock
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outstanding on the Record Date. Based upon the number of shares of Manor Care
common stock outstanding on , 1998, approximately shares of Common
Stock will be distributed to Manor Care stockholders. The shares of Common
Stock will be fully paid and nonassessable, and the holders thereof will not
be entitled to preemptive rights. Certificates representing the shares of
Common Stock will be mailed to Manor Care stockholders who so request as soon
as practicable after such request is received. See "DESCRIPTION OF CAPITAL
STOCK OF MANORCARE HEALTH SERVICES."
No holder of Manor Care common stock will be required to pay any cash or
other consideration for the shares of Common Stock received in the
Distribution or to surrender or exchange shares of Manor Care common stock in
order to receive shares of Common Stock. The Distribution will not affect the
number of outstanding shares of Manor Care Realty common stock.
SOLVENCY OPINION
The Distribution is conditioned upon, among other things, the receipt by the
Board of Directors of Manor Care of an opinion of a reputable appraisal or
financial advisory firm, in a form satisfactory to the Board of Directors, to
the effect that, assuming the Distribution and the transactions related
thereto are consummated as proposed: (i) with respect to each of Manor Care
Realty and ManorCare Health Services, immediately after giving effect to the
Distribution (a) the fair value of such company's aggregate assets would
exceed such company's total liabilities (including contingent liabilities);
(b) the present fair saleable value of such company's aggregate assets would
be greater than such company's probable liabilities on its debts as such debts
become absolute and mature; (c) such company would be able to pay its debts
and other liabilities (including contingent liabilities and other commitments)
as they mature; and (d) the capital remaining in such company after the
Distribution would not be unreasonably small for the business in which such
company is engaged, as management has indicated it is now conducted and is
proposed to be conducted following consummation of the Distribution; and (ii)
with respect to Manor Care, before consummation of the Distribution and the
transactions related thereto (a) the fair value of Manor Care's aggregate
assets would exceed its total liabilities (including contingent liabilities);
(b) the present fair saleable value of Manor Care's aggregate assets would be
greater than its probable liabilities on its debts as such debts become
absolute and mature; and (c) the excess of the value of the aggregate assets
of Manor Care, over the total identified liabilities (including contingent
liabilities) of Manor Care would equal or exceed the value of the Distribution
to stockholders plus the stated capital of ManorCare Health Services (the
"Solvency Opinion"). The Board of Directors has reserved the right to waive
the receipt of the Solvency Opinion as a condition to consummation of the
Distribution. The Board of Directors may not provide stockholders with notice
if receipt of the Solvency Opinion is waived as a condition to consummation of
the Distribution; however, the Board of Directors will waive such condition
only if the Board of Directors is satisfied as to the solvency of Manor Care,
Manor Care Realty and ManorCare Health Services and as to the permissibility
of the Distribution under Section 170 of the Delaware General Corporation Law
("DGCL").
ManorCare Health Services has engaged American Appraisal Associates, Inc. to
provide such an opinion and has agreed to pay American Appraisal Associates,
Inc. a fee of $20,000 upon execution of the commitment letter relating to the
opinion, an additional fee of $40,000 plus expenses upon delivery of a draft
opinion and another $10,000 plus expenses upon delivery of the final opinion.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Manor Care has received a private letter ruling (the "Ruling") from the IRS
which provides, among other things, that the Distribution will qualify as a
tax-free transaction under Section 355 of the Internal Revenue Code of 1986,
as amended (the "Code") and that neither the stockholders of Manor Care nor
Manor Care will recognize any income, gain or loss as a result of the
Distribution. The Ruling is based upon various factual representations that
were made to the IRS. If Manor Care engages in the Distribution and the
Distribution is held to be taxable, both Manor Care Realty and stockholders of
Manor Care could recognize income or gain and thus become liable for the
payment of a material amount of income tax. See "RISK FACTORS--Certain Tax
Considerations."
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The following is a summary of the material Federal income tax consequences
of the Distribution assuming that it qualifies as a tax-free transaction under
Section 355 of the Code:
(1) Pursuant to Section 355 of the Code, Manor Care stockholders will not
recognize any income, gain or loss upon the receipt of the shares of Common
Stock.
(2) A Manor Care stockholder's tax basis for the Manor Care common stock
with respect to which shares of Common Stock are received will be
apportioned between such shares of Manor Care common stock and such shares
of Common Stock in proportion to the fair market values of each on the date
the shares of Common Stock are distributed to the Manor Care stockholder.
Such allocation must be calculated separately for each block of Manor Care
shares (shares purchased at the same time and at the same cost) with
respect to which the shares of Common Stock are received. The holding
period for the shares of Common Stock received in the Distribution will
include the period during which such Manor Care shares were held (provided
that such Manor Care shares are held as a capital asset at the time of the
Distribution).
(3) Neither Manor Care nor ManorCare Health Services will recognize any
income, gain or loss as a result of the Distribution.
Treasury regulations governing Section 355 of the Code require that each
Manor Care stockholder who receives shares of Common Stock pursuant to the
Distribution attach a statement to the Federal income tax return that will be
filed by the stockholder for the taxable year in which such stockholder
receives the shares in the Distribution, which statement shows the
applicability of Section 355 of the Code to the Distribution. Manor Care will
provide each Manor Care stockholder with information necessary to comply with
this requirement.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO STOCKHOLDERS WHO
RECEIVED THEIR SHARES THROUGH THE EXERCISE OF AN OPTION OR OTHERWISE AS
COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES OR WHO
ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE. ALL STOCKHOLDERS
SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL
AND FOREIGN TAX LAWS.
LISTING AND TRADING OF THE SHARES OF COMMON STOCK
Application has been made to list the shares of Common Stock on the New York
Stock Exchange, Inc. ("NYSE") under the symbol "MRH." ManorCare Health
Services expects that initially it will have approximately holders of
record of the shares of Common Stock, based on the number of stockholders of
record of Manor Care on , 1998.
A "when-issued" trading market is expected to develop on or about the Record
Date. The term "when-issued" means that shares can be traded prior to the time
certificates are actually available or issued. Prices at which the shares of
Common Stock may trade on a "when-issued" basis or after the Distribution
cannot be predicted. See "RISK FACTORS--Absence of Prior Trading Market for
the Common Stock."
The shares of Common Stock distributed to Manor Care stockholders will be
freely transferable, except for shares received by persons who may be deemed
to be "affiliates" of ManorCare Health Services under the Securities Act of
1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of ManorCare Health Services after the Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with, ManorCare Health Services and may include the directors
and principal executive officers of ManorCare Health Services as well as any
principal stockholder of ManorCare Health Services. Persons who are affiliates
of ManorCare Health Services will be permitted to sell their shares of Common
Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act, including an exemption contained in Rule 144 thereunder.
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FUTURE MANAGEMENT OF MANORCARE HEALTH SERVICES
Following the Distribution, the business and operations of ManorCare Health
Services will continue to be operated substantially in the manner in which
they have been operated in the past and with substantially the same operating
management as at present. The seven principal executive officers of ManorCare
Health Services have an average of more than 15 years of industry experience.
Effective upon consummation of the Distribution, Mr. Stewart Bainum, Jr. will
resign as Chief Executive Officer of Manor Care. Mr. Bainum, Jr. will act as
Chairman of the Board of both ManorCare Health Services and Manor Care Realty.
See "MANAGEMENT--Executive Officers of ManorCare Health Services."
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RISK FACTORS
This Information Statement contains certain forward-looking statements
regarding ManorCare Health Services' future plans, operations and prospects,
which involve risks and uncertainties. ManorCare Health Services' actual
results could differ materially from the results anticipated in these forward-
looking statements as a result of certain of the factors set forth under "Risk
Factors" and elsewhere in this Information Statement.
FORWARD-LOOKING INFORMATION
This Information Statement contains various forward-looking statements and
information that are based on management's belief as well as assumptions made
by and information currently available to management. When used in this
document, the words "anticipate," "estimate," "project," "intends," "expect"
and similar expressions are intended to identify forward-looking statements.
Although ManorCare Health Services believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated, projected or expected. Among the key factors that may have a direct
bearing on ManorCare Health Services' operating results is ManorCare Health
Services' ability to implement its plan to acquire from Manor Care Realty
approximately 170 Arden Courts and 38 Springhouse senior residences over the
next five years. In addition, actual future results and trends may differ
materially depending on a variety of factors discussed in this "Risk Factors"
section and elsewhere in this 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
ManorCare Health Services was formed for the purpose of effecting the
Distribution. ManorCare Health Services does not have an operating history as
an independent public company, but will own and conduct the operations of the
Assisted Living Business previously owned and conducted by Manor Care, and
operate and manage the Skilled Nursing Facilities previously operated and
managed by Manor Care and own the stock of Vitalink and In Home Health
previously owned by Manor Care. On a historical basis, for the three fiscal
years ended May 31, 1997, ManorCare Health Services' businesses were
profitable. There can be no assurance, however, that ManorCare Health
Services' operations will be profitable in 1998 or future years. See "SELECTED
HISTORICAL FINANCIAL DATA" and "COMBINED FINANCIAL STATEMENTS."
ManorCare Health Services' future success will depend on a number of
factors, including (i) the level of demand for ManorCare Health Services'
assisted living facilities and the Skilled Nursing Facilities, (ii) the
success of ManorCare Health Services' planned expansion of its Assisted Living
Business, (iii) ManorCare Health Services' ability to manage and operate the
Skilled Nursing Facilities, (iv) the substantial competition encountered by
ManorCare Health Services, see "--Competition" and "BUSINESS--Competition,"
(v) the presence of existing governmental regulation and the potential for
health care reform which might be adverse to ManorCare Health Services, see
"--Regulation," and "BUSINESS--Government Regulation," (vi) ManorCare Health
Services' transition to an independent, public company and the costs
associated therewith and (vii) the future success of Vitalink and In Home
Health.
The success of ManorCare Health Services' acquisition and expansion strategy
depends, in significant part, upon the anticipated development of assisted
living facilities by Manor Care Realty and in turn upon Manor Care Realty's
ability to obtain necessary financing, locate desirable sites, acquire
property, obtain local regulatory approvals and construct the facilities on
schedule and on budget. At or prior to the Distribution, Manor Care will
utilize part of the proceeds from the sale of the Manor Care Real Estate Notes
and borrowings under the Credit Facilities to make or cause to be made the
cash portion of the Capital Contribution. ManorCare Health Services'
acquisition and expansion strategy also depends, in significant part, upon
receipt of the Capital Contribution and upon ManorCare Health Services'
entering into the MCHS Credit Facility.
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DEPENDENCE BY MANORCARE HEALTH SERVICES ON RELATED PARTY AGREEMENTS
In connection with the Distribution, Manor Care Realty will enter into
agreements with ManorCare Health Services, including the Development
Agreement, the Lease Agreements and the Assisted Living Management Agreements.
Pursuant to the Development Agreement, Manor Care Realty will develop assisted
living facilities for sale to ManorCare Health Services. If at any time during
the two-year period measured from the time a particular facility opens
occupancy reaches 75% for a period of five days, ManorCare Health Services
will be obligated to purchase the facility. Such purchases shall be at fixed
prices based upon a stated premium to approved construction costs as
determined under the Development Agreement. If ManorCare Health Services does
not acquire a facility within the two-year stabilization period, Manor Care
Realty will have the right to sell the facility to a third party. Total
approved development costs include expenses incurred in connection with the
development and construction of the facilities, but do not include operating
losses incurred during the two-year stabilization period. The premium to total
approved development costs is intended to compensate Manor Care Realty for the
increasing value of its investment over time as well as for the risks it takes
in connection with developing assisted living facilities, including the risks
inherent in operating the facilities during the two-year stabilization period.
Pursuant to the Assisted Living Facility Management Agreement, ManorCare
Health Services will manage assisted living facilities for Manor Care Realty
for a fixed monthly fee during the two-year stabilization period under the
Development Agreement. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND
MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--Development Agreement."
Accordingly, the risks related to construction and the initial operation of
the assisted living facilities developed by Manor Care Realty will be borne by
Manor Care Realty.
Pursuant to the Lease Agreements, Manor Care Realty will lease to ManorCare
Health Services all of its Skilled Nursing Facilities, and Manor Care Realty
will grant to ManorCare Health Services, pursuant to the Lease Agreements or
by separate agreement, the right to operate all of Manor Care Realty's current
and future skilled nursing facilities. ManorCare Health Services' revenues
will be dependent on the operations of the skilled nursing facilities under
the Lease Agreements and the Assisted Living Facility Management Agreement.
Manor Care Realty's development strategy will require substantial capital
resources. The inability of Manor Care Realty to secure all necessary
financing for the development and construction of the assisted living
facilities on acceptable terms and conditions could have a material adverse
effect on ManorCare Health Services. In addition, the potential exists for
disagreement in the future as to compliance with the terms of the contracts
between the parties. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION--Lease Agreements."
The financial terms of the Lease Agreements were structured by Manor Care's
management under the general direction of Manor Care's Board of Directors to
create a risk/reward sharing arrangement at each of the Skilled Nursing
Facilities pursuant to which each of the companies would be fairly and
reasonably compensated for the contributions it made and the risks it assumed.
Manor Care did not seek proposals from unaffiliated third parties. Such a
solicitation would not have been practical in view of the proposed
relationship and make-up of the two companies to be parties to the Lease
Agreements. However, after the terms of the Lease Agreements were finalized,
Manor Care's Board of Directors reviewed them in light of the objectives
listed above taking into account that alternative third party proposals were
not solicited. Similarly, the financial terms of the Development Agreement and
the Assisted Living Facility Management Agreements were structured to achieve
the following objectives: (i) Manor Care Realty should receive a fair return
on its capital invested in developing new assisted living facilities; (ii)
ManorCare Health Services should be required to purchase a facility
immediately upon its achievement of a profitable occupancy level; and (iii)
each party should receive returns based on the risks assumed by that party
pursuant to the terms of the Distribution Agreement and the Assisted Living
Facility Management Agreement. After the terms of the Development Agreement
and the Assisted Living Facility Management Agreements were finalized, Manor
Care's Board of Directors reviewed them in light of the objectives listed
above taking into account that Manor Care Realty would be functioning
substantially as ManorCare Health Services' developer of assisted living
facilities. Based on the Board of Directors' review, the Board concurred with
management's judgement that the transactions contemplated by the Distribution
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Agreement including the Distribution, the Capital Contribution, the execution,
delivery and performance of the Lease Agreements, the Development Agreement
and the Assisted Living Facility Management Agreements and the transactions
contemplated thereby, when considered as a whole are no less favorable to
either party than would be available to an unaffiliated third party.
DEPENDENCE ON MANOR CARE REALTY
ManorCare Health Services core strategy contemplates the acquisition from
Manor Care Realty of 170 new Arden Courts facilities and 38 new Springhouse
facilities over the next five years. Under the Development Agreement, Manor
Care Realty will locate, develop and build these facilities for sale to
ManorCare Health Services and, pending their purchase by ManorCare Health
Services, will own them for an occupancy stabilization period of up to two
years. The success of ManorCare Health Services' strategy will thus depend in
very significant part upon Manor Care Realty's capacity to locate desirable
sites, acquire property, obtain local regulatory approvals and construct the
facilities on schedule and on budget. The estimated cost to complete these
facilities is approximately $1.4 billion. Manor Care Realty's ability to
achieve its development goals will depend upon a variety of factors, many of
which are beyond Manor Care Realty's control, including Manor Care Realty's
ability to obtain necessary financing. As a result of the Distribution, Manor
Care Realty will be highly leveraged, with indebtedness that is substantial in
relation to its stockholders' equity. On a pro forma basis after giving effect
to the offering of the Manor Care Real Estate Notes and the use of proceeds
thereof, the Distribution and related borrowings and assuming that all holders
of the outstanding Old Senior Notes accept the Exchange Offer, on November 30,
1997, Manor Care Realty's aggregate outstanding indebtedness would have been
$776 million. This high degree of leverage may make it more difficult for
Manor Care Realty to secure short-term construction financing for these
facilities and will make Manor Care Realty more immediately vulnerable to
adverse changes in prevailing interest rates and in general business
conditions, as well as conditions in the real estate development industry. The
failure of Manor Care Realty to maintain substantial compliance with its
schedule for completing these new assisted living facilities or to build them
at a cost substantially as planned or to secure all necessary financing for
development and construction of the facilities on acceptable terms could have
a material adverse effect on ManorCare Health Services. In addition, Manor
Care Realty's high degree of leverage could adversely affect Manor Care
Realty's ability to pay principal and interest on or to redeem the Real Estate
Note and may adversely affect the ability of ManorCare Health Services to sell
the Real Estate Note. The failure of Manor Care Realty to pay principal and
interest on the Real Estate Note in a timely manner or the inability of
ManorCare Health Services to sell the Real Estate Note to a third party for
its principal amount could have a material adverse effect on ManorCare Health
Services . See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH
SERVICES AFTER THE DISTRIBUTION."
CONFLICTS WITH MANOR CARE REALTY
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing
relationships between the companies. Such sources of conflict include the fact
that after the Distribution, (i) ManorCare Health Services will lease 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 Real Estate Note, (v) ManorCare Health Services and Manor
Care Realty will enter into the Non-Competition Agreement that will limit the
competition between the companies and (vi) ManorCare Health Services may
manage assisted living facilities not developed by Manor Care Realty. See
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER
THE DISTRIBUTION." With respect to these matters, the potential exists for
disagreements as to the quality of the services provided by the parties and as
to contract
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compliance. However, Manor Care believes that each of Manor Care Realty and
ManorCare Health Services will benefit from a strategic relationship with the
other entity created by the Lease Agreements, the Development Agreement, the
Assisted Living Facility Management Agreement and the other related party
agreements. As a result of this relationship, each company's revenues are
dependent in part on the other company and thus Manor Care believes that Manor
Care Realty and ManorCare Health Services will have a mutual interest in
resolving any contract compliance disagreements. ManorCare Health Services
believes that there will be sufficient mutuality of interest between the two
companies to result in a mutually productive relationship. However, despite
the anticipated mutuality of interest, each of Manor Care Realty and ManorCare
Health Services will have unique shareholder groups whose interests may differ
from one another.
In addition, ManorCare Health Services and Manor Care Realty will have two
common directors, Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs.
Bainum, Jr. and Simmons, as well as certain other officers and directors of
ManorCare Health Services and Manor Care Realty will also own shares (and/or
options or other rights to acquire shares) in both companies following the
Distribution. Appropriate policies and procedures will be followed by the
board of directors of each company to limit the involvement of the overlapping
directors (and if appropriate, relevant officers of such companies) in
conflict situations, including requiring them to abstain from voting as
directors of either ManorCare Health Services or Manor Care Realty. Such
procedures will include requiring Messrs. Bainum, Jr. and Simmons (or such
other executive officers or directors having a significant ownership interest
in both companies) to abstain from voting as directors of either company, with
respect to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest situation exists
will be determined on a case-by-case basis depending on such factors as the
dollar value of the matter, the degree of personal interest of Messrs. Bainum,
Jr. and Simmons (or such other executive officers and directors having a
significant ownership interest in both companies) in the matter, the
respective interests of the shareholders of ManorCare Health Services or Manor
Care Realty and the likelihood that resolution of the matter will have
significant strategic, operational or financial implications for the business
of the respective companies.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that the Board of
Directors of Manor Care shall have received a satisfactory opinion regarding
the solvency of Manor Care and ManorCare Health Services and the
permissibility of the Contribution of Assets, the Assumption of Liabilities,
the Capital Contribution and the Distribution under the requirements of
Section 170 of the DGCL of Manor Care's net assets following the Distribution.
See "THE DISTRIBUTION--Solvency Opinion." The solvency opinion will address
certain factual matters relevant to an assessment of the legality of the
Distribution under Delaware law, but will not constitute a legal opinion and
will not be delivered by a firm qualified to practice law in Delaware. Manor
Care's Board of Directors does not intend to consummate the Distribution
unless it is satisfied regarding the solvency of Manor Care and ManorCare
Health Services and the permissibility of the Distribution under Section 170
of the DGCL. There is no certainty, however, that a court would reach the same
conclusion.
If a court in a lawsuit by an unpaid creditor or representatives of
creditors such as a trustee in bankruptcy were to find that, at the time Manor
Care effected the Distribution, Manor Care or ManorCare Health Services, as
the case may be, (i) (a) was insolvent, (b) was rendered insolvent by reason
of the Distribution, (c) was engaged in a business or transaction for which
its remaining assets, as the case may be, constituted unreasonably small
capital, or (d) intended to incur, or believed it would incur, debts beyond
its ability to pay as such debts matured and received less than fair
consideration or reasonably equivalent value or (ii) made this Distribution
with actual intent to hinder, delay or defraud existing or future creditors of
Manor Care, such court may be asked to void the Distribution (in whole or in
part) as a fraudulent conveyance and require that the stockholders return the
distribution (in whole or in part) to Manor Care, or require Manor Care or
ManorCare Health Services, as the case may be, to fund certain liabilities of
the other company for the benefit of creditors. The measure of insolvency for
purposes of the foregoing will vary depending upon the jurisdiction whose law
is being applied. Generally, however, Manor Care or ManorCare Health Services,
as the case may be, would be considered insolvent if the fair value of their
respective assets were less than the amount of their respective liabilities or
if they incurred debt beyond their ability to repay such debt as it matures.
In addition, under Section 170 of the
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DGCL (which is applicable to Manor Care in the Distribution) a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
Manor Care's Board of Directors and management believe that, in accordance
with the solvency opinion rendered in connection with the Distribution, both
prior to and immediately following the consummation of the Distribution, (i)
Manor Care, Manor Care Realty and ManorCare Health Services each (a) will be
solvent (in accordance with the foregoing definitions), (b) will be able to
repay its debts as they mature, and (c) will have sufficient capital to carry
on its businesses and (ii) the Distribution will be made entirely out of Manor
Care's surplus, as required under Section 170 of the DGCL. Manor Care's Board
of Directors and management further believe that neither Manor Care nor
ManorCare Health Services is entering into the Distribution with any actual
intent to hinder, delay or defraud existing or future creditors of Manor Care
Realty or ManorCare Health Services.
COMPETITION
ManorCare Health Services operates in a highly competitive environment and
competes with a variety of other companies in providing assisted living
services, skilled nursing services, institutional pharmacy services and home
health care services, as well as numerous other companies providing similar
service and care alternatives, such as congregate care facilities and
retirement communities. In particular, given the relatively low barriers to
entry and continuing health care cost containment pressures in the assisted
living industry, ManorCare Health Services expects that the assisted living
industry will become increasingly competitive in the future. Some of ManorCare
Health Services' present and potential competitors have, or may have access
to, greater financial resources than those of ManorCare Health Services and
may be more established in their respective communities than ManorCare Health
Services. Consequently, increased competition in the future could limit
ManorCare Health Services' ability to attract and retain residents, to
maintain or increase resident service fees or to expand its business. As a
result, any increased competition could have a material adverse effect on
ManorCare Health Services. See "BUSINESS--Competition."
REGULATION
General. Health care is an area of extensive and frequent regulatory change.
The Federal government and all states in which ManorCare Health Services
operates regulate various aspects of ManorCare Health Services' business.
Skilled nursing facilities and assisted living facilities and other health
care businesses, including institutional pharmacies and home health agencies,
are subject to annual licensure and other regulatory requirements. In
particular, the operation of nursing facilities 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. Skilled nursing
facilities 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 (to the extent they participate) and the ability to participate in
other third party programs. ManorCare Health Services is also subject to
inspection regarding record keeping and inventory control. Failure of the
skilled nursing facilities to be in substantial compliance with licensure and
certification laws, rules and regulations could result in loss of
certification as a Medicare and Medicaid provider and/or a loss of licensure.
ManorCare Health Services' assisted living facilities are subject to varying
degrees of regulation and licensing by local and state health and social
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. Failure of the assisted living
facilities to be in compliance with licensing requirements could result in
loss of licensure. In most states, assisted living facilities
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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 skilled nursing
facilities, the assisted living facilities or other components of ManorCare
Health Services' health care businesses may have a significant impact on
ManorCare Health Services' methods and costs of doing business.
Licensing. ManorCare Health Services' success will depend in part upon its
ability to satisfy applicable regulations and requirements and to procure and
maintain required licenses in rapidly changing regulatory environments. Any
failure to satisfy applicable regulations or to procure or maintain a required
license could have a material adverse effect on ManorCare Health Services. In
addition, certain regulatory developments, such as revisions in the building
code requirements for assisted living or skilled nursing facilities, mandatory
increases in the scope and quality of care to be offered to residents and
revisions in licensing and certification standards, could have a material
adverse effect on ManorCare Health Services. Furthermore, there have been
numerous initiatives on the Federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain of these health care initiatives, such as reductions in funding of the
Medicare and Medicaid programs, potential changes in reimbursement regulations
by the Health Care Financing Administration ("HCFA"), enhanced pressure to
contain health care costs by Medicare, Medicaid and other payors and
permitting greater state flexibility in the administration of Medicaid could
adversely affect the Skilled Nursing Facilities operated and managed by
ManorCare Health Services. See "BUSINESS--Government Regulation."
Medicare Payment System. On August 5, 1997, Congress enacted the Balanced
Budget Act of 1997 (the "Budget Act") which seeks to achieve a balanced
Federal budget by, among other things, reducing Federal spending on the
Medicare and Medicaid programs. The law contains numerous changes in Medicare
payments to skilled nursing facilities, home health agencies, and hospices.
The law 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 at a per diem rate 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. For
ManorCare Health Services, the phase-in to prospective rates will begin in
November 1998. A similar prospective payment system is required to be
established for home health services, beginning October 1, 1999. Prior to
implementation, the Budget Act established certain interim payment measures,
for cost reporting periods beginning after October 1, 1997, including reduced
home health limits, reducing per visit cost limits, and agency-specific per
beneficiary annual limits on an agency's costs. The law also reduces payments
to many providers and suppliers, including hospices. The Budget Act also gives
states greater flexibility in the administration of their Medicaid programs in
that the Budget Act repeals the requirement that payment be reasonable and
adequate to cover the costs of "efficiently and economically operated" skilled
nursing facilities. There can be no assurance that additional Federal, state
or local laws or regulations will not be imposed or expanded which would have
a material adverse effect on ManorCare Health Services. See "BUSINESS--
Government Regulation."
Anti-Remuneration Laws. ManorCare Health Services is also subject to Federal
and state laws which govern financial and other arrangements between health
care providers. These laws prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
Federal "Stark Legislation" which prohibits, with limited exceptions, the
referral of patients for certain designated health services, including home
health services, physical therapy and
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occupational therapy, by a physician to an entity in which the physician has a
financial ownership interest. The January 1998 notice of proposed rulemaking
to issue regulations implementing the Stark Legislation makes clear that the
restrictions apply to referrals for designated health services provided in
skilled nursing facilities. In addition, ManorCare Health Services is subject
to the Federal "anti-kickback law" which prohibits, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of patients, or the purchasing, leasing, ordering or
arranging for any goods, facility services or items for which payment can be
made under Medicare, Medicaid or other Federal health care programs. 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. In addition, in July 1995, Federal
officials announced a major anti-fraud initiative called Operation Restore
Trust. This program targets fraud involving nursing facilities, home health
agencies, suppliers of medical equipment and hospices and is currently
operating in 17 states. 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 and have seldom
been interpreted by the courts or regulatory agencies. There can be no
assurance that the Federal and State anti-remuneration laws will ultimately be
interpreted in a manner consistent with the practice of, and business
transactions undertaken by, ManorCare Health Services. Failure to comply with
such laws can result in civil money penalties, exclusion from the Medicare,
Medicaid and other Federal health care programs, and criminal convictions. See
"BUSINESS--Government Regulation."
Certificate of Need Laws. Many states have adopted Certificate of Need or
similar laws which generally require that the appropriate state agency approve
certain acquisitions and determine that a need exists for certain bed
additions, new services and capital expenditures or other changes prior to
beds and/or new services being added or capital expenditures being undertaken.
To the extent that Certificates of Need or other similar approvals are
required for the expansion of Company operations, either through facility
acquisitions or expansion or provision of new services or other changes, such
expansion could be adversely affected by the failure or inability to obtain
the necessary approvals, changes in the standards applicable to such approvals
and possible delays and expenses associated with obtaining such approvals.
Manor Care has extensive experience filing for CONs. During the period from
1987 to the present, Manor Care commenced operations of 64 new skilled nursing
facilities, most of which required CON applications. During the past four
fiscal years, Manor Care received CON approval for 13 skilled nursing
facilities and 18 assisted living facilities. There can be no assurance,
however, that ManorCare Health Services will be able to obtain CON approval
for all future projects requiring such approval. See "BUSINESS--Government
Regulation."
Medicaid Waiver Program. Certain states provide for Medicaid reimbursement
for assisted living services pursuant to Medicaid Waiver Programs permitted by
the Federal government. In the event ManorCare Health Services elects to
provide services in states with a Medicaid Waiver Program, ManorCare Health
Services may then elect to become certified as a Medicaid provider in such
states. As a provider of services under the Medicaid Waiver Program, ManorCare
Health Services will be subject to all of the requirements of such program,
including the fraud and abuse laws, violations of which may result in civil
and criminal penalties and exclusion from further participation in the
Medicaid Waiver Program and other Federal health care programs. ManorCare
Health Services intends to comply with all applicable laws, including the
fraud and abuse laws; however, there can be no assurance that administrative
or judicial interpretation of existing laws or regulations will not in the
future have a material adverse impact on ManorCare Health Services' business,
results of operations or financial condition. See "BUSINESS--Government
Regulation."
Related Party Rule. The Medicare related party rule applies to companies
that are associated or affiliated with, or have control of, or are controlled
by, a Medicare provider. Many state Medicaid programs have adopted
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the same rule in determining costs that will be included in the payment rates.
The Medicare program may consider Vitalink and In Home Health to be related
parties with ManorCare Health Services. Consequently, unless a provider
qualifies for the exception to the related party rule, the Medicare program
will only reimburse the provider for the cost incurred by the related party in
providing products or services, rather than the related party's charge. An
organization can qualify for an exception from the related party rule by
meeting the following criteria: (i) the entities are bona-fide separate
organizations; (ii) a substantial part of the supplying organization's
business activity is conducted with non-related organizations and there is an
open, competitive market for such services or products; (iii) the services or
products are commonly obtained by a provider from other organizations and are
not a basic element of patient care ordinarily furnished directly to patients
by the provider; and (iv) the charge to the provider is in line with the
charge for such services and products in the open market and no more than the
charge made under comparable circumstances to others. The Medicare related
party rule could materially affect the relationship among ManorCare Health
Services, Manor Care Realty, Vitalink and In Home Health.
Home Health Care. On September 15, 1997, President Clinton imposed a
Medicare moratorium on new home health agencies so that new regulations could
be issued to combat fraud. On January 13, 1998, the Clinton Administration
lifted the moratorium, based on the issuance of new regulations for home
health agencies. These regulations require, as mandated by the Budget Act,
that all home health agencies obtain surety bonds to participate in the
Medicare and Medicaid programs and disclose related business interests.
ManorCare Health Services does not believe that there will be any material
adverse affect on either In Home Health or on ManorCare Health Services as a
result of these new requirements.
STAFFING AND LABOR COSTS
ManorCare Health Services competes with various health care providers,
including other assisted living and skilled nursing providers, with respect to
attracting and retaining qualified or skilled personnel. ManorCare Health
Services also depends on the available labor pool of low-wage employees. A
shortage of nurses or other trained personnel or general inflationary
pressures may require ManorCare Health Services to enhance its wage and
benefits package in order to compete. There can be no assurance that ManorCare
Health Services' labor costs will not increase or, if they do, that such costs
can be matched by corresponding increases in revenues. Any significant failure
by ManorCare Health Services to attract and retain qualified employees, to
control its labor costs or to match increases in its labor expenses with
corresponding increases in revenues could have a material adverse effect on
ManorCare Health Services' business, operating results and financial
condition. See "BUSINESS--Employees."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
ManorCare Health Services currently, and for the foreseeable future, expects
to rely primarily on the ability of the residents of its assisted living
facilities to pay ManorCare Health Services' fees from their own or familial
financial resources. Generally only seniors with income or assets meeting or
exceeding the comparable median in the region where ManorCare Health Services'
assisted living facilities are located are expected to be able to afford
ManorCare Health Services' fees. Inflation or other circumstances that
adversely affect the ability of seniors to pay for ManorCare Health Services'
services could have an adverse effect on ManorCare Health Services. If
ManorCare Health Services encounters difficulty in attracting seniors with
adequate resources to pay for its services, its business, operating results
and financial condition likely would be adversely affected.
PAYMENT BY THIRD-PARTY PAYORS
A portion of ManorCare Health Services' revenues from the services it
provides for the Skilled Nursing Facilities will be dependent upon
reimbursement from third-party payors, including Medicare, state Medicaid
programs and private insurers. For the fiscal year ended May 31, 1997, the
Skilled Nursing Facilities to be
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operated by ManorCare Health Services derived approximately 55% of their
patient service revenue from private pay sources, 19% from Medicare and 26%
from various state Medicaid agencies in each case as they were operated by
Manor Care. As of May 31, 1997, all of the patients at Manor Care's assisted
living facilities were private pay. Both governmental and private third-party
payors have employed cost containment measures designed to limit payments made
to health care providers such as ManorCare Health Services. Those measures
include the adoption of initial and continuing recipient eligibility criteria
which may limit payment for services, the adoption of coverage and duration
criteria which limit the services which will be reimbursed and establishment
of payment ceilings which set the maximum reimbursement that a provider may
receive for services. Furthermore, government payment programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions, all of which may materially
increase or decrease the rate of program payments to ManorCare Health Services
for its services. There can be no assurance that payments under governmental
and private third-party payor programs will remain at levels comparable to
present levels or will, in the future, be sufficient to cover the costs
required to serve to patients eligible for reimbursement pursuant to such
programs. In addition, there can be no assurance that the Skilled Nursing
Facilities, or the provision of services and supplies by ManorCare Health
Services, now or in the future will initially meet or continue to meet the
requirements for participation in such programs. ManorCare Health Services
could be adversely affected by the continuing efforts of governmental and
private third-party payors to contain the amount of reimbursement for health
care services. For example, the Budget Act will, over the next several years,
alter the manner in which Medicare reimburses skilled nursing facilities from
a retrospective to a prospective payment system. See "--Regulation." In
addition, certain states have proposed or enacted a case mix prospective
payment system pursuant to which the payment to a facility for a patient is
based upon the patient's condition and need for services. ManorCare Health
Services cannot at this time predict whether any pending/new proposals will be
adopted or, if adopted and implemented, what effect, if any, such proposals
will have on ManorCare Health Services. In addition, private payors, including
managed care payors, increasingly are demanding discounted fee structures or
the assumption by health care providers of all or a portion of the financial
risk through prepaid capitation arrangements. Efforts to impose reduced
allowances, greater discounts and more stringent cost controls by government
and other payors are expected to continue and could, depending on the scope,
have a material adverse effect on ManorCare Health Services.
ENVIRONMENTAL MATTERS
Certain federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. Failure to comply with such laws or the
regulations promulgated thereunder could subject an entity covered by these
laws to fines, criminal penalties and other enforcement actions. ManorCare
Health Services has developed policies with respect to the handling and
disposal of medical, infectious and hazardous waste to assure compliance by
each of its centers with those laws and regulations. ManorCare Health Services
believes that it is in material compliance with applicable laws and
regulations governing medical, infectious and hazardous waste. See "BUSINESS--
Government Regulation--Environmental Regulation."
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public trading for the Common Stock,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. Application has been made to list the Common Stock on
the NYSE. There can be no assurance either as to the prices at which the
Common Stock will trade before or after the Effective Date. Until the Common
Stock is fully distributed and an orderly market develops, the prices at which
such shares trade may fluctuate significantly. Prices for shares of Common
Stock will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for the shares,
investor perception of ManorCare Health Services, 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 15.22% and 22.86%,
respectively, of the Common Stock, in each case including shares with respect
to which voting power is shared with each other and other individuals or
entities. Collectively, members of the Bainum family are expected to own
beneficially approximately 29.95% of the Common Stock. In addition, Mr.
Bainum, Jr. will be Chairman of the Board of ManorCare Health Services. As a
result, the Bainum family may be in a position to influence significantly the
affairs of ManorCare Health Services, including the election of directors.
See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS."
CERTAIN TAX CONSIDERATIONS
Manor Care has received the Ruling from the IRS which provides, among other
things, that the Distribution will qualify as a tax-free transaction under
Section 355 of the Code and that neither the stockholders of Manor Care nor
Manor Care will recognize any income, gain or loss as a result of the
Distribution. The Ruling is based upon various factual representations that
were made to the IRS. If any of such factual representations are determined to
be inaccurate, absent the receipt of a supplemental ruling from the IRS, the
Ruling generally cannot be relied upon by any party. There can be no assurance
that, in such an event, Manor Care Realty would be able to obtain a
supplemental ruling from the IRS. If Manor Care engages in the Distribution
and the Distribution is held to be taxable, both Manor Care Realty and
stockholders of Manor Care could recognize income or gain and thus become
liable for the payment of a material amount of income tax. See "RELATIONSHIP
BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER THE
DISTRIBUTION--Tax Sharing Agreement."
COMMON STOCK DIVIDEND POLICY
It is currently contemplated that following the Distribution, ManorCare
Health Services will pay quarterly cash dividends on the shares of Common
Stock of $0.022 per share. Adjusted for stock splits, Manor Care has paid a
quarterly dividend of $0.022 per share since 1987. Subject to ManorCare Health
Services' financial results and declaration by the Board of Directors,
ManorCare Health Services currently intends to pay its first dividend in ,
1998. Although ManorCare Health Services currently intends to declare and pay
dividends, the declaration and payment of dividends is at the discretion of
ManorCare Health Services' Board of Directors. The Delaware General
Corporation Law also prohibits ManorCare Health Services 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 ManorCare Health Services' financial
condition, capital requirements, funds from operations, future business
prospects and such other factors as the Board of Directors of ManorCare Health
Services may deem relevant. No assurance can be given that ManorCare Health
Services will pay any dividends.
THE YEAR 2000 ISSUE
ManorCare Health Services has assessed and continues to assess the potential
impact of the situation commonly referred to as the "Year 2000 Issue." The
Year 2000 Issue, which affects most corporations, concerns the inability of
information systems, primarily computer software programs, to properly
recognize and process date sensitive information relating to the year 2000 and
beyond. ManorCare Health Services is in the process of determining the costs
and expenditures associated with the Year 2000 Issue and has several
information system improvement initiatives underway to ensure that ManorCare
Health Services' computer systems will be Year 2000 compliant. ManorCare
Health Services is expected to incur expenditures of approximately $6 to $8
million over the next few years to address this issue. The failure by third
party payors, such as private issuers, managed care organizations, health
maintenance organizations, preferred provider organizations and federal and
state government agencies that administer Medicare and/or Medicaid, to
adequately address their year 2000 Issues could adversely affect ManorCare
Health Services.
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RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES
AFTER THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between Manor
Care Realty and ManorCare Health Services after the Distribution and to
provide for an orderly transition on the Effective Date to the status of two
separate, independent companies, Manor Care and ManorCare Health Services are
entering into various agreements described below. The discussion below is a
summary of the principal provisions of the Lease Agreements, the Development
Agreement, the Non-Competition Agreement, the Assisted Living Facility
Management Agreement, the Employee Benefits and Other Employment Matters
Allocation Agreement, the Employee Benefits Administration Agreement, the
Office Lease Agreement, the Distribution Agreement, the Tax Sharing Agreement,
the Tax Administration Agreement, the Corporate Services Agreement, the
Trademark Agreement, the License Agreement, the Design Services Agreement, the
Cash Management Agreement, the Risk Management Consulting Services Agreement,
and the Real Estate Note. This summary does not purport to be complete.
Reference is made to the complete provisions of, and such summary is qualified
in its entirety by reference to, the forms of such agreements, copies of which
are filed as exhibits to the Registration Statement of which this Information
Statement forms a part. See "RISK FACTORS--Conflicts With Manor Care Realty."
LEASE AGREEMENTS RELATING TO SKILLED NURSING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into Lease
Agreements (each a "Lease Agreement," and collectively the "Lease
Agreements"), pursuant to which Manor Care Realty will lease to ManorCare
Health Services all the Skilled Nursing Facilities owned by Manor Care, and
Manor Care Realty will grant to ManorCare Health Services, the right to
operate, pursuant to the Lease Agreements, all of Manor Care Realty's current
skilled nursing facilities and, by separate agreement, its future skilled
nursing facilities. Under each Lease Agreement, ManorCare Health Services' use
of the subject facility will be limited to operating a skilled nursing
facility together with such other ancillary uses as exist on the Effective
Date at such facility. Manor Care Realty and ManorCare Health Services will
also enter into Lease Agreements or similar arrangements pursuant to which
ManorCare Health Services will also lease and operate two skilled nursing
facilities in which Manor Care Realty is a substantial equity investor by
joint venture, common ownership or otherwise.
Under the Lease Agreements, ManorCare Health Services will operate the
facilities and will collect all revenues from the facilities. Under the Lease
Agreement for each facility, ManorCare Health Services will be obligated to
pay Manor Care Realty annual rent ("Premises Rent") equal to the greater of
(i) 77% of Net Operating Profit and (ii) a value of the subject facility
agreed upon by ManorCare Health Services and Manor Care Realty (the "Priority
Basis") multiplied by 10%; provided that the Premises Rent for a specific
Lease Year may be reduced below these two amounts as a result of the deferral
mechanism described below. Manor Care Realty and ManorCare Health Services
have determined that Premises Rent for the fiscal year ended May 31, 1998 will
be paid on an aggregate portfolio basis, not on a facility by facility basis.
The Premises Rent on a facility is payable in installments (each "Monthly
Premises Rent"), as follows: (i) on the first day of each calendar month of
each Lease Year, commencing with the first day of the month following the
month in which the commencement date of the Lease Agreement occurs, ManorCare
Health Services shall pay to Manor Care Realty an amount equal to one-twelfth
of 10% of the Priority Basis (the "Monthly Priority Sum"); and (ii) on or
before the fifteenth day of each calendar month of each Lease Year, commencing
with the fifteenth day of the month following the month in which the
commencement date of the Lease Agreement occurs, if 77% of the Net Operating
Profit for the Lease Year to the last day of the immediately preceding
calendar month, is greater than 10% of the Priority Basis (the "Priority Sum")
multiplied by a fraction the numerator of which is the number of days that
have passed in the applicable Lease Year and the denominator of which is 365,
ManorCare Health Services shall pay to Manor Care Realty an amount equal to
such excess; and (iii) on or before the fifteenth day of each calendar month
of each Lease Year, commencing with the fifteenth day of the month following
the month in which the commencement date of the Lease Agreement occurs, if the
Net Operating Profit for the Lease Year to the last day of the immediately
preceding calendar month, is less than the Priority Sum allocable to the Lease
Year to date, Manor Care Realty shall repay to ManorCare Health Services an
amount equal to such deficiency.
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Such deficiency amounts paid by Manor Care Realty to ManorCare Health Services
are referred to as "Deferred Premises Rent." The Priority Basis for each
skilled nursing facility will be a predetermined dollar value for each
facility agreed upon by ManorCare Health Services and Manor Care Realty and
will not be subject to increase or decrease based upon any change in the cost
of living or inflation. In determining the Priority Basis for each facility,
the parties reviewed, among other things, historical and projected cash flows,
costs of recent capital improvements, the location of the facility and
relevant market conditions. The computation of Net Operating Profit includes
as a Project Expense an amount equal to 6% of Project Revenues ("Tenant's Base
Fee"), which is in effect a base fee out of Project Revenues which ManorCare
Health Services is entitled to retain without reduction. Project Revenues
generally include all revenues and income derived by ManorCare Health Services
from the facilities. Project Expenses generally include all expenses incurred
by ManorCare Health Services to comply with its obligations under the Lease
Agreements including Tenant's Base Fee; provided however that Project Expenses
do not include Premises Rent.
Deferred Premises Rent may be deferred until such time as Net Operating
Profit is available to pay it; provided that as of the first day of each new
Lease Year all Deferred Premises Rent for the prior Lease Year which has not
become due and payable shall be deemed cancelled and extinguished and shall
not thereafter be due and payable. To the extent that Net Operating Profit
supports less than all Monthly Premises Rent and Deferred Premises Rent then
due, payments made with respect thereto shall be deemed to be made first to
Deferred Premises Rent (from longest to shortest outstanding) and then to
Monthly Premises Rent. The total amount of fiscal 1997 rent which could have
been deferred and ultimately canceled is approximately $10.3 million relating
to 23 facilities. Approximately $6.6 million of this amount relates to 12
recently acquired, renovated or developed facilities which are anticipated to
pay rent at least equal to Priority Sum within the next two fiscal years.
Each facility will be operated pursuant to an Operating Budget (as defined
in the Lease Agreements). The Operating Budget for the period ending May 31,
1998 will be attached to each of the Lease Agreements as an exhibit. The
Operating Budget for each facility for the period from June 1, 1998 through
May 31, 1999 will be agreed upon by Manor Care Realty and ManorCare Health
Services. Thereafter, each Operating Budget will not be subject to Manor Care
Realty's approval unless (i) the Net Operating Profit for the Lease Year (as
defined in the Lease Agreements) immediately prior to the Lease Year with
respect to which the Operating Budget in question is being prepared was less
than the greater of (a) the Priority Sum and (b) 90% of budgeted Net Operating
Profit for such Lease Year or (ii) budgeted Net Operating Profit for the
current Lease Year is less than the greater of (a) the Priority Sum for the
current Lease Year and (b) 90% of budgeted Net Operating Profit for the prior
Lease Year. ManorCare Health Services will have the right to use 2.75% of
aggregate Project Revenues (aggregated across all facilities under all Lease
Agreements) for maintenance capital expenditures at the facilities. Manor Care
Realty shall reimburse ManorCare Health Services for all such maintenance
capital expenditures. In addition, each year, ManorCare Health Services must
prepare and submit to Manor Care Realty for approval a budget setting forth
ManorCare Health Services' estimate of the cost of performing proposed revenue
generating alterations, additions and improvements of the facilities (i.e.,
major capital expenditures). Manor Care Realty may withhold its approval in
its absolute discretion. Manor Care Realty will reimburse ManorCare Health
Services for all approved expenditures. If Manor Care Realty withholds its
approval and ManorCare Health Services believes that the proposed revenue
generating items are reasonably necessary to the maintenance of the facility
as a competitive, efficient and economical operation, ManorCare Health
Services may elect to terminate the subject Lease Agreement effective as of
the first anniversary of the date of ManorCare Health Services' election. If
Manor Care Realty disputes ManorCare Health Services' belief, the dispute
shall be resolved by arbitration. In the event the arbitrator decides in favor
of Manor Care Realty, ManorCare Health Services' notice of termination will be
deemed void ab initio.
The Lease Agreements provide that ManorCare Health Services, on behalf of
the underlying property, will have the right to enter into service agreements
with its affiliates, provided, among other conditions, that such services are
competitively priced. In addition, Manor Care Realty will have the right to
mortgage its interest in each facility to the extent of 90% of the fair market
value thereof as of the date the Indebtedness is incurred. Manor Care Realty
will have the right to incur indebtedness in the amount of at least $100
million which may be secured
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by a blanket mortgage covering any number of facilities; provided, however,
that in no event shall the aggregate indebtedness secured by mortgages
covering facilities (other than facilities located in Pennsylvania) exceed an
amount equal to 85% of the fair market value of the facilities covered by such
mortgages as of the date the indebtedness is incurred; and provided, further,
that in no event shall the aggregate indebtedness secured by such mortgages
(including mortgages covering facilities located in Pennsylvania) exceed an
amount equal to 90% of the fair market value of all of the facilities whether
or not covered by mortgages as of the date the indebtedness is incurred. The
foregoing limitations will not apply to any indebtedness to the extent secured
by certain properties held directly by Manor Care Real Estate Corp. in
Pennsylvania. Any such mortgage will be superior to the Lease Agreements;
provided that the holder of any such mortgage will deliver to ManorCare Health
Services a non-disturbance agreement. Each Lease Agreement will have an
initial term of five years with up to thirty-four one year renewals at the
option of ManorCare Health Services; provided that in certain states total
lease terms will not exceed the maximum term permitted by statute such that
such Lease Agreement will not be deemed a change of ownership for real estate
transfer tax purposes.
Manor Care Realty will have the right to terminate a Lease Agreement in the
event that (i) either (a) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive twelve-month Lease Years or
(b) actual Net Operating Profit fails to exceed the Priority Sum for two
consecutive twelve-month Lease Years, subject to ManorCare Health Services'
right to cure with respect to one year only by making a cash payment to Manor
Care Realty of such deficiency plus 5% of 90% of budgeted Net Operating Profit
or 5% of the Priority Sum, as applicable, (ii) the facility is decertified as
a skilled nursing facility, is disqualified from participation in Medicare or
Medicaid or ManorCare Health Services loses its license to operate the subject
facility as a skilled nursing facility or (iii) any one of certain additional
defaults occurs, such as monetary default, breach of covenant and bankruptcy
defaults. All termination rights will be subject to "right to cure"
provisions, except that ManorCare Health Services will have no right to cure
if the subject facility is disqualified from Medicare or Medicaid or
decertified or if ManorCare Health Services loses its license to operate a
skilled nursing facility. Finally, ManorCare Health Services will have the
right to terminate a Lease Agreement in the event a facility is damaged and
either (i) the insurance proceeds are insufficient to cover the restoration
costs or (ii) the restoration could not reasonably be completed within 12
months following the damage. A Lease Agreement will automatically terminate
upon the condemnation of so much of a facility that, in ManorCare Health
Services' reasonable judgment, the conduct of its business would be
substantially prevented or impaired.
In the event that Manor Care Realty terminates a Lease Agreement based upon
actual Net Operating Profit being less than 90% of budgeted Net Operating
Profit for two consecutive Lease Years, Manor Care Realty will be obligated to
pay to ManorCare Health Services a termination fee, which fee will be based on
the performance of the subject facility, in accordance with the formula
therefor set forth in the Lease Agreements. Unless ManorCare Health Services
consents to the sale, Manor Care Realty will also be obligated to pay to
ManorCare Health Services a termination fee upon the sale of a facility. The
termination fee is formula-based and intended to approximate ManorCare Health
Services' future income from the operation of that facility.
ManorCare Health Services is prohibited from assigning a Lease Agreement or
subletting any facility without Manor Care Realty's approval, which it may
withhold in its sole discretion, except that Manor Care Realty's consent is
not required for assignments or sublettings (i) in connection with ManorCare
Health Services' sale of its business operations as a going concern or with
its merger or consolidation into or with another company or (ii) to an
affiliate succeeding to ManorCare Health Services' business operations or
(iii) to an affiliate succeeding to the skilled nursing facility business
operations of ManorCare Health Services.
The Lease Agreements provide that ManorCare Health Services is obligated to
comply with all applicable laws and must obtain and keep in full force and
effect all licenses and permits necessary to operate the facilities. Pursuant
to the Lease Agreements, with respect to ManorCare Health Services' use,
occupancy and operation of the Skilled Nursing Facilities, Manor Care Realty
will not be liable, and ManorCare Health Services will, whether or not
available insurance proceeds are sufficient therefor, indemnify, defend and
hold Manor Care Realty harmless from and against any and all loss, cost,
expense, liability and claims of liability for damage or injury to person or
property on or about the facilities, or otherwise, arising from ManorCare
Health Services' negligence or willful misconduct. Other than such
indemnification obligation, ManorCare Health Services will
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not have any liability, personal or otherwise, in connection with any of its
obligations under the Lease Agreements except to the extent of (i) Project
Revenues, (ii) proceeds of insurance and awards for condemnation applicable to
the skilled nursing facilities and actually received by ManorCare Health
Services and (iii) ManorCare Health Services' interest, if any, in the
improvements on the skilled nursing facilities and leasehold estate created
under the Lease Agreements.
The payments from ManorCare Health Services to Manor Care Realty under the
Lease Agreements will not have any effect on the revenues of ManorCare Health
Services. The lease payments will be reflected as operating expenses of
ManorCare Health Services and revenues of Manor Care Realty.
DEVELOPMENT AGREEMENT RELATING TO ASSISTED LIVING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into a Master
Development Agreement (the "Development Agreement") pursuant to which Manor
Care Realty will develop assisted living facilities for sale to ManorCare
Health Services. Neither Manor Care Realty nor ManorCare Health Services is
obligated to proceed under development of a facility unless and until
ManorCare Health Services has approved the project budget. Each facility will
be built by Manor Care Realty based upon ManorCare Health Services' then
existing prototype designs. Under the Development Agreement, if stabilized
occupancy of 75% or more is achieved for a period of five days within two
years of commencing operations, ManorCare Health Services will be obligated to
purchase the facility. The purchase price for each facility will be equal to
(i) the actual project costs (but in no event in excess of an amount equal to
the amount of the project budget approved by ManorCare Health Services plus
5%) plus (ii) such actual project costs multiplied by the applicable premium
percentage plus (iii) Manor Care Realty's portion of shared cost savings, if
any, plus (iv) an agreed amount for inventory items. Manor Care Realty's
portion of shared cost savings is an amount equal to 50% of the excess of the
amount of the approved project budget over the amount of the actual project
costs. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two-year stabilization period. The premium percentage in respect of each
Arden Courts facility is the percentage set forth below opposite the month
during which notice of the purchase of the facility occurs is given by
ManorCare Health Services to Manor Care Realty:
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the sixth
full calendar month thereafter....................................... 14.50%
Seventh calendar month................................................ 15.50%
Eighth calendar month................................................. 15.95%
Ninth calendar month.................................................. 17.80%
Tenth calendar month.................................................. 19.55%
Eleventh calendar month............................................... 21.15%
Twelfth calendar month................................................ 22.87%
Thirteenth calendar month............................................. 24.10%
Fourteenth calendar month............................................. 25.30%
Fifteenth calendar month.............................................. 26.85%
Sixteenth calendar month.............................................. 27.95%
Seventeenth calendar month............................................ 28.99%
Eighteenth calendar month............................................. 30.30%
Nineteenth calendar month............................................. 31.50%
Twentieth calendar month.............................................. 32.50%
Twenty-first calendar month........................................... 33.54%
Twenty-second calendar month.......................................... 34.75%
Twenty-third calendar month........................................... 35.90%
Twenty-fourth calendar month.......................................... 37.00%
</TABLE>
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The premium in respect of each Springhouse facility shall be the percentage
opposite the month set forth below during which the notice of purchase of the
subject facility is given by ManorCare Health Services to Manor Care Realty:
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the sixth
full calendar month thereafter....................................... 12.00%
Seventh calendar month................................................ 13.00%
Eighth calendar month................................................. 14.00%
Ninth calendar month.................................................. 15.00%
Tenth calendar month.................................................. 15.00%
Eleventh calendar month............................................... 16.20%
Twelfth calendar month................................................ 17.40%
Thirteenth calendar month............................................. 18.40%
Fourteenth calendar month............................................. 19.40%
Fifteenth calendar month.............................................. 20.33%
Sixteenth calendar month.............................................. 21.30%
Seventeenth calendar month............................................ 22.30%
Eighteenth calendar month............................................. 23.00%
Nineteenth calendar month............................................. 23.90%
Twentieth calendar month.............................................. 24.80%
Twenty-first calendar month........................................... 25.65%
Twenty-second calendar month.......................................... 26.49%
Twenty-third calendar month........................................... 27.40%
Twenty-fourth calendar month.......................................... 28.20%
</TABLE>
The purchase price for each facility is formula-based and may or may not
approximate the fair market value of a particular facility. Given that
pursuant to the Development Agreement, Manor Care Realty's primary activity
will be developing assisted living facilities for ManorCare Health Services,
which facilities ManorCare Health Services will be obligated to buy if certain
conditions are met, Manor Care believes that over time the aggregate purchase
prices for the facilities should approximate the aggregate purchase prices
that would be available from a similarly situated unaffiliated third party.
The Development Agreement provides that prior to presentation to any other
party and prior to proceeding by itself for its own account, ManorCare Health
Services shall present to Manor Care Realty for evaluation any assisted living
facility development opportunity that ManorCare Health Services desires to
have pursued. Within thirty (30) days after Manor Care Realty has received
such reports and studies as Manor Care Realty deems necessary in order to
evaluate such opportunity, Manor Care Realty shall elect whether or not to
proceed with the opportunity. In the event that Manor Care Realty elects (or
is deemed to have elected) not to proceed with the opportunity, ManorCare
Health Services shall be free, subject to any applicable restrictions set
forth in the Non-Competition Agreement, to pursue such assisted living
facility development opportunity with others.
Pursuant to the Assisted Living Facility Management Agreement, during the
two-year stabilization period, ManorCare Health Services will manage the
facility for Manor Care Realty for a fixed monthly fee. See "--Assisted Living
Facility Management Agreement." If ManorCare Health Services does not acquire
a facility developed by Manor Care Realty during the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. ManorCare Health Services will, however, retain the rights to the Arden
Courts or Springhouse brand name in the event of a third-party sale. The
Development Agreement will have a term of seven years and may be terminated
for cause by either Manor Care Realty or ManorCare Health Services under
certain circumstances.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
Prior to the commencement of the development of an assisted living facility,
Manor Care Realty and ManorCare Health Services will execute and deliver an
Assisted Living Facility Management Agreement (the
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"Assisted Living Facility Management Agreement") pursuant to which ManorCare
Health Services will manage the assisted living facility for the period from
the first day of the calendar month in which the subject facility is opened to
the earlier of (a) the date of the sale of the subject facility by Manor Care
Realty to ManorCare Health Services or (b) the second anniversary of the date
on which the subject facility opened for business. ManorCare Health Services
will manage each facility for Manor Care Realty for a fixed monthly fee. The
monthly management fee for each Arden Court facility will be $5,000 and the
monthly management fee for each Springhouse facility will be $8,500. The fixed
monthly fee payable to ManorCare Health Services represents an approximation
of ManorCare Health Services' general and administrative costs for managing
the facilities. All operating costs relating to the managed facilities will be
borne by Manor Care Realty as the owner of the facilities.
If stabilized occupancy of 75% or more is not achieved within two years of
commencing operations, upon request by Manor Care Realty made no later than
thirty (30) days prior to the second anniversary of the commencement of
operations, ManorCare Health Services will continue to manage the facility for
a period ending no later than the third anniversary of the commencement of
operations. During any such extended term, Manor Care Realty will be obligated
to pay to ManorCare Health Services a management fee equal to 6% of gross
revenues on a monthly basis and Manor Care Realty will have the right to
terminate the Assisted Living Facility Management Agreement as of the last
calendar day of any month upon not less than thirty (30) days prior written
notice.
NON-COMPETITION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Non-
Competition Agreement (the "Non-Competition Agreement"), which will impose
certain non-competition restrictions on each of Manor Care Realty and
ManorCare Health Services. The Non-Competition Agreement will terminate on the
date the Development Agreement expires or is terminated; provided that if
Manor Care Realty is actively developing Assisted Living Facilities pursuant
to the Development Agreement, the restrictions set forth below relating to
Manor Care Realty's ability to acquire assisted living facilities and
ManorCare Health Services' ability to develop or manage assisted living
facilities will continue with respect to the assisted living facilities being
developed until the earlier of (i) the second anniversary of the expiration of
the term of the Development Agreement or (ii) the date on which ManorCare
Health Services acquires the last of such facilities.
Agreements with Respect to the Skilled Nursing Business. The Non-Competition
Agreement provides that Manor Care Realty will be a health care real estate
company focused on the ownership, construction, development and acquisition of
health care properties. The Non-Competition Agreement provides that in the
event that ManorCare Health Services identifies a skilled nursing facility
development opportunity or a skilled nursing facility acquisition opportunity,
ManorCare Health Services will notify Manor Care Realty of such opportunity
and if Manor Care Realty does not respond within a specified time or rejects
the opportunity to acquire or develop such facility, ManorCare Health Services
will have the right to present such development or skilled nursing facility
acquisition opportunity to a non-affiliated third-party; provided that
ManorCare Health Services will not, without the prior consent of Manor Care
Realty (which consent may be given or withheld in the sole discretion of Manor
Care Realty), present such development or skilled nursing facility acquisition
opportunity to such non-affiliated third party if such development or
acquisition would result in the acquisition or development of a skilled
nursing facility that is within a five mile radius of a Manor Care Realty
owned Skilled Nursing Facility.
In the event that Manor Care Realty determines to proceed with the
development of a skilled nursing facility or a skilled nursing facility
acquisition, Manor Care Realty will notify ManorCare Health Services of such
determination indicating the material terms on which Manor Care Realty is
prepared to permit ManorCare Health Services to manage and lease such skilled
nursing facility (or facilities) and ManorCare Health Services will have a
specified time after the receipt of such notice to notify Manor Care Realty of
its interest in entering into a management and lease agreement with Manor Care
Realty with respect to such skilled nursing facility (or facilities). In the
event that ManorCare Health Services so notifies Manor Care Realty, ManorCare
Health
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Services and Manor Care Realty will negotiate in good faith for a specified
time period to enter into a management agreement and lease with respect to
such skilled nursing facility (or facilities), but if (i) ManorCare Health
Services does not respond to such notice within such specified time period or
rejects the opportunity to negotiate with Manor Care Realty with respect to
such skilled nursing facility (or facilities) or (ii) ManorCare Health
Services negotiates with Manor Care Realty but the parties are unable to reach
an agreement during such specified time period, Manor Care Realty will have
the right to enter into a management agreement and/or a lease agreement
relating to such skilled nursing facility (or facilities) with a non-
affiliated third party on terms no more favorable in the aggregate to such
third party than those offered to ManorCare Health Services or manage such
facility itself for a period not to exceed 18 months following commencement of
operations of a Manor Care Realty developed skilled nursing facility or
consummation of the skilled nursing facility acquisition, as the case may be.
In the event Manor Care Realty elects to manage such skilled nursing facility
(or facilities), Manor Care Realty will enter into a management agreement
and/or lease agreement with respect to such skilled nursing facility (or
facilities) with an non-affiliated third party following the expiration of
such 18 month period. The terms of such management agreement and/or a lease
agreement will be no more favorable in the aggregate to such third party than
those offered to ManorCare Health Services. In the event that ManorCare Health
Services desires to acquire a business which also includes one or more skilled
nursing facilities, the ownership or possession of which by ManorCare Health
Services would otherwise be prohibited by the Non-Competition Agreement,
ManorCare Health Services must offer Manor Care Realty the right to purchase
such skilled nursing facilities at a price to be agreed upon by the parties;
provided, however that if the parties are unable to agree on such purchase
price, the parties shall submit the issue to binding arbitration. In the event
Manor Care Realty elects not to purchase such skilled nursing facilities at
such purchase price or the parties have been unable to agree on the purchase
price and have submitted the dispute to arbitration, ManorCare Health Services
nonetheless may complete such acquisition but will use its commercially
reasonable efforts to divest itself of such skilled nursing facilities within
one year of the closing of such acquisition. In the event that ManorCare
Health Services determines to sell the skilled nursing facilities for a price
less than the purchase price offered to Manor Care Realty or determined by the
arbitrator, as the case may be, ManorCare Health Services will notify Manor
Care Realty and Manor Care Realty will have the irrevocable and exclusive
option, to buy on the terms set forth in such notice, such skilled nursing
facilities. If Manor Care Realty does not notify ManorCare Health Services
within a specified time period of its intention to purchase such facilities,
Manor Care Realty will be deemed to have declined to purchase such skilled
nursing facilities and ManorCare Health Services will be free to sell such
skilled nursing facilities at a price equal to 97.5% of, or exceeding, the
price and on terms similar to those specified in such notice.
In addition, the Non-Competition Agreement provides that ManorCare Health
Services will not, without the prior consent of Manor Care Realty (which
consent will not be unreasonably withheld), engage in the lease, operation or
management of any skilled nursing facility owned by a third party that is
within a five-mile radius of a Manor Care Realty owned skilled nursing
facility that is leased or managed by ManorCare Health Services and, subject
to certain exceptions, ManorCare Health Services will not own a skilled
nursing facility.
The Non-Competition Agreement also provides that Manor Care Realty will not
engage, either directly or indirectly, in the management of skilled nursing
facilities, except as set forth above and except as may be permitted with
respect to a particular skilled nursing facility by the Lease Agreement or
other agreement between Manor Care Realty and ManorCare Health Services
pursuant to which ManorCare Health Services manages such skilled nursing
facility.
Agreements with Respect to the Assisted Living Business. Except as provided
below and except pursuant to the terms of the Development Agreement, the Non-
Competition Agreement provides that Manor Care Realty will not acquire any
assisted living facility, provided, that Manor Care Realty will not be deemed
to have acquired an assisted living facility by reason of the acquisition of a
mixed use facility in which not more than the greater of 20% of the units in
the facility or 30 units are designated for assisted living.
In the event that Manor Care Realty identifies an assisted living facility
acquisition opportunity, Manor Care Realty will notify ManorCare Health
Services of such opportunity and ManorCare Health Services will have a
specified time to notify Manor Care Realty of its interest in pursuing such
opportunity. In the event that
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<PAGE>
ManorCare Health Services does not respond within such time period or rejects
the opportunity to acquire such facility, Manor Care Realty will have the
right to make such assisted living facility acquisition; provided, however,
that if any such assisted living facility is within a five mile radius of any
Manor Care Realty developed assisted living facility that is owned or managed
by ManorCare Health Services, Manor Care Realty will not be permitted to
proceed with such acquisition without the prior written consent of ManorCare
Health Services (which consent will not to be unreasonably withheld or
delayed).
The Non-Competition Agreement provides that in the event that Manor Care
Realty desires to acquire a business which also includes one or more assisted
living facilities, the ownership or possession of which by Manor Care Realty
would otherwise be prohibited by the Non-Competition Agreement, Manor Care
Realty must offer ManorCare Health Services the right to purchase such
assisted living facilities at a price to be agreed to by the parties; provided
that if the parties are unable to agree on such purchase price, the parties
will submit the dispute to binding arbitration. In the event ManorCare Health
Services elects not to purchase such assisted living facilities at such
purchase price or the parties have been unable to agree on the purchase price
and have submitted the dispute to arbitration, Manor Care Realty nonetheless
may complete such acquisition but will use its commercially reasonable efforts
to divest itself of such assisted living facilities within one year of the
closing such acquisition.
In the event that Manor Care Realty determines to sell the assisted living
facilities for a price less than the purchase price offered to ManorCare
Health Services or determined by the arbitrator, as the case may be, Manor
Care Realty will notify ManorCare Health Services and ManorCare Health
Services will have the irrevocable and exclusive option, to buy such assisted
living facilities on the terms set forth in such notice. If ManorCare Health
Services does not notify Manor Care Realty within a specified time period,
ManorCare Health Services will be deemed to have declined to purchase such
assisted living facilities and Manor Care Realty shall be free to sell such
assisted living facilities at a price equal to 97.5% of, or exceeding, the
price and on terms similar to those specified in such notice. In the event
Manor Care Realty acquires an assisted living facility (or facilities) in such
a transaction, Manor Care Realty will offer ManorCare Health Services the
opportunity to manage and lease such assisted living facility (or facilities)
and ManorCare Health Services and Manor Care Realty will negotiate in good
faith to enter into a management agreement with respect to such assisted
living facility (or facilities). In the event that ManorCare Health Services
does not respond to such offer within a specified time period or rejects the
opportunity to negotiate with Manor Care Realty with respect to such assisted
living facility (or facilities) or ManorCare Health Services negotiates with
Manor Care Realty but the parties are unable to reach an agreement after such
time period, Manor Care Realty will have the right to enter into a management
agreement relating to such assisted living facility (or facilities) with a
non-affiliated third party on terms no more favorable in the aggregate to such
third party than those offered to ManorCare Health Services or manage such
facility itself for a period not to exceed 18 months following consummation of
the acquisition of such assisted living facility (or facilities). In the event
Manor Care Realty elects to manage such assisted living facility (or
facilities), Manor Care Realty will enter into a management agreement with a
non-affiliated third party following the expiration of such 18 month period.
The terms of such management agreement shall be no more favorable in the
aggregate to such third party than those offered to ManorCare Health Services.
The Non-Competition Agreement also provides that except as provided therein,
Manor Care Realty will not engage, either directly or indirectly, in the
management of assisted living facilities.
The Non-Competition Agreement also provides that ManorCare Health Services
will not be permitted to enter into a management agreement with a non-
affiliated third party in connection with an assisted living facility that is
located within a five-mile radius of an assisted living facility (i) developed
by Manor Care Realty pursuant to the terms of the Development Agreement and
still owned by Manor Care Realty or (ii) under development by Manor Care
Realty pursuant to the Development Agreement or (iii) still covered by the
terms of the Development Agreement, unless Manor Care Realty specifically
consents thereto (which consent will not be unreasonably withheld). The Non-
Competition Agreement also provides that ManorCare Health Services will not
develop assisted living facilities except as may be permitted pursuant to the
terms of the Development Agreement.
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Agreements with Respect to the Other Businesses. The Non-Competition
Agreement provides that Manor Care Realty will not, either directly or
indirectly, (i) own, manage, operate, finance or participate in the ownership,
management, operation or financing of any entity engaged in the institutional
pharmacy business or the home health care business or otherwise in the
continuum of care (other than the hospital management business) (the "Manor
Care Realty Restricted Business") or (ii) engage in any other manner or make
any investment in any entity engaged in the Manor Care Realty Restricted
Business; provided, however, that Manor Care Realty will be entitled to
acquire a business that includes a Manor Care Realty Restricted Business so
long as Manor Care Realty provides ManorCare Health Services with same notices
and rights concerning the Manor Care Realty Restricted Business as
contemplated by the Non-Competition Agreement with respect to the acquisition
by Manor Care Realty of a business that includes certain assisted living
facilities. The Non-Competition Agreement provides that the provisions of the
agreement relating to the institutional pharmacy business will terminate when
ManorCare Health Services no longer owns, directly or indirectly, 20% or more
of the fully diluted equity of Vitalink Pharmacy Services, Inc. (including any
successor thereto by merger, consolidation, stock purchase or sale of all or
substantially all of the assets) and the provisions of the agreement relating
to the home health business will terminate when ManorCare Health Services no
longer owns, directly or indirectly, 20% or more of the fully diluted equity
of In Home Health, Inc. (including any successor thereto by merger,
consolidation, stock purchase or sale of all or substantially all of the
assets).
The Non-Competition Agreement also provides that ManorCare Health Services
will not, either directly or indirectly, (i) own, manage, operate, finance or
participate in the ownership, management, operation or financing of any entity
engaged in the hospital management business (the "ManorCare Health Services
Restricted Business") or (ii) engage in any other manner or make any
investment in any entity engaged in the hospital management business;
provided, however that such restrictions will not apply to skilled nursing
facilities or assisted living facilities or units thereof that are located
within or are adjacent to hospitals; provided, further, however, that
ManorCare Health Services will be entitled to acquire a business that includes
a ManorCare Health Services Restricted Business so long as ManorCare Health
Services provides Manor Care Realty with the same notices and rights
concerning the ManorCare Health Services Restricted Business as contemplated
by the Non-Competition Agreement with respect to the acquisition by ManorCare
Health Services of a business that includes certain skilled nursing
facilities. The Non-Competition Agreement provides that the provisions of the
agreement relating to the hospital management business will terminate when
Manor Care Realty no longer owns, directly or indirectly, 20% or more of the
fully diluted equity of Community Hospital of Mesquite, Inc. (including any
successor thereto by merger, consolidation, stock purchase or sale of all or
substantially all of the assets). In addition, the Non-Competition Agreement
provides that, if ManorCare Health Services enters into a new line of business
involving the ownership of real estate which real estate constitutes 40% or
more of the fair market value of such business, ManorCare Health Services must
offer for sale such real estate to Manor Care Realty with the same notices and
rights concerning such real estate as contemplated by the Non-Competition
Agreement with respect to the acquisition by ManorCare Health Services of a
business that includes certain skilled nursing facilities.
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement (the "Employee
Benefits Allocation Agreement"), pursuant to which the employee benefits with
respect to employees who remain employed by Manor Care Realty or its
subsidiaries immediately after the Distribution ("Manor Care Realty
Employees") and the employee benefits of employees who are employed by
ManorCare Health Services immediately after the Distribution ("ManorCare
Health Services Employees") will be allocated.
The Employee Benefits Allocation Agreement provides that all of the vested
and non-vested Incentive Stock Options ("ISOs") of employees of Manor Care who
will be employed by ManorCare Health Services will be converted into ISOs of
ManorCare Health Services. The ISOs of employees who remain employed by Manor
Care Realty will be converted into ISOs of Manor Care Realty. In addition,
both employees who will be employed by ManorCare Health Services and employees
who remain employed by Manor Care Realty will have the right to elect to
convert their vested Manor Care Non-Qualified Stock Options ("NQSOs") into any
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percentage combination of Manor Care Realty NQSOs and ManorCare Health
Services NQSOs. The Employee Benefits Allocation Agreement also provides that
one-half of the non-vested NQSOs of any employee who will be employed by
ManorCare Health Services will be converted into NQSOs of ManorCare Health
Services, and one-half of the non-vested NQSOs of any employee who remains
employed by Manor Care Realty will be converted into NQSOs of Manor Care
Realty. The remaining non-vested NQSOs will be converted into any percentage
combination of ManorCare Health Services NQSOs and Manor Care Realty NQSOs at
the election of the employee. Notwithstanding the foregoing, the NQSOs of one
executive officer will be converted on a pro rata basis to ManorCare Health
Services NQSOs and Manor Care Realty NQSOs based on their relative stock
values. Another executive officer will have the option to convert NQSOs to
ManorCare Health Services NQSOs and Manor Care Realty NQSOs such that such
officer's overall option holdings are converted on a pro rata basis to
ManorCare Health Services options and Manor Care Realty options based on their
relative stock values.
The Employee Benefits Allocation Agreement also provides that employees of
Choice Hotels International, Inc. ("Choice Hotels") and Sunburst Hospitality
Corporation ("Sunburst") can elect to convert their Manor Care NQSOs into any
percentage combination of ManorCare Health Services NQSOs and Manor Care
Realty NQSOs.
The Employee Benefits Allocation Agreement also addresses the treatment of
Manor Care NQSOs owned by non-employee directors of Manor Care. The NQSOs of
non-employee directors who become directors of both Manor Care Realty and
ManorCare Health Services will be converted on a pro rata basis to ManorCare
Health Services NQSOs and Manor Care Realty NQSOs based on their relative
stock values. The Employee Benefits Allocation Agreement also provides that
all NQSOs of non-employee directors who remain with Manor Care Realty or who
become directors of ManorCare Health Services will be converted to NQSOs of
Manor Care Realty or ManorCare Health Services, respectively.
The Employee Benefits Allocation Agreement will provide that the adjustment
in stock options will be based upon a predetermined formula related to (i)
stock prices on the first day the shares in the companies are independently
traded and (ii) the election of the optionees. In all cases, however, the
exercise price and the number of the options will be adjusted to maintain the
same financial value to the option holder before and after the Distribution.
The ratio of the exercise price per option to the market value per share will
not be reduced, and the vesting provisions and option period of the original
grant will remain the same.
EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Employee
Benefits Administration Agreement (the "Employee Benefits Administration
Agreement"), pursuant to which ManorCare Health Services will administer the
employee benefits plans and programs of Manor Care Realty following the
Distribution.
ManorCare Health Services shall provide such services for a fee which shall
include any or a combination of the following: (i) activity-based charges;
(ii) fixed-fee based charges; (iii) usage-based charges; and (iv) time and
materials charges, as specified in the Corporate Services Agreement. The
Employee Benefits Administration Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Employee Benefits
Administration Agreement.
OFFICE SUBLEASE AGREEMENT
Manor Care leases from Gaithersburg Realty Trust the building complex in
Gaithersburg, Maryland (the "Complex") at which the principal executive
offices of ManorCare Health Services and Manor Care Realty are located. Manor
Care will assign its interest in the lease to ManorCare Health Services,
subject to the consent of Gaithersburg Realty Trust, and ManorCare Health
Services, as sublandlord, and Manor Care Realty, as subtenant, will enter into
a sublease agreement with respect to the Complex (the "Office Sublease
Agreement"). The Complex consists of an office building (the "Office
Building") containing approximately 377,126 gross square feet of space, a
warehouse and distribution building (the "Warehouse Building") containing
approximately 200,000 gross square feet of space, and approximately 98.7974
acres of land.
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ManorCare Health Services will sublease to Manor Care Realty approximately
58,714 rentable square feet in the Office Building, for a base term expiring
on August 30, 2002, with options to renew for four (4) successive periods of
three (3) years each. As Basic Rent for each Lease Year of the base term,
Manor Care Realty will pay Tenant's Pro Rata Share of all Operating Expenses
for such Lease Year. "Tenant's Pro Rata Share" means the ratio of (i) the
number of rentable square feet in the Office Building occupied by Manor Care
Realty as of the commencement of such Lease Year, to (ii) the total number of
rentable square feet in the Office Building occupied by Manor Care Realty and
ManorCare Health Services as of the commencement of such Lease Year.
"'Operating Expenses" means all expenses incurred by ManorCare Health Services
(net of rental income paid by third parties) in connection with the operation
and maintenance of the Complex (including vacant space and common areas),
including real estate taxes, insurance, utilities, repairs, property
management, and rent payments to Gaithersburg Realty Trust. ManorCare Health
Services will be responsible for "Landlord's Pro Rata Share" of Operating
Expenses for each Lease Year of the base term, meaning the ratio of (i) the
number of square feet in the Office Building occupied by ManorCare Health
Services as of the commencement of such Lease Year, to (ii) the total number
of rentable square feet in the Office Building occupied by Manor Care Realty
and ManorCare Health Services as of the commencement of such Lease Year. It is
expected that ManorCare Health Services will occupy approximately 202,458
rentable square feet in the Office Building as of the commencement of the
Office Sublease Agreement. Accordingly, based on a total of 261,172 rentable
square feet in the Office Building occupied by Manor Care Realty and ManorCare
Health Services, ManorCare Health Services' Pro Rata Share would be 78% and
Manor Care Realty's Pro Rata Share would be 22%.
It is the intention of the parties to share any appreciation in the value of
the Complex subsequent to the acquisition and leasing of the Complex by the
Gaithersburg Realty Trust in August, 1995. Accordingly, at any time during the
base term of the Office Sublease Agreement or any renewal term, Manor Care
Realty shall have the right to exercise its shared appreciation rights by
requiring ManorCare Health Services to pay to Manor Care Realty approximately
twenty-two percent (22%) of the Complex's appreciation. "Appreciation" is
defined as the difference between (i) the Complex's fair market value at the
time Manor Care Realty exercises its shared appreciation rights, and (ii) the
cost of acquiring the Complex, plus the cost of any capital improvements to
the Complex. Fair market value shall be established by an appraisal that
assumes that Manor Care Realty and ManorCare Health Services each pay fair
market rental for their respective premises. Until such time as Manor Care
Realty exercises its shared appreciation rights, the Basic Rent payable by
Manor Care Realty for each Lease year during the base term and any subsequent
renewal term shall be Tenant's Pro Rata Share of Operating Expenses as
hereinabove provided. Upon Manor Care Realty's exercise of its shared
appreciation rights, the Basic Rent payable by Manor Care Realty shall convert
to fair market rental as determined by the appraisal process as of the
commencement of the next renewal term. In each subsequent renewal term the
Basic Rent shall be increased (but not to exceed 9%) based upon any increase
in the CPI Index since the prior renewal term.
Manor Care Realty's right to exercise its renewal options is conditional
upon ManorCare Health Services' continuing control over the Complex through an
extension of the existing lease with Gaithersburg Realty Trust beyond its
current expiration date of August 30, 2002, or otherwise. Any income derived
from the Complex will be shared by ManorCare Health Services and Manor Care
Realty in proportion to their Pro Rata Shares.
The Office Sublease Agreement will also cover approximately 5000 square feet
to be occupied by ManorCare Health Services in the Warehouse Building. Space
occupied by ManorCare Health Services in the Warehouse Building will not be
included in the calculation of Landlord's Pro Rata Share. ManorCare Health
Services will pay a market rent for warehouse space and such rental payments
will be treated as third party rental income for purposes of calculating
Operating Expenses.
DISTRIBUTION AGREEMENT
Pursuant to the Distribution Agreement, on or prior to the Effective Date,
Manor Care will convey or cause to be conveyed to ManorCare Health Services
all of the right, title and interest of Manor Care and its subsidiaries in:
(i) all of the business and assets of the Assisted Living Business; (ii) the
shares of Common Stock of Vitalink
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owned by Manor Care; (iii) the shares of Common and Preferred Stock of In Home
Health owned by Manor Care; (iv) the shares of common stock of The Tidewater
Healthcare Shared Services Group, Inc. ("Tidewater"); (v) the partnership
interests (the "Joint Venture Interests") owned by Manor Care in the
partnerships owning the Sycamore Glen, Centerville and Fitzgerald Mercy
skilled nursing facilities and (vi) certain of the contracts entered into in
connection with the November 1, 1996 spin-off of Choice Hotels International,
Inc. (the "Choice Spinoff") (the "Contribution of Assets").
Pursuant to the Distribution Agreement, ManorCare Health Services will
assume, and indemnify and hold Manor Care Realty harmless against certain
liabilities (the "Assumed Liabilities"), including: (i) liabilities arising
after the Effective Date relating to (x) the ownership, operation and
management of the assisted living facilities and (y) the operation and
management of the Skilled Nursing Facilities; (ii) liabilities arising out of
the ownership of the stock of Vitalink, In Home Health, Tidewater and the
Joint Venture Interests, whether arising before or after the Effective Date;
(iii) liabilities arising out of information contained in or omitted from the
Registration Statement on Form 10 (the "Form 10") filed by ManorCare Health
Services with the Commission in connection with the Distribution; (iv)
liabilities set forth or referenced in the ManorCare Health Services financial
statements or the notes thereto contained in the Form 10; (v) liabilities
arising out of information contained in or omitted from the information
contained in the Registration Statement on Form S-4 filed by ManorCare Health
Services in connection with the Exchange Offer; (vi) liabilities under
indemnification agreements in effect as of the Effective Date between Manor
Care and certain employees and directors with respect to services rendered by
any such employee or director to ManorCare Health Services or the Assisted
Living Business or in connection with Vitalink or In Home Health; (vii) third-
party claims relating to the operation and management of the assisted living
facilities prior to the Effective Date and the operation and management of the
Skilled Nursing Facilities prior to the Effective Date (in each case, only to
the extent such claims are not covered by insurance or self-insurance of Manor
Care in effect immediately prior to the Effective Date and are of the type set
forth on a schedule to the Distribution Agreement); (viii) environmental
liabilities arising out of or in connection with the Assisted Living
Facilities, (ix) environmental liabilities to the extent such liabilities
arose by reason of ManorCare Health Services' negligent operation or
management of an assisted living facility or Skilled Nursing Facility; (x)
after ManorCare Health Services acquires an assisted living facility pursuant
to the terms of the Development Agreement, environmental liabilities arising
out of or in connection with such acquired assisted living facility; (xi)
liabilities arising out of or in connection with the handling of biomedical
waste at the Assisted Living Facilities or the Skilled Nursing Facilities;
(xii) all accounts payable relating exclusively to the Skilled Nursing
Facilities or the Assisted Living Business; (xiii) the $30 million aggregate
principal amount of indebtedness incurred under the Existing Revolving Credit
Facility in connection with the acquisition of additional equity securities of
Vitalink (the "Vitalink Borrowings"); (xiv) certain obligations of Manor Care
arising out of the contracts entered into in connection with the Choice Spin-
off and (xv) any "Covered Claims" under the Distribution Agreement entered
into between Manor Care, Inc. and Choice Hotels Holdings, Inc., dated November
1, 1996.
After giving pro forma effect to the Distribution and related transactions
as if they occurred on November 30, 1997 (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care's
indebtedness, (ii) liabilities relating to benefits and workers' compensation
of approximately $56.0 million, (iii) current liabilities of the skilled
nursing facilities of approximately $46.6 million, and (iv) deferred tax
liabilities of approximately $40.7 million. In addition, ManorCare Health
Services will assume certain contingent liabilities of Manor Care pursuant to
the terms of the Distribution Agreement. However, the assumption of such
liabilities will not release Manor Care Realty therefrom if ManorCare Health
Services should fail, for any reason, to perform its obligations pursuant to
such assumed liabilities.
Pursuant to the Distribution Agreement, Manor Care Realty will retain, and
indemnify and hold ManorCare Health Services harmless against, certain
liabilities (the "Retained Liabilities"), including: (i) any liabilities of
Manor Care for money borrowed (other than the Vitalink Borrowings); (ii)
third-party claims arising out of the operation and management of the assisted
living facilities prior to the Effective Date and the operation and management
of the Skilled Nursing Facilities prior to the Effective Date (in each case,
only to the extent such claims are covered by insurance or self-insurance of
Manor Care in effect immediately prior to the Effective
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Date and the operation and management of the Skilled Nursing Facilities prior
to the Effective Date and are of the type set forth on a schedule to the
Distribution Agreement); (iii) (x) certain pending environmental claims,
including a variety of actions relating to waste disposal sites in which one
or more subsidiaries of affiliates of Manor Care have been identified as
potentially responsible parties arising out of activities of Cenco
Incorporated and its subsidiary and affiliated corporations (the "Actions"),
as specified in a schedule to the Distribution Agreement; (y) any and all
currently unknown but potential environmental and other claims arising out of
the activities of Cenco Incorporated, and its subsidiary and affiliated
companies, and any and all of Cenco Incorporated's predecessor corporations
and affiliates ("Cenco"), including new claims arising out of the sites
identified in a schedule to the Distribution Agreement, and (z) all other
claims arising out of Cenco's discontinued operations; (iv) all environmental
liabilities arising out of the Skilled Nursing Facilities, other than
liabilities arising by reason of ManorCare Health Services' negligent
operation or management of a Skilled Nursing Facility; (v) prior to the time
ManorCare Health Services acquires an assisted living facility pursuant to the
terms of the Development Agreement, environmental liabilities arising out of
or in connection with such assisted living facility other than any such
liabilities arising by reason of ManorCare Health Services' negligent
operation or management of any such assisted living facility; (vi) liabilities
arising out of information contained in or omitted from the Registration
Statement on Form S-3 filed by Manor Care Real Estate Corp.; and (vii) any tax
liabilities (which will be governed by the Tax Sharing Agreement).
The potential liability exposure for currently pending environmental claims
and litigation, without regard to insurance coverage, cannot be quantified
with precision because of the inherent uncertainties of litigation in the
Actions and the fact that the ultimate cost of the remedial actions for some
of the waste disposal sites where Manor Care is alleged to be a potentially
responsible party has not yet been quantified. Manor Care believes that the
potential environmental liability exposure, after consideration of insurance
coverage, is approximately $3 million. Future liabilities for the pending
environmental claims and litigation, without regard to insurance, currently
are not expected to exceed approximately $46 million.
The Distribution Agreement provides that all cash and cash balances in
depository accounts as of the Distribution Date will be remitted to Manor Care
Realty. All petty cash accounts of Manor Care will be allocated on the
Distribution Date to ManorCare Health Services. The Distribution Agreement
also provides that all other current assets and liabilities (the "Noncash
Working Capital") will be conveyed (or in the case of certain government
receivables, deemed to have been conveyed) to ManorCare Health Services.
Promptly after the Distribution Date, ManorCare Health Services and Manor Care
Realty will calculate the amount of the Noncash Working Capital so conveyed
(or deemed to have been conveyed) and ManorCare Health Services will pay to
Manor Care Realty an amount equal to 50% of the Noncash Working Capital up to
$25 million (i.e., in no circumstances will such payment to Manor Care Realty
exceed $12.5 million).
In addition, pursuant to the Distribution Agreement, on or prior to the
Effective Date, Manor Care will make or cause to be made the Capital
Contribution to ManorCare Health Services. See "--The Realty Note."
Manor Care Realty and ManorCare Health Services have agreed in the
Distribution Agreement to share on an equal basis all costs and expenses
incurred in connection with the Distribution and the related transactions,
except that any fees paid in connection with any financings entered into in
conjunction with the Distribution will be paid by the party undertaking such
financings.
Manor Care Realty has agreed to indemnify and hold harmless ManorCare Health
Services and ManorCare Health Services has agreed to indemnify and hold
harmless Manor Care Realty, against any loss, liability or expense incurred or
suffered by the indemnified party arising out of or relating to the failure by
the indemnifying party, as the case may be, to perform or otherwise discharge
the Retained Liabilities, in the case of Manor Care Realty and the Assumed
Liabilities in the case of ManorCare Health Services. The Distribution
Agreement provides that the indemnifying party may assume the defense of a
claim or suit brought by a third party (unless the claim involves both
ManorCare Health Services and Manor Care Realty as defendants and the parties
reasonably believe there is a conflict of interest in which case an
independent counsel will be selected). In
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addition, the Distribution Agreement provides that the indemnifying party may
settle or compromise the claim without the prior consent of the indemnified
party; provided that the indemnified party may not agree to a settlement
unless as a condition to such settlement the indemnified party receives a
written release from any and all liability relating to such third party claim
and such settlement does not include any relief other than monetary damages.
To the extent that the Distribution Agreement provides for indemnification
by ManorCare Health Services of Manor Care Realty and by Manor Care Realty of
ManorCare Health Services from liabilities arising under the Securities Act of
1933 and the Securities Exchange Act of 1934, Manor Care and ManorCare Health
Services have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy and is, therefore,
unenforceable.
TAX SHARING AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Sharing Agreement (the "Tax Sharing Agreement") which will provide for, among
other things, the allocation of federal, state and local income tax
liabilities between Manor Care Realty and its subsidiaries, on the one hand,
and ManorCare Health Services and its subsidiaries, on the other hand. In
general, under the Tax Sharing Agreement, Manor Care Realty will be
responsible for paying all income taxes shown to be due on any Manor Care
Realty consolidated federal income tax return (including the consolidated
federal income tax return for the fiscal year ended May 31, 1998), and any
other tax return filed with respect to Manor Care Realty or any of its
subsidiaries for any taxable period. ManorCare Health Services will be
responsible for paying all income taxes shown to be due on any tax return
filed with respect to ManorCare Health Services or any of its subsidiaries for
any taxable period beginning on or after the Effective Date.
ManorCare Health Services will indemnify Manor Care Realty from and against
any additional income tax liability of Manor Care or any of its subsidiaries,
resulting from any tax audit or any judicial or administrative proceeding or
otherwise for any taxable period (including any taxable period ending on or
before the Effective Date), relating to the businesses that will be conducted
by ManorCare Health Services following the Distribution. Conversely, Manor
Care Realty will indemnify ManorCare Health Services from and against any
additional income tax liability of ManorCare Health Services or any of its
subsidiaries, resulting from any tax audit or any judicial or administrative
proceeding or otherwise for any taxable period (including any taxable period
ending on or before the Effective Date), relating to the businesses that will
be conducted by Manor Care Realty following the Distribution. In addition,
Manor Care Realty, on the one hand, and ManorCare Health Services, on the
other hand, will each be entitled to any income tax refund received from any
taxing authority to the extent that such refund relates to the businesses
conducted by that party following the Distribution.
The Tax Sharing Agreement also provides that if the Distribution (including
certain related transactions) fails to qualify as a tax-free transaction under
Section 355 of the Code as a result of either party taking or failing to take
certain specified actions, then that party will be liable for and will
indemnify the other party from and against all taxes and other damages
resulting from such failure to qualify. If the failure to qualify as a tax-
free transaction results from both parties taking or failing to take certain
specified actions, then the first party taking or failing to take any of such
actions shall be liable for and will indemnify the other party from and
against all taxes and other damages resulting from such failure to qualify. In
the event that it is impossible to determine which party was the first to take
or fail to take any of such actions, all taxes and other damages resulting
from such failure to qualify shall be allocated between the parties based upon
each party's relative market capitalization on the first day that Manor Care
Realty and ManorCare Health Services trade as two separate companies on the
NYSE.
TAX ADMINISTRATION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Administration Agreement (the "Tax Administration Agreement"). The Tax
Administration Agreement sets forth the terms and conditions pursuant to which
ManorCare Health Services will provide certain tax-related administrative
services to Manor
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Care Realty following the Distribution. Such services will include audit and
compliance work related to income, real estate, personal property and sales
and use taxes. The Tax Administration Agreement will remain in effect for one
year from the Effective Date, after which it will renew automatically for one-
year periods unless terminated pursuant to the terms of the Tax Administration
Agreement.
CORPORATE SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Corporate
Services Agreement (the "Corporate Services Agreement") pursuant to which,
following the Distribution, ManorCare Health Services will provide certain
corporate services to Manor Care Realty including administrative, payroll and
accounting systems. ManorCare Health Services shall provide such services for
a fee which shall include any or a combination of the following: (i) activity-
based charges; (ii) fixed-fee based charges; (iii) usage-based charges; and
(iv) time and materials charges, as specified in the Corporate Services
Agreement. The Corporate Services Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Corporate Services
Agreement.
TRADEMARK AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Trademark
Agreement (the "Trademark Agreement") pursuant to which Manor Care Realty will
assign to ManorCare Health Services approximately 40 U.S. trademarks and
service marks registered and pending (and all federal, state and foreign
registrations and all other rights and privileges related thereto). These
registrations and applications represent all of the trademarks necessary for
the operations of the business of ManorCare Health Services. Pursuant to the
Trademark Agreement, ManorCare Health Services will assume all obligations
related to such trademarks and trademark applications.
LICENSE AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a License
Agreement (the "License Agreement") pursuant to which ManorCare Health
Services will license to Manor Care Realty the right to use approximately 20
U.S. trademarks and service marks; and certain other marks, trade names,
copyrights, designs and trade dress in connection with the operation of Manor
Care Realty's business. The license granted under the License Agreement
relating to Manor Care Realty's skilled nursing facilities will terminate
within 45 days of the termination of all the Lease Agreements. The license
granted under the License Agreement relating to Manor Care Realty's assisted
living facilities will terminate within a reasonable time after the
termination of the Development Agreement and all the Assisted Living Facility
Management Agreements. ManorCare Realty's right to use such marks with respect
to a single skilled nursing or assisted living facility will terminate within
a reasonable time after ManorCare Health Services ceases to lease or manage
such single nursing or assisted living facility.
DESIGN SERVICES AGREEMENT
Manor Care and ManorCare Health Services will enter into a Design Services
Agreement (the "Design Services Agreement") pursuant to which Manor Care
Realty will provide certain interior design and architectural services in
connection with capitalized renovation projects. The fee for these services
will be $48,000 per month until May 31, 1998, after which the fee will be paid
annually and will be based on the percentage of Manor Care Realty's design
department budget required to provide services to ManorCare Health Services.
Fees under the Design Services Agreement will be credited against the 2.75% of
aggregate annual Project Revenues from all the skilled nursing facilities
leased under Lease Agreements applied toward reasonable repairs, replacements
and renewals to be made in the ordinary course of operations as set forth in
the Lease Agreements. The Design Services Agreement will remain in effect
until May 31, 1999, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Design Services
Agreement.
CASH MANAGEMENT AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
after the Distribution ManorCare Health Services will
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perform cash management services for Manor Care Realty, including but not
limited to bank relationship management, bank account administration, daily
cash flow position management and settlement, bank account analysis review,
electronic fund transfers, and deposits of cash and checks. For these
services, Manor Care Realty will pay ManorCare Health Services a quarterly fee
determined by multiplying ManorCare Health Services' cash management
department expenses by a percentage estimate of time spent providing services
to Manor Care Realty as well as reimbursement for direct expenses incurred.
The Cash Management Agreement will remain in effect for one year from the
Effective Date, after which it will renew automatically for one-year periods
unless terminated pursuant to the terms of the Cash Management Agreement.
RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Risk
Management Consulting Services Agreement (the "Risk Management Consulting
Services Agreement"), pursuant to which ManorCare Health Services will provide
to Manor Care Realty risk management consulting services, including but not
limited to insurance renewals, insurance, indemnity and bond contract review,
surety bond procurement, regulatory compliance services, environmental
management, and risk management services. Manor Care Realty will pay ManorCare
Health Services a fixed annual fee for such services as well as reimbursement
for insurance and self-insurance plans. The Risk Management Consulting
Services Agreement will remain in effect for one year from the Effective Date,
after which it will renew automatically for one-year periods unless terminated
pursuant to the terms of the Risk Management Consulting Services Agreement.
THE REAL ESTATE NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. In order to fund the cash
portion of the Capital Contribution, Manor Care Real Estate will utilize part
of the proceeds of its public offering of $350 million aggregate principal
amount of % senior notes due 2008 and borrowings under the Credit
Facilities. As part of the Capital Contribution, Manor Care will contribute or
cause to be contributed to ManorCare Health Services the Real Estate Note to
be issued by Manor Care Real Estate and guaranteed by Manor Care Realty. Manor
Care may reduce the principal amount of the Real Estate Note prior to issuance
or reduce the amount of the cash portion of the Capital Contribution to the
extent Old Senior Notes remain outstanding upon consummation of the
Exchange Offer. The Real Estate Note will have the same general terms
(including interest rate and maturity, and parent and subsidiary guarantees)
as the Manor Care Real Estate Notes except that Manor Care Real Estate may
redeem the Real Estate Note after three years at a redemption price equal to
100% of the principal amount thereof plus accrued and unpaid interest. In
addition, ManorCare Health Services has agreed not to transfer the Real Estate
Note on or prior to the sixth month anniversary of the date of issuance
thereof. After such date, ManorCare Health Services may transfer the Real
Estate Note without restriction subject to Manor Care Real Estate's right to
redeem the Real Estate Note. ManorCare Health Services will have certain
demand registration rights with respect to all or any portion of the Real
Estate Note. Upon receipt of any such demand, Manor Care Real Estate is
required to use reasonable efforts to register the portion of the Real Estate
Note reflected in the demand of ManorCare Health Services.
On or after such third anniversary of the issuance of the Real Estate Note,
ManorCare Health Services may request that Manor Care Real Estate redeem the
Real Estate Note. In the event that ManorCare Health Services requests that
Manor Care Real Estate redeem the Real Estate Note and Manor Care Real Estate
does not redeem the Real Estate Note, the interest rate on the Real Estate
Note will increase by 200 basis points; provided that such interest rate will
not be so increased unless, as of the time such request for redemption is
made, the aggregate amount of rent paid by ManorCare Health Services under the
Lease Agreements with respect to all properties subject to such Lease
Agreements shall equal or exceed the aggregate Priority Sum for all such
properties on a cumulative basis from the Effective Date through the third
anniversary thereof (such aggregate amount of rent being herein referred to as
the "Threshold Rent"). Solely for purposes of calculating the
44
<PAGE>
Threshold Rent, (i) the aggregate Priority Sum for the fiscal year ended May
31, 1999 shall be deemed to be the aggregate Priority Sum calculated pursuant
to the Lease Agreements plus $5 million and (ii) the aggregate Priority Sum
for the fiscal year ended May 31, 2000 and thereafter shall be deemed to be
the aggregate Priority Sum calculated pursuant to the Lease Agreements plus
$10 million.
Manor Care Real Estate's high degree of leverage could adversely affect
Manor Care Real Estate's ability to pay principal and interest on or to redeem
the Real Estate Note and may adversely affect the ability of ManorCare Health
Services to sell the Real Estate Note. Manor Care Real Estate may not have
adequate funds to effect the redemption of the Real Estate Note and in such
case may seek to obtain such funds through additional debt or equity
financing. There can be no assurance that Manor Care Real Estate would be able
to obtain such funds.
The terms of the Real Estate Note will not limit in any way ManorCare Health
Services' use of the proceeds thereof. ManorCare Health Services intends to
use the proceeds of the Real Estate Note for general corporate purposes, which
may include debt service, working capital or acquisition financing. The
failure of Manor Care Real Estate to pay principal and interest on the Real
Estate Note in a timely manner or the inability of ManorCare Health Services
to sell the Real Estate Note to a third party for its principal amount could
have a material adverse effect on ManorCare Health Services.
Pursuant to the terms of the Real Estate Note, the holders of a majority of
the aggregate principal amount of the Real Estate Note then outstanding shall
be entitled, on up to four occasions, to request that Manor Care Real Estate
register under the Securities Act the portion of the Real Estate Note subject
to such request. Manor Care Real Estate will be obligated to use its best
efforts to effect such a registration and to enter into an indenture with
respect to such portion of the Real Estate Note, which indenture will contain
substantially identical terms to the indenture relating to the Manor Care Real
Estate Notes and which will be qualified under the Trust Indenture Act of
1939, as amended.
45
<PAGE>
FINANCING
THE CAPITAL CONTRIBUTION
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. In order to fund the cash
portion of the Capital Contribution, Manor Care Real Estate will utilize part
of the proceeds of its public offering of $350 million aggregate principal
amount of the Manor Care Real Estate Notes and borrowings under the Credit
Facilities. As part of the Capital Contribution, Manor Care will contribute or
cause to be contributed to ManorCare Health Services the Real Estate Note
which will be issued by Manor Care Real Estate and guaranteed by Manor Care
Realty. For a description of the Real Estate Note, see "RELATIONSHIP BETWEEN
MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--The
Real Estate Note."
CONCURRENT MANOR CARE REAL ESTATE FINANCINGS
In connection with the Distribution, Manor Care Real Estate is offering $350
million aggregate principal amount of the Manor Care Real Estate Notes. The
Manor Care Real Estate Notes will be fully and unconditionally guaranteed on a
senior and joint and several basis by Manor Care Realty's present and future
subsidiaries, other than certain unrestricted subsidiaries. In addition, Manor
Care Real Estate is negotiating a commitment letter with Chase and CSI
relating to a $150 million term loan facility and a $300 million revolving
credit facility (the "Credit Facilities"). It is anticipated that the Credit
Facilities will be secured by a majority of the assets of Manor Care Realty
and Manor Care Real Estate, by a pledge of the capital stock of Manor Care
Real Estate and Manor Care Realty's other subsidiaries and by an assignment of
certain agreements with ManorCare Health Services, and, subject to the terms
and conditions thereof, will be available for general corporate purposes and
working capital purposes. In addition, Manor Care anticipates that the Credit
Facilities will be fully and unconditionally guaranteed by Manor Care Realty
and substantially all of Manor Care Realty's present and future subsidiaries.
Manor Care will utilize part of the proceeds from the sale of the Manor Care
Real Estate Notes and borrowings under the Credit Facilities to fund the cash
portion of the Capital Contribution. In the event that the commitment letter
is executed, Chase will commit to purchase a portion of such facilities and
CSI will use its best efforts to arrange the balance of such facilities with
other lenders.
THE MCHS CREDIT FACILITY
ManorCare Health Services is negotiating a commitment letter (the
"Commitment Letter") with Chase and CSI pursuant to which Chase will agree to
act as administrative agent for a syndicate of financial institutions for the
MCHS Credit Facility described below and CSI will agree to act as arranger for
such credit facilities. The following summary of the anticipated provisions of
the Commitment Letter does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the Commitment Letter.
It is anticipated that the Commitment Letter provides for a five-year
$100,000,000 revolving credit facility, a portion of which may be used for the
issuance of letters of credit.
It is anticipated that the loans under the MCHS Credit Facility (the
"Revolving Loans") will bear interest, at ManorCare Health Services' option,
at LIBOR or Chase's adjusted base rate, in each case plus a variable margin
which will be adjusted depending on ManorCare Health Services' senior,
unsecured long-term debt rating by Standard & Poor's Corporation and Moody's
Investor's Service. ManorCare Health Services anticipates paying a variable
quarterly facility fee on the full amount of the MCHS Credit Facility,
irrespective of usage.
ManorCare Health Services expects that the MCHS Credit Facility will be used
for general corporate purposes, including working capital, capital
expenditures and acquisitions.
ManorCare Health Services expects that the Credit Agreement will contain
covenants customary for transactions of this type, including, without
limitation, restrictions on indebtedness; liens and sale-leaseback
46
<PAGE>
transactions; investments, loans and advances; mergers and consolidations;
asset sales; transactions with affiliates; business of ManorCare Health
Services and subsidiaries; and agreements restricting dividends, intercompany
loans and advances by subsidiaries. The Credit Agreement will also contain
financial covenants including ratio of consolidated EBITDA to consolidated
interest expense and ratio of total debt to consolidated EBITDA.
It is anticipated that events of default under the MCHS Credit Facility will
include, without limitation, and subject to certain cure periods and
exceptions: (i) the nonpayment of principal, interest, fees and other amounts
payable when due; (ii) the failure to observe or perform any covenant or
undertaking contained in the documentation for the MCHS Credit Facility; (iii)
any representation or warranty shall prove to have been incorrect in any
material respect when made; (iv) a change of control of ManorCare Health
Services; (v) the existence of defaults with respect to any material
indebtedness of ManorCare Health Services; (vi) the occurrence of certain
material adverse events with respect to ERISA plans; (vii) the imposition of
certain judgment defaults on ManorCare Health Services or the commencement of
a voluntary or involuntary bankruptcy of ManorCare Health Services or any of
its subsidiaries; and (viii) material default by ManorCare Health Services
under material agreements with Manor Care Realty. In the event that the
Commitment Letter is executed, Chase will commit to purchase a portion of such
facility and CSI will use its best efforts to arrange the balance of such
facility with other lenders.
NEW MCHS SENIOR NOTES
In connection with the Distribution, ManorCare Health Services plans to
offer $1,000 principal amount of its 7 1/2% Senior Notes due June 15, 2006
(the "New MCHS Senior Notes") in exchange for each $1,000 principal amount of
7 1/2% Senior Notes due June 15, 2006 of Manor Care properly tendered (the
"Old Senior Notes"). Concurrently with the Exchange Offer, Manor Care plans to
solicit (the "Solicitation") consents ("Consents") to certain amendments (the
"Proposed Amendments") to the indenture governing the Old Senior Notes (the
"Old Indenture"). The Proposed Amendments would, among other things, eliminate
the covenants in the Old Indenture that restrict (i) the creation, incurrence
or assumption of liens, (ii) sale leaseback transactions and (iii)
transactions with affiliates. If Consents are received from the holders of at
least a majority in principal amount of the Old Senior Notes (the "Requisite
Consents"), the Old Indenture will be amended in accordance with the Proposed
Amendments. As a result of the Exchange Offer, ManorCare Health Services, not
Manor Care Realty, will be the obligor on the New MCHS Senior Notes; and Manor
Care Realty, not ManorCare Health Services, will remain the obligor on the Old
Senior Notes. Consummation of the Exchange Offer is conditioned upon, among
other things, acceptance of the Exchange Offer by holders of at least a
majority in principal amount of the Old Senior Notes (the "Minimum Tender
Condition") and consummation of the Distribution. Manor Care may in its
reasonable discretion waive any such conditions and accept for exchange any
Old Senior Notes properly tendered. Holders of Old Senior Notes who tender
into the Exchange Offer will be required, as a condition to valid tender, to
have given their Consent to the Proposed Amendments. The Proposed Amendments
will become operative only upon consummation of the Exchange Offer. If the
Exchange Offer is consummated, then, unless the Requisite Consents have not
been obtained, the Proposed Amendments will become effective and each
nonexchanging holder of the New MCHS Senior Notes will be bound by such
amendment even though such holder did not consent to the Proposed Amendment.
The principal amount of the Real Estate Note may be decreased to the extent
that Old Senior Notes remain outstanding upon consummation of the Exchange
Offer.
The New MCHS Senior Notes will be senior unsecured obligations of ManorCare
Health Services and will rank pari passu in right of payment with all senior
debt of ManorCare Health Services. After giving pro forma effect to the
Distribution and related transactions as if they occurred on November 30,
1997, ManorCare Health Services would have had approximately $45.5 million of
secured indebtedness, principally mortgage bond indebtedness. The New MCHS
Senior Notes will be issued pursuant to an indenture between ManorCare Health
Services and the Wilmington Trust Company, as trustee.
The aggregate principal amount of the New MCHS Senior Notes will be limited
to $150 million. The New MCHS Senior Notes will mature on June 15, 2006 and
will bear interest at the rate of 7 1/2% per annum.
47
<PAGE>
The New MCHS Senior Notes will be redeemable, at the option of ManorCare
Health Services, in whole at any time or in part from time to time at a
redemption price equal to the greater of (i) 100% of their principal amount
and (ii) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted, on a semiannual basis, at the
Treasury Rate (as defined in the indenture), plus 15 basis points, plus
accrued interest thereon to the date of redemption.
The New MCHS Senior Notes Indenture contains certain covenants which impose
certain limitations and restrictions on the ability of ManorCare Health
Services to (i) create, incur or assume liens, (ii) enter into sale leaseback
transactions and (iii) enter into affiliated transactions.
The Exchange Offer will expire at 12:00 midnight, New York City time, on
, 1998 or at any later time and date to which the Exchange Offer may be
extended by Manor Care.
48
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
ManorCare Health Services at November 30, 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 November 30, 1997. See "PRO FORMA
FINANCIAL DATA OF MANORCARE HEALTH SERVICES."
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
-----------------------------------
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt:
Old MCHS Senior Notes..................... $ 149,490 $(149,490)/1/ --
New MCHS Senior Notes..................... -- 149,490 /1/ 149,490
Existing Revolving Credit Facility........ 215,000 (215,000) --
Promissory Note........................... 21,941 (21,941) --
Mortgages and Capital Leases.............. 71,899 (26,415) 45,484
Vitalink debt............................. 100,733 -- 100,733
---------- --------- --------
Total long-term debt.................... 559,063 (263,356) 295,707
Stockholders' Equity:
Total stockholders' equity.............. 729,023 (33,725)/2/ 695,298
---------- --------- --------
Total capitalization........................ $1,288,086 $(297,081) $991,005
========== ========= ========
</TABLE>
- --------
(1) Reflects the issuance by ManorCare Health Services of the New MCHS Senior
Notes pursuant to the Exchange Offer and assumes that all of the holders
of the Old Senior Notes accept the Exchange Offer. The consummation of the
Exchange Offer is conditioned on, among other things, acceptance of the
Exchange Offer by holders of at least a majority in principal amount of
the outstanding Old Senior Notes. Obligations with respect to Old Senior
Notes not exchanged will remain obligations of Manor Care Realty following
the Distribution. Manor Care may reduce the principal amount of the Real
Estate Note prior to issuance or reduce the amount of the cash portion of
the Capital Contribution to the extent Old Senior Notes remain outstanding
upon consummation of the Exchange Offer.
(2) Reflects the contribution of net assets from ManorCare Health Services in
connection with the Distribution Agreement.
49
<PAGE>
PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated condensed statements of income for the
fiscal year ended May 31, 1997 and the six month period ended November 30,
1997 give effect to the Distribution and related transactions (including the
Exchange Offer, the Lease Agreements, and the Assisted Living Facility
Management Agreement) as if such transactions occurred on June 1, 1996 and
June 1, 1997, respectively and the Vitalink merger ("TeamCare Merger") with
and into TeamCare, Inc. ("TeamCare") as if it had occurred on June 1, 1996.
The unaudited pro forma consolidated condensed statements of income for the
fiscal year ended May 31, 1997 and the six month period ended November 30,
1997 have been prepared by adjusting the historical consolidated statements of
income to reflect the Distribution and related transactions as if they had
been effected on June 1, 1996 and June 1, 1997, respectively.
The unaudited pro forma consolidated condensed balance sheet at November 30,
1997 gives effect to the Distribution and related transactions (including the
Exchange Offer and the Lease Agreements) as if such transactions had occurred
at that date. Such balance sheet has been prepared by adjusting the historical
consolidated balance sheet to reflect the Distribution and related
transactions as if they had been effected on November 30, 1997.
The unaudited pro forma financial statements should be read in conjunction
with the financial data presented elsewhere in this Information Statement. The
pro forma financial data are presented for informational purposes only and may
not reflect the future results of operations or financial position of
ManorCare Health Services or what the results of operations or financial
position would have been had ManorCare Health Services operated as a separate,
independent company during such periods.
50
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------------
TEAM LEASE MANAGEMENT
HISTORICAL CARE SUBTOTAL DISTRIBUTION MESQUITE(E) AGREEMENTS AGREEMENT
---------- -------- ---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $1,527,247 $192,364 $1,719,611 $(1,603)(a) $(50,612) $2,483(f)
12,087 (i)
Expenses:
Operating expenses......... 1,202,836 170,681 1,373,517 (2,081)(a) (40,659) $177,004 (d) 2,081(f)
5,213 (i) (20,266)(d)
General corporate and other.. 68,563 68,563 (77)(a) (1,924)
2,510 (b)
(5,447)(b)
4,990 (c)
1,977 (i)
Depreciation and amortization.. 80,378 8,027 88,405 (365)(a) (2,138) (58,105)(d)
Provision for restructuring
charge.................... 6,950 (j)
---------- -------- ---------- ------- -------- -------- ------
Total expenses............. 1,351,777 178,708 1,530,485 13,670 (44,721) 98,633 2,081
---------- -------- ---------- ------- -------- -------- ------
Income before other income and
(expenses) and income taxes.. 175,470 13,656 189,126 (3,186) (5,891) (98,633) 402
Interest income from
advances to discontinued
lodging segment............ 21,221 21,221 (21,221)(h)
Interest income and other... 8,683 127 8,810 21,250 (l) (109)
(6,412)(k)
Gain on issuance of Vitalink
stock...................... 50,271 50,271
Minority interest expense... (4,001) (4,068) (8,069) 120 (k)
Interest expense............ (41,831) (7,737) (49,568) 24,307 (g) 148
---------- -------- ---------- ------- -------- -------- ------
Income before income taxes.. 209,813 1,978 211,791 14,858 (5,852) (98,633) 402
Provision for income taxes.. 84,700 4,175 88,875 5,998 (m) (2,362)(m) (39,817)(m) 162(m)
---------- -------- ---------- ------- -------- -------- ------
Net income (loss)........... $ 125,113 $ (2,197) $ 122,916 $ 8,860 $ (3,490) $(58,816) $ 240
========== ======== ========== ======= ======== ======== ======
Weighted average shares of
common stock............... 63,257
----------
Income per share of common
stock:
----------
Net income per share........ $ 1.98
==========
<CAPTION>
PRO
FORMA
-----------
<S> <C>
Revenues.................... $1,681,966
Expenses:
Operating expenses......... 1,494,809
General corporate and other.. 70,592
Depreciation and amortization.. 27,797
Provision for restructuring
charge.................... 6,950
-----------
Total expenses............. 1,600,148
-----------
Income before other income and
(expenses) and income taxes.. 81,818
Interest income from
advances to discontinued
lodging segment............
Interest income and other... 23,539
Gain on issuance of Vitalink
stock...................... 50,271
Minority interest expense... (7,949)
Interest expense............ (25,113)
-----------
Income before income taxes.. 122,566
Provision for income taxes.. 52,856
-----------
Net income (loss)........... $ 69,710
===========
Weighted average shares of
common stock............... 63,257
-----------
Income per share of common
stock:
-----------
Net income per share........ $ 1.10
===========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed income statement.
51
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------------
LEASE MANAGEMENT PRO
HISTORICAL DISTRIBUTION MESQUITE(E) AGREEMENTS AGREEMENT FORMA
---------- ------------ ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $885,623 $ (1,845)(a) $(25,359) $1,867(f) $ 860,286
Expenses:
Operating expenses..... 723,244 (1,756)(a) (20,700) $ 89,283 (c) 1,756(f) 781,267 (j)
General corporate and 28,208 (151)(a) (950) (10,560)(d) -- 32,134
other.................. 1,640 (b)
6,163 (c)
(2,776)(b)
Depreciation and
amortization........... 47,818 (446)(a) (1,244) (31,528)(d) -- 14,600
Provision for
restructuring charge... -- 6,950 (j) -- -- -- 6,950
-------- -------- -------- -------- ------ ---------
Total expenses......... 799,270 9,624 (22,894) 47,195 1,756 834,951
-------- -------- -------- -------- ------ ---------
Income before other
income and (expenses)
and income taxes....... 86,353 (11,469) (2,465) (47,195) 111 25,335
Interest income from
advances to
discontinued lodging
segment................ 4,994 (4,994)(h) --
Interest income and
other.................. 4,690 10,625 (l) (47) 11,682
(3,586)(k)
Minority interest
expense................ 7,294 (79)(k) 7,215
Interest expense........ (22,073) 10,986 (g) 146 (10,941)
-------- -------- -------- -------- ------ ---------
Income before income
taxes.................. 81,258 1,483 (2,366) (47,195) 111 33,291
Provision for income
taxes.................. 35,692 587 (m) (936)(m) (18,666)(m) 44(m) 16,721
-------- -------- -------- -------- ------ ---------
Net income (loss)....... $ 45,566 $ 896 $ (1,430) $(28,529) $ 67 $ 16,570
======== ======== ======== ======== ====== =========
Weighted average shares
of common stock........ 63,748 63,748
-------- ---------
Income per share of
common stock:
Net income per share... $ 0.72 $ 0.26
======== =========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed income statement.
52
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
NOVEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 53,032 $ (27,065)(c) $ 226,513
250,000 (a)
(12,500)(d)
(30,000)(a)
(6,950)(f)
(4)(b)
Other current assets................... 378,919 (63,620)(c) 286,965
(28,189)(e)
(145)(b)
---------- --------- ----------
Total current assets................... 431,951 81,527 513,478
Property and equipment, net.............. 1,076,521 (834,822)(c) 227,184
(14,515)(b)
Goodwill................................. 371,317 (9,366)(c) 361,951
Real Estate Note......................... 250,000 (a) 250,000
Other assets............................. 115,475 (392)(b) 68,248
(46,835)(c)
---------- --------- ----------
Total assets............................. $1,995,264 $(574,403) $1,420,861
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities................ $ 227,636 $ (79,377)(c) $ 134,340
(207)(b)
(13,712)(e)
Long-term debt........................... 559,063 (233,356)(c) 295,707
(30,000)(a)
Minority interest........................ 184,299 (1,316)(c) 182,983
Deferred taxes and other long-term
liabilities............................. 295,243 (35,842)(c) 112,533
(146,390)(e)
(478)(b)
---------- --------- ----------
Total liabilities........................ 1,266,241 (540,678) 725,563
Total shareholders' equity............... 729,023 500,000 (a) 695,298
(14,371)(b)
(631,817)(c)
(12,500)(d)
131,913 (e)
(6,950)(f)
---------- --------- ----------
Total liabilities and shareholders'
equity.................................. $1,995,264 $(574,403) $1,420,861
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed balance sheet.
53
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(a) Reflects the elimination of revenues, income and expenses associated with
facilities which opened during fiscal year 1997 (the "Developed
Properties"). These facilities would not have been purchased by ManorCare
Health Services under the terms of the Development Agreement until such
facilities achieved 75% occupancy. All revenues and expenses associated
with the operations of assisted living facilities during the stabilization
period of operations will be reported in the income statement of Manor
Care Realty. When an assisted living facility is sold to ManorCare Health
Services, all subsequent operations of that facility will be recorded on
ManorCare Health Services' income statement.
(b) Reflects net additional annual costs of $2.5 million ($1.6 million for the
six months ended November 30, 1997) associated with staffing of human
resources, finance, legal, information technology, cash management and
accounting personnel and directors costs; and the transfer of expenses of
$5.4 million for the fiscal year ended May 31, 1997 and $2.8 million for
the six months ended November 30, 1997. Transferred expenses include costs
of finance and accounting, legal, and construction and development
functions as well as additional expenses related to directors fees, etc.
Costs are transferred based on the historical costs incurred for these
functions by Manor Care, Inc.
(c) Reflects the transfer of certain general corporate credits to Manor Care
Realty. Credits of $5.0 million for the fiscal year ended May 31, 1997 and
credits of $6.2 million for the six months ended November 30, 1997 are
related to rental income and gains on the sales of skilled nursing
facilities and of a corporate office building.
(d) Reflects lease payments to Manor Care Realty for skilled nursing
facilities under the terms of the Lease Agreements as well as depreciation
and real estate taxes associated with those properties. The total amount
of 1997 rent which would have been deferred and ultimately canceled is
$10.3 million relating to 23 facilities. Approximately $6.6 million of
this amount relates to 12 recently acquired, renovated or developed
facilities which are anticipated to pay at least full Base Rent within the
next two fiscal years.
(e) Reflects the operations of Mesquite Hospital and the Decatur, Georgia
skilled nursing facility for the fiscal year ended May 31, 1997 and the
six months ended November 30, 1997.
(f) Reflects revenues and expenses associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreement. See Note (a). The income from operations of the Developed
Properties totaled a loss of $0.9 million for fiscal year 1997. Income
from operations of the Developed Properties equals revenues ($1.6 million)
less operating expenses ($2.1 million), general corporate and other
expenses ($0.1 million) and depreciation and amortization ($0.4 million).
If the Distribution had taken place on June 1, 1996, the income from
operations of the Developed Properties would have been equal to the
management fee income of $0.4 million; operating expenses of $2.1 million
would have been unchanged; the general corporate and other expenses and
depreciation and amortization would have been booked by the developer,
Manor Care Realty. Accordingly, if the Distribution had taken place on
June 1, 1996, revenues would have been equal to $2.5 million, the sum of
the management fee income of $0.4 million plus reimbursement of the
operating expenses of $2.1 million. The income from operations of the
Developed Properties totaled a loss of $0.5 million for the six months
ended November 30, 1997. Income from operations is equal to historical
revenues ($1.9 million) less operating expenses ($1.8 million), general
corporate and other expenses ($0.2 million) and depreciation and
amortization ($0.4 million). If the Distribution had taken place on June
1, 1997, the income from operations of the Developed Properties would have
been equal to the management fee income of $0.1 million; operating
expenses of $1.8 million would have been unchanged; and general corporate
and other expenses and depreciation and amortization would have been
booked by the developer, Manor Care Realty. Accordingly, if the
Distribution had taken place on June 1, 1997, revenues would have been
equal to $1.9 million, the sum of the management fee income of $0.1
million plus reimbursement of the operating expenses of $1.8 million.
(g) Reflects interest expense associated with Existing Revolving Credit
Facility ($9.4 million for the fiscal year ended May 31, 1997 and $4.7
million for the six months ended November 30, 1997), Senior Subordinated
Notes ($13.3 million for the fiscal year ended May 31, 1997 and $6.6
million for the six months ended
54
<PAGE>
November 30, 1997), and interest related to mortgages and capital leases on
skilled nursing facilities and other, net of capitalized interest ($1.6
million for the fiscal year ended May 31, 1997 and ($0.3) million for the
six months ended November 30, 1997).
(h) Reflects the elimination of interest income from advances to the
discontinued lodging segment as this amount would have been earned by Manor
Care Realty.
(i) Reflects the revenues and expenses of sold facilities which would have been
owned by Manor Care Realty.
(j) Reflects transaction fees of $7.0 million.
(k) Reflects interest/other income of $6.3 million at May 31, 1997 and $3.7
million at November 30, 1997 related mainly to interest income on
investments, rental income, and minority owners' share of income in a
skilled nursing facility.
(l) Reflects interest income earned at an estimated 8.5% on the Real Estate
Note contributed to ManorCare Health Services on the Effective Date. This
estimated rate is based on a range of actual rates achieved in recent
public bond offerings having similar terms by companies with similar credit
statistics. This rate will be fixed and will be the same as that on the
$350 million of Manor Care Notes. The annual effect of a 1/8% change in
rate is $0.4 million.
(m)Reflects tax effect of adjustments made pursuant to notes (a) through (l).
55
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NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(a) Reflects cash dividend of $250.0 million, the Real Estate Note and the
repayment of borrowings under the Existing Revolving Credit Facility
related to the Vitalink tender offer.
(b) Reflects the transfer of assets and liabilities attributable to the
Developed Properties to Manor Care Realty.
(c) Reflects the transfer to Manor Care Realty of the skilled nursing
facilities, mortgages and certain other assets and liabilities associated
with the skilled nursing facilities as well as the assets and liabilities
of Mesquite Hospital.
(d) Reflects payment of $12.5 million to Manor Care Realty for working capital
of skilled nursing facilities.
(e) Reflects the allocation of deferred tax liabilities to Manor Care Realty
pursuant to the Tax Allocation Agreement.
(f) Reflects the payment of transaction fees totaling $7.0 million.
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SELECTED HISTORICAL FINANCIAL DATA
The statements of income data for the fiscal years ended May 31, 1997, 1996,
1995, 1994 and 1993 and the balance sheet data for the fiscal years ended May
31, 1997, 1996, 1995 and 1994 are derived from the audited consolidated
financial statements of Manor Care. The balance sheet data at May 31, 1993 are
derived from unaudited consolidated financial statements of Manor Care that,
in the opinion of Manor Care, reflect all adjustments consisting of normal
recurring adjustments necessary to present fairly the information set forth
below. The statements of income data for the six month periods ended November
30, 1997 and 1996 and the balance sheet data as of November 30, 1997 are
derived from the unaudited consolidated financial statements of Manor Care.
The following selected historical financial data of Manor Care should be read
in conjunction with the historical consolidated financial statements and notes
thereto included elsewhere in this Information Statement. The historical
consolidated financial statements of Manor Care may not necessarily reflect
the results of operations or financial position that would have been obtained
had ManorCare Health Services been a separate, independent company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION." Earnings per share data are presented elsewhere in this
Information Statement and on a pro forma basis only. See "PRO FORMA FINANCIAL
DATA."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, FISCAL YEARS ENDED MAY 31,
-------------------- -----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $ 885,623 $ 688,064 $1,527,247 $1,248,197 $1,019,458 $ 923,308 $ 830,968
Expenses:
Operating expenses.... 723,244 541,482 1,202,836 963,081 769,998 696,199 627,733
Depreciation and
amortization......... 47,818 36,877 80,378 68,086 54,374 49,019 46,394
General corporate and
other................ 28,208 31,873 68,563 72,322 63,197 45,666 46,371
Provision for asset
impairment and
restructuring........ -- -- -- 26,300 -- -- --
--------- --------- ---------- ---------- ---------- ---------- ----------
Total expenses...... 799,270 610,232 1,351,777 1,129,789 887,569 790,884 720,498
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 86,353 77,832 175,470 118,408 131,889 132,424 110,470
Other income and
(expenses):
Interest income from
advances to
discontinued lodging
segment.............. 4,994 10,157 21,221 19,673 15,492 10,665 7,083
Gain on issuance of
Vitalink stock....... -- -- 50,271 -- -- -- --
Interest expense...... (22,073) (19,168) (41,831) (30,338) (22,769) (27,441) (34,988)
Other income
(expenses), net...... 11,984 4,879 4,682 3,728 5,219 3,536 4,884
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations before
income taxes........... 81,258 73,700 209,813 111,471 129,831 119,184 87,449
Income taxes............ 35,692 29,400 84,700 46,000 52,156 50,481 32,720
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations............. $ 45,566 $ 44,300 $ 125,113 $ 65,471 $ 77,675 $ 68,703 $ 54,729
========= ========= ========== ========== ========== ========== ==========
<CAPTION>
AS OF NOVEMBER 30, AS OF MAY 31,
-------------------- -----------------------------------------------------------
1997 1997 1996 1995 1994 1993
-------------------- ---------- ---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $1,995,264 $1,979,704 $1,681,840 $1,289,817 $1,085,636 $1,025,230
Long-term debt.......... 559,063 596,473 490,575 315,271 223,892 330,189
Shareholders' equity.... 729,023 690,431 707,769 624,873 533,815 361,642
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, FISCAL YEARS ENDED MAY 31,
------------------ -------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- ---------- --------- --------- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided by
continuing operating
activities............. $ 51,367 $ 28,925 $ 80,151 $ 199,307 $ 120,760 N/A N/A
Cash provided by (used
in) continuing
investing activities... 12,726 (90,060) (209,235) (259,118) (191,713) N/A N/A
Cash (used in) provided
by continuing financing
activities............. (43,943) 38,337 87,604 122,644 80,037 N/A N/A
Investment in property
and equipment and
systems development.... 110,720 83,713 183,469 136,332 91,900 N/A N/A
</TABLE>
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
On September 15, 1997, Manor Care announced its intention to proceed with a
separation of its skilled nursing facility management, assisted living,
pharmacy and home health businesses (collectively, the "Health Services
Business") from its skilled nursing facility, real estate and healthcare
facility development business via a spin-off of the Health Services Business
(the "Distribution"). The spin-off of the Health Services Business will be
effected by a distribution to Manor Care's shareholders of all the common
stock of New ManorCare Health Services, Inc., a wholly owned subsidiary of
Manor Care, which as of the date of the spin-off will own and operate all
Manor Care's assisted living operations as well as manage and lease the
skilled nursing assets owned by Manor Care. Following the Distribution, New
ManorCare Health Services, Inc. will change its name to ManorCare Health
Services, Inc. and Manor Care will change its name to Manor Care Realty, Inc.
The Board of Directors voted to approve in principle the transaction subject
to receipt of other approvals and consents and satisfactory implementation of
the arrangements for the Distribution. Manor Care anticipates that the
transaction will be completed by the end of fiscal year 1998. The Distribution
is conditional upon certain matters, including receipt of a satisfactory
solvency opinion and the declaration of the special dividend by Manor Care's
Board of Directors.
Due to the fact that the majority of the current Manor Care operations will
be transferred to ManorCare Health Services in connection with the
Distribution, the Distribution will be reported for accounting purposes as a
"reverse spin-off." Accordingly, Manor Care, Inc. will continue to present
consolidated results (with no discontinued operations treatment) up to the
date of the Distribution. After the Distribution, ManorCare Health Services
will present Manor Care, Inc.'s historical consolidated results for periods
prior to the Distribution and Manor Care Realty will present the historical
results of Mesquite Hospital, Manor Care Realty's accounting predecessor, for
periods prior to the Distribution.
A number of significant factors, which are discussed below, affected the
consolidated results of operations, financial condition and liquidity of Manor
Care during the three fiscal years ended May 31, 1997, May 31, 1996 and May
31, 1995 and the six months ended November 30, 1997. This discussion should be
read in conjunction with the Consolidated Financial Statements and notes
thereto for such fiscal years included elsewhere in this Information
Statement. ManorCare Health Services' results of operations, liquidity and
capital resources are derived from the consolidated financial statements of
Manor Care, Inc. The consolidated financial statements include the results of
operations of Vitalink Pharmacy Services, In Home Health and Manor Care's
assisted living and skilled nursing operations as they were operated by Manor
Care. However, these financial statements may not necessarily reflect the
consolidated results of operations or financial position of ManorCare Health
Services or what the results of operations would have been if ManorCare Health
Services had been an independent, public company during those periods.
The health care industry is highly regulated by federal, state and local
law. See "RISK FACTORS--Regulation" and "BUSINESS--Government Regulation."
Certain of these regulations apply to the relationship between ManorCare
Health Services and Manor Care Realty, Vitalink and In Home Health, including
the provisions of the Medicare related party rule and the federal and state
anti-remuneration laws. The Medicare related party rule limits the amount the
Medicare program will reimburse for products and services provided by a
related party. See "BUSINESS--Government Regulation-Related Party Rule." Many
state Medicaid programs have adopted the same rule in determining costs that
will be included in the payment rates. Manor Care has treated Vitalink and In
Home Health as related parties in compliance with this rule. ManorCare Health
Services intends to continue to treat Vitalink and In Home Health as related
parties and also plans to treat Manor Care Realty as a related party.
Accordingly, ManorCare Health Services does not expect that the Medicare
related party rule will have a material effect on the conduct of its business.
The anti-remuneration laws govern certain financial arrangements among health
care providers and others who may be in a position to refer or recommend
patients to such providers. See "BUSINESS--Government Regulation--Anti-
remuneration laws." Manor Care
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<PAGE>
has treated, and will continue to treat, Vitalink and In Home Health as
separate entities, capable of referring or recommending patients to, or
receiving referrals or recommendations from, ManorCare for purposes of the
anti-remuneration laws. ManorCare Health Services intends to continue to treat
Vitalink and In Home Health as separate entities and also plans to treat Manor
Care Realty as a separate entity. Accordingly, ManorCare Health Services
believes that its business arrangements with Vitalink and In Home Health are
in compliance with the anti-remuneration laws.
OVERVIEW AND OUTLOOK
Manor Care owns and operates skilled nursing and assisted living facilities
serving primarily the private pay elderly market. Manor Care's skilled nursing
facilities provide high acuity, long-term care and Alzheimer's services
principally to residents over the age of 65. Manor Care'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 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.
Manor Care also owns approximately 51% of Vitalink, 64% of the voting stock
of In Home Health and an acute care hospital. Vitalink is a publicly traded
institutional pharmacy company which provides medications, consulting,
infusion and other ancillary services to approximately 173,000 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.
Manor Care has increased skilled nursing capacity by approximately 2.5%
annually over the last five fiscal years. Overall occupancy has remained
relatively stable during this period. Occupancy for mature facilities--those
facilities owned by Manor Care for a full two-year period--decreased from
90.3% to 89.8%, between fiscal year 1996 and fiscal year 1997. This decline in
occupancy has resulted in an annual decrease in revenues of approximately $5
million. During the five-year period from fiscal year 1993 to fiscal year
1997, ManorCare Health Services has increased assisted living capacity
substantially, from 3 facilities with 321 beds to 31 facilities with 3,173
beds.
Despite increasing competition for private pay customers, Manor Care has
consistently maintained a high ratio of private pay revenues. The slight
decline in Manor Care's private pay mix over the past four years can be
attributed primarily to the inroads that assisted living providers have
achieved in this market segment.
RESULTS OF OPERATIONS
The following discussion is based on the operations of Manor Care before the
Distribution and related transactions. The operations of the skilled nursing
facilities will continue to have a material impact on ManorCare Health
Services after the Distribution because of the Lease Agreements. The
information contained herein does not indicate the results of operations or
financial condition of ManorCare Health Services that would have been reported
for the periods indicated had the Distribution occurred on the first day of
the periods discussed. Following the Distribution, ManorCare Health Services'
principal sources of revenue will be the management and operation of skilled
nursing facilities under the Lease Agreements, assisted living revenues,
pharmacy revenues and home health revenues. ManorCare Health Services'
operating expenses will consist of operating and payroll expenses relating to
the skilled nursing and assisted living facilities, payments pursuant to the
Lease Agreements and all of the costs of the pharmacy and home health
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
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1997, 1996 and 1995, these revenues amounted to $652.1 million, $549.1 million
and $431.0 million, respectively. In the opinion of management, any difference
between revenues recorded and final determination will not be significant.
ManorCare Health Services does not anticipate a material effect on revenues as
a result of the Balanced Budget Act of 1997. However, because the regulations
pertaining to this Act have neither been proposed nor implemented, this
preliminary conclusion is subject to change as a result. If the regulations do
have a material effect on ManorCare Health Services, ManorCare Health Services
will disclose any such material effect as may be required.
Six Months ended November 30, 1997 compared to November 30, 1996
SKILLED NURSING FACILITIES. Skilled nursing revenues increased $44.8 million
(8.8%) to $554.3 million for the six months ended November 30, 1997 as
compared to the same period in the prior year. The increase in revenues is
principally attributable to increases in rates (5.1%) and capacity. The growth
in bed capacity is attributable to the purchase of one skilled nursing
facility (179 beds), openings of three newly constructed facilities (387 beds)
and additions or renovations at existing facilities (274 beds). The increase
in rates includes the incremental impact of settlements with government
agencies related to prior period cost reports of $3.9 million for the six
months ended November 30, 1997 as compared to the same period in the prior
year.
Operating expenses increased $31.3 million (8.1%) to $416.2 million for the
six months ended November 30, 1997 as compared to the same period in the prior
year. The increase in operating expenses is attributable to additional
capacity and increased staffing necessitated by higher patient acuity and more
complex product and service offerings. As a result, the operating profit
associated with the operation of the skilled nursing facilities for the six
months ended November 30, 1997 increased to $138.2 million from $124.6 million
in the previous period. Operating margin as a percentage of sales increased
from 24.5% to 24.9%.
PHARMACY. Pharmacy revenues for the six month period ended November 30,
1997, increased over the comparable period of fiscal year 1997 by $158.8
million or 192.0%, primarily due to the inclusion of TeamCare revenues.
TeamCare was acquired in February, 1997. Excluding TeamCare revenues, net
revenues for the six months ended November 30, 1997 increased $18.8 million or
22.7% over the same period last year. This increase results from revenues
contributed by the acquisition of Medisco effective July 31, 1996, an increase
in beds served obtained through marketing and sales efforts and an increase in
revenues per bed.
Pharmacy operating expenses increased $142.6 million or 210.0% for the six
month period ended November 30, 1997 over the comparable period last year.
Included in operating expenses for the six months ended November 30, 1997 is
an unusual item representing a non-recurring charge of $3.1 million relating
to costs associated with the August 1997 resignation of Vitalink's Chief
Executive Officer and the consolidation of all corporate functions in
Naperville, Illinois. Excluding the unusual item, operating expenses increased
$139.5 million to $210.5 million or 85.9% of net revenues in the six months
ended November 30, 1997 compared to $69.7 million or 85.7% of net revenues in
the same prior year period. The increase is primarily attributable to the
inclusion of TeamCare results effective February 1, 1997. The increase in
operating costs as a percentage of net revenue is mainly attributable to
TeamCare's higher payroll costs as a percentage of revenues, TeamCare's higher
selling, general and administration costs and the amortization of goodwill and
pharmacy contracts arising from the TeamCare merger ($3.6 million). Operating
margin decreases also resulted from a variety of pricing related factors,
including certain third party reimbursement reductions and changes in customer
base.
ASSISTED LIVING BUSINESS. Assisted living revenues increased by $8.5 million
or 24.0% for the six month period ended November 30, 1997 from $35.3 million
for the same period last year due to capacity ($4.0 million) and rate ($4.5
million) increases.
Operating expenses increased by $6.6 million or 23.7% for the six month
period ended November 30, 1997 compared to the six month period ended November
30, 1996, as a result of increases in capacity and inflation.
HOME HEALTH. Home health revenues decreased $14.7 million for the six months
ended November 30, 1997 over the prior year period, primarily due to
adjustments to Medicare receivables in connection with recent
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Medicare reimbursement decisions related to the allowability of community
liaison costs and required documentation to support allowable costs. Revenues
recorded under the Medicare program are subject to adjustment upon audit by
government intermediaries. As a result of these decisions, In Home Health
increased recorded reserves for other unresolved cost disputes by
approximately $15.5 million.
Operating expenses increased $1.2 million or 1.9% for the six month period
ended November 30, 1997 as compared to the same prior year period. The
increase in operating expenses is primarily due to a restructuring charge of
$2.0 million related to lease costs and related equipment write-offs
associated with vacated office sites and to severance agreements with
involuntarily terminated employees. This charge was a result of a plan to
restructure In Home Health's field operations and reduce its cost structure.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $10.9
million for the six month period ended November 30, 1997, due to increases in
property and equipment resulting from additions and renovations to existing
facilities as well as new construction during the past twelve months.
General corporate and other expense for the six month period ended November
30, 1997, decreased $3.7 million when compared to the same period last year.
This decrease was partially due to a reduction in employees related to the
discontinued lodging operations and reengineering efforts in both
organizational and financial systems. Additionally, a gain of $2.1 million
from the sale of a corporate office building is included in general corporate
and other expense for the six month period ended November 30, 1997. For the
six month period ended November 30, 1996, a gain of $7.3 million from the sale
of four nursing centers and charitable contributions expense of $5.0 million
are included in general corporate and other expense. General corporate and
other expense represented 3.2% of revenues during the six month period ended
November 30, 1997, compared to 4.6% for the same period last year. General
corporate and other expense includes risk management, information systems,
treasury, accounting, legal, human resources and other administrative support
functions.
Interest income from advances to discontinued lodging operations decreased
by $5.2 million for the six months ended November 30, 1997 compared to the
same period last year. This reduction was attributable to the prepayment of
$110.0 million of indebtedness in the fourth quarter of fiscal year 1997 and
the prepayment of the remaining $115.7 million in the second quarter of fiscal
year 1998.
Interest expense increased $2.9 million for the six month period ended
November 30, 1997 over the same prior year period. The increase in interest
expense resulted primarily from an increase in the average outstanding balance
of the $250 million competitive advance and multi-currency revolving credit
facility (the "Existing Credit Facility") as well as increases in borrowings
under Vitalink's $200 million revolving credit facility used to consummate the
TeamCare merger. Interest capitalized in conjunction with construction
programs amounted to $2.4 million for the six months ended November 30, 1997
and $2.6 million for the six months ended November 30, 1996.
Income from continuing operations before income taxes for the six month
period ended November 30, 1997, was $81.3 million. This compares to income
from continuing operations before income taxes in the same period last year of
$73.7 million.
On November 1, 1996, Manor Care completed the spin-off of its lodging
segment by contributing its net investment in discontinued lodging operations
totaling $165.7 million to Choice Hotels International, Inc. Manor Care
shareholders of record on October 10, 1996, received one share of Choice
Hotels International, Inc. common stock for each outstanding share of Manor
Care common stock. Accordingly, lodging results are reported as discontinued
operations for all periods presented. Because the spin-off was completed two
months into the second quarter, results for the six month period ended
November 30, 1996 include less than six months of income and earnings per
share from the discontinued lodging segment.
On November 20, 1997, a consensus was reached by the Emerging Issues Task
Force regarding reengineering costs (Issue 97-13) providing that all
reengineering costs be expensed as incurred based on the fair
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value of the services rendered. As a result, in November 1997, Manor Care
expensed $3.2 million of reengineering costs (net of taxes) as the effect of a
cumulative change in accounting principle.
Comparison of Fiscal Year Results
SKILLED NURSING FACILITIES. Skilled nursing revenues increased from $985.2
million to $1.1 billion ($71.0 million or 7%) in fiscal 1997 compared to the
prior year. The increase in revenues is attributable to an increase
in average daily rates of approximately 6.0% ($61 million) and an increase in
bed capacity of approximately 5.7%. The increase in average rates includes the
incremental impact of settlements with government agencies related to prior
period cost reports of $4 million. The growth in bed capacity is attributable
to the purchase of two nursing facilities (279 beds), openings of newly
constructed facilities (398 beds) and additional bed development at existing
centers (467 beds), and is net of the sale of four facilities (498 beds) in
the second quarter of 1997.
Skilled nursing revenues increased from $893.5 million to $985.2 million in
fiscal year 1996 ($91.7 million or 10.3%). The increase in revenues is
attributable to an increase in average daily rates of approximately 6% ($59
million) and an increase in bed capacity of approximately 3.3%. The increase
in rates includes the incremental impact of settlements with government
agencies related to prior period cost reports of approximately $7 million. The
growth in bed capacity is attributable to the purchase of four nursing
facilities (569 beds), openings of newly constructed facilities (360 beds) and
additional bed development at existing centers (35 beds).
Skilled nursing operating expenses increased from $735.7 million in 1996 to
$789.1 million in 1997 ($53.4 million or 7%). Additional capacity accounts for
$20.5 million of this increase. The remainder of the increase is caused by
additional staffing necessitated by higher patient acuity and more complex
product and service offerings. Gross margin as a percentage of sales was flat
at 25.3% in fiscal years 1997 and 1996.
Operating expenses increased from $671.0 million in 1995 to $735.7 million
in 1996 ($64.7 million or 9.6%). The increase in operating expenses was
attributable to additional capacity ($8.3 million), as well as to additional
staffing necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales increased slightly
from 24.9% to 25.3% from fiscal year 1995 to 1996.
PHARMACY. Pharmacy revenues increased 94% for fiscal year 1997 or $132.6
million primarily as a result of the TeamCare Merger ($94.6 million),
Vitalink's acquisition of a pharmacy ($12.4 million), and capacity and rate
changes at existing pharmacies ($25.6 million). Pharmacy revenues increased
$28.6 million or 26% in fiscal 1996 due to capacity increases ($17.4 million)
and Vitalink's acquisition of a pharmacy and infusion business ($5.1 million).
Operating expenses increased $52.8 million to $100.5 million or 36.8% of net
revenues in fiscal 1997 compared to $47.7 million or 33.9% of net revenues in
fiscal 1996. The increase was principally attributable to the inclusion of
TeamCare results effective February 1, 1997. The increase in operating costs
as a percentage of revenues is attributable to a variety of factors, including
TeamCare's higher payroll cost as a percentage of net revenues (25.3% for
TeamCare v. 20.9% for Vitalink), TeamCare's higher selling, general and
administration costs (10.7% v. 8.4%) and the amortization of goodwill and
pharmacy contracts arising from the TeamCare merger ($3 million).
Operating expenses (excluding cost of goods sold) increased $10.4 million to
$47.7 million or 33.9% of net revenues in fiscal 1996 compared to $37.3
million or 33.2% of net revenues in fiscal 1995. Both payroll and selling,
general and administrative expenses increased to support the growth in beds
serviced. Payroll as a percentage of net revenues increased to 20.7% from
19.7% primarily resulting from investments in staff for information systems
and selling efforts. The increase in depreciation and amortization is the
result of the amortization of pharmacy contracts, goodwill and noncompete
agreements obtained in connection with acquired businesses as well as
depreciation of capital expenditures from existing pharmacies.
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Gross profit for fiscal year 1997 was $133.6 million, an increase of $64.6
million or 90.9% over fiscal year 1996. The increase was largely attributable
to the TeamCare merger. The gross profit margin declined to 48.9% from 49.7%
principally due to the addition of relatively less profitable new accounts and
reimbursement reductions from certain state Medicaid programs.
Gross profit for fiscal year 1996 was $70.0 million, an increase of $14.0
million or 25.0% over fiscal year 1995. The gross profit margin decreased
slightly to 49.7% in fiscal year 1996 compared to 49.9% in fiscal year 1995.
ASSISTED LIVING. Assisted living revenues increased for fiscal year 1997 by
52.5% or $25.3 million due to increases in rates at existing facilities ($1.9
million), capacity increases ($20.2 million) and occupancy increases ($3.2
million). Assisted living revenues increased $34.3 million or 250% in 1996 due
to capacity growth and rate increases. Manor Care acquired six assisted living
facilities and opened five Arden Courts in fiscal year 1996.
Operating expenses increased $19.1 million to $59.1 million or 80.6% of net
revenues in fiscal year 1997 compared to $40.1 million or 83.2% of net
revenues in fiscal year 1996 as a result of increases in capacity and
inflation.
Operating expenses increased $30.2 million to $40.1 million or 83.2% of net
revenues in fiscal year 1996 compared to $9.9 million or 71.4% of net revenues
in fiscal year 1995 as a result of increases in capacity and inflation. The
increase in operating expenses as a percentage of revenue was due to a
significant level of new assisted living development.
HOME HEALTH. Home health revenues increased 67.7% or $50.2 million for the
fiscal year 1997, reflecting a full year of home health operations. Manor Care
entered into the home health business with the acquisition of In Home Health
in October 1995. Home health revenues of $74.2 million for fiscal year 1996
represent revenues contributed by In Home from its acquisition in October 1995
through May 1996.
Operating expenses increased $50.6 million to $124.5 million or 100.1% of
net revenues in fiscal year 1997 compared to $73.9 million or 99.6% of net
revenues in fiscal year 1996. The increase from 1996 to 1997 represents the
impact of a full year of expenses in fiscal year 1997 versus eight months of
expenses for the fiscal year 1996.
There were no home health revenues or operating expenses in fiscal year
1995, as Manor Care did not enter the home health business until fiscal year
1996.
OTHER RESULTS OF OPERATIONS. General corporate and other expenses
represented 4.5% of revenue in fiscal year 1997 and 5.8% of revenue in fiscal
year 1996. General corporate and other expenses includes all indirect
operating expenses as well as risk management, information systems, treasury,
accounting, legal and other administrative support for Manor Care and its
various subsidiaries. The reduction of general corporate and other expenses is
partially due to a reduction in employees related to the discontinued lodging
segment and reengineering efforts in both organizational and financial
systems. Additionally, general corporate and other expenses for fiscal year
1997 included a gain of $7.3 million from the sale of four nursing centers and
charitable contributions expense of $5.0 million.
Interest expense increased 38% and 33% in fiscal years 1997 and 1996,
respectively. The interest expense increase of 38% in fiscal year 1997 was
primarily 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 and acquisitions, as discussed above. The interest
expense increase of 33% in fiscal year 1996 was primarily attributable to
additional borrowings in connection with facility development and
acquisitions.
Minority interest expense increased $2.3 million during fiscal year 1997 to
$4.0 million. The increase results primarily from Vitalink's merger with
TeamCare.
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Manor Care recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long lived assets and costs associated with Manor
Care's restructuring of its healthcare business. The most significant
components of the provisions were non-cash asset impairment charges of $21.2
million relating to writedowns of property, equipment and capitalized system
development costs.
LIQUIDITY AND CAPITAL RESOURCES
Manor Care maintains adequate capital resources, including strong operating
cash flows and committed lines of credit, to support ongoing operations and to
fulfill capital requirements in the foreseeable future.
On November 1, 1996, Manor Care separated its lodging business from its
healthcare business via a tax-free spin-off of the lodging division. In
conjunction with this spin-off, Manor Care received a three-year, $225.7
million 9% note from its lodging segment. In April 1997, Manor Care received a
prepayment of $110.0 million on the advances to the discontinued lodging
segment. In October 1997, Manor Care received prepayment of the remaining
$115.7 million. All proceeds were used to repay borrowings under the Existing
Credit Facility.
In September 1996, Manor Care amended its Existing Credit Facility to
provide for the spin-off of the lodging division. The Existing Credit Facility
expires in September 2001. At November 30, 1997, bank lines totaled $275.0
million, of which $ 38.1 million remained unused. ManorCare Health Services
intends to establish a new revolving credit facility in conjunction with the
Distribution.
In June 1996, Manor Care completed a public offering of unsecured Senior
Notes in the amount of $150.0 million, the proceeds of which were used to
repay borrowings under the Existing Credit Facility. The notes are due in June
2006 and carry a 7 1/2% interest rate. In connection with the Distribution,
ManorCare Health Services plans to offer to exchange $1,000 principal amount
of its 7 1/2% Senior Notes due 2006 for each $1,000 principal amount of the 7
1/2% Senior Notes due 2006 of Manor Care properly tendered. See "DESCRIPTION
OF THE TRANSACTIONS--The Exchange Offer and Solicitation."
Manor Care's working capital ratio was 1.5 at May 31, 1997 and 1.0 at May
31, 1996.
ACQUISITIONS, OPENINGS, DIVESTITURES AND SALES OF PROPERTY
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares and stock options 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. On May 21, 1997, Manor Care successfully
completed its tender offer to purchase 1.5 million shares of Vitalink common
stock. As a result of the tender offer, Manor Care's interest in Vitalink was
increased to approximately 51%. The net pretax gain resulting from these
transactions in Vitalink stock was $50.3 million. Manor Care also purchased
two nursing centers for $17.8 million and Vitalink purchased a pharmacy for
$5.3 million. During fiscal 1996, investment in property and equipment
utilized in continuing operations and systems development amounted to $136.3
million. Additionally, during fiscal 1996, $51.4 million was spent to acquire
four additional nursing centers and six assisted living facilities with five
attached skilled nursing units. Vitalink also purchased two pharmacies for
$6.3 million. In October 1995, Manor Care purchased approximately 41% of In
Home Health, Inc.'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 million shares of common stock.
During the first six months of fiscal years 1998 and 1997, investment in
property and equipment and systems development amounted to $110.7 million and
$83.7 million. During fiscal 1997, investment in property and equipment
utilized in continuing operations and systems development amounted to $183.5
million.
During the first six months of fiscal year 1998, Manor Care opened one newly
constructed skilled nursing facility located in California and sold a
corporate office building located in Maryland. Additionally, Manor Care
purchased certain assets of a pharmacy business for $5.6 million and acquired
another pharmacy business in Oklahoma City, Oklahoma for $0.1 million plus
351,318 shares of Vitalink Common Stock.
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During the first six months of fiscal 1997, Manor Care transferred an
assisted living facility to the discontinued lodging segment with an
approximate net book value of $4.9 million. In addition, Manor Care acquired a
nursing center in California for $4.4 million and sold four nursing centers in
Indiana, Iowa, Illinois and Texas for $17.3 million. Manor Care also opened
three newly constructed skilled nursing facilities.
In connection with the Distribution, ManorCare Health Services will receive
cash of approximately $250 million and the Real Estate Note in an aggregate
principal amount of up to $250.0 million. ManorCare Health Services has agreed
not to transfer the Real Estate Note on or prior to the six month anniversary
of the date of issuance thereof. In addition, on or after the third
anniversary of the issuance of the Real Estate Note, ManorCare Health Services
may request that Manor Care Real Estate redeem the Real Estate Note. Manor
Care Real Estate may not have adequate funds to effect such redemption and in
such case may seek to obtain funds therefor through additional debt or equity
financing. There can be no assurance that Manor Care Real Estate would be able
to obtain such financing. In addition, the terms of Manor Care Real Estate's
outstanding indebtedness may prohibit such redemption. In the event that
ManorCare Health Services requests that Manor Care Real Estate redeem the Real
Estate Note and Manor Care Real Estate does not redeem the Real Estate Note,
the interest rate on the Real Estate Note will increase by 200 basis points;
provided that such interest rate will not be so increased unless, as of the
time such request for redemption is made, the aggregate amount of rent paid by
ManorCare Health Services under the Lease Agreements with respect to all
properties subject to such Lease Agreements shall be equal to or exceed the
aggregate Priority Sum for all such properties on a cumulative basis from the
Effective Date through the third anniversary thereof (such aggregate amount of
rent being herein referred to as the "Threshold Rent"). Solely for purposes of
calculating the Threshold Rent, (i) the aggregate Priority Sum for the fiscal
year ended May 31, 1999 shall be deemed to be the aggregate Priority Sum
calculated pursuant to the Lease Agreements plus $5 million and (ii) the
aggregate Priority Sum for the fiscal year ended May 31, 2000 and thereafter
shall be deemed to be the aggregate Priority Sum calculated pursuant to the
Lease Agreements plus $10 million. Manor Care Real Estate's high degree of
leverage could adversely affect Manor Care Real Estate's ability to pay
principal and interest on or to redeem the Real Estate Note and may adversely
effect the ability of ManorCare Health Services to sell the Real Estate Note.
The failure of Manor Care Real Estate to pay principal and interest on the
Real Estate Note in a timely manner or the inability of ManorCare Health
Services to sell the Real Estate Note to a third party for its principal
amount could have a material adverse effect on ManorCare Health Services and
could require ManorCare Health Services to seek alternate sources of liquidity
for its operations. There can be no assurances that such alternate sources of
liquidity will be available. For a description of the Real Estate Note, see
"RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES AFTER
THE DISTRIBUTION--The Real Estate Note."
ManorCare Health Services believes that cash flows from operations, together
with the proceeds from the Capital Contribution and available borrowings under
the Existing Credit Facility, will provide it with sufficient resources to
meet its working capital needs, to finance projected capital expenditures and
to meet its liquidity requirements through fiscal year 2001.
ManorCare Health Services' five year strategic plan includes the
acquisitions of 170 Arden Courts and 38 Springhouse facilities from Manor Care
Real Estate pursuant to the Development Agreement. The aggregate capital
required to complete these acquisitions over the 5 year period is estimated at
$1.7 billion. Principal capital sources planned to fund the acquisitions
include $500 million of cash and notes received in connection with the
Distribution and cash provided from operations. Additionally, ManorCare Health
Services expects to incur minor expenditures for routine renovation and
maintenance of existing properties.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased to $690.4 million at May 31, 1997 from $707.8
million at May 31, 1996. This decrease was primarily due to the $164.2 million
dividend of the discontinued lodging segment and $6.1 million of cash
dividends paid, offset by net income of $136.9 million and stock options
exercised of $12.3 million.
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FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Information Statement including the
words "plans," "anticipates," "intends," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. ManorCare
Health Services undertakes no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
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. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
substantially similar to the standard recently issued by the International
Accounting Standards Committee entitled "International Accounting Standards,
Earnings Per Share." ManorCare Health Services plans to adopt SFAS 128 in
fiscal year 1998 and has not determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of comprehensive
income and its components. ManorCare Health Services plans to adopt SFAS 130
in fiscal year 1999 and has not determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. ManorCare Health Services
plans to adopt SFAS 131 in fiscal year 1999 and has not determined the impact
of adoption.
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BUSINESS
OVERVIEW
ManorCare Health Services believes that it is a leading provider of a full
range of senior support health care services. ManorCare Health Services
provides an array of services that includes skilled nursing, assisted living,
institutional pharmacy and home health care and additional support services
for the frail elderly living at home. ManorCare Health Services is striving to
become the nation's foremost provider of high-quality senior support health
care services within the private pay segment. In order to achieve this goal,
ManorCare Health Services is planning to focus on the rapid acquisition of
assisted living facilities in cluster markets pursuant to the Development
Agreement with Manor Care Realty. Under the Development Agreement, ManorCare
Health Services intends to acquire from Manor Care Realty approximately 170
Arden Courts and 38 Springhouse senior residences to be newly developed by
Manor Care Realty during the next five years. See "RELATIONSHIP BETWEEN MANOR
CARE REALTY AND MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--Development
Agreement." Its strategy for achieving this objective entails aggressive
implementation of the following key initiatives:
. grow through acquisition of proprietary assisted living facilities
developed by Manor Care Realty
. expand on current market leadership position in the private pay segment
. extend leadership position as provider of the most innovative Alzheimer's
services in the industry
. maintain focus on high-quality personalized care and services
. market distinctive products nationally under the ManorCare Health
Services brand name
. build on existing senior support services platform
. focus on development of cluster markets
ManorCare Health Services leases and operates 168 skilled nursing facilities
owned by Manor Care Realty and owns joint venture interests in and manages
three additional skilled nursing facilities. The skilled nursing facilities
are located in 28 states and contain approximately 24,089 beds. These
facilities provide skilled nursing services principally for residents over the
age of 65. Within its skilled nursing facilities, ManorCare Health Services
operates 146 Arcadia special-care units which provide care to individuals in
the middle to late stages of Alzheimer's disease and 21 MedBridge high acuity
units which focus on short-term, post-hospital care for medically complex
residents and those in need of aggressive physical rehabilitation. ManorCare
Health Services owns and operates 37 assisted living facilities in 12 states
containing 3,854 units. These facilities include 14 Arden Courts, serving
persons with early to middle-stage Alzheimer's disease or related memory
impairment, and 21 Springhouse senior residences, serving the general assisted
living population. ManorCare Health Services also has majority control of
Vitalink, one of the largest public institutional pharmacy companies, and In
Home Health, a national home health care services company. Vitalink operates
57 institutional pharmacies in 36 states, serving approximately 173,000 beds.
In Home Health provides home health services in 14 states.
On October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration by Manor Care (and to be considered by ManorCare Health
Services after the Distribution) include strategic mergers, joint ventures or
other business combinations that could enhance Vitalink's strategic position
in its markets, better enable it to serve its customers and increase
Vitalink's shareholder value. Vitalink has retained SBC Warburg Dillon Read
Inc. to act as financial advisor in connection with the exploration of
strategic alternatives with respect to Manor Care's interest in Vitalink.
Manor Care has no present commitments or agreements with respect to any such
transaction and there can be no assurance that Manor Care (or ManorCare Health
Services after the Distribution) will decide to enter into any such
transaction or, should it decide to do so, will be able to reach an agreement
with respect to any such transaction on terms acceptable to it.
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INDUSTRY TRENDS
There are several trends affecting the long-term care industry. First, the
competitive landscape is changing. The industry is consolidating as smaller,
local operators are being acquired by larger operators. In addition, several
large multi-unit operators have merged to form even larger chains. By 1995,
54% of the skilled nursing homes in the country were part of a chain, up from
28% in 1977. Finally, some long term care providers have recognized the need
to diversify by expanding into assisted living, home health care, and
ancillary services.
Second, many hospitals have developed their own post-acute care capabilities
in response to cost containment pressures. These integrated delivery systems
place a premium on keeping patients within their systems. The development of
post-acute care capabilities by hospitals impacts providers of long-term care,
as these providers have historically received a large number of referrals from
clinical networks, including hospitals, physicians and managed care
organizations. However, shifts away from cost-based reimbursement to
prospective pay systems may cause hospitals to rethink their strategy and
create new opportunities for partnerships with home care and skilled nursing
providers.
Third, the number of elderly in America is expanding faster than the overall
population. As the senior population continues to expand, the demand for
health related services targeted specifically at serving their needs is
increasing. The number of people aged 75 and older, the primary consumer of
senior support health care services, is growing more quickly than the overall
population. According to the U.S. Bureau of the Census, the number of seniors
75 and older is estimated to increase by approximately 37% from 13 million in
1990 to an estimated 17.8 million in 2005. The U.S. Bureau of the Census data
predicts that total U.S. population will only increase by approximately 15%
during the same period.
Other market trends contributing to change in the long-term care industry
include:
. a continued increase in the number of frail, elderly individuals living
alone who require assistance with their activities of daily living
("ADLs") such as dressing, bathing, eating, and medication management;
. the increase in the net worths of older people, which enables a greater
number of individuals to privately pay for support services, home health
care, assisted living and skilled nursing care; and
. the growth in the number of dual-career families who may find it more
difficult to care for their elderly relatives in their homes and who may
also have greater financial resources to better support their elderly
relatives outside the home.
The attractive demographics and future growth opportunities have encouraged
existing market participants to increase their product offerings and have
encouraged new entrants such as real estate developers to offer continuing
care retirement communities and assisted living facilities which are focused
on the frail elderly care market. In addition, more options geared towards
maximizing the individual's ability to live independently in their homes are
becoming available. These industry participants are expanding the set of
senior support health care options for the elderly. The level of care selected
by the elderly and their families depends on the needs of the individual. The
range of health services available for the elderly includes:
. Home health care--the provision of health care service to the elderly in
their homes, including nursing, infusion therapy, hospice,
rehabilitation, personal care, companion care and home making;
. Senior support services--emerging new services geared towards the
elderly, including geriatric care management, financial management and
planning, transportation services and other services that support the
elderly living at home;
. Physician services--geriatric centers and physicians who specialize in
geriatric care and outpatient disease management;
. Short-term care--adult day care and respite care;
. Residential care--congregate care facilities, continuing care retirement
communities, assisted living facilities and skilled nursing facilities;
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. Alzheimer's disease care--facilities focused on individuals with
Alzheimer's disease or related memory impairment; and
. Acute care--medical treatment in hospital facilities as well as sub-acute
care in hospitals and skilled nursing facilities.
BUSINESS STRATEGY
ManorCare Health Services' goal is to become the nation's foremost provider
of high-quality senior support health care services within the private pay
segment. ManorCare Health Services intends to aggressively expand its unit
capacity in assisted living while at the same time broadening the range of
products and services for private pay customers still living at home. Its
strategy for achieving this objective entails the following key initiatives:
. Grow through Acquisition of Proprietary Assisted Living Facilities
Developed by Manor Care Realty. ManorCare Health Services believes the
anticipated increased market demand for assisted living facilities
presents ManorCare Health Services with significant opportunities for
growth. ManorCare Health Services will work with Manor Care Realty to
identify target markets for expansion and will acquire from Manor Care
Realty approximately 170 Arden Courts and 38 Springhouse senior
residences over the next five years. Pursuant to the Development
Agreement, Manor Care Realty will develop assisted living facilities for
sale to ManorCare Health Services. ManorCare Health Services will be
obligated to purchase each such facility if occupancy reaches 75% for a
period of five days during the two-year period measured from the time a
particular facility opens. In addition, ManorCare Health Services will
make acquisitions of other assisted living properties on an opportunistic
basis. The Non-Competition Agreement limits ManorCare Health Services'
ability to develop or enter into management agreements with respect to
assisted living facilities located near assisted living facilities being
developed by Manor Care Realty; however, it does not restrict ManorCare
Health Services' ability to acquire new assisted living facilities.
ManorCare Health Services believes that its experience in delivering
assisted living services and targeting its facilities to private pay
individuals in existing and new cluster markets will enable it to
experience significant growth and higher margins. In addition, ManorCare
Health Services believes it can leverage its experience in Alzheimer's
care to provide the most innovative and highest quality Alzheimer's
services available through its Arden Courts assisted living facilities.
To date, Manor Care Realty has 26 facilities under construction and 87
additional facilities under contract and in development.
. Expand on Current Market Leadership Position in the Private Pay
Segment. In its skilled nursing management business, ManorCare Health
Services believes that continuing to focus on private pay patients
enables it to reduce its exposure to anticipated changes in government
reimbursement practices and enables ManorCare Health Services to achieve
more attractive profit margins. Private pay patients accounted for
approximately 60% of ManorCare Health Services' skilled nursing and
assisted living revenues in fiscal 1997 compared to a 1996 industry
average of approximately 30% for for-profit nursing care providers.
ManorCare Health Services believes that its high-end specialty products
such as Williamsburg (luxurious accommodations including upgraded
furnishings and decor, concierge services and a private dining area with
a gourmet menu), Heritage (luxurious accommodations including upgraded
furnishings and decor, a private lounge and other amenities) and Arcadia
(a secure, self-contained unit designed specifically for Alzheimer's and
other related memory disorder patients) will enable ManorCare Health
Services to continue to attract upper income, service sensitive residents
who pay directly for services without the benefit of any government
assistance program.
ManorCare Health Services has set a goal of dedicating a significant
portion of its skilled nursing beds to specialty products. ManorCare
Health Services believes that this drive and ManorCare Health Services'
aggressive expansion into the assisted living industry will further
enhance its leadership position in the private pay segment. ManorCare
Health Services believes that its substantial investment in direct
marketing through advertising, direct mail, advanced telemarketing and
community outreach will allow it to maintain its market leadership in this
segment.
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. Extend Leadership Position as Provider of the Most Innovative Alzheimer's
Services in the Industry. ManorCare Health Services believes that it is
the industry leader in Alzheimer's disease management, with almost 15
years of experience and more than 18% of its total beds devoted to
Alzheimer's care. ManorCare Health Services' Arcadia special-care units
in its skilled nursing facilities meet the needs of individuals in the
middle to late stages of Alzheimer's disease. ManorCare Health Services
plans to continue to develop Arcadia special-care units throughout its
existing markets. ManorCare Health Services' Arden Courts assisted living
facilities serve individuals in the earlier stages of the disease
process. ManorCare Health Services plans to open approximately 170 Arden
Courts in the next five years. ManorCare Health Services also serves
individuals suffering from Alzheimer's and other forms of dementia
through its Springhouse facilities which offer specialized programs for
this population. ManorCare Health Services believes that its proprietary
Alzheimer's care protocols are integral to the high quality of care it
provides to its Alzheimer's residents. ManorCare Health Services'
integrated continuum of care allows ManorCare Health Services to meet the
needs of its Alzheimer's customers from diagnosis to home-based care
through assisted living to high acuity facility-based care. For example,
for an individual moving through the stages of Alzheimer's disease, this
continuum of care would begin with a memory assessment program followed
by home health care. The individual would then reside in an Arden Courts
assisted living facility for the early to middle stages of the disease
and would ultimately, during the middle to late stages of the disease,
move into an Arcadia special-care unit.
. Maintain Focus on High Quality Personalized Care and Services. ManorCare
Health Services is dedicated to delivering the highest level of service
quality and patient satisfaction, striving to provide its residents with
personalized care and services. ManorCare Health Services believes that
delivering the highest product integrity standards will enable it to
achieve ManorCare Health Services' goal of delivering "best in class"
services to its residents--services which are considered superior by
ManorCare Health Services' customers, as well as industry experts, to
those services offered by ManorCare Health Services' competitors.
ManorCare Health Services believes that providing "best in class"
services will reinforce its reputation as the leading provider of high
quality, personalized senior support health care services. ManorCare
Health Services relies on its product management organization to develop
Company-wide care protocols, standards of operation and training
programs, which ensure that ManorCare Health Services delivers superior
and consistent care in all of its facilities. In addition to providing
high quality and consistent services on a Company-wide basis, ManorCare
Health Services personalizes the service package to meet the needs of
each particular resident. The facility staff develops a care plan for
each resident based on professional assessments and family consultations.
The care plan is updated regularly based on the individual needs of the
resident by the facility's health care and social services staff in
conjunction with the resident and his/her family. ManorCare Health
Services also strives to understand its residents' needs by conducting
over 13,000 resident and family member interviews annually. Resident
satisfaction scores from these interviews are a major component of
incentive compensation for all field and corporate managers. A quality
assurance program is administered with the objective of exceeding the
expectations of all residents and their families.
. Market Distinctive Products Nationally under the ManorCare Health
Services Brand Name. ManorCare Health Services believes that its
competitive position will be materially enhanced by continuing to develop
the premier national brand name in the senior support health care
industry. In September 1996, ManorCare Health Services created a unified
national brand name for all the elements in its continuum of care:
"ManorCare Health Services." ManorCare Health Services believes that a
stronger brand identity for its services will make it easier for
ManorCare Health Services to build national awareness and facilitate
customer confidence in the services it provides. In addition, ManorCare
Health Services believes that its aggressive plan to acquire assisted
living facilities will enable it to achieve the critical mass necessary
to establish further its senior support health care services nationally.
ManorCare Health Services is leveraging its premier brand name through
partnership arrangements with complementary elder health care providers.
ManorCare Health Services' strategy includes developing a brand name
image synonymous with "best in class" in every element of its business.
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. Build on Existing Senior Support Services Platform. ManorCare Health
Services believes that its success depends upon creating a seamless
continuum of care allowing residents to "age in place." ManorCare Health
Services' current continuum of care includes: home health care, assisted
living facilities, skilled nursing facilities and pharmacy services. In
addition to substantially increasing its assisted living offerings,
ManorCare Health Services plans to expand its continuum of care by
providing senior support services to the frail elderly still living at
home. ManorCare Health Services believes that targeting such senior
support services to the middle class to affluent senior population will
enable it both to gather information about the frail elderly who still
reside at home, indicating their possible needs for other ManorCare
Health Services health care or facility-based services, and to cultivate
relationships with these individuals and their families. ManorCare Health
Services is pursuing a strategy to develop information systems technology
to efficiently track its customers and create superior cost-effective
clinical protocols. ManorCare Health Services believes that the
information gathered about these customers coupled with the relationship
formed with them and their families will increase their awareness of and
confidence in the quality of services provided by ManorCare Health
Services.
. Focus on Development of Cluster Markets. ManorCare Health Services has
focused its skilled nursing development on cluster markets in order to
achieve critical mass and improve its competitive advantage with respect
to its regional suppliers and payors. By adding assisted living
facilities to this existing base, ManorCare Health Services believes it
can leverage its cost structure and build on its brand image. In
addition, ManorCare Health Services is centralizing certain corporate
functions, including accounting, billing and other non-care related
functions at the cluster level. ManorCare Health Services has implemented
a major reengineering effort as a way to foster continuous improvement
within its core processes. To support the cluster market structure from
an organizational standpoint, ManorCare Health Services has created a
market management structure in which all products and services within a
cluster market are united under a single market management team. Under a
market management structure, the regional management has responsibility
for the entire continuum of services offered in the specific regional
clusters. ManorCare Health Services also believes that by marketing its
continuum of care in its cluster markets, it can spread its marketing
costs over more facilities and thus outspend its competitors. The market
management structure provides management with greater flexibility to
better respond to market trends and competitive changes in local markets.
SKILLED NURSING SERVICES
ManorCare Health Services believes it is the premier operator of skilled
nursing facilities in the United States. Through a cohesive framework of
proprietary care protocols ManorCare Health Services' skilled nursing
facilities provide (i) long-term care for chronically ill and frail elderly
individuals who need 24-hour skilled nursing and physical, occupational and
speech therapies; (ii) high acuity, short-term, post-hospital care for
medically complex patients and persons in need of aggressive rehabilitation;
and (iii) long-term care for individuals with middle to late-stage Alzheimer's
or related memory impairment. In all cases these services include appropriate
nursing care, room and board, special diets, occupational, speech, physical
and recreational therapy and other services designed to improve the well-being
of the resident. ManorCare Health Services maintains a Quality Assurance
Program to ensure that high standards of care are consistently observed in
each facility. The Quality Assurance Program sets corporate standards for
delivery of care, designed to ensure the provision of "best in class"
services, and provides consulting and training support to the facilities.
ManorCare Health Services leases and operates Manor Care Realty's 168
skilled nursing facilities in 28 states pursuant to Lease Agreements under
which ManorCare Health Services pays monthly fees to Manor Care Realty.
ManorCare Health Services also owns the joint venture interests in and manages
three additional skilled nursing facilities. Many of these facilities are less
than ten years old and target affluent to middle income seniors in need of
skilled nursing care. ManorCare Health Services differentiates itself from its
competitors by offering unique specialty products designed to meet the needs
of specific customer segments. A significant portion of the beds at skilled
nursing facilities operated and managed by ManorCare Health Services are
dedicated to specialty services, which are attractive because they generate
higher per patient day revenues and profits than standard
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long-term care. For example, the Heritage and Williamsburg wings in ManorCare
Health Services' skilled nursing facilities provide residents with upgraded
decor, a private lounge, and special programs and, in the case of the
Williamsburg wings, concierge services and a private dining area with a
gourmet menu. ManorCare Health Services believes that the Heritage and
Williamsburg design concepts support ManorCare Health Services' reputation as
the premier provider of skilled nursing care and contributes to ManorCare
Health Services' high percentage of private pay residents as compared to the
rest of the industry. Within its skilled nursing facilities, ManorCare Health
Services operates 146 Arcadia special-care units providing services to
individuals in the middle to late stages of Alzheimer's disease or afflicted
with related memory impairment. ManorCare Health Services also operates 21
dedicated MedBridge high acuity units featuring high staff-to-patient ratios,
sophisticated clinical capabilities and state-of-the-art rehabilitation
departments. In addition, ManorCare Health Services' facilities offer
specially designed wound care programs, oncology and orthopedic rehabilitation
programs. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH
SERVICES--Lease Agreements."
ManorCare Health Services believes these high-end specialty products will
facilitate marketing efforts to attract longer stay (1-3 years) private pay
residents. ManorCare Health Services-managed skilled nursing and
rehabilitation facilities range in bed capacity from 53 to 259 beds and had an
aggregate bed capacity of 24,089 beds during the 1997 fiscal year. ManorCare
Health Services' nursing facilities are located in the following 28 states:
Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana,
Iowa, Kansas, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico,
North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina,
South Dakota, Texas, Utah, Virginia, Washington and Wisconsin.
ASSISTED LIVING SERVICES
ManorCare Health Services is pursuing an aggressive acquisition strategy in
the assisted living industry in an effort to build upon its current market
position and enhance ManorCare Health Services' competitive position in the
private pay segment. ManorCare Health Services has an acquisition plan
pursuant to which it intends to acquire from Manor Care Realty approximately
170 Arden Courts and 38 Springhouse senior residences during the next five
years. Pursuant to the Development Agreement, Manor Care Realty will develop
assisted living facilities for sale to ManorCare Health Services. ManorCare
Health Services will be obligated to purchase each such facility if occupancy
reaches 75% for a period of five days during the two-year stabilization period
measured from the time a particular facility opens. The purchase price for
each facility will be at a premium to Manor Care Realty's total development
costs, such premium ranging from 12% to 37%, based on the number of months
elapsed since the opening of the relevant facility. Total approved development
costs include expenses incurred in connection with the development and
construction of the facilities, but do not include operating losses incurred
during the two-year stabilization period. The premium to total approved
development costs is intended to compensate Manor Care Realty for the
increasing value of its investment over time as well as for the risks it takes
in connection with developing assisted living facilities, including the risks
inherent in operating the facilities during the two-year stabilization period.
If ManorCare Health Services does not acquire a facility within such two-year
stabilization period, Manor Care Realty may sell the facility to a third
party. During the two year stabilization period (or such lesser time if
stabilized occupancy is achieved and ManorCare Health Services purchases the
facility) ManorCare Health Services will manage the assisted living facilities
for Manor Care Realty for a fixed monthly fee. See "RELATIONSHIP BETWEEN MANOR
CARE REALTY AND MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--Development
Agreement."
In a strategy similar to that employed in ManorCare Health Services' skilled
nursing facilities, ManorCare Health Services' assisted living facilities
target affluent to middle income seniors in need of a full range of assisted
living services to optimize their quality of life. These services are
available 24 hours a day and generally include meal service, housekeeping,
personal care, nursing and health related services, social and recreational
services, transportation and special services (such as banking and shopping).
Personal services include bathing, dressing, personal hygiene, grooming,
ambulating and dining assistance. Health-related services, which are tailored
to individual patient needs and applicable state regulatory requirements, may
include assistance with medication management, skin care and injections, as
well as health care monitoring. ManorCare Health Services
73
<PAGE>
also believes that it offers more security to its customers by including these
health-related services as part of its care delivery. ManorCare Health
Services believes that by providing programs with a range of service options
responsive to the full range of the residents' changing needs, ManorCare
Health Services affords greater continuity of care and thereby permits
residents to "age in place."
ManorCare Health Services' Arden Courts assisted living facilities are a
distinct product and service segment focused exclusively on individuals
suffering from the early to middle stages of Alzheimer's disease or related
memory impairment. These special purpose assisted living facilities offer a
proprietary, specially designed physical plant with security systems,
structured activities and related resident services and support systems. These
facilities are typically divided into four color-coded houses comprising a
total of 56 units with access to communal living rooms, kitchens, dining rooms
and protected gardens. All aspects of the facilities' operations are managed
by an Executive Director, specially trained in the care of Alzheimer's
patients. Arden Courts assisted living facilities are designed to allow
residents the freedom to move about independently while keeping them safely
contained within a secured area with security systems. ManorCare Health
Services' specially designed social activities provide Arden Courts residents
with a minimum of eight hours of meaningful interactive activity per day. In
addition, ManorCare Health Services utilizes special nutritional programs to
help assure that caloric intake is maintained in its residents. ManorCare
Health Services' Arden Courts assisted living facilities also offer education,
counseling and support to the residents' families.
ManorCare Health Services' Springhouse senior residences are freestanding,
residential-style facilities designed to meet the needs of the general
assisted living population. ManorCare Health Services' assisted living
facilities are functionally arranged to provide a home-like atmosphere. The
architectural and interior design concepts incorporate the ManorCare Health
Services operating philosophy of delivering superior quality care, protecting
resident privacy, enabling freedom of choice, encouraging independence and
fostering individuality in a home-like setting. Each facility is operated with
certain protocols designed to maintain the health of the residents and to
provide a measure of security and support for those individuals. Each facility
includes common areas designed to promote social interaction among residents,
such as a common dining area, a laundry room, a library, a wellness center,
barber and beauty shop, crafts room, spa and a snack room or ice cream parlor.
In addition, Springhouse residents have access to medication management
services, therapy and other ancillary services as well as dementia programs
and dedicated dementia units in some locations.
ManorCare Health Services provides a wide variety of health care services at
its assisted living facilities, including medication management, monitoring
the resident's general health status and assisting residents in the
performance of their ADLs. In order to determine the individual care needs and
lifestyle preferences of its residents, ManorCare Health Services' facility-
based staff assesses each resident upon admission to determine his/her health
status, including functional abilities, need for personal care services and
assistance with ADLs as well as personal preferences. In addition, ManorCare
Health Services utilizes a current physician's report to ascertain the health
status and needs of the resident. ManorCare Health Services develops a plan of
care for each of its residents and utilizes licensed nurses, certified or
trained staff and third party providers to meet their health care needs. In
order to ensure that the plan of care continues to be tailored to a resident's
current needs, each resident is periodically reassessed. ManorCare Health
Services utilizes the plan of care as the basis for determining the monthly
charges for each resident's care and services. In addition, ManorCare Health
Services fosters resident wellness through health screening such as blood
pressure checks, periodic special services such as influenza inoculations,
chronic disease management such as blood glucose monitoring for diabetics,
dietary and nutritional programs, regular exercise and fitness classes and
special classes given by health care professionals. To the extent permitted by
state regulations, ManorCare Health Services also makes available third-party
specialized health care services to patients when necessary.
ManorCare Health Services' facilities accept residents for respite care
(short term placement for several days to several months) to accommodate
short-term exigencies. ManorCare Health Services believes that respite care
services serve as an introduction to the continuum of services it offers as
many residents are frequent returnees and often become permanent residents at
a Company facility.
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<PAGE>
INSTITUTIONAL PHARMACY SERVICES
ManorCare Health Services owns 51% of Vitalink, a publicly traded company
that provides institutional pharmacy services to nursing facilities, assisted
living facilities and other institutions. ManorCare Health Services believes
it will benefit from increased revenues generated through Vitalink's growth
strategy, including (i) expansion of market share through selective industry
acquisitions which should permit Vitalink to leverage its critical mass,
access new customers and realize operational efficiencies through
consolidation of the combined entities' infrastructure; (ii) continued
penetration of existing markets through targeting of non-ManorCare Health
Services institutional facilities to maximize pharmaceutical facility output;
(iii) further growth from meeting the pharmacy requirements of new or acquired
ManorCare Health Services skilled nursing and assisted living facilities;
(iv) geographically targeting dominant infusion service home care companies to
drive sales of infusion products; (v) development of proprietary information
and database systems to provide state of the art patient care and disease
management capabilities; and (vi) development of new services to provide
support to the elderly while they still reside in their homes, such as disease
management or patient education and compliance programs. Vitalink's recent
acquisition of GranCare's institutional pharmacy business, TeamCare, and the
resultant expansion of the scope of its business to include the provision of
pharmacy services to institutional clients with 173,000 related institutional
beds is indicative of the implementation of Vitalink's growth strategy.
Vitalink, which is the second largest publicly traded institutional pharmacy
in the country, is a high quality, value-added partner with health care
providers and payors and provides four types of services:
. Customized filling of prescription and non-prescription medications for
individual patients pursuant to physician orders delivered to nursing
facilities.
. Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.
. Infusion therapy services, consisting of the administration of a product
(nutrient, antibiotic, chemotherapy or other drugs or fluids) by tube,
catheter or intravenously. Vitalink prepares and delivers the product
which is administered by the nursing center staff.
. Integrated data systems such as VitalCONSULT, an integrated consultant
software package that allows pharmacists and nurses to record outcome
events, laboratory data, and patient status updates and administer
disease management programs and formularies more efficiently, and OPTIMA
(Optimizing Patient Theory in Medication Administration), a state-of-the-
art patient care management system designed to identify individuals who
are at high risk for certain diseases, which focuses on treatment
protocols and incorporates a disease-specific drug formulary. These
innovative systems increase efficiency, enhance clinical support and
result in superior outcomes.
Vitalink operates 57 institutional pharmacies located in 36 states and four
regional infusion pharmacies, which specialize in pharmaceutical dispensing of
individual medications, pharmacy consulting and infusion therapy products. In
the 1997 fiscal year, approximately 13% of the beds serviced by Vitalink were
Manor Care-affiliated. Net revenue from Manor Care and its patients (including
revenues received from government reimbursement programs) accounted for
approximately 29%, 48% and 49% of total net revenues in fiscal years 1997,
1996 and 1995, respectively. The balance came from unrelated third parties. On
October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration by Manor Care (and to be considered by ManorCare Health
Services after the Distribution) include strategic mergers, joint ventures or
other business combinations that could enhance Vitalink's strategic position
in its markets, better enable it to serve its customers and increase
Vitalink's shareholder value. Manor Care does not believe that any of the
strategic alternatives that it is exploring will have a material effect on the
operations of the skilled nursing business and the assisted living business.
Vitalink has retained SBC Warburg Dillon Read Inc. to act as financial advisor
in connection with the exploration of strategic alternatives with respect to
Manor Care's interest in Vitalink. Manor Care has no present commitments or
agreements with respect to any such transaction and there can be no assurance
that Manor Care (or ManorCare Health Services after the Distribution) will
decide to enter into any such transaction or, should it decide to do so, be
able to reach an agreement with respect to any such transaction on terms
acceptable to it.
75
<PAGE>
HOME HEALTH CARE SERVICES
ManorCare Health Services provides home health care services through its
majority owned subsidiary, In Home Health. In those markets in which In Home
Health does not participate, ManorCare Health Services is expanding its
relationships with other regional home health care service providers. Through
In Home Health, ManorCare Health Services offers its clients a broad range of
professional and support services to meet medical and personal needs at home.
These services provide an entry for clients in ManorCare Health Services'
cluster markets into ManorCare Health Services' integrated continuum of care.
In addition, ManorCare Health Services believes that its home health care
businesses profit from referrals from its assisted living and skilled nursing
facilities. In Manor Care's 1997 fiscal year, In Home Health indirectly
derived approximately $6.8 million in revenues (less than 10% of In Home
Heath's fiscal 1997 revenues) from referrals from Manor Care facilities. On
September 15, 1997, President Clinton imposed a Medicare moratorium on new
home health agencies so that new regulations could be issued to combat fraud.
On January 13, 1998, the Clinton Administration lifted the moratorium, based
on the issuance of new regulations for home health agencies. These regulations
require, as mandated by the Budget Act, that all home health agencies obtain
surety bonds to participate in the Medicare and Medicaid programs, and
disclose related business interests. According to press reports, some home
health agencies have had difficulty obtaining bonds meeting the required
criteria. If a home health agency is unable to obtain a bond, the agency could
lose certification to participate in the Medicare and Medicaid programs.
ManorCare Health Services does not believe that there will be any material
adverse affect on either In Home Health or on ManorCare Health Services as a
result of these new requirements.
The home health care and support services that ManorCare Health Services
provides through In Home Health include skilled nursing, infusion therapy,
hospice, rehabilitation, personal and companion care and homemaking. Hospice
services are an important new area of growth, and In Home Health operates 15
Medicare certified hospices in its 19 markets. In Home Health plans to become
certified in the four remaining geographic markets as soon as it can meet the
requirement of obtaining a Certificate of Need, either through acquisition of
an existing home health agency which has a CON or upon completion and approval
of application for a new CON. This process could take one to three years
because of the current moratorium on home health agency applications and the
long process of receiving approval for a CON. ManorCare Health Services also
expects to broaden the range of home health care options it offers by
providing its home-based Alzheimer's customers with specially trained
companions who can provide daily service ranging from short visits to all day
care.
ManorCare Health Services owns approximately 64% of the voting power of In
Home Health, a publicly traded company which provides home health care
services in 14 states. Each of In Home Health's branches has two divisions: a
Visit Division and an Extended Care Division. The Visit Division provides
clients with round-the-clock care on a short-term basis. The Extended Care
Division provides clients with care up to 24 hours a day on a long-term basis.
In Home Health operates infusion pharmacies which distribute pharmaceutical
drugs, fluids and supplies.
EMPLOYEES
As of the Effective Date, ManorCare Health Services will have approximately
29,500 employees. From time to time, some of ManorCare Health Services-managed
skilled nursing facilities experience shortages of professional nursing help
which may require ManorCare Health Services to seek temporary employees
through employment agencies at an increased cost.
A vast majority of ManorCare Health Services' employees are paid on an
hourly basis and are covered by the federal minimum wage laws. A few employees
are represented by labor unions and attempts have been made to unionize
employees of certain other facilities. ManorCare Health Services believes that
it enjoys a good relationship with its employees.
76
<PAGE>
PROPERTIES
ManorCare Health Services' signature Arden Courts and Springhouse model
facilities, first designed in 1993 and 1994 respectively, are freestanding,
residential-style facilities. Each Arden Courts facility ranges in size from
25,000 to 28,000 square feet, is built to target a site ranging between three
and four acres and has a capacity of 52 to 56 residents. Each Springhouse
facility ranges in size from 65,000 to 70,000 square feet, is built to target
a site ranging between five and six acres and has a capacity of 105 to 110
residents. Approximately 30-40% of each facility is devoted to common areas
and amenities, including reading rooms, family or living rooms and other areas
designed to promote interaction among residents. The ground level typically
contains a kitchen and common dining area, administrative offices, a laundry
room, a library or living room, a wellness center, barber shop, crafts room,
spa and a snack room. ManorCare Health Services' assisted living facilities
are usually one to three stories and are functionally arranged to provide a
home-like atmosphere. The architectural and interior design concepts
incorporate the ManorCare Health Services operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a home-like
setting.
The skilled nursing facilities operated by ManorCare Health Services range
in bed capacity from 53 to 259 beds and have an aggregate bed capacity of
24,089 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.
ManorCare Health Services has occupied its current headquarters since August
1996. The main building is approximately 335,000 square feet and is 90%
occupied at November 30, 1997. There is another building on the property which
is not used by the company (200,000 square feet of which 180,000 square feet
is storage and 20,000 square feet is office) and of which 80,000 square feet
is subleased to an unrelated party. The buildings and the approximately 100
acres of land on which they are situated are controlled through a lease. The
property is zoned for another 1,000,000 square feet of commercial space. Manor
Care believes that the main building will be adequate for expansion at the
current pace at least through the year 2000. For a description of the
arrangements with respect to the headquarters facility after the Distribution,
see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES
AFTER THE DISTRIBUTION--Office Lease Agreement."
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<PAGE>
The table below summarizes certain information regarding ManorCare Health
Services' facilities as of November 30, 1997 after giving pro forma effect to
the Distribution:
ASSISTED LIVING SERVICES--SPRINGHOUSE
<TABLE>
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Tucson........................................................ AZ 107(1)
Brea.......................................................... CA 92
Laguna Hills.................................................. CA 288(3)
Whittier...................................................... CA 73
Boynton Beach................................................. FL 127
Boynton Beach--Village........................................ FL 104
Dunedin....................................................... FL 110(1)
Naples........................................................ FL 311(3)
Port Charlotte................................................ FL 84
Sarasota...................................................... FL 106(1)
Peoria........................................................ IL 289(3)
Carmel........................................................ IN 260(3)
Bethesda...................................................... MD 92
Bethesda--Westwood............................................ MD 62(2)
Kensington.................................................... MD 201(4)
Silver Spring................................................. MD 118
Southfield.................................................... MI 101
Fairfield..................................................... OH 257(3)
Westlake...................................................... OH 97
Pottstown Residential......................................... PA 57(1)
West Reading Residential...................................... PA 53
Total Springhouse Facilities.................................. 21
-----
Total Springhouse Units....................................... 2,989
=====
ASSISTED LIVING SERVICES--ARDEN COURTS
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Farmington.................................................... CT 55
West Palm Beach............................................... FL 56(1)
Elk Grove..................................................... IL 54(1)
South Holland................................................. IL 56(1)
Potomac....................................................... MD 48(1)
Silver Spring................................................. MD 49(1)
Sterling Heights.............................................. MI 53
Cherry Hill................................................... NJ 53
Westlake...................................................... OH 56
Allentown..................................................... PA 56
King of Prussia............................................... PA 54(1)
North Hills................................................... PA 56(1)
Yardley....................................................... PA 52(1)
Fair Oaks..................................................... VA 55(1)
Total Arden Courts Facilities................................. 14
-----
Total Arden Courts Units...................................... 753
=====
</TABLE>
- --------
(1) Each parcel of land on which each of these facilities is located is
covered by a 99 year ground lease between Manor Care Realty, as landlord,
and ManorCare Health Services, as tenant. ManorCare Health Services owns
the buildings and improvements located thereon and the furniture, fixtures
and equipment located therein.
(2) This facility is leased by ManorCare Health Services from an unrelated
third party.
(3) These facilities also contain skilled nursing beds in the following
numbers: Naples (101), Laguna Hills (98), Peoria (51), Carmel (55) and
Fairfield (57).
(4) This facility is owned by an unrelated third party and managed by
ManorCare Health Services pursuant to a management agreement.
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<PAGE>
SKILLED NURSING SERVICES
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
ARIZONA
Tucson.................. 117
-----
Total................... 117
=====
CALIFORNIA
Citrus Heights.......... 146
Encinitas............... 117
Fountain Valley......... 146
Hemet................... 176
Palm Desert............. 178
Rancho Bernardo......... 95
Rossmoor................ 119
Sunnyvale............... 138
Walnut Creek............ 153
-----
Total................... 1,268
=====
COLORADO
Boulder................. 149
Denver.................. 151
-----
Total................... 300
=====
DELAWARE
Pike Creek.............. 151
Wilmington.............. 139
-----
Total................... 290
=====
FLORIDA
Boca Raton.............. 178
Boynton Beach........... 179
Carrollwood............. 117
Dunedin................. 119
Jacksonville............ 114
Naples.................. 116
Palm Harbor............. 179
Plantation.............. 119
Sarasota................ 176
Venice.................. 129
West Palm Beach......... 120
Winter Park............. 132
-----
Total................... 1,678
=====
GEORGIA
Decatur................. 129
Marietta................ 116
-----
Total................... 245
=====
<CAPTION>
ILLINOIS
<S> <C>
Arlington Heights....... 153
Champaign............... 98
Decatur................. 95
Elgin................... 79
Elk Grove............... 177
Hinsdale................ 188
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Kankakee................ 102
Libertyville............ 149
Naperville.............. 113
Normal.................. 97
Oak Lawn................ 173
Oak Lawn Americana...... 141
Orchard Manor........... 53
Palos Heights........... 176
Palos Heights West...... 120
Peoria.................. 119
Rolling Meadows......... 154
South Holland........... 185
Urbana.................. 97
Westmont................ 115
Wilmette................ 76
-----
Total................... 2,660
=====
INDIANA
Anderson................ 218
Indianapolis North...... 182
Indianapolis South...... 118
Kokomo.................. 100
-----
Total................... 618
=====
IOWA
Cedar Rapids............ 104
Davenport............... 100
Dubuque................. 95
Waterloo................ 93
-----
Total................... 392
=====
KANSAS
Overland Park........... 175
Topeka.................. 120
Wichita................. 117
-----
Total................... 412
=====
MARYLAND
Bethesda................ 102
Chevy Chase............. 158
Largo................... 128
Potomac................. 137
Roland Park............. 89
Rossville............... 180
Ruxton.................. 217
Silver Spring........... 119
Towson.................. 126
Wheaton................. 98
-----
Total................... 1,354
=====
</TABLE>
79
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
MISSOURI
Florissant.............. 97
Fremont................. 220
-----
Total................... 317
=====
MICHIGAN
Kingsford............... 105
Windemere............... 179
-----
Total................... 284
=====
NEVADA
Reno.................... 150
-----
Total................... 150
=====
NEW JERSEY
Cherry Hill............. 107
Mountainside............ 148
West Deptford........... 135
-----
Total................... 390
=====
NEW MEXICO
Camino Vista............ 134
Northeast Heights....... 137
Sandia.................. 176
-----
Total................... 447
=====
NORTH CAROLINA
Pinehurst............... 114
-----
Total................... 114
=====
NORTH DAKOTA
Fargo................... 107
Minot................... 105
-----
Total................... 212
=====
OHIO
Akron................... 100
Barberton............... 118
Belden Village.......... 144
Centreville............. 139
Cincinnati.............. 149
Lake Shore.............. 199
Mayfield Heights........ 149
North Olmstead.......... 177
Oregon.................. 108
Rocky River............. 209
Sycamore Glen........... 99
Westerville............. 178
Willoughby.............. 154
Woodside................ 143
-----
Total................... 2,066
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
OKLAHOMA
Midwest City............. 102
Norman................... 108
Northwest Oklahoma City.. 116
Southwest Oklahoma City.. 116
Tulsa.................... 110
Warr Acres............... 100
Windsor Hills............ 107
-----
Total.................... 759
=====
PENNSYLVANIA
Allentown................ 163
Bethel Park.............. 159
Bethlehem-I.............. 227
Bethlehem-II............. 215
Camp Hill................ 118
Carlisle................. 151
Chambersburg............. 205
Dallastown............... 203
Devon Manor.............. 261
Easton................... 224
Elizabethtown............ 96
Fitzgerald Mercy......... 119
Harrisburg............... 234
Huntingdon Valley........ 121
Jersey Shore............. 120
King of Prussia.......... 148
Kingston Court........... 126
Kingston East............ 177
Lansdale................. 170
Laureldale............... 199
Lebanon.................. 158
McMurray................. 140
Monroeville.............. 121
North Hill............... 199
Pittsburgh............... 149
Pottstown Nursing........ 160
Pottsville............... 176
Sinking Spring........... 216
Sunbury.................. 126
West Reading............. 177
Whitehall................ 173
Williamsport North....... 154
Williamsport South....... 128
Yardley.................. 140
Yeadon................... 198
York North............... 162
York South............... 126
-----
Total.................... 6,139
=====
SOUTH CAROLINA
Charleston............... 116
Columbia................. 128
Lexington................ 112
-----
Total.................... 356
=====
</TABLE>
80
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
SOUTH DAKOTA
Aberdeen................ 98
-----
Total................... 98
=====
TEXAS
Dallas.................. 200
Fort Worth.............. 158
Forth Worth NW.......... 103
San Antonio-Babcock..... 210
San Antonio-North....... 95
San Antonio-Northwest... 143
San Antonio-Windcrest... 187
Sharpview............... 127
Temple.................. 102
Temple Care............. 141
Webster................. 111
-----
Total................... 1,577
=====
UTAH
Ogden................... 134
-----
Total................... 134
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- ----
VIRGINIA
Arlington............... 191
Fair Oaks............... 119
Imperial................ 127
Stratford Hall.......... 233
----
Total................... 670
====
WASHINGTON
Gig Harbor.............. 120
Lynwood................. 113
Meadow Park............. 124
Spokane................. 125
----
Total................... 482
====
WISCONSIN
Appleton................ 103
Fond du Lac............. 107
Green Bay-East.......... 78
Green Bay-West.......... 105
Madison................. 167
----
<CAPTION>
560
Total................... ====
</TABLE>
TOTAL SKILLED NURSING FACILITIES: 171
TOTAL SKILLED NURSING BEDS: 24,089
All of the facilities listed in the above table are owned or leased by Manor
Care Realty and leased by ManorCare Health Services except for five facilities
owned directly by ManorCare Health Services, two facilities in which Manor
Care Realty has an ownership interest pursuant to joint venture agreements and
three facilities in which ManorCare Health Services has an ownership interest
pursuant to joint venture agreements. Manor Care Realty owns 35% of the Winter
Park, Florida facility and 94% of the Decatur, Georgia facility. Pursuant to
management agreements with the owner/operator of the facilities, ManorCare
Health Services will manage the facilities. Each management agreement is for a
two-year term with automatic, two-year renewal periods. ManorCare Health
Services owns 50% of each of the Centreville, Ohio facility, the Sycamore
Glen, Ohio facility and the Fitzgerald Mercy, Pennsylvania facility. Pursuant
to the joint venture agreements, ManorCare Health Services will manage the
facilities on a long-term basis with the earliest expiration of such
agreements on March 2035.
Set forth below is a chart which illustrates occupancy rates for Manor
Care's skilled nursing facilities and assisted living facilities. These
occupancy rates include facilities that have been operated by Manor Care for
less than two years.
OCCUPANCY RATES
<TABLE>
<CAPTION>
12 MONTHS ENDED
5/31/97
---------------
<S> <C>
Skilled Nursing.............................................. 88.4%
Assisted Living--Arden Courts................................ 66.4%
Assisted Living--Springhouse................................. 83.9%
</TABLE>
COMPETITION
ManorCare Health Services' principal competitors in the skilled nursing
business are Advocat, Inc., Beverly Enterprises, Inc., Extendicare, Inc.,
Genesis Health Ventures, Inc., Health Care and Retirement Corporation,
81
<PAGE>
Integrated Health Services, Inc., Mariner Health Group, Inc., National
HealthCare L.P., Paragon Health Network, Inc., Sun Healthcare Group, Inc. and
Vencor, Inc. ManorCare Health Services' principal competitors in the assisted
living business are Alternative Living Services, Inc., ARV Assisted Living,
Inc., CareMatrix Corporation, Emeritus Corporation, Kapson Senior Quarters
Corp., Karrington Health, Inc., Marriott International, Inc. and Sunrise
Assisted Living, Inc. ManorCare Health Services' principal competitors in the
institutional pharmacy business are NCS Healthcare, Inc., Omnicare, Inc. and
PharMerica, Inc. ManorCare Health Services' principal competitors in the home
health business are HealthCor Holdings, Inc., Home Health Corporation of
America, Inc., Housecall Medical Resources, Inc., National Home HealthCare
Corp., Olsten Corporation and Option Care, Inc.
The senior housing and health care industries are highly competitive and
ManorCare Health Services expects that the assisted living business in
particular will become more competitive in the future. ManorCare Health
Services' assisted living and skilled nursing facilities compete on a local
and regional basis with other senior support health care providers, some of
which have greater financial resources or operate on a nonprofit basis.
ManorCare Health Services' competes with other providers on the basis of
breadth and quality of services, reputation, location and physical appearance
of the facilities, family preferences, relationship with key referral sources
and, in the case of private patients, pricing. Accordingly, ManorCare Health
Services seeks to meet competition in each locality by establishing a
reputation within the local medical communities for high quality services and
trained, caring staff.
In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of ManorCare Health
Services' present and potential competitors operate on a not-for-profit basis
or as charitable organizations, while others have, or may obtain, greater
financial resources than those of ManorCare Health Services. Consequently,
there can be no assurance that ManorCare Health Services will not encounter
increased competition that could limit its ability to attract residents or
expand its business. Moreover, if the development of new assisted living
facilities outpaces demand for those facilities in certain markets, such
markets may become saturated. Such an oversupply of facilities could cause
ManorCare Health Services to experience decreased occupancy, depressed margins
and lower operating results.
Vitalink competes with national institutional pharmacies as well as numerous
local and regional retail pharmacies, as well as with the pharmacy operations
owned by long-term care providers other than ManorCare Health Services. These
competitors provide product and service offerings similar to those provided by
Vitalink and may be larger or have greater financial resources than ManorCare
Health Services.
The home health care business is highly competitive and many such companies
have experienced declines in performance. In Home Health competes with: (i)
hospitals and public health agencies that provide short term, intermittent
care, (ii) national specialized home care providers and (iii) other
independent home care companies. The primary competitive factors in the home
health care business are the price of the services and quality considerations
such as responsiveness, the technical ability of the professional staff and
the ability to provide comprehensive services.
GOVERNMENT FUNDING
Assisted Living. As a result of limited government funding for the assisted
living business, ManorCare Health Services relies and expects to rely in the
future on the ability of its residents to pay the cost of care from their own
financial resources. Depending on the nature of an individual's health
insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an "alternative care benefit."
Some state or local governments offer limited funding in the form of housing
subsidies for rent or housing-related services for low income seniors. Others
may provide subsidies in the form of additional payment for those who receive
Supplemental Security Income. However, the federal government does not
currently provide any reimbursement for ManorCare Health Services' assisted
living facilities.
Medicaid provides benefits for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. Medicaid reimbursement varies from state to state. In
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1981, the federal government approved a Medicaid waiver program called Home
and Community-Based Care which was designed to permit states to develop
programs specific to the health care and housing needs of the low-income
elderly eligible for nursing home placement (a "Medicaid Waiver Program").
Under a Medicaid Waiver Program, states apply to the Health Care Financing
Administration for a waiver to use Medicaid funds to support community-based
options for low-income elderly who need long-term care. These waivers permit
states to reallocate a portion of Medicaid funding for nursing facility care
to other forms of care such as assisted living. In 1994, the federal
government implemented new regulations which empowered states to further
expand their Medicaid Waiver Programs and eliminated restrictions on the
amount of Medicaid funding states could allocate to community-based care, such
as assisted living. A limited number of states currently have such programs
operating that allow them to pay for assisted living care. Without a Medicaid
Waiver Program, states can only use federal Medicaid funds for long-term care
in nursing facilities.
Skilled Nursing. Patients seeking the service of ManorCare Health Services'
skilled nursing facilities come from a variety of sources, and are principally
referred by hospitals and physicians. ManorCare Health Services targets upper
income, service sensitive patients who pay for services without benefit of any
government assistance program for its skilled nursing facilities. Manor Care
Realty locates its nursing facilities in geographies that are attractive to
private pay patients because ManorCare Health Services believes that focusing
on private pay patients helps reduce its exposure to potential changes in
government reimbursement practice and enables ManorCare Health Services to
achieve relatively attractive profit margins.
ManorCare Health Services expects that state Medicaid and federal Medicare
reimbursement programs will constitute an additional source of future revenues
for its managed skilled nursing facilities. Both initial and continuing
qualification of a skilled nursing care facility to participate in such
programs depend upon many factors including, among other things,
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls. Medicaid programs
typically provide for fixed rate payment to health care providers who must
accept reimbursement from Medicaid as payment in full for all covered services
rendered to Medicaid patients. With respect to skilled nursing, Medicare is a
retrospective payment system in which each facility receives an interim
payment during the year, which is later adjusted to reflect actual allowable
direct and indirect costs of services based on the submission of a cost report
at the end of each year. As a result of the Budget Act, the Medicare payment
system will become prospective such that skilled nursing facilities will be
reimbursed per diem for specific covered services regardless of actual cost.
See "RISK FACTORS--Regulation" and "--Government Regulation--Federal and State
Assistance Programs." There can be no assurance that either Medicaid or
Medicare will pay rates that recognize all of ManorCare Health Services' costs
of providing services to residents covered by those programs.
Private Pay Patients. As a general rule, the profit margin is higher with
private pay patients than with patients to whom services are rendered with
government assistance programs.
The following table sets forth for the periods specified, the percentage of
private patients, Medicare patients and Medicaid patients in Manor Care's
skilled nursing facilities as they were operated by Manor Care.
<TABLE>
<CAPTION>
SKILLED NURSING
FACILITIES
LATEST TWELVE
MONTHS AS OF
5/31/97
------------------
% OF % OF
OCCUPANCY REVENUES
--------- --------
<S> <C> <C>
Private Patients......................................... 51% 55%
Medicare Patients........................................ 11% 19%
Medicaid Patients........................................ 38% 26%
--- ---
Total.................................................. 100% 100%
</TABLE>
As of May 31, 1997, all of the residents at Manor Care's assisted living
facilities were private pay.
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GOVERNMENT REGULATION
ManorCare Health Services' skilled nursing facilities and assisted living
facilities and the business of Vitalink and In Home Health are subject to
extensive federal, state and local statutes and regulations. In addition, the
facilities are subject to various local building codes and other ordinances.
ManorCare Health Services believes that, at this time, none of its facilities
is in violation of any applicable regulation that would materially 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. ManorCare
Health Services cannot predict the ultimate timing, the content, or the impact
of future legislation and regulations affecting ManorCare Health Services and
the health care industry in general. See "RISK FACTORS--Regulation."
Certificate of Need Laws. Many of the states in which ManorCare Health
Services will operate have adopted Certificate of Need ("CON") statutes
applicable to the assisted living and skilled nursing services provided by
ManorCare Health Services. CON or similar laws generally require that approval
must be obtained from the designated state health planning agency for certain
acquisitions and capital expenditures, and determine that a need exists prior
to the expansion of existing facilities, construction of new facilities,
addition of beds, acquisition of major items of equipment or introduction of
new services. CON laws typically do not affect the operations of facilities
that already are operating. CON laws are in effect in the following states
where ManorCare Health Services will operate and where ManorCare Health
Services may continue to expand: Florida, Illinois, New Jersey, Ohio, New
York, Connecticut and Kentucky. Failure to obtain the necessary state approval
can result in (i) the inability to provide services, to operate a facility, or
to complete an acquisition, addition or other change; (ii) the imposition of
sanctions; (iii) adverse action on the facility's license; and/or (iv) adverse
reimbursement action. CONs or other approvals may be required in connection
with ManorCare Health Services' future acquisitions and/or expansions. There
can be no assurance that ManorCare Health Services will be able to obtain the
CONs or other approvals necessary for any or all such projects. There can be
no assurance that states with CON laws may not abolish such laws or that
states without such laws will enact such CON laws. Manor Care has extensive
experience filing for CONs. During the period from 1987 to the present, Manor
Care commenced operations 64 new skilled nursing facilities, most of which
required CON applications. During the past four fiscal years, Manor Care
received CON approval for 13 skilled nursing facilities and 18 assisted living
facilities.
Anti-remuneration Laws. ManorCare Health Services is subject to federal and
state anti-remuneration laws, such as the Federal 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 Federal anti-kickback law has been broadly interpreted to apply
to certain contractual relationships between health care providers and sources
of patient referral.
The recently enacted Budget Act also includes numerous health fraud
provisions, including: new exclusion authority for the transfer of ownership
or control interest in an entity to an immediate family or household member in
anticipation of, or following, a conviction, assessment, or exclusion;
increased mandatory exclusion periods for multiple health fraud convictions,
including permanent exclusion for those convicted of three health care-related
crimes; authority for the Secretary to refuse to enter into Medicare
agreements with convicted felons; new civil money penalties for contracting
with an excluded provider or violating the Medicare and Medicaid anti-kickback
statute; new surety bond and information disclosure requirements for certain
providers and suppliers; and an expansion of the mandatory and permissive
exclusions added by the Health Insurance Portability and Accountability Act of
1996 to any federal health care program (other than the Federal Employee
Health Benefits Program).
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In addition, in July 1995, federal officials launched a major anti-fraud
initiative called Operation Restore Trust. This program targets fraud
involving skilled nursing facilities, home health agencies, suppliers of
medical equipment and hospices and is currently operating in 17 states. Over
the longer term, Operation Restore Trust investigative techniques will be used
in all 50 states, and will be applied throughout the Medicare and Medicaid
programs. Enforcement actions could include criminal prosecutions or actions
for civil money penalties, overpayments or Medicare or Medicaid exclusion. See
"RISK FACTORS--Regulation--Anti-Remuneration Laws." In addition, state fraud
and abuse laws vary from state to state and seldom have been interpreted by
courts or regulatory agencies. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in the Medicare and Medicaid
programs. ManorCare Health Services plans to continue to treat Vitalink and In
Home as separate entities, and will also treat Manor Care Realty as a separate
entity, capable of referring or recommending patients to, or receiving
referrals or recommendations from, ManorCare Health Services. Thus, ManorCare
Health Services believes that its business arrangements with Vitalink and In
Home Health are in compliance with the anti-remuneration laws.
Billing Regulation. Certain provisions in the Social Security Act authorize
penalties, including exclusion from participation in Medicare and Medicaid,
for various billing-related offenses. The Department of Health and Human
Services can also initiate permissive exclusion actions for improper billing
practices such as submitting claims "substantially in excess" of the
provider's usual costs or charges, failure to disclose ownership and officers,
or failure to disclose subcontractors and suppliers.
Federal and State Assistance Programs. Funds received by ManorCare Health
Services 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 ManorCare Health Services or amounts
due ManorCare Health Services from the government agency. ManorCare Health
Services 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. ManorCare Health Services can give no assurance that
payments under such programs will in the future remain at a level comparable
to the present level or be sufficient to cover the operating and fixed costs
allocable to such patients.
There have been numerous initiatives on the Federal and state levels for
comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods beginning July 1, 1998.
For ManorCare Health Services, the Budget Act will be phased-in for cost
report years starting in November, 1998. Medicare is currently a retrospective
payment system in which each facility receives an interim payment during the
year, which is later adjusted to reflect actual allowable direct and indirect
costs of services based on the submission of a cost report at the end of each
year. The Budget Act will result in a shift to a prospective Medicare payment
system in which skilled nursing facilities will be reimbursed at a per diem
rate 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 institutes
consolidated billing for skilled nursing facilities, under which payments for
non-physician Part B services for beneficiaries no longer eligible for Part A
skilled care will be made to the facility, regardless of whether this item or
service was furnished by the facility, by others under arrangement, or under
any other contracting or consulting arrangement, effective for items or
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services furnished on or after July 1, 1998. Likewise, the Budget Act requires
the Secretary to establish a prospective payment system for home health
services, to be implemented beginning October 1, 1999. Prior to
implementation, the Budget Act establishes certain interim payment measures,
for cost reporting periods beginning after October 1, 1997, including reduced
home health limits, reduced per visit cost limits, and agency-specific per
beneficiary annual limits on an agency's costs. The legislation also requires
home health agencies to submit claims for all services and mandates that all
payments will be made to the agency regardless of whether the item or service
was furnished by the agency, by others under arrangement, or under any other
contracting or consulting arrangement. Other provisions limit Medicare
payments for certain drugs, biologicals and supplies. 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" nursing facilities. Further, the Budget Act allows states to mandate
enrollment in managed care systems without seeking approval from the Health
Care Financing Administration for waivers from certain Medicaid requirements
as long as certain standards are met. Although state managed care programs
have historically exempted institutional care, no assurance can be given that
such programs will not ultimately change the reimbursement system for long-
term care to capitated rates or otherwise affect the levels of payment to
ManorCare Health Services' skilled nursing facilities. Such programs could
also affect payment levels to In Home Health and Vitalink. ManorCare Health
Services cannot predict the impact that this change will have on ManorCare
Health Services. ManorCare Health Services cannot predict whether any other
proposals will be adopted at the Federal or state level or, if adopted and
implemented, what effect, if any, such proposals will have on ManorCare Health
Services. ManorCare Health Services believes, however, that government and
private efforts to contain or reduce health care costs will continue and that
these trends are likely to lead to reduced or slower growth in reimbursement
for certain services it provides. A significant change in coverage, reduction
in payment rates by third-party payors or the decline in availability of
funding could have a material adverse effect on the business and financial
condition of ManorCare Health Services.
False Claim Regulation. False claims are prohibited pursuant to criminal and
civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit
filing false claims or making false statements to receive payment or
certification under Medicare or Medicaid, or failing to refund overpayments or
improper payments; offenses for violation are felonies punishable by up to
five years imprisonment, and/or $25,000 fines. Criminal penalties may also be
imposed pursuant to the Federal False Claim Act, 18 U.S.C. Section 287. In
addition, under the Health Insurance Portability and Accountability Act of
1996, Congress enacted a criminal health care fraud statute for fraud
involving a health care benefit program, which is defined to include both
public and private payors. 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. Also, the
statute allows any individual to bring a suit, known as a qui tam action,
alleging false or fraudulent Medicare or Medicaid claims or other violations
of the statute and to potentially share in any amounts paid by the entity to
the government in fines or settlement.
OSHA. Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on ManorCare Health Services
with regard to protecting employees from hazards in the workplace, including
exposure to blood-borne pathogens. ManorCare Health Services believes that it
is in compliance with such regulatory requirements.
Related Party Rule. The Medicare related party rule applies to companies
that are associated or affiliated with, or have control of, or are controlled
by a Medicare provider. Many state medical programs have adopted the same rule
in determining costs that will be included in the payment rates. The Medicare
program may consider Vitalink and In Home Health to be related parties with
ManorCare Health Services. Consequently, unless a provider qualifies for the
exception to the related party rule, the Medicare program will only reimburse
the provider for the cost incurred by the related party in providing products
or services, rather than the related party's charge. An organization can
qualify for an exception from the related party rule by meeting the following
criteria: (i) the entities are bona-fide separate organizations; (ii) a
substantial part of the supplying organization's
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business activity is conducted with non-related organizations and there is an
open, competitive market for such services or products; (iii) the services or
products are commonly obtained by a provider from other organizations and are
not a basic element of patient care ordinarily furnished directly to patients
by the provider; and (iv) the charge to the provider is in line with the
charge for such services and products in the open market and no more than the
charge made under comparable circumstances to others. For the purposes of the
Medicare related party rule, ManorCare Health Services plans to continue to
treat Vitalink and In Home Health as related parties, and will also treat
Manor Care Realty as a related party. Thus, ManorCare Health Services does not
believe that there will be any material adverse effect on ManorCare Health
Services as a result of the Medicare related party rule.
Home Health Care. On September 15, 1997, President Clinton imposed a
Medicare moratorium on new home health agencies so that new regulations could
be issued to combat fraud. On January 13, 1998, the Clinton Administration
lifted the moratorium, based on the issuance of new regulations for home
health agencies. These regulations require, as mandated by the Budget Act,
that all home health agencies obtain surety bonds to participate in the
Medicare and Medicaid programs and disclose related business interests.
ManorCare Health Services does not believe that there will be any material
adverse affect on either In Home Health or on ManorCare Health Services as a
result of these new requirements.
Environmental Regulation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property or an entity that arranges for the disposal or
treatment of hazardous or toxic substances at a disposal site may be held
jointly and severally liable for the cost of removal or remediation of certain
hazardous or toxic substances, that could be located on, in or under such
property. Such laws and regulations often impose liability whether or not the
owner, operator or otherwise responsible party knew of, or caused, the
presence of the hazardous of toxic substances. The costs of any required
remediation or removal of these substances can be substantial and the
liability of a responsible party as to any property is generally not limited
under such laws and regulation and could exceed the property's value and the
aggregate assets of the liable party. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property
as collateral. In connection with the ownership and leasing to third-parties
of its properties, Manor Care Realty could be liable for these costs, as well
as certain other costs, including governmental fines and injuries to persons
or properties.
INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims which are customary risks inherent in the operation
of health facilities and are generally covered by insurance. ManorCare Health
Services maintains property, liability and professional malpractice insurance
policies in amounts and with such coverage and deductibles which are deemed
appropriate by management, based upon historical claims, industry standards
and the nature and risks of its business. In addition, ManorCare Health
Services self insures, either directly or indirectly through insurance
arrangements requiring it to reimburse insurance carriers, some of its
liability risks other than catastrophic exposures.
There can be no assurance that claims will not arise which are in excess of
ManorCare Health Services' insurance coverage or are not covered by ManorCare
Health Services' insurance coverage. A successful claim against ManorCare
Health Services not covered by, or in excess of, ManorCare Health Services'
insurance could have a material adverse effect on ManorCare Health Services'
financial condition and results of operations. Claims against ManorCare Health
Services, regardless of their merit or eventual outcome, may also have a
material adverse effect on ManorCare Health Services' ability to attract
residents or expand its business and would require management to devote time
to matters unrelated to the operation of ManorCare Health Services' business.
In addition, ManorCare Health Services' insurance policies must be renewed
annually and there can be no assurance that ManorCare Health Services will be
able to continue to obtain liability insurance coverage in the future or, if
available, that such coverage will be available on acceptable terms.
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LEGAL PROCEEDINGS
ManorCare Health Services is subject to regulatory and legal actions,
investigations or claims for damages that arise from time to time in the
ordinary course of business. Although it is impossible to predict the outcome
of any legal proceeding and ManorCare Health Services cannot estimate the
range of the ultimate liability, if any, relating to these proceedings,
ManorCare Health Services believes that the outcome of such proceedings should
not, individually or in the aggregate, have a material adverse effect on the
results of operations or financial condition of ManorCare Health Services.
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MANAGEMENT
EXECUTIVE OFFICERS OF MANORCARE HEALTH SERVICES
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected to become on the
Effective Date the executive officers of ManorCare Health Services are set
forth below. The business address of each of the prospective executive
officers is 11555 Darnestown Road, Gaithersburg, Maryland, 20878, unless
otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. .... 51 Chairman of the Board
Donald C. Tomasso....... 52 President and Chief Executive Officer
Scott J. Van Hove....... 40 Executive Vice President, Operations
James H. Rempe.......... 67 Senior Vice President, General Counsel and Secretary
Richard A. Goodman...... 49 Senior Vice President, Chief Financial Officer
Carole Y. Prest......... 46 Senior Vice President, Strategy and Marketing
H. David Lundgren....... 46 Senior Vice President, Human Resources
Wolfgang von Maack...... 57 President and Chief Executive Officer of In Home Health
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and ManorCare Health Services, Inc. (a subsidiary
of Manor Care which prior to the Distribution owned and operated Manor Care's
assisted living and skilled nursing facilities) ("Old ManorCare Health
Services") since March 1987; Chief Executive Officer of Manor Care since March
1987 and President since June 1989; Chairman of the Board of Vitalink since
February 1997; Vice Chairman of the Board of Vitalink from February 1995 to
February 1997; Vice Chairman of the Board of Manor Care and subsidiaries from
June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink
since September 1991, of Old ManorCare Health Services since 1976 and of
Choice and its predecessors since 1977; Chief Executive Officer of Old
ManorCare Health Services since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987
to June 1990.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services from May 1991 to
February 1995; Chairman and Chief Executive Officer of Vitalink from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Scott J. Van Hove. Senior Vice President and Chief Administrative Officer of
Manor Care since December 1995; Executive Vice President, Operations of Old
ManorCare Health Services since February 1997; Senior Vice President of Old
Manor Care Health from December 1995 to January 1997; Vice President of
Operations, of Manor Care from March 1990 to December 1995.
James H. Rempe. Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981, of Choice and its predecessors from February
1981 to November 1996 and of Old ManorCare Health
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Services since December 1980; Secretary of Vitalink from January 1993 to
January 1997 and a Director since September 1994; Senior Vice President and a
Director of Vitalink from January 1983 to September 1991; Director of In Home
Health since October 1995.
Richard A. Goodman. Previously employed by PepsiCo. Inc. for more than five
years, including as Senior Vice President and Chief Financial Officer of its
Taco Bell Corp. Division from 1994 to 1997, as Senior Vice President and Chief
Financial Officer of its KFC International Division from 1993 to 1994, and as
Vice President, Corporate Strategic Planning-International PepsiCo., Inc. from
1992 to 1993.
Carole Y. Prest. Vice President, Corporate Strategic Planning of Manor Care
from September, 1995 to September, 1997; previously employed by GenRad, Inc.
for nine years, including Vice President and General Manager of Concord
Products Division; Chairman of Board and President of Manor Care Foundation;
Director of Sunburst Hospitality Corporation.
H. David Lundgren. Vice President, Organizational Strategy and Development
of Aetna, Inc. from 1996 to April 1997; Vice President, Human Resources of
Aetna Inc. from 1992 to 1996.
Wolfgang von Maack. President and Chief Executive Officer of In Home Health
since May 1997; Senior Vice President, Healthcare Services of Old ManorCare
Health Services since June 1990; Vice President, Operations of Old ManorCare
Health Services from March 1988 to June 1990.
The following individuals, who are currently officers or directors of Manor
Care, will be directors and/or executive officers of Manor Care Realty after
the Distribution: (i) Stewart Bainum, Jr. as Chairman of the Board and
Director, (ii) Kennett L. Simmons as Director, (iii) Joseph R. Buckley as
Chief Executive Officer and Director, (iv) Leigh C. Comas as Senior Vice
President and Chief Financial Officer, (v) Larry Godla as Senior Vice
President, Construction and Development, and (vi) Margarita Schoendorfer as
Vice President and Controller.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the annual and
long-term compensation of those persons who, following the Distribution, will
serve as the chairman of the board and the four other most highly compensated
executive officers of ManorCare Health Services (the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------------
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS SHARES (#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- ----- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3)... 1997 $568,062 $340,837 (4) -- 60,000 $35,074
Chairman of the Board 1996 625,102 337,555 (4) -- 60,000 33,543
1995 572,308 343,385 (4) -- -- 9,000
Donald C. Tomasso........ 1997 428,002 235,401 (4) -- 35,000 18,760
President and 1996 400,005 145,602 (4) -- 50,000 5,750
Chief Executive Officer 1995 345,737 190,155 (4) -- -- 2,250
James H. Rempe........... 1997 281,507 140,754 (4) $271,250 15,000 16,727
Senior Vice President, 1996 269,048 121,072 (4) -- 15,000 15,969
General Counsel and 1995 267,349 133,675 (4) -- -- 9,000
Secretary
Scott J. Van Hove........ 1997 240,192 116,753 (4) -- 50,000 14,542
Executive Vice
President, 1996 210,310 89,754 (4) -- 40,000 8,690
Operations 1995 183,393 68,311 (4) -- -- 6,750
Wolfgang von Maack(5).... 1997 238,992 81,182 (4) -- 14,000 10,588
President and 1996 227,677 76,727 (4) -- 10,000 10,245
Chief Executive Officer, 1995 225,219 66,665 (4) -- -- 6,750
In Home Health, Inc.
</TABLE>
- --------
(1) Represents options to purchase shares of Manor Care Common Stock. The
options shown above represent the number of options held prior to the
Choice Spin-off. In connection with the Choice Spin-off, these
90
<PAGE>
options were converted, in some cases, into options to purchase Manor Care
common stock and options to purchase Choice common stock. These conversions
are reflected in the following table of "Stock Option Grants in Fiscal
1997." For a discussion of the treatment of options in connection with the
Distribution, see "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION--Employee Benefits and Other
Employment Matters Allocation Agreement."
(2) Represents amounts contributed by Manor Care for fiscal 1997, 1996 and
1995 under the 401(k) Plan and the Nonqualified Savings Plan, which
provide retirement and other benefits to eligible employees, including the
Named Officers. Amounts contributed in cash or stock by Manor Care during
fiscal 1997 under the 401(k) Plan for the Named Officers were as follows:
Mr. Bainum, Jr., $9,000; Mr. Tomasso, $6,253; Mr. Rempe, $5,591; Mr. Van
Hove, $4,655 and Mr. von Maack, $3,540. Amounts contributed in cash or
stock by Manor Care during fiscal 1997 under the Nonqualified Savings Plan
for the Named Officers were as follows: Mr. Bainum, Jr., $26,074; Mr.
Tomasso, $12,507; Mr. Rempe, $11,137; Mr. Van Hove, $9,887 and Mr. von
Maack, $7,047.
(3) Mr. Bainum, Jr. will resign as Chief Executive Officer of ManorCare Health
Services effective on the Effective Date. Following the Distribution, Mr.
Bainum, Jr. will be the Chairman of the Board of ManorCare Health Services
and the Chairman of the Board of Manor Care Realty. On November 1, 1996,
Manor Care distributed to its shareholders (the "Choice Spin-off") all of
the shares of its wholly owned subsidiary, Choice Hotels International,
Inc. ("Choice"). Mr. Bainum, Jr. is the Chairman of the Board of Choice.
In fiscal 1997, Mr. Bainum, Jr. devoted approximately 75% of his time to
Manor Care and approximately 25% of his time to Choice. The compensation
reflected here is total compensation received for services rendered to
Manor Care and Choice prior to November 1, 1996 and the 75% of Mr. Bainum,
Jr.'s compensation received from Manor Care from November 1, 1996 through
the end of the 1997 fiscal year. Choice has separated its franchising
business and its lodging business through a special dividend to its
shareholders (the "Sunburst Spin-off"). As of the Sunburst Spin-off,
Choice's franchising business is conducted by a separate public company
named Choice Hotels International, Inc. ("Choice Hotels") and Choice's
lodging business is conducted by a separate public company named Sunburst
Hospitality Corporation ("Sunburst"). It is expected that Mr. Bainum, Jr.
will devote 12.5% of his time to Choice Hotels, 12.5% of his time to
Sunburst, 37.5% of his time to ManorCare Health Services and 37.5% of his
time to Manor Care Realty.
(4) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(5) As of the Effective Date, pursuant to an Employee Time Sharing Agreement
by and among Wolfgang von Maack, ManorCare Health Services, In Home Health
and Mesquite Community Hospital, L.P. ("Mesquite"), Mr. von Maack, who
will be employed by ManorCare Health Services, will devote 75% of his
professional time to the affairs of In Home Health and 25% of his
professional time to the affairs of Mesquite. The Employee Time Sharing
Agreement provides that In Home Health and Mesquite will provide ManorCare
Health Services with 75% and 25%, respectively, of Mr. von Maack's annual
budgeted expenses and will be reimbursed or will reimburse ManorCare
Health Services in the event that Mr. von Maack's actual costs are lower
than or exceed such annual budget.
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<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
MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--Employee Benefits Allocation
Agreement."
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATE OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
NUMBER OF GRANTED TO ALL EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME COMPANY GRANTED(1) FISCAL YEAR 1997 PER SHARE DATE 5%(3) 10%(4)
---- ------- ---------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5).. MNR 60,000 6.3% $25.0505 7/1/06 $ 945,246 $2,395,440
CHI 60,000 (6) $14.5095 7/1/06 547,494 1,387,474
------- ---------- ----------
Total 120,000 $1,492,750 $3,783,904
Donald C. Tomasso(5).... MNR 55,272 3.7%(7) $25.0505 7/1/06 $ 870,760 $2,206,679
CHI 0 -- -- -- --
------- ---------- ----------
Total 55,272 $ 870,760 $2,206,679
James H. Rempe(5)....... MNR 20,430 1.6%(7) $25.0505 7/1/06 $ 321,856 $ 815,647
CHI 5,625 (6) $14.5095 7/1/06 52,327 130,075
------- ---------- ----------
Total 26,055 $ 373,183 $ 945,722
Scott J. Van Hove(5).... MNR 39,480 2.6%(7) $25.0505 7/1/06 $ 621,972 $1,576,199
MNR 25,000(1) 2.6% $27.0000 1/15/07 424,500 1,075,750
CHI 0 -- --
------- ---------- ----------
Total 64,480 $1,046,472 $2,651,949
Wolfgang von Maack(5)... MNR 22,108 1.47%(7) $25.0505 7/1/06 $ 348,285 $ 882,623
CHI 0 -- -- -- --
------- ---------- ----------
Total 22,108 $ 348,285 $ 882,623
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) All of the options shown, except for Mr. Van Hove's 25,000 MNR options,
were granted prior to the Choice Spin-off. In connection with the Choice
Spin-off, the existing options were converted, in some cases, into options
to purchase Manor Care Common Stock and options to purchase Choice common
stock. In all cases, the exercise prices were adjusted to maintain the
same financial value to the option holder before and after the Choice
Spin-off. The number of options set forth in the above table present the
number and exercise prices of the options after the Choice Spin-off.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of Manor Care's stock price. Since options are granted at market
price, a zero percent gain in the stock price will result in no realizable
value to the optionees.
(3) A 5% per year appreciation in stock price from $25.0505 per share yields
$40.8046, from $14.5095 per share yields $23.6344, from $13.8933 per share
yields $22.6344 and from $27.00 per share yields $43.98.
(4) A 10% per year appreciation in stock price from $25.0505 per share yields
$64.9745, from $14.5095 per share yields $37.6339, from $13.8933 per share
yields $36.0356 and from $27.00 per share yields $70.03.
(5) The options granted to the officers vest at the rate of 20% per year
commencing on the first through the fifth anniversary of the date of the
stock option grant.
(6) Information is not available for the total number of Choice options
granted during the fiscal year 1997.
(7) This percentage relates to the number of options granted to the officers
prior to the conversion of such options in the Choice Spin-off. The
converted number of options is listed in this table.
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<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT MAY 31, 1997 AT MAY 31, 1997
ACQUIRED VALUE ------------------------- -------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
COMPANY # $ # # EXERCISABLE UNEXERCISABLE
------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. .... MNR 329,791 $2,318,180 174,000 221,000 $3,633,404 $2,749,771
CHI 465,000 3,105,452 239,000 221,000 2,758,324 1,334,863
Donald C. Tomasso....... MNR -- -- 109,138 278,734 1,178,161 3,491,641
CHI -- -- 66,500 0 612,534 --
James H. Rempe.......... MNR 30,587 543,625 22,835 82,881 352,453 1,086,277
CHI -- -- 57,374 28,000 600,600 205,906
Scott J. Van Hove....... MNR -- -- 61,894 212,142 1,159,075 2,415,701
CHI -- -- 45,000 0 457,268 --
Wolfgang von Maack...... MNR -- -- 73,353 102,888 1,578,129 1,497,752
CHI -- -- 71,300 0 840,092 --
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) The closing price of Manor Care's common stock and for Choice common stock
as reported by the New York Stock Exchange on May 30, 1997, was $28.625
and $15.75, respectively. The value is calculated on the basis of the
difference between the option exercise price and such closing price
multiplied by the number of shares of common stock underlying the option.
RETIREMENT PLANS
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the Supplemental Executive Retirement Plan (the "SERP").
Participants will be selected by the Board or any designated committee and
will be at the level of Senior Vice President or above.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment which produces the highest
average, prior to the first occurring of the early retirement date or the
normal retirement date. The normal retirement age is 65, and participants must
have a minimum of 15 years of service. Participants may retire at age 60 and
may elect to receive reduced benefits commencing prior to age 65, subject to
Board approval. All of the Named Officers who will be participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.
Assuming that the following officers continue to be employed by ManorCare
Health Services until they reach age 65, their credited years of service would
be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. ........................ 23.5 38
Donald C. Tomasso........................... 6 19
Scott J. Van Hove........................... 10 35
</TABLE>
Mr. Rempe has twenty-seven current years of service and had twenty-five years
of service at age sixty-five.
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<PAGE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$300,000 $45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
Prior to the Distribution, it is expected that the existing Manor Care
Retirement Savings and Investment Plan (the "401(k) Plan"), a defined
contribution retirement, savings and investment plan for its employees and the
employees of its participating affiliated companies, will be amended to cover
both Manor Care Realty and ManorCare Health Services. The 401(k) Plan will be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and will include a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over who have worked for
ManorCare Health Services (or Manor Care) for a twelve-month period during
which such employee completed at least 1,000 hours will be eligible to
participate. Subject to certain non-discrimination requirements, each employee
will be able to contribute an amount to the 401(k) Plan on a pre-tax basis up
to 15% of the employee's salary, but not more than the current federal limit
of $9,500. ManorCare Health Services will match contributions made by its
employees subject to certain limitations. The amount of the match will be
equal to a percentage of the amount of salary reduction contribution made on
behalf of a participant during the plan year based upon a formula that
involves the profits of ManorCare Health Services for the year and the number
of years of service of the participant.
Prior to the Distribution, it is expected that the existing Manor Care
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified Savings
Plan") will be amended to cover both Manor Care Realty and ManorCare Health
Services. Certain select highly compensated members of management of ManorCare
Health Services will be eligible to participate in the Plan. The Nonqualified
Savings Plan will mirror the provisions of the 401(k) Plan, to the extent
feasible, and will be structured so as to provide the participants with a pre-
tax savings vehicle to the extent that pre-tax savings are limited under the
401(k) Plan as a result of various governmental regulations, such as non-
discrimination testing.
ManorCare Health Services match under the 401(k) Plan and the Nonqualified
Savings Plan will be limited to a maximum aggregate of 6% of the annual salary
of a participant. Likewise, participant contributions under the two plans will
not exceed the aggregate of 15% of the annual salary of a participant.
OPTION AND STOCK PURCHASE PLANS
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Under the Stock Purchase Plan, all employees who have
completed one year of service are eligible to participate. Eligible employees
may purchase stock of ManorCare Health Services in an amount of no less than
2% nor more than 10% of compensation (as defined in the Stock Purchase Plan),
subject to an overall maximum purchase per employee per calendar year of
$25,000. At the end of each quarterly offering period, ManorCare Health
Services will contribute cash equal to 10% of the purchase price of the common
stock so purchased. ManorCare Health Services will pay the administrative
costs for the purchase of ManorCare Health Services common stock.
94
<PAGE>
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services 1997 Long-Term Incentive Plan (the
"Incentive Plan"), pursuant to which key employees of ManorCare Health
Services and its subsidiaries are eligible to be granted awards under the
Incentive Plan. The types of awards that may be granted under the Incentive
Plan are restricted shares, incentive stock options, nonqualified stock
options, stock appreciation rights and performance shares. A total of up to
7.1 million shares of common stock will be reserved for issuance pursuant to
the Incentive Plan.
EMPLOYMENT AGREEMENTS
ManorCare Health Services expects to enter into an employment agreement,
effective upon the Effective Date, with Stewart Bainum, Jr. (the "Employment
Agreement"), providing for Mr. Bainum, Jr.'s employment as Chairman of the
Board of ManorCare Health Services. The Employment Agreement will have a term
of three years and either ManorCare Health Services or Mr. Bainum may
terminate the Employment Agreement upon 30 days' prior written notice on the
first and second anniversary dates of the Employment Agreement. The Employment
Agreement will provide that Mr. Bainum, Jr. will devote 12.5% of his
professional time to the affairs of Sunburst, 12.5% of his professional time
to the affairs of Choice Hotels, 37.5% of his professional time to the affairs
of Manor Care Realty and the remaining 37.5% of his professional time to the
affairs of ManorCare Health Services. The Employment Agreement provides for a
base salary of approximately $258,000 per annum for services to ManorCare
Health Services and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of ManorCare Health Services.
ManorCare Health Services has entered into an employment agreement, dated
July 14, 1997, with Scott Jacob Van Hove (the "Van Hove Employment
Agreement"), providing for Mr. Van Hove's employment as Executive Vice
President, Operations of ManorCare Health Services. The Van Hove Employment
Agreement will expire on July 14, 2000, after which the parties may extend the
term if they mutually desire to do so. The Van Hove Employment Agreement
provides for a base salary of approximately $263,000 per annum and a maximum
bonus of 50% of Mr. Van Hove's base compensation based upon the performance of
ManorCare Health Services.
95
<PAGE>
THE BOARD OF DIRECTORS
DIRECTORS OF MANORCARE HEALTH SERVICES
ManorCare Health Services' Board of Directors will be classified into three
classes, designated Class I, Class II and Class III, each class to be as
nearly equal in number of directors as possible. The term of the initial Class
I directors will terminate on the date of the 1998 annual meeting of ManorCare
Health Services' stockholders; the term of the initial Class II directors will
terminate on the date of the 1999 annual meeting of ManorCare Health Services'
stockholders; and the term of the initial Class III directors will terminate
on the date of the 2000 annual meeting of ManorCare Health Services'
stockholders. At each annual meeting of ManorCare Health Services'
stockholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term. Newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
retirement, disqualification, removal or other cause will be filled solely by
the affirmative vote of a majority of the remaining directors then in office.
Increases or decreases in the number of directors will be apportioned among
the classes as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class will
hold office for a term that will coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director.
The name, age, proposed class of directorship upon consummation of the
Distribution and business background (other than executive officers who are
directors) of each of the persons who are expected to become on the Effective
Date the directors of ManorCare Health Services are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. ................ 51 Chairman of the Board; Class I Director
Regina E. Herzlinger................ 53 Class II Director
William H. Longfield................ 59 Class III Director
Frederic V. Malek................... 60 Class II Director
Jerry E. Robertson, Ph.D. .......... 64 Class III Director
Kennett L. Simmons.................. 55 Class III Director
Donald C. Tomasso................... 52 Class I Director
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October,
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and Old ManorCare Health Services since March 1987;
Chief Executive Officer of Manor Care since March 1987 and President since
June 1989; Chairman of the Board of Vitalink since February, 1997; Vice
Chairman of the Board of Vitalink from February 1995 to February 1997; Vice
Chairman of the Board of Manor Care and subsidiaries from June 1982 to March
1987; Director of Manor Care since August 1981, of Vitalink since September
1991, of Old ManorCare Health Services since 1976 and of Choice and its
predecessors since 1977; Chief Executive Officer of Old ManorCare Health
Services since June 1989 and President from May 1990 to May 1991; Chairman of
the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991; Chairman of the Board of Choice from March 1987 to June 1990.
Regina E. Herzlinger. Nancy R. McPherson Professor of Business
Administration, Harvard Business School, since 1971. Director: C.R. Bard,
Inc., Deere & Company, Cardinal Health Care, Inc., Schering-Plough Corporation
and Total Renal Care Inc.
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<PAGE>
William H. Longfield. Chairman and Chief Executive Officer of C.R. Bard,
Inc. (medical devices) since September 1995; President and Chief Executive
Officer from June 1994 to September 1995; President and Chief Operating
Officer of C.R. Bard, Inc. from September 1991 to June 1994; Executive Vice
President and Chief Operating Officer of C.R. Bard, Inc. from February 1989 to
September 1991. Director: C.R. Bard, Inc., Horizon Mental Health Management,
Inc., United Dental Care, Inc., The West Company and Atlantic Health Systems.
Frederic V. Malek. Chairman, Thayer Capital Partners since March 1993; Co-
chairman of CB Commercial Real Estate Group, Inc. from April 1989 to October
1996; Campaign Manager, Bush-Quayle '92 Campaign from January 1992 to December
1992; Vice Chairman of NWA, Inc. (airlines) from July 1990 to December 1991.
Director: American Management Systems, Inc., Automatic Data Processing Corp.,
CB Commercial Real Estate Group, Inc., Choice, FPL Group, Inc., Northwest
Airlines, Inc. and various Paine Webber mutual funds.
Jerry E. Robertson, Ph.D. Retired; Executive Vice President of 3M Life
Sciences Sector and Corporate Services from November 1984 to March 1994.
Director: Allianz Life Insurance Company of North America, Cardinal Inc.,
Choice Hotels International, Inc., Coherent, Inc., Haemonetics Corporation,
Medwave, Inc., Project Hope and Stris Corporation.
Kennett L. Simmons. Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to E.M. Warburg,
Pincus & Co. from 1991 to 1994; Chairman and Chief Executive Officer of United
Healthcare Corporation from October 1987 to February 1991. Director: United
Healthcare Corporation and Virginia Health Care Foundation.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services from May 1991 to
February 1995; Chairman and Chief Executive Officer of Vitalink from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Prior to the Effective Date, the directors of ManorCare Health Services are
Stewart Bainum, Jr., James H. Rempe, Senior Vice President, General Counsel
and Secretary of Manor Care, and Leigh C. Comas, Vice President, Finance and
Treasurer of Manor Care, and the executive officers of ManorCare Health
Services are Stewart Bainum, Jr., Donald C. Tomasso, James H. Rempe, Leigh C.
Comas and Margarita A. Schoendorfer. Following the Distribution, Stewart
Bainum, Jr. will be Chairman of the Board of ManorCare Health Services 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
ManorCare Health Services and 37.5% of his time to Manor Care Realty. After
the Distribution, Kennett L. Simmons will also be a director of Manor Care
Realty.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Distribution, the Board of Directors is expected to
consist of eight members. Following the Distribution Date, additional non-
employee directors may be elected to the Board of Directors. The additional
non-employee directors have not yet been determined. It is expected that the
Board of Directors will hold five meetings during the fiscal year and that the
standing committees of the Board will include the Audit Committee, the Finance
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Nominating/Governance Committee. The members of the committees have not yet
been determined.
The Compensation/Key Executive Stock Option Plan Committee will administer
ManorCare Health Services' stock option plans and grant options thereunder,
will review compensation of officers and key management employees, will
recommend development programs for employees such as training, bonus and
incentive plans, pensions and retirement, and will review other employee
fringe benefit programs.
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<PAGE>
The Compensation/Key Executive Stock Option Committee No. 2, will be formed
to comply with certain provisions of the Omnibus Budget Reconciliation Act of
1993 and Rule 16b-3 under the Exchange Act. The Committee will administer
ManorCare Health Services' stock option plans, grant stock options thereunder
and review the compensation of the CEO and the four most highly compensated
officers (and others potentially in that classification) for each fiscal year.
The Quality Assurance Committee will review the operations of ManorCare
Health Services and facilities to determine if acceptance standards of quality
are being maintained.
The Audit Committee will review the scope and results of the annual audit,
will review and approve the services and related fees of ManorCare Health
Services' independent public accountants, will review ManorCare Health
Services' internal accounting controls and will review ManorCare Health
Services' Internal Audit Department and its activities.
The Nominating Governance Committee will recommend to the Board of Directors
the members to serve on the Board of Directors during the ensuing year and
will deal with corporate governance issues. The Committee will not consider
nominees recommended by stockholders.
NON-EMPLOYEE DIRECTOR PLAN
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan (the "Non-Employee
Director Plan"). Part A of the Non-Employee Director Plan provides that
eligible non-employee directors will be granted options to purchase 5,000
shares of Common Stock on their date of election and will be granted options
to purchase 1,000 shares as of each annual stockholders' meeting of ManorCare
Health Services 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 ManorCare Health Services will receive no
separate remuneration for their services as directors. Prior to the
Distribution, it is expected that ManorCare Health Services will adopt the
ManorCare Health Services, Inc. Non-Employee Director Stock Compensation Plan,
pursuant to which eligible non-employee directors will receive annually, in
lieu of cash, restricted stock of ManorCare Health Services, the fair market
value of which at the time of grant will be equal to $30,000, which will
represent the Board retainer and meeting fees. In addition, all non-employee
directors will receive $1,610 per diem for Committee meetings attending,
except where the Committee meeting is on the same day as a Board meeting, and
will be reimbursed for travel expenses and other out-of-pocket costs incurred
in attending meetings.
98
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements
being entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Lease Agreement, the Corporate Services
Agreement, the Trademark Agreement, the License Agreement, the Cash Management
Agreement, the Design Services Agreement, and the Risk Management Consulting
Services Agreement. See "RELATIONSHIP BETWEEN MANOR CARE REALTY AND MANORCARE
HEALTH SERVICES AFTER THE DISTRIBUTION."
Upon consummation of the Distribution, certain management employees of Manor
Care Realty will hold options to purchase shares of Company Common Stock.
Management employees of Manor Care Realty will have certain elections with
respect to the conversion of their Manor Care options into options of Manor
Care Realty or ManorCare Health Services. See "RELATIONSHIP BETWEEN MANOR CARE
REALTY AND MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION--Employee Benefits
and Other Employee Matters Allocation Agreement."
99
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF
MANORCARE HEALTH SERVICES
Based on information which has been obtained from Manor Care's records and a
review of statements filed with the Securities and Exchange Commission (the
"Commission") pursuant to Section 13(g) of the Exchange Act with respect to
Manor Care common stock and received by Manor Care prior to August 5, 1997, no
person known to Manor Care will be the beneficial owner of more than 5% of the
Common Stock of ManorCare Health Services upon completion of the Distribution
other than as set forth below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON PERCENT OF CLASS
STOCK AS OF THE AS OF THE
NAME AND ADDRESS EFFECTIVE DATE EFFECTIVE DATE(2)
---------------- ---------------- -----------------
<S> <C> <C>
Stewart Bainum(1)(3)...................... 10,156,643 15.22%
Stewart Bainum, Jr.(1)(4)................. 15,269,851 22.86%
Barbara Bainum(1)(5)...................... 5,485,815 8.22%
Bruce Bainum(1)(6)........................ 5,482,302 8.21%
Ronald Baron(7)........................... 7,976,459 11.96%
</TABLE>
- --------
(1) Stewart Bainum, Jr., Bruce Bainum and Barbara Bainum are children of
Stewart Bainum. The total beneficial ownership of the Bainum family (set
forth in the table above in the names of Stewart Bainum, Stewart Bainum,
Jr., Barbara Bainum and Bruce Bainum) is 19,978,307 shares (which excludes
overlapping interests). Such collective interest represents 29.95% of the
outstanding Common Stock of ManorCare Health Services.
(2) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(3) Includes 3,765,478 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum; his
joint interest in 895,466 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,082,857 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his wife
as a limited partner and as such has the right to acquire at any time a
number of shares equal in value to the liquidation preference of their
limited partnership interest; 3,567,869 shares held directly by Realty
Investment Company, Inc. ("Realty Investment"), a real estate investment
and management company in which Mr. Bainum and his wife have shared voting
authority; 40,305 shares held by the Commonweal Foundation of which Mr.
Bainum is Chairman of the Board of Directors and has shared voting
authority; and 500 shares held by Mid-Pines Associates, L.P. ("Mid-Pines")
in which Mr. Bainum has shared voting authority. Also includes 792 shares
of restricted stock granted pursuant to the Manor Care, Inc. Non-Employee
Director Stock Compensation Plan. Also includes 798,711 shares held by the
Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife. Also includes 3,665 shares which Mr. Bainum has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after August 5, 1997. Does not
include shares owned beneficially by Stewart Bainum, Jr., Mr. Bainum's
son, whose interests are stated in the above table, except shares owned by
Bainum Associates, MC Investments, Realty Investment and Mid-Pines in
which Mr. Bainum has a beneficial interest.
(4) Includes 5,417,761 shares owned by Bainum Associates and 4,415,250 shares
owned by MC Investments, in both of which Mr. Bainum, Jr. is managing
general partner with the sole right to dispose of the shares. Authority to
vote such shares is held by the voting general partner, Mr. B. Houston
McCeney. Also includes 1,779,628 shares owned by Mid-Pines, in which Mr.
Bainum, Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment in which Mr. Bainum, Jr. has
shared voting authority. Also includes 88,000 shares which Mr. Bainum, Jr.
has the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with ManorCare
Health Services pursuant to the terms of the Manor Care,
100
<PAGE>
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).
(5) Includes 98,013 shares held directly by Ms. Bainum; 3,567,869 shares held
by Realty Investment, and 1,779,628 shares held by Mid-Pines, in both of
which Ms. Bainum has shared voting authority. Also includes 40,305 shares
held by the Commonweal Foundation in which Ms. Bainum has shared voting
authority.
(6) Includes 94,500 shares held directly by Mr. Bainum; 3,567,869 shares held
by Realty Investment, 1,779,628 shares held by Mid-Pines and 40,305 shares
held by the Commonweal Foundation, in all of which Mr. Bainum has shared
voting authority.
(7) Includes 163,620 shares owned directly by Mr. Baron. Also includes 705,000
shares owned by Baron Capital Partners, L.P. and Baron Investment
Partners, L.P., investment partnerships of which Mr. Baron is General
Partner; 5,950,000 shares owned by two investment companies registered
under the Investment Company Act of 1940, Baron Asset Fund and Baron
Growth & Income Fund, which are advised by BAMCO, Inc., a registered
investment adviser which is controlled by Mr. Baron; 1,157,839 shares held
for the accounts of investment advisory clients of Baron Capital
Management, Inc., a registered investment adviser controlled by Mr. Baron.
101
<PAGE>
BENEFICIAL OWNERSHIP OF MANAGEMENT OF MANORCARE HEALTH SERVICES
The following table sets forth information with respect to the shares of
Common Stock which are expected to be beneficially owned by each director and
Named Executive Officer of ManorCare Health Services and by all directors and
executive officers of ManorCare Health Services as a group as of the Effective
Date based upon their respective holdings of Manor Care common stock as of
August 5, 1997. See "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
ManorCare Health Services as a group
(12 persons)(10)....................... 15,599,930 22.86%
</TABLE>
- --------
* Less than 1%.
(1) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(2) Includes 5,417,761 shares owned by Bainum Associates Limited Partnership
and 4,415,250 shares owned by MC Investments Limited Partnership, limited
partnerships in both of which Mr. Bainum, Jr. is managing general partner
with the sole right to dispose of the shares. Authority to vote such
shares is held by the voting general partner, Mr. B. Houston McCeney.
Also includes 1,779,628 shares owned by Mid-Pines, in which Mr. Bainum,
Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment Company, Inc., a real estate
investment and management company in which Mr. Bainum, Jr. has shared
voting authority. Also includes 88,000 shares which Mr. Bainum, Jr. has
the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with
ManorCare Health Services pursuant to the terms of the ManorCare Health
Services Retirement Savings and Investment Plan (the "401(k) Plan") and
the ManorCare Health Services Nonqualified Retirement Savings and
Investment Plan (the "Nonqualified Savings Plan").
(3) Includes 3,159 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(4) Includes 5,791 shares which Mr. Longfield has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(5) Includes 3,665 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(6) Includes 13,500 shares held by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority; also includes 3,665 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997.
(7) Includes 40 shares held by adult children of Mr. Tomasso who share the
same household. Beneficial ownership of such shares is disclaimed. Also
includes 135,984 shares which Mr. Tomasso has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 326 shares and 574
shares, respectively, which Mr. Tomasso has the right
102
<PAGE>
to receive upon termination of his employment with ManorCare Health
Services pursuant to the terms of the 401(k) Plan and the Nonqualified
Savings Plan.
(8) Includes 3,552 shares which Mr. Rempe has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 780 shares and 424
shares, respectively, which Mr. Rempe has the right to receive upon
termination of his employment with ManorCare Health Services pursuant to
the terms of the 401(k) Plan and Nonqualified Savings Plan.
(9) Includes 81,823 shares which Mr. Van Hove has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 337 shares and 376
shares, respectively, which Mr. Van Hove has the right to receive upon
termination of his employment with ManorCare Health Services pursuant to
the terms of the 401(k) Plan and Nonqualified Savings Plan.
(10) Includes a total of 410,173 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60
days after August 5, 1997, and a total of 2,592 shares and 3,220 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with ManorCare Health Services
pursuant to the terms of the 401(k) Plan and the Nonqualified Savings
Plan.
103
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF MANORCARE HEALTH SERVICES
Under the Amended and Restated Certificate of Incorporation of ManorCare
Health Services (the "Charter"), which is attached as Appendix A to this
Information Statement, the total number of shares of capital stock that
ManorCare Health Services has authority to issue is 165,000,000 shares
consisting of 160,000,000 shares of common stock, par value $.01 per share,
and 5,000,000 shares of preferred stock (the "Preferred Stock"), par value
$.01 per share.
Based on the number of shares of Manor Care Common Stock outstanding on
, 1998, it is expected that shares of ManorCare Health Services' Common
Stock will be issued to stockholders of Manor Care in the Distribution. All
the shares of ManorCare Health Services' Common Stock to be distributed to
Manor Care stockholders in the Distribution will be fully paid and non-
assessable.
COMMON STOCK
The Charter designates a series of common stock consisting of 160,000,000
shares of common stock. ManorCare Health Services Common Stock being
distributed on the Effective Date is part of such series. Holders of ManorCare
Health Services' 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
ManorCare Health Services, 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
ManorCare Health Services upon liquidation, dissolution or winding up of
ManorCare Health Services. ManorCare Health Services 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 ManorCare Health Services is authorized to determine,
without any further action by the holders of ManorCare Health Services' 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 ManorCare Health Services elect to exercise its
authority, the rights and privileges of holders of ManorCare Health Services'
Common Stock could be made subject to rights and privileges of any such other
series of common stock. ManorCare Health Services has no present plans to
issue any common stock of a series other than ManorCare Health Services'
Common Stock.
See "RISK FACTORS--Common Stock Dividend Policy" for a description of the
dividend policy of ManorCare Health Services after the Distribution.
PREFERRED STOCK
ManorCare Health Services' 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.
104
<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
ManorCare Health Services (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 ManorCare Health Services not approved by ManorCare Health Services' Board
of Directors. Such provisions enable ManorCare Health Services, 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 ManorCare
Health Services 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
ManorCare Health Services is required for the approval of any proposal to
merge or consolidate with any other entity (other than an entity 90% owned by
ManorCare Health Services) or sell, lease or exchange all or substantially all
of ManorCare Health Services' 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
ManorCare Health Services within 10 calendar days after receipt of the written
request of a majority of the total number of directors of ManorCare Health
Services (assuming no vacancies) or, if there are no directors in office, by a
majority vote of the stockholders. ManorCare Health Services' 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 ManorCare Health Services 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 ManorCare
Health Services 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 ManorCare Health Services 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 ManorCare Health
Services 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.
105
<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 ManorCare Health Services will
be liable to ManorCare Health Services 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 ManorCare Health Services 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
ManorCare Health Services 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 ManorCare Health
Services 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 ManorCare
Health Services, 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 ManorCare Health Services 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 ManorCare Health Services has appointed Arthur
Andersen LLP as the firm's independent accountants to audit ManorCare Health
Services' 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
ManorCare Health Services 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 ManorCare
Health Services 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.
106
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MANOR CARE, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of May 31, 1997 and 1996 and November 30,
1997 (unaudited)......................................................... F-3
Consolidated Statements of Income for the fiscal years ended May 31, 1997,
1996 and 1995 and the six months ended November 30, 1997 and 1996 (unau-
dited)................................................................... F-4
Consolidated Statements of Cash Flows for the fiscal years ended May 31,
1997, 1996 and 1995 and the six months ended November 30, 1997 and 1996
(unaudited).............................................................. F-5
Consolidated Statements of Shareholders' Equity as of May 31, 1997, 1996,
1995 and 1994 and November 30, 1997 (unaudited).......................... F-6
Notes to Combined Financial Statements.................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF MANOR CARE, INC.:
We have audited the accompanying consolidated balance sheets of Manor Care,
Inc. (a Delaware Corporation) and subsidiaries as of May 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended May 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Manor Care, 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 those
statements taken as a whole. The schedule listed in the index in Item 15(b),
Exhibit 99.01 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated
financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated 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
consolidated financial statements taken as a whole.
Washington, D.C.
June 27, 1997
(except for the Distribution as discussed in the footnotes
entitled "Principles of Consolidation" and "Transactions between
Manor Care Realty and ManorCare Health Services" which is dated
September 14, 1997)
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
MAY 31, 1997 MAY 31, 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ 32,882 $ 62,533 $ 53,032
Receivables (net of allowances for
doubtful accounts of $41,493, $24,311
and $40,970)......................... 215,191 107,267 256,162
Inventories........................... 37,724 18,734 39,257
Income taxes.......................... 41,856 40,420 54,812
Other................................. 9,817 6,107 28,688
---------- ---------- ----------
Total current assets................ 337,470 235,061 431,951
---------- ---------- ----------
Property and equipment, at cost, net of
accumulated depreciation............... 1,027,571 918,207 1,076,521
---------- ---------- ----------
Goodwill................................ 356,460 54,646 371,317
---------- ---------- ----------
Advances to discontinued lodging
segment................................ 115,723 225,723 --
---------- ---------- ----------
Net investment in discontinued lodging
segment................................ -- 159,537 --
---------- ---------- ----------
Other assets............................ 142,480 88,666 115,475
---------- ---------- ----------
Total assets........................ $1,979,704 $1,681,840 $1,995,264
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt..... $ 14,845 $ 23,984 $ 8,728
Accounts payable...................... 82,457 85,804 79,314
Accrued expenses...................... 130,519 113,426 125,882
Income taxes payable.................. -- 8,614 13,712
---------- ---------- ----------
Total current liabilities........... 227,821 231,828 227,636
---------- ---------- ----------
Mortgages and other long-term debt...... 596,473 490,575 559,063
---------- ---------- ----------
Deferred income taxes ($202,937,
$151,410 and $213,752) and other....... 279,014 218,256 295,243
---------- ---------- ----------
Minority interest....................... 185,965 33,412 184,299
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.10 par, 160.0 million
shares authorized; 66.8 million, 65.8
million and 67.0 million shares
issued .............................. 6,682 6,581 6,710
Contributed capital................... 194,640 174,364 198,605
Retained earnings..................... 538,630 571,925 575,020
Cumulative translation adjustment..... -- (1,362) --
Treasury stock, 3.2 million, 3.0
million and 3.2 million shares, at
cost................................. (49,521) (43,739) (51,312)
---------- ---------- ----------
Total shareholders' equity.......... 690,431 707,769 729,023
---------- ---------- ----------
$1,979,704 $1,681,840 $1,995,264
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31 NOVEMBER 30, 1997
------------------------------------ ------------------
1997 1996 1995 1997 1996
---------- ---------- ---------- -------- --------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $1,527,247 $1,248,197 $1,019,458 $885,623 $688,064
---------- ---------- ---------- -------- --------
Expenses:
Operating expenses.... 1,202,836 963,081 769,998 723,244 541,482
Depreciation and
amortization......... 80,378 68,086 54,374 47,818 36,877
General corporate and
other................ 68,563 72,322 63,197 28,208 31,873
Provisions for asset
impairment and
restructuring........ -- 26,300 -- -- --
---------- ---------- ---------- -------- --------
Total expenses........ 1,351,777 1,129,789 887,569 799,270 610,232
---------- ---------- ---------- -------- --------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 175,470 118,408 131,889 86,353 77,832
---------- ---------- ---------- -------- --------
Other income and
(expenses):
Interest income from
advances to
discontinued lodging
segment.............. 21,221 19,673 15,492 4,994 10,157
Gain on issuance of
Vitalink stock....... 50,271 -- -- -- --
Interest income and
other................ 8,683 5,416 7,348 4,690 4,633
Minority interest
expense.............. (4,001) (1,688) (2,129) 7,294 246
Interest expense...... (41,831) (30,338) (22,769) (22,073) (19,168)
---------- ---------- ---------- -------- --------
Total other income and
(expenses), net...... 34,343 (6,937) (2,058) (5,095) (4,132)
---------- ---------- ---------- -------- --------
Income from continuing
operations before
income taxes........... 209,813 111,471 129,831 81,258 73,700
Income taxes............ 84,700 46,000 52,156 35,692 29,400
---------- ---------- ---------- -------- --------
Income from continuing
operations............. 125,113 65,471 77,675 45,566 44,300
Discontinued lodging
operations
Income from
discontinued lodging
operations (net of
income taxes of
$8,734, $14,966,
$13,144, $0, and
$8,734
respectively)........ 11,829 20,436 16,811 -- 11,829
Extraordinary item, net
of taxes............... -- -- -- (3,216) --
Cumulative change in
accounting principle,
net of taxes .......... -- -- -- (3,173) --
---------- ---------- ---------- -------- --------
Net income.............. $ 136,942 $ 85,907 $ 94,486 $ 39,177 $ 56,129
========== ========== ========== ======== ========
Weighted average share
of common stock........ 63,257 62,628 62,480 63,748 63,040
---------- ---------- ---------- -------- --------
Income per share of
common stock
Income from continuing
operations........... $ 1.98 $ 1.04 $ 1.24 $ 0.72 $ 0.70
Income from
discontinued lodging
operations........... 0.19 0.33 0.27 -- 0.19
Extraordinary item.... -- -- -- (0.05) --
Cumulative change in
accounting
principle............ -- -- -- (0.05) --
---------- ---------- ---------- -------- --------
Net income per share of
common stock........... $ 2.16(a) $ 1.37 $ 1.51 $ 0.62 $ 0.89
========== ========== ========== ======== ========
</TABLE>
- --------
(a) Fiscal year 1997 does not add due to rounding.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
------------------------------- ------------------
1997 1996 1995 1997 1996
--------- --------- --------- -------- --------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.............. $ 136,942 $ 85,907 $ 94,486 $ 39,177 $ 56,129
Reconciliation of net
income to net cash pro-
vided by operating ac-
tivities:
Gain on issuance of
Vitalink stock......... (50,271) -- -- -- --
Income from discontinued
lodging operations..... (11,829) (20,436) (16,811) -- (11,829)
Depreciation and amorti-
zation................. 80,378 68,086 54,374 47,818 36,877
Cumulative change in ac-
counting principle..... -- -- -- 5,288 --
Adjustments to In Home
Health Medicare re-
serves................. -- -- -- 15,451 --
Provisions for asset im-
pairment and restruc-
turing................. -- 26,300 -- -- --
Amortization of debt
discount............... 513 455 499 115 397
Provisions for bad
debts.................. 20,341 16,190 12,587 19,311 7,987
Increase (decrease) in
deferred taxes......... 48,200 (4,314) 1,579 3,794 5,014
Gain on sale of
healthcare facilities.. (7,322) -- -- (2,057) (7,321)
Minority interest....... 4,001 1,668 2,129 (7,104) 246
Changes in assets and
liabilities (excluding
sold facilities and ac-
quisitions):
Change in receivables... (87,205) (39,551) (20,128) (53,694) (26,109)
Change in inventories
and other current as-
sets................... (6,528) (1,569) (9,115) (19,579) (20,918)
Change in current lia-
bilities............... (27,812) 48,366 15,839 (8,993) (8,995)
Change in income taxes
payable................ (6,169) 12,879 (12,681) 7,988 8,863
Change in other liabili-
ties................... (13,088) 5,306 (1,998) 3,852 (11,456)
--------- --------- --------- -------- --------
Net cash provided by con-
tinuing operations...... 80,151 199,307 120,760 51,367 28,925
Net cash provided by dis-
continued lodging opera-
tions................... 40,599 52,682 48,604 -- 40,599
--------- --------- --------- -------- --------
Net cash provided by op-
erating activities...... 120,750 251,989 169,364 51,367 69,524
--------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in property
and equipment.......... (167,716) (121,896) (83,500) (91,815) (78,165)
Acquisition of assisted
living facilities...... -- (19,050) -- -- --
Investment in systems
development............ (15,753) (14,436) (8,400) (18,905) (5,548)
Acquisition of pharmacy
business............... (97,400) -- -- -- --
Acquisition of
healthcare facilities.. (17,793) (32,369) (56,745) -- (4,440)
Acquisition of pharma-
cies................... (5,291) (6,270) (2,451) (5,672) (5,291)
GranCare settlement..... -- -- -- 18,500 --
Acquisition of Vitalink
stock.................. (30,000) -- -- -- --
Purchase of home health
business............... -- (22,950) -- -- --
Sale of healthcare busi-
ness................... -- -- 13,334 -- --
Sale of healthcare fa-
cilities............... 17,283 -- -- -- 17,283
Receipts from (advances
to) discontinued lodg-
ing segment............ 113,267 (27,201) (51,461) 115,723 --
Other items, net........ (5,832) (14,946) (2,490) (5,105) (13,899)
--------- --------- --------- -------- --------
Net cash (utilized) pro-
vided by investing ac-
tivities of continuing
operations.............. (209,235) (259,118) (191,713) 12,726 (90,060)
Net cash utilized by in-
vesting activities of
discontinued lodging op-
erations................ (29,424) (169,641) (92,422) -- (29,424)
--------- --------- --------- -------- --------
Net cash (utilized) pro-
vided by investing ac-
tivities................ (238,659) (428,759) (284,135) 12,726 (119,484)
--------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term
debt................... 277,381 149,000 207,254 109,543 149,400
Principal payments of
long-term debt......... (180,241) (23,030) (122,496) (6,770) (108,547)
Proceeds from exercise
of stock options....... 12,254 3,307 841 3,989 10,149
Treasury stock ac-
quired................. (5,782) (1,131) (73) (1,807) --
Retirement of deben-
tures.................. (9,900) -- -- (146,100) (9,900)
Dividends paid.......... (6,108) (5,502) (5,489) (2,798) (2,765)
--------- --------- --------- -------- --------
Net cash provided (uti-
lized) by financing ac-
tivities of continuing
operations.............. 87,604 122,644 80,037 (43,943) 38,337
Net cash provided by
financing activities of
discontinued lodging
operations.............. 654 43,687 50,008 -- 654
--------- --------- --------- -------- --------
Net cash provided (uti-
lized) by financing ac-
tivities................ 88,258 166,331 130,045 (43,943) 38,991
--------- --------- --------- -------- --------
Net change in cash and
cash equivalents........ (29,651) (10,439) 15,274 20,150 (10,969)
--------- --------- --------- -------- --------
Cash and cash equiva-
lents, at beginning of
year.................... 62,533 72,972 57,698 32,882 62,533
--------- --------- --------- -------- --------
Cash and cash equiva-
lents, at end of year... $ 32,822 $ 62,533 $ 72,972 $ 53,032 $ 51,564
========= ========= ========= ======== ========
NON-CASH ACTIVITIES:
Liabilities assumed in
connection with acqui-
sition of properties... $ 172,778 $ 68,250 $ -- $ -- $ --
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- CONTRIBUTED RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
---------- ------ ----------- --------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT COMMON SHARES)
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994..... 65,436,734 $6,545 $167,316 $ 402,520 $ (31)
Net income.............. -- -- -- 94,486 --
Exercise of stock op-
tions.................. 77,000 8 833 -- --
Cash dividends.......... -- -- -- (5,489) --
Other................... -- -- 550 3 740
---------- ------ -------- --------- -------
Balance, May 31, 1995..... 65,513,734 6,553 168,699 491,520 709
Net income.............. -- -- -- 85,907 --
Exercise of stock op-
tions.................. 269,156 28 3,279 -- --
Cash dividends.......... -- -- -- (5,502) --
Other................... -- -- 2,386 -- (2,071)
---------- ------ -------- --------- -------
Balance, May 31, 1996..... 65,782,890 6,581 174,364 571,925 (1,362)
Net income.............. -- -- -- 136,942 --
Exercise of stock op-
tions.................. 1,011,951 101 12,153 -- --
Cash dividends.......... -- -- -- (6,108) --
Dividend of discontinued
lodging segment........ -- -- -- (164,225) 1,362
Tax benefit of common
stock transactions
related to employee
benefit plans.......... -- -- 6,818 -- --
Other................... -- -- 1,305 96 --
---------- ------ -------- --------- -------
Balance, May 31, 1997..... 66,794,841 6,682 194,640 538,630 --
Net income.............. -- -- -- 39,177 --
Exercise of stock op-
tions.................. 212,524 28 3,961 -- --
Cash dividends.......... -- -- -- (2,798) --
Other................... -- -- 4 11 --
---------- ------ -------- --------- -------
Balance, November 30, 1997
(unaudited).............. 67,007,365 $6,710 $198,605 $ 575,020 $ --
========== ====== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Manor Care,
Inc. and its subsidiaries (the "Company"). As a result of the Company's spin-
off of its lodging operations, the accompanying financial statements reflect
the lodging segment as a discontinued operation. All significant intercompany
transactions have been eliminated, except for advances to the discontinued
lodging segment and the related interest income.
On September 15, 1997, the Company announced its intention to proceed with a
separation of its skilled nursing facility management, assisted living,
pharmacy and home health businesses (collectively, the "Health Services
Business") from its skilled nursing facility management, real estate and
healthcare facility development business via a spin-off of the Health Services
Business (the "Distribution"). The spin-off of the Health Services Business
will be effected by a distribution to the Company's shareholders of all the
common stock of New ManorCare Health Services, Inc., a wholly owned subsidiary
of the Company, which as of the date of the spin-off, will own and operate all
the Company's assisted living operations as well as manage and lease the
skilled nursing assets owned by the Company. Following the Distribution, New
ManorCare Health Services, Inc. will change its name to ManorCare Health
Services, Inc. and the Company will change its name to Manor Care Realty, Inc.
The Board of Directors voted to approve in principle the transaction subject
to receipt of other approvals and consents and satisfactory implementation of
the arrangements for the Distribution. The Company anticipates that the
transaction will be completed by the end of fiscal year 1998. The Distribution
is conditional upon certain matters, including receipt of a satisfactory
solvency opinion, and the declaration of the special dividend by the Company's
Board of Directors.
Following the Distribution, Manor Care Realty's principal sources of revenue
will be payments pursuant to the leasing of the skilled nursing facilities to
ManorCare Health Services, the operations of the developed assisted living
facilities prior to sale, the proceeds of the sale of assisted living
facilities, and revenues of Mesquite Hospital. Manor Care Realty's principal
operating expenses will be related to the operation of the assisted living
facilities prior to sale, the operating expenses of Mesquite Hospital and
general overhead expenses. ManorCare Health Services' principal sources of
revenue will be from the management of skilled nursing facilities owned by
Manor Care Realty, the operations of assisted living facilities, pharmacy
operations, home health operations and management fees from the developed
assisted living facilities owned by Manor Care Realty. ManorCare Health
Services' principal operating expenses will be expenses related to the
operation of skilled nursing and assisted living facilities, lease payments to
Manor Care Realty, and the operations of pharmacy and home health segments.
Due to the fact that the majority of the current Manor Care, Inc. operations
will be transferred to ManorCare Health Services, Inc. as a result of the
Distribution, this transaction will be reported as a reverse Distribution.
Accordingly, consolidated results for Manor Care, Inc. will be shown up to the
date of the Distribution. After the Distribution, ManorCare Health Services,
Inc. will present consolidated Manor Care, Inc. results for periods prior to
the Distribution and Manor Care Realty, Inc. will not report any periods prior
to the Distribution.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet as of November 30, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the six
months ended November 30, 1997 and 1996, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows at November 30, 1997
and for all periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
F-7
<PAGE>
or omitted. The results of operations and cash flows for the six month periods
ended November 30, 1997 and 1996 are not necessarily indicative of the
operating results or cash flows for the full year.
CASH
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, were:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Land........................................... $ 97,569 $ 92,884
Building and improvements...................... 971,850 887,184
Capitalized leases............................. 12,747 12,747
Furniture, fixtures and equipment.............. 242,143 209,035
Facilities in progress......................... 58,200 49,067
------------ ------------
1,382,509 1,250,917
Less: Accumulated depreciation and amortiza-
tion.......................................... (354,938) (332,710)
------------ ------------
$ 1,027,571 $ 918,207
============ ============
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows.
<TABLE>
<S> <C>
Building and improvements........................................ 10-40 years
Furniture, fixtures and equipment................................ 3-20 years
</TABLE>
Accumulated depreciation includes $9.4 million and $9.7 million at May 31,
1997 and 1996, respectively, relating to capitalized leases. Capitalized
leases are amortized on a straight-line basis over the lesser of the lease
term or the remaining useful life of the leased property.
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.
Construction overhead and costs incurred to ready a project for its intended
use are capitalized for major development projects and are amortized over the
lives of the related assets.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1997, $4.6 million; 1996,
$3.1 million; 1995, $1.8 million.
ACCOUNTING FOR CAPITALIZED SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the estimated useful
lives of the related systems of not more than five years.
F-8
<PAGE>
ACCOUNTING FOR INVESTMENTS IN JOINT VENTURES
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliates as they occur. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee. These investments will be transferred in connection with the
Distribution.
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 amortized over 40 years. Amortization expense amounted to $4.5 million,
$1.0 million and $0.7 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 income in these entities.
SELF-INSURANCE PROGRAMS
The Company self-insures 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 at a discount
rate of 7% based on actuarial projections for known and incurred but not
reported claims.
PRO FORMA INFORMATION (UNAUDITED)
After giving effect to the Distribution and related transactions, pro forma
revenues, net income and net equity for the six months ended November, 1997
would have been $860.3 million, $16.6 million, and $695.3 million,
respectively.
Pro forma income per share for six months ended November 30, 1997, after
giving effect to the transaction described in the pro forma consolidated
financial statements, would have been $0.26. Pro forma income per common share
is computed by dividing pro forma net income by the weighted average number of
outstanding common shares, aggregating 63.7 million shares as of November 30,
1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company has disclosed herein pro
forma net income and pro forma earnings per share in the footnotes using the
fair value based method beginning in fiscal year 1997 with comparable
disclosures for fiscal year 1996.
F-9
<PAGE>
NET INCOME PER COMMON SHARE
Net income per common share has been computed based on the weighted average
number of shares of common stock outstanding. Stock options are included in
the calculation when dilutive.
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 reasonable assured of
recovery. Refer to "Commitments and Contingencies" footnote for additional
information.
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.
RECLASSIFICATIONS
Certain amounts previously presented have been reclassified to conform to
the 1997 presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued 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.
SFAS 128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard recently
issued by the International Accounting Standards Committee entitled
"International Accounting Standards, Earnings Per Share." 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 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.
F-10
<PAGE>
LONG-TERM RECEIVABLES
Long-term receivables of $22 million and $19.1 million at May 31, 1997 and
1996, respectively, represent accounts receivable for Medicare at In Home
Health, Inc. ("IHHI"), relating primarily to the reimbursement of disputed
costs from prior years.
Approximately 55% of IHHI's revenue is derived from services provided to
Medicare beneficiaries through cost reimbursement programs. Virtually all of
the payments for these services are based on the Medicare program's
reimbursable costs incurred in rendering the services. Cost reports are filed
annually and are subject to audit and retroactive adjustment. IHHI reports
revenue for those costs that it believes are probable of recovery under
applicable Medicare statutes and regulations.
Over the years Medicare auditors have claimed that certain costs were not
reimbursable under the Medicare program. These positions are based on
interpretations promulgated after the period covered by the cost reports that
are contrary to IHHI's interpretation or on what IHHI believes is the
misapplication of specific reimbursement principles.
As of May 31, 1997, IHHI has received reports challenging $18.9 million of
these costs. An additional $18.8 million of costs similar to the costs which
have been challenged have been incurred through May 31, 1997 related to open
cost reporting years. Of this $37.7 million, approximately $22.5 million
related to the treatment of certain community liaison personnel costs, which
Medicare alleges are unreimbursable sales costs. Other significant disputed
costs related to physical therapists employed by IHHI and certain other branch
and corporate expenses.
As of May 31, 1997 total IHHI accounts receivable due from Medicare were
approximately $40.5 million including the disputed costs of $37.7 million. On
a consolidated basis, the Company had established reserves against these
disputed costs of $9.8 million. The Company does not believe that the
resolutions of these disputed costs will be accomplished in the next year.
Therefore, they have been classified as a non-current asset. Additionally, as
of May 31, 1997, IHHI had received approximately $12.5 million in payment from
Medicare for disputed costs. Because Medicare may seek repayment of these
amounts, the potential liability is recorded in Accrued Liabilities. In August
1997, IHHI received three court decisions relating to certain of these
amounts.
IHHI has, on a preliminary basis, evaluated these decisions on its recorded
accounts receivable and, accordingly, recorded a reserve of $15.5 million in
the six months ended November 30, 1997. The net impact to the Company after
taxes and minority interest was approximately $3.8 million.
F-11
<PAGE>
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Payroll........................................... $ 63,783 $ 53,986
Taxes, other than income.......................... 14,507 12,302
Insurance......................................... 18,271 22,310
Interest.......................................... 8,100 1,875
Other............................................. 25,858 22,953
------------ ------------
$ 130,519 $ 113,426
============ ============
</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............................................... $ 14,845
1999............................................... 8,605
2000............................................... 7,891
2001............................................... 6,536
2002............................................... 6,279
2003 to 2024....................................... 567,162
--------
$611,318
========
</TABLE>
Long-term debt, consisting of mortgages, capital leases, Senior Notes, and
Senior Subordinated Notes, was net of discount of $1.2 million and $1.0
million at May 31, 1997 and 1996, respectively. Amortization of discount was
$0.5 million in 1997, 1996, and 1995, including the write-off associated with
debt redemptions. At May 31, 1997, the Company had mortgages and capital
leases of $80.2 million, of which $45.6 million is related to mortgages on
assisted living facilities. Mortgages on assisted living facilities are held
by the Company and will be transferred to New ManorCare Health Services on the
Distribution Date.
Interest paid was $35.6 million in 1997, $29.9 million in 1996 and $22.5
million in 1995. During fiscal year 1997, interest rates on subordinated debt
ranged from 4.8% to 9.5%. Interest rates on mortgages and other long-term debt
ranged from 2.6% to 12.0%. The weighted average interest rate in fiscal year
1997 was 7.2%.
In June 1996, the Company issued $150.0 million of 7 1/2% Senior Notes due
2006. These notes are 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. The proceeds of this offering were used to
repay borrowings under the Company's $250.0 million competitive advance and
multi-currency revolving credit facility (the "Facility").
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased
$9.9 million of the 9 1/2% Senior Subordinated Notes for $10.5 million.
In September 1996, the Company amended the Facility provided by a group of
sixteen banks. The Facility provides that up to $75.0 million is available for
borrowings in foreign currencies. Borrowings under the Facility
F-12
<PAGE>
are, at the option of the Company, at one of several rates including LIBOR
plus 20 basis points. In addition, the Company has the option to request
participating banks to bid on loan participation at lower rates than those
contractually provided by the Facility. The Facility presently requires the
Company to pay fees of 1/10 of 1% on the entire loan commitment. The Facility
will terminate on September 6, 2001. At May 31, 1997, outstanding revolver
borrowings amounted to $85.0 million.
Various debt agreements impose, among other restrictions, restrictions
regarding financial ratios and payment of dividends. Pursuant to such
restrictions, owned property with a net book value of $145.8 million was
pledged or mortgaged and approximately $167.4 million of retained earnings was
not available for cash dividends.
During fiscal year 1997, Vitalink Pharmacy Services, Inc. ("Vitalink")
entered into a committed $200 million revolving credit facility (the "Vitalink
Credit Facility"), which expires February 12, 2002, with Chase Manhattan Bank.
The Vitalink Credit Facility allows for variable borrowing levels, and given
its five year term, Vitalink's compliance with its terms, and Vitalink's
expectation that the Credit Facility can be refinanced upon maturity, all
borrowings under this Credit Facility are classified as long term.
Amounts totaling $97.4 million were drawn under the Vitalink Credit Facility
to redeem $98.2 million of GranCare's $100.0 million Senior Subordinated
Notes. Borrowings under the Vitalink 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 Vitalink Credit Facility payable on a quarterly basis.
The terms of the Vitalink 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 Vitalink 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. The debt related to the Vitalink Credit Facility is
classified as long-term debt on the consolidated balance sheet.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2035. Future minimum
lease payments are as follows.
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
1998......................................... $ 13,458 $ 1,825
1999......................................... 11,678 1,045
2000......................................... 10,028 719
2001......................................... 8,715 292
2002......................................... 7,101 292
Thereafter................................... 45,862 1,904
------------- ------------
Total minimum lease payments................. $ 96,842 $ 6,077
------------- ------------
Less: Amount representing interest........... 1,606
------------
Present value of lease payments.............. 4,471
------------
Less: Current portion........................ 1,445
------------
Lease obligations included in long-term
debt........................................ $ 3,026
============
</TABLE>
Rental expense under noncancelable operating leases was $11.9 million in
1997, $8.0 million in 1996 and $4.9 million in 1995.
F-13
<PAGE>
INTEREST RATE HEDGING
The Company has entered into multiple interest rate swap agreements to hedge
its exposure to fluctuations in interest rates on its long-term debt and
operating leases. At May 31, 1997, the Company had three interest rate swap
agreements outstanding, with a total notional principal amount of $30.3
million. These agreements effectively convert the Company's interest rate
exposure on a floating rate operating lease to a fixed interest rate of 5.60%
and mature simultaneously with the relevant operating lease in 2002. The
weighted average interest rate under the lease was 6.21% for the year ended
May 31, 1997. While the Company is exposed to credit loss in the event of
nonperformance by other parties to outstanding interest rate swap agreements,
the Company does not anticipate any such credit losses.
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2%
Senior Notes, the Company 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
have been deferred and are being amortized against interest expense over the
life of the 7 1/2% Senior Notes effectively reducing the interest rate on the
Notes to 7.1%. The agreements had no effect on interest expense during the
period that the swaps were outstanding.
INCOME TAXES
Because of the relative ownership percentages, the Company files separate
income tax returns for the Company's 51% owned pharmacy subsidiary, Vitalink
Pharmacy Services, Inc. ("Vitalink") (effective February 1, 1997) and In Home
Health, Inc. ("IHHI"). The consolidated tax provision, therefore, is based
upon the separate tax provisions of each of the companies.
Income tax provisions were as follows for the year ended May 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current tax expense:
Federal........................................ $ 30,001 $ 41,427 $ 41,432
State.......................................... 6,499 8,887 9,145
Deferred tax expense:
Federal........................................ 39,341 (3,450) 1,296
State.......................................... 8,859 (864) 283
-------- -------- --------
$84,700 $ 46,000 $ 52,156
</TABLE>
F-14
<PAGE>
Deferred tax assets (liabilities) are comprised of the following at May 31.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Depreciation and amortization.............. $(117,213) $ (83,237) $ (80,554)
Purchased tax benefits..................... (44,110) (45,527) (46,212)
Gain on stock issuance..................... (37,187) (11,896) (11,896)
Other...................................... (23,368) (19,514) (17,956)
--------- --------- ---------
Gross deferred tax liabilities............. (221,878) (160,174) (156,618)
--------- --------- ---------
Tax deposit................................ 5,754 5,754 12,000
Reimbursement reserve...................... 9,550 16,882 5,064
Reserve for doubtful accounts.............. 20,267 10,206 8,309
Deferred compensation...................... 13,982 9,526 9,476
Acquisition costs.......................... 3,833 -- --
Other...................................... 7,263 6,816 8,030
--------- --------- ---------
Gross deferred tax assets.................. 60,649 49,184 42,879
--------- --------- ---------
Net deferred tax........................... $(161,229) $(110,990) $(113,739)
========= ========= =========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Federal income tax rate...................... 35% 35% 35%
======== ======== ========
Federal taxes at statutory rate.............. $ 73,435 $ 39,015 $ 45,441
State income taxes, net of Federal tax
benefit..................................... 9,983 5,215 6,128
Minority interest............................ 2,289 499 1,521
Tax credits.................................. (143) (19) (910)
Other........................................ (864) 1,290 (24)
-------- -------- --------
Income tax expense........................... $ 84,700 $ 46,000 $ 52,156
======== ======== ========
</TABLE>
Income taxes paid on a consolidated basis for the years ended May 31, 1997,
1996, and 1995 were $54.0 million, $54.3 million, and $69.7 million,
respectively.
CAPITAL STOCK
There are 5.0 million shares of authorized but unissued preferred stock with
a par value of $1.00 per share. The rights of the preferred shares will be
determined by the Board of Directors when the shares are issued.
During fiscal years 1997 and 1996, the Company acquired 134,118 and 30,208
shares of its common stock for a total cost of $5.8 million and $1.1 million,
respectively. A total of 8.9 million shares of common stock have been
authorized, under various stock option plans, to be granted to key executive
officers and key employees. At May 31, 1997 and 1996, options for the purchase
of an aggregate of 3,041,807 and 3,667,527 shares were outstanding at prices
equal to the market value of the stock at date of grant. Options totaling
822,717 are presently exercisable and 2,219,090 will become exercisable from
fiscal year 1998 to 2002 and will expire at various dates to February 2007. In
addition, 49,957 options have been granted to non-employee directors. Options
totaling 7,630 are presently exercisable and 42,327 options will become
exercisable from fiscal year 1998 to 2001 and will expire at various dates to
September 2001.
F-15
<PAGE>
Option activity under the above plans was as shown in the table below.
<TABLE>
<CAPTION>
OPTIONS 1997 1996 1995
------- --------- --------- ---------
<S> <C> <C> <C>
Granted: No. of shares....................... 956,400 582,168 110,000
Avg. Option Price.......................... $ 38.82 $ 30.89 $ 27.50
Adjustment as a result of the spin-off: No.
of shares................................... 1,454,915 -- --
Exercised: No. of shares..................... 1,011,951 269,156 77,000
Avg. Option Price.......................... $ 8.45 $ 12.34 $ 10.92
Canceled: No. of shares...................... 2,010,127 148,735 --
Avg. Option Price.......................... $ 22.42 $ 20.57 --
Outstanding at May 31:
No. of shares.............................. 3,091,764 3,702,527 3,538,250
Avg. Option Price.......................... $ 14.87 $ 16.87 $ 14.36
Available for grant at May 31: No. of
shares...................................... 1,680,826 1,089,899 1,603,500
</TABLE>
In connection with the spin-off of the Company's lodging segment, the
outstanding options held by current and former employees of the Company as of
November 1, 1996 were redenominated in both Company and lodging company stock
and the number and exercise prices of the options were adjusted based on the
relative trading prices of shares of the common stock of the two companies to
retain the intrinsic value of the options. The total number of options
outstanding increased by 1,454,915 as a result of this adjustment.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its various stock option plans and employee
stock purchase plan and, accordingly, no compensation expense has been
recognized for options granted and shares purchased under the provisions of
these plans. Had compensation expense for options granted and shares purchased
under the stock-based compensation plans been determined based on the fair
value at the grant dates, net income and earnings per share would have been as
follows for the years ended May 31.
<TABLE>
<CAPTION>
1997 1996
------------- ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income:
As reported..................................... $ 136,942 $ 85,907
Pro forma....................................... $ 128,141 $ 81,697
Earnings per share:
As reported..................................... $ 2.16 $ 1.37
Pro forma....................................... $ 2.03 $ 1.30
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not likely
to be representative of the effects on reported net income for future years.
SFAS 123 does not apply to awards granted prior to fiscal year 1996 and
additional awards are anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed a risk-free interest rate equal to
approximately 6.36% and 6.37% for fiscal years 1997 and1996, respectively,
expected volatility of 12.8%, dividend yields based on historical dividends of
$.088 per share annually and expected option lives of eight years. The average
fair values of the options granted during 1997 and 1996, as measured on the
dates of the grants, are estimated to be $15.12 and $11.96, respectively.
ACQUISITIONS AND DIVESTITURES
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares of GranCare. In addition,
F-16
<PAGE>
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. In addition,
the Company acquired a nursing center in California for $4.4 million and a
nursing center in Michigan for $13.4 million. Through new construction, the
Company opened four skilled nursing centers and six assisted living
facilities. The Company sold four nursing centers in Indiana, Iowa, Illinois,
and Texas for $17.3 million and transferred an assisted living facility with
an approximate net book value of $4.9 million to the discontinued lodging
segment.
During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was
cash and the remainder was assumed liabilities. Additionally, six assisted
living facilities, with five attached skilled nursing units, were purchased
for $74.3 million, of which $19.0 million was cash and the remainder was
assumed liabilities. Vitalink purchased a pharmacy servicing 2,200
institutional beds and an infusion therapy business for a total of $6.3
million. In October 1995, the Company purchased for $22.9 million
approximately 41% of the common stock of IHHI, a provider of home health
services. The Company paid an additional $20.0 million to IHHI 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 63%
of the voting stock of IHHI. IHHI is consolidated in the Company's financial
statements.
During fiscal year 1995, the Company purchased nine nursing centers and
assisted living facilities for approximately $56.7 million. Vitalink purchased
a pharmacy servicing 1,300 institutional beds for $2.5 million. In March 1995,
the Company sold its investment in a physicians' practice management business
for $13.3 million. The physicians' practice management investment was made in
fiscal year 1994 in the amount of $10.0 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>
YEARS ENDED MAY 31,
-------------------------
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues............................... $ 1,719,611 $ 1,480,559
Income from continuing operations before income
taxes........................................... $ 211,791 $ 114,408
Income from discontinued operations.............. $ 11,829 $ 20,436
Net income....................................... $ 134,745 $ 81,380
Net income per share............................. $ 2.13 $ 1.30
</TABLE>
F-17
<PAGE>
PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net
realizable value, an impairment loss is recorded in the period the impairment
is determined.
The Company recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long-lived assets and costs associated with the
Company's restructuring. The most significant components of the provisions
were non-cash impairment charges of $21.2 million relating to writedowns of
property, equipment and capitalized systems development costs and $5.1 million
related to the spinoff of the lodging segment in fiscal year 1996.
In fiscal year 1996, the Company determined that it incurred costs in excess
of the original amount expected to complete a systems development project for
billing and receivables which began in fiscal year 1995. Intensive testing
during a six month pilot identified over 100 major system problems. At this
time, it was determined that the newly developed system was not functional and
that a major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs. The carrying amount was
determined to be in excess of the fair value and accordingly, the related
assets were written down by $13 million to the net realizable value.
DISCONTINUED OPERATIONS
On November 1, 1996, the Company completed the spin-off of its lodging
segment. The Company's shareholders of record on October 10, 1996 received one
share of Choice Hotels International, Inc. common stock for each outstanding
share of Manor Care common stock. Accordingly, lodging results are reported as
discontinued operations for all periods presented.
The revenues, income from discontinued operations before income taxes, and
net income from discontinued operations for the years ended May 31, 1997,
1996, and 1995 were as follows.
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues......................................... $89,849 $374,873 $302,535
Income from discontinued operations before income
taxes........................................... $20,563 $ 35,402 $ 29,955
Net income from discontinued operations.......... $11,829 $ 20,436 $ 16,811
</TABLE>
Net income from discontinued operations for the year ended May 31, 1996
includes the results of operations of the lodging segment through March 7,
1996, the measurement date. During the period from the measurement date
through May 31, 1996, the lodging segment incurred a net loss of $12.0
million. The net loss was primarily the result of provisions for asset
impairment and costs and expenses directly associated with the spin-off
totaling $33.3 million. The non-cash provision for asset impairment in the
discontinued lodging segment reflects primarily the writedown of European
hotel assets based on expected future cash flows. This non-cash provision was
recorded in accordance with SFAS 121. No loss on the disposal of the
discontinued lodging operations was recognized as the discontinued lodging
segment generated income between the measurement date and the date of the
spin-off.
Included in discontinued lodging operations is interest expense charged by
the continuing healthcare segment to the discontinued lodging segment relating
to cash advances provided to the discontinued lodging segment for the
acquisition and renovation of lodging assets. For the years ended May 31,
1997, 1996, and 1995, interest so allocated amounted to $3.4 million, $19.7
million, and $15.5 million, respectively. The indebtedness related to lodging
acquisitions and renovations is reflected as advances to discontinued lodging
segment in the consolidated balance sheets. Such advances amounted to $115.7
million and $225.7 million at May 31, 1997 and
F-18
<PAGE>
1996, respectively. The indebtedness is to be repaid over a three year period
from the date of the spin-off. Interest is charged at an annual rate of 9% on
the indebtedness. The Company received a prepayment of $110.0 million on the
advances to the discontinued lodging segment. This payment was subject to a
prepayment penalty of $1.9 million.
General corporate expenses of $5.5 million, $7.4 million, and $6.3 million,
respectively, were charged to discontinued lodging operations for the years
ended May 31, 1997, 1996, and 1995. Allocation of general corporate charges
was principally determined based on time allocations.
For purposes of providing an orderly transition after the spin-off, the
Company has entered into various agreements with the discontinued lodging
segment, including, among others, a Tax Sharing Agreement, Corporate Services
Agreement, Employee Benefits Allocation Agreement and Support Services
Agreement. These agreements provide, among other things, that the Company (i)
will provide certain corporate and support services, such as accounting, tax,
and computer systems support and (ii) will provide certain risk management
services and other miscellaneous administrative services. These agreements
will extend for a period of 30 months from the spin-off date or until such
time as the discontinued lodging segment has arranged to provide such services
in-house or through another unrelated provider of such services.
TRANSACTIONS BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES
For purposes of providing an orderly transition after the Distribution,
Manor Care Realty and ManorCare Health Services 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 ManorCare Health Services (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 the
Company, (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 ManorCare
Health Services or Manor Care Realty has arranged to provide such services in-
house or through another unrelated provider of such services.
LEASE AGREEMENTS
On the Distribution Date, Manor Care Realty and ManorCare Health Services
will enter into Lease Agreements, pursuant to which Manor Care Realty will
lease to ManorCare Health Services all of its skilled nursing facilities.
Under each Lease Agreement, ManorCare Health Services' use of the subject
facility will be limited to skilled nursing operations.
Manor Care Realty will be responsible for paying all real property taxes and
insurance costs. ManorCare Health Services will be obligated to pay to Manor
Care Realty under each Lease Agreement an annual amount equal to the Owner's
Priority ("Land Rent"). In addition, each Lease Agreement will provide for
ManorCare Health Services to retain a base fee monthly of 6% of Project
Revenues (as defined in the Lease Agreement) and an incentive fee of up to 23%
of Net Operating Profit (as defined in the Lease Agreement).
Under each Lease Agreement, Manor Care Realty will have the right to
terminate if certain financial results are not achieved or if, due to
ManorCare Health Services' fault, the facility is decertified as a skilled
nursing facility or is disqualified from participation in Medicare or
Medicaid. The Lease Agreements will also provide for termination in the event
of additional defaults such as monetary default, breach of covenant and
bankruptcy defaults. Manor Care Realty will be obligated to pay to Manor Care
Health Services a termination fee in certain situations.
F-19
<PAGE>
DEVELOPMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into a development agreement (the "Development Agreement") pursuant to
which Manor Care Realty will develop assisted living facilities for sale to
ManorCare Health Services and retain ownership of such facilities until
occupancy has stabilized at 75% or more for a period of 5 days. The purchase
price for each facility will be at a premium to the total development costs,
which will be based upon the time elapsed since the opening of the facility.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into an assisted living facility management agreement (the "Assisted
Living Facility Management Agreement") pursuant to which during the two-year
stabilization period under the Development Agreement, ManorCare Health
Services will manage the facility for Manor Care Realty. During the management
period, ManorCare Health Services will be reimbursed for all operating costs
and will receive a fixed monthly fee.
7 1/2% SENIOR NOTES
In connection with the Exchange Offer, ManorCare Health Services will assume
$150 million of 7 1/2% Senior Notes due 2006 from the Company. These notes
will be redeemable at the option of ManorCare Health Services 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.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company,
the ultimate outcome of such litigation will not have a material adverse
effect on the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. For
fiscal years 1997, 1996, and 1995 these revenues amounted to $652.1 million,
$549.1 million, and $431.0 million, respectively. In the opinion of
management, any difference between revenues recorded and final determination
will not be significant. The increase in revenues subject to audit adjustment
is due, in large part, to acquisitions made by Vitalink and, in fiscal year
1996, to the investment in IHHI. The Company does not anticipate a material
effect on revenues as a result of the Balanced Budget Act of 1997. However,
the regulations pertaining to this Act have neither been proposed nor
implemented, and therefore, this preliminary conclusion may change as a
result.
In fiscal year 1997, the Health Care Financing Administration issued a
modification to regulations governing the treatment of interest expense and
investment income offsets for Medicare reimbursement purposes. As a result of
this modification the Company recognized revenues of approximately $20 million
in fiscal year 1997, which had been reserved in prior years.
As of May 31, 1997, the Company had contractual commitments of $58.2 million
relating to its internal construction program.
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 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-20
<PAGE>
One or more subsidiaries or affiliates of the Company have been identified
as potentially responsible parties ("PRPs") in a variety of actions (the
"Actions") relating to waste disposal sites which allegedly are subject to
remedial action under the Comprehensive Environmental Response Compensation
Liability Act, as amended, 42 U.S.C. (S)(S)9601 et seq. ("CERCLA") and similar
state laws. CERCLA imposes retroactive, strict joint and several liability on
PRPs for the costs of hazardous waste clean-up. The Actions arise out of the
alleged activities of Cenco, Incorporated and its subsidiary and affiliated
companies ("Cenco"). Cenco was acquired in 1981 by a wholly owned subsidiary
of the Company. The Actions allege that Cenco transported and/or generated
hazardous substances what came to be located at the sites in question. The
Company believes that the waste disposal activities at issue occurred prior to
the Manor Care subsidiary's acquisition of Cenco. Environmental proceedings
such as the Actions may involve owners and/or operators of the hazardous waste
site, multiple waste generators and multiple waste transportation disposal
companies. Such proceedings typically involve efforts by governmental entities
and/or private parties to allocate or recover site investigation and clean-up
costs, which costs may be substantial. The potential liability exposure for
currently pending environmental claims and litigation, without regard to
insurance coverage, cannot be quantified with precision because of the
inherent uncertainties of litigation in the Actions and the fact that the
ultimate cost of the remedial actions for some of the waste disposal sites
where the Company is alleged to be a potentially responsible party has not yet
been quantified. The Company believes that the potential environmental
liability exposure, after consideration of insurance coverage, is
approximately $3 million. Future liabilities for the pending environmental
claims and litigation, without regard to insurance, currently are not expected
to exceed approximately $46 million. The Company estimated future liabilities
without regard to insurance based on counsel's evaluation of the range of
potential liability and cost of defense in each of the Actions. The Company
has accrued the liabilities based on its estimate of the likely outcome of the
Actions, taking into account insurance coverage available for the liabilities.
F-21
<PAGE>
BUSINESS SEGMENT INFORMATION
The Company operates principally in four segments: skilled nursing
operations, pharmacy services, assisted living operations and home health
operations. Revenues for the pharmacy segment include sales to skilled nursing
and assisted living facilities which are subsequently eliminated in
consolidation. Income (loss) from operations consists of total revenues less
operating, depreciation and amortization, and general corporate expenses.
<TABLE>
<CAPTION>
SKILLED ASSISTED HOME
NURSING PHARMACY LIVING HEALTH ELIMINATIONS TOTAL
---------- -------- -------- -------- ------------ ----------
1997
- ---- (IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,118,208 $274,038 $54,853 $124,354 $(44,206) $1,527,247
Income (loss) from
operations............. 144,865 33,109 (2,739) (2,928) 3,163 175,470
Identifiable assets..... 1,223,808 516,805 178,684 60,407 -- 1,979,704
Depreciation and
amortization........... 61,068 9,527 6,723 3,060 -- 80,378
Capital expenditures.... 122,812 4,648 55,967 42 -- 183,469
1996
- ----
Revenues................ $1,034,190 $141,115 $37,276 $ 74,153 $(38,537) $1,248,197
Income (loss) from
operations............. 99,174(a) 22,301 (6,982)(a) 67 3,848 118,408
Identifiable assets..... 1,383,072 79,013 147,157 72,598 -- 1,681,840
Depreciation and
amortization........... 56,362 4,363 5,613 1,748 -- 68,086
Capital expenditures.... 109,063 3,537 23,170 562 -- 136,332
1995
- ----
Revenues................ $ 938,946 $112,257 $12,368 -- $(44,113) $1,019,458
Income (loss) from
operations............. 110,691 18,726 (1,202) -- 3,674 131,889
Identifiable assets..... 1,153,648 63,825 72,344 -- -- 1,289,817
Depreciation and
amortization........... 48,675 3,753 1,946 -- -- 54,374
Capital expenditures.... 62,509 2,163 27,228 -- -- 91,900
</TABLE>
- --------
(a) Includes total provisions for asset impairment and restructuring of $26.3
million, of which $25.1 million relates to skilled nursing operations and
$1.2 million relates to assisted living operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
The Company has various pension and profit sharing plans, including a
supplemental executive retirement plan, and contributes to certain union
welfare plans. The provision for these plans amounted to $11.8 million in
1997, $11.6 million in 1996, and $11.0 million in 1995. All vested benefits
under retirement plans are funded or accrued.
The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees. Contributions of up to 6% of each covered
employee's salary are determined based on the employee's level of contribution
to the plan, years of service and Company profitability. The cost of the plan
totaled $7.2 million in 1997, $5.8 million in 1996, and $4.8 million in 1995.
Also included in the Company's retirement plans is a defined benefit pension
plan covering substantially all of its employees. The benefits are based on
service credits for years of participation after January 1, 1992. In addition,
there is a prior benefit equal to the accrued benefit at December 31, 1991 for
certain individuals who were participants in a predecessor plan. No new
participants were eligible to enter this plan after August 15, 1996 and
service credits for all participants were frozen as of December 31, 1996.
Service cost benefits earned during fiscal years 1997, 1996 and 1995
approximated the plan's annual costs of $4.0 million, $2.8 million, and $2.7
million, respectively. As of February 28, 1997, 1996, and 1995, plan assets
F-22
<PAGE>
of approximately $20.3 million, $14.4 million, and $11.0 million compared to
vested benefit obligations of $17.0 million, $12.4 million, and $8.7 million,
respectively.
Projected benefit obligations were not significantly different from
accumulated benefit obligations of $21.0 million, $16.3 million, and $11.0
million as of the same dates. Liabilities recorded on the Company's balance
sheets as of May 31, 1997, 1996, and 1995 were $2.3 million, $2.0 million, and
$0.5 million, respectively. Projected benefit obligations were determined
using an assumed discount rate of 7.5% for 1997, 7.0% for 1996, and 8.5% for
1995, an assumed rate of return on plan assets of 8.25%, and an assumed
compensation increase of 4.5%.
The Company also has various incentive compensation plans for certain
personnel. Incentive compensation expense was $5.3 million in 1997, $4.4
million in 1996, and $4.1 million in 1995.
As part of the Vitalink merger with TeamCare, a temporary 401(k) plan has
been established for employees who were former participants in the GranCare
401(k) plan. Vitalink expects to establish a permanent plan in fiscal year
1998.
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, and
receivables approximate fair value due to the short-term nature of these
items. Management believes that the fair value of the advances to the
discontinued lodging segment approximates the carrying value.
Total fair market value for the outstanding interest rate swap agreements at
May 31, 1997 and 1996 was $1.4 million and $1.8 million, respectively. Fair
values were determined based on quoted rates.
SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME FROM
CONTINUING
OPERATIONS BEFORE
QUARTERS ENDED OTHER INCOME AND
(IN THOUSANDS OF DOLLARS, (EXPENSES) AND
EXCEPT PER SHARE DATA) REVENUE INCOME TAXES NET INCOME PER SHARE
- ------------------------- ---------- ----------------- ---------- ---------
<S> <C> <C> <C> <C>
FISCAL 1997
August....................... $ 336,479 $ 36,126 $ 23,685 $ .38
November..................... 351,585 41,706 32,444 .51
February..................... 388,747 46,792 61,392 .97
May.......................... 450,436 50,846 19,421 .30
---------- -------- -------- -----
$1,527,247 $175,470 $136,942 $2.16
========== ======== ======== =====
FISCAL 1996
August....................... $ 273,992 $ 30,512 $ 28,426 $ .45
November..................... 299,722 38,050 28,788 .46
February..................... 334,404 36,844 22,302 .36
May.......................... 340,079 13,002 6,391 .10
---------- -------- -------- -----
$1,248,197 $118,408 $ 85,907 $1.37
========== ======== ======== =====
</TABLE>
F-23
<PAGE>
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK AND DIVIDENDS PAID
(UNAUDITED)
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE CASH DIVIDENDS PAID
------------------------ ----------------------
PER SHARE
QUARTERS ENDED HIGH LOW AMOUNT DATE
- -------------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C>
FISCAL 1997
August......................... $ 39.63* $ 31.50* $ .022 8/27/96
November....................... $ 42.25* $ 23.75 $ .022 11/27/96
February....................... $ 28.00 $ 24.13 $ .022 2/27/97
May............................ $ 28.38 $ 21.88 $ .022 5/27/97
FISCAL 1996
August......................... $ 34.25* $ 27.78* $ .022 8/25/95
November....................... $ 35.58* $ 30.50* $ .022 11/27/95
February....................... $ 40.25* $ 32.75* $ .022 2/27/96
May............................ $ 43.50* $ 36.50* $ .022 5/24/96
</TABLE>
- --------
* Market prices prior to November 1, 1996, are reflective of the stock value
prior to the spin-off of the discontinued lodging business.
F-24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Form of Distribution Agreement, dated as of , 1998, between Manor Care, Inc.
("Manor Care") and the Registrant.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended Bylaws of the Registrant.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP re: Tax Matters.*
10.1 Form of Tax Sharing Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.2 Form of Tax Administration Agreement, dated as of , 1998, between Manor Care and
the Registrant.*
10.3 Form of Corporate Services Agreement, dated as of , 1998, between Manor Care
Realty and the Registrant.*
10.4 Credit Agreement, dated as of , 1998, among the Registrant, Manor Care, The
Chase Manhattan Bank and Chase Securities Inc.*
10.5 Commitment Letter, dated , 1998, among the Registrant, Manor Care, The Chase
Manhattan Bank and Chase Securities, Inc.*
10.6 Form of Assisted Living Facility Management Agreement, dated as of , 1998,
between the Registrant and Manor Care.*
10.7 Form of Master Development Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.8 Form of Lease Agreement, dated as of , 1998, between Manor Care and the
Registrant.*
10.9 Form of Non-Competition Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.10 Form of Employee Benefits and Other Employment Matters Allocation Agreement, dated
as of , 1998, between the Registrant and Manor Care.*
10.11 Form of Employee Benefits Administration Agreement, dated as of , 1998, between
the Registrant and Manor Care Realty.*
10.12 Form of Office Sublease Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.13 Form of Trademark Agreement, dated as of , 1998, between the Registrant and
Manor Care.*
10.14 Form of Cash Management Agreement, dated as of , 1998, between the Registrant
and Manor Care.*
10.15 Form of Risk Management Consulting Services Agreement, dated as of , 1998,
between the Registrant and Manor Care Realty.*
10.16 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Compensation
Plan.*
10.17 Form of New ManorCare Health Services, Inc. Long-term Incentive Plan.*
10.18 Form of New ManorCare Health Services, Inc. Supplemental Executive Retirement Plan.*
10.19 Form of New ManorCare Health Services, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan.*
10.20 Form of Employment Agreement, dated as of , 1998, between Stewart Bainum, Jr.
and the Registrant.*
10.21 Form of Employment Agreement, dated as of , 1998, between Scott J. Van Hove and
the Registrant.*
10.22 Form of License Agreement, dated , 1998, between Manor Care Realty and the
Registrant.*
10.23 Form of % Senior Note due 2008 of Manor Care Realty (Real Estate Note).*
10.24 Form of Vehicle Lease Agreement, dated , 1998, between Manor Care and the
Registrant.*
10.25 Form of Design Services Agreement, dated , 1998, between Manor Care and the Reg-
istrant.*
21.1 Subsidiaries of the Registrant.*
23.01 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1).*
27.01 Financial Data Schedule.
99.01 Schedule II--Valuation and Qualifying Accounts.
</TABLE>
- --------
* To be filed by amendment.
<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
SCHEDULE II
MANOR CARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING OF PROFIT WRITE- END
DESCRIPTION PERIOD AND LOSS OTHER OFFS OF PERIOD
- ----------- ------------ --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Six months ended Novem-
ber 30, 1997
Allowance for doubtful
accounts.............. $41,493 $19,311 $ -- $(19,834) $40,970
Year ended May 31, 1997
Allowance for doubtful
accounts.............. $24,311 $20,341 $10,644(a) $(13,803) $41,493
Year ended May 31, 1996
Allowance for doubtful
accounts.............. $18,797 $16,190 $ 1,030(a) $(11,706) $24,311
Year ended May 31, 1995
Allowance for doubtful
accounts.............. $15,481 $12,587 $ -- $(9,271) $18,797
</TABLE>
(a) Represents reserves of acquired companies.
