MANOR CARE INC/NEW
8-K, 1997-09-15
SKILLED NURSING CARE FACILITIES
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<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 8-K
                                 CURRENT REPORT

                     Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934


                               September 15, 1997
                       ---------------------------------
                       (Date of earliest event reported)


                                Manor Care, Inc.
             ------------------------------------------------------
             (Exact name of Registrant as Specified in its Charter)


     Delaware                          1-8195                 52-1200376
- -----------------------------   ---------------------      ---------------
(State or Other Jurisdiction    (Commission File No.)      (IRS Employer
of Incorporation)                                          Identification No.)



              11555 Darnestown Road, Gaithersburg, Maryland 20878
          ------------------------------------------------------------
          (Address of principal executive offices, including zip code)

                                 (301) 979-4000
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
         -------------------------------------------------------------
         (Former name or former address, if changed since last report)
<PAGE>
 
Item 5.  Other Events.

         On September 15, 1997 Manor Care, Inc. (the "Company") issued a press
release which is attached hereto as Exhibit 99.1. Such press release is
incorporated herein by reference.

Item 7.  Financial Statements and Exhibits

         (a)  Financial Statements
              --------------------

 
         (b)  Financial Statement Schedule
              ----------------------------

 
         (c)  Exhibits
              --------

                27  Financial Data Schedule.
              99.1  Press Release, dated September 15, 1997.



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<PAGE>
 
                                   SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.


                                 MANOR CARE, INC.


                                 By: /s/ James H. Rempe
                                    -------------------------------------------
                                     Name:  James H. Rempe
                                     Title: Senior Vice President, General
                                            Counsel and Secretary


Date:  September 15, 1997


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<PAGE>
 
                                    SUMMARY


         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.

The Distribution

         Pursuant to the Distribution Agreement to be entered into between Manor
Care and ManorCare Health Services (the "Distribution Agreement"), on or prior
to the date the Distribution is effected (the "Effective Date") Manor Care will
convey or cause to be conveyed to ManorCare Health Services all of the right,
title and interest of Manor Care and its subsidiaries in: (i) all of the
business and assets of Manor Care's assisted living business (the "Assisted
Living Business"); (ii) the shares of Common Stock of Vitalink Pharmacy
Services, Inc. ("Vitalink") owned by Manor Care; and (iii) the shares of Common
and Preferred Stock of In Home Health, Inc. ("In Home Health") owned by Manor
Care (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 Distribution Date (ii) the operation of
Manor Care Realty's 171 skilled nursing facilities (the "Skilled Nursing
Facilities") after the Effective Date and (iii) the ownership of stock in
Vitalink or In Home Health whether arising before, on or after the Distribution
(the "Assumption of Liabilities").

         Contemporaneously with the Effective Date, Manor Care will make a
capital contribution (the "Capital Contribution") to ManorCare Health Services
of (i) approximately $250 million in cash and (ii) a $250 million note of Manor
Care Realty (the "Realty Note"). See "Description of Certain Indebtedness of
Manor Care Realty -- the Realty Note."

         Following the Contribution of Assets, the Assumption of Liabilities and
the Capital Contribution, Manor Care will distribute to the holders of record of
Manor Care's common stock, par value $.01 per share ("Manor Care Common Stock"),
one share of the common stock, par value $.01 per share, of ManorCare Health
Services for every share of Manor Care Common Stock. Following the Distribution,
Manor Care will change its name to Manor Care Realty, Inc.

         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
<PAGE>
 
Services will (i) own and operate all of the business and assets of, and be
responsible for the liabilities associated with, the Assisted Living Business,
(ii) operate and manage the Skilled Nursing Facilities owned by Manor Care
Realty and (iii) own all of Manor Care's stock in Vitalink and In Home Health.

The Exchange Offer

         Manor Care plans to offer to exchange $1,000 principal amount of its 
7 1/2% Senior Notes due June 15, 2006 issued by ManorCare Health Services (the
"New MCHS Senior Notes") for each $1,000 principal amount of 7 1/2% Senior Notes
due June 15, 2006 of Manor Care (the "Old Senior Notes") properly tendered (the
"Exchange Offer"). Consummation of the Exchange Offer will result in the
effective assumption by ManorCare Health Services of all or a part of the
obligations of Manor Care under the Old Senior Notes as they existed prior to
the Distribution. Obligations with respect to the Old Senior Notes not exchanged
will remain obligations of Manor Care Realty following the Distribution. See
"The Exchange Offer."

New Indebtedness

         Prior to the consummation of the Distribution, Manor Care Realty
expects to obtain a new bank credit facility which will consist of a $300
million revolving credit facility and a $150 million term loan facility (the
"Credit Facilities"). Manor Care Realty is also planning to make a public
offering of $350 million aggregate principal amount of senior unsecured debt
securities. For a description of the expected terms of the Credit Facilities,
see "Description of Certain Indebtedness - Other Indebtedness."


             BUSINESS OF MANOR CARE REALTY AFTER THE DISTRIBUTION

         Manor Care Realty will be a health care real estate company focused on
the ownership, construction, development and acquisition of health care
properties, including skilled nursing and assisted living facilities. Manor Care
and its predecessor companies have been engaged in the development, construction
and acquisition of health care properties since 1959. At or prior to the
Distribution, Manor Care Realty will enter into a series of agreements with
ManorCare Health Services pursuant to which ManorCare Health Services will lease
and operate all of Manor Care Realty's 171 Skilled Nursing Facilities and Manor
Care Realty will develop assisted living facilities for sale to ManorCare Health
Services. See "-- Relationship With ManorCare Health Services." Following the
Distribution, Manor Care Realty's principal sources of revenue will arise from
(i) payments pursuant to the lease of the Skilled Nursing Facilities to
ManorCare Health Services and (ii) the proceeds of the sale to ManorCare Health
Services of assisted living facilities developed by Manor Care Realty. Manor
Care Realty's principal expenses will include (i) the costs incurred in
developing the assisted living facilities for ManorCare Health Services, (ii)
the costs of operating the assisted living facilities prior to their sale to
ManorCare Health Services and (iii) financing costs, including interest expense.
Assuming the Distribution and the related

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transactions had been consummated on June 1, 1996, on a pro forma basis for the
year ended May 31, 1997, Manor Care Realty would have had approximately $217
million in revenue and earnings before interest, taxes, depreciation and
amortization of approximately $158 million.

         Manor Care Realty's geographically diversified portfolio of properties
will include:

         .        171 Skilled Nursing Facilities in 28 states containing
                  approximately 24,050 beds. The Skilled Nursing Facilities will
                  be operated by ManorCare Health Services pursuant to the terms
                  of the Lease Agreements described under "-- Relationship With
                  ManorCare Health Services -- Lease Agreements Relating to
                  Skilled Nursing Facilities."

         .        25 assisted living facilities under construction by October 1,
                  1997 in 12 states, including 6 Springhouse senior residences
                  serving the general assisted living population and 19 Arden
                  Courts serving persons with early to middle stages of
                  Alzheimer's disease or related memory impairment. Upon
                  completion, these facilities will be managed by ManorCare
                  Health Services pursuant to the Assisted Living Facility
                  Management Agreement. Assuming that certain occupancy levels
                  are attained within two years, these facilities will be
                  purchased by ManorCare Health Services pursuant to the terms
                  of the Development Agreement and on a formula based price. See
                  "-- Relationship With ManorCare Health Services -- Development
                  Agreements Relating to Assisted Living Facilities" and 
                  "-- Assisted Living Facility Management Agreement."

         .        64 sites under contract and in development, including 48 Arden
                  Court sites and 16 Springhouse sites. These facilities will
                  also be managed by and, if the requisite occupancy levels are
                  achieved, purchased by ManorCare Health Services pursuant to
                  the terms of the Assisted Living Facility Management Agreement
                  and the Development Agreement.

         .        2 skilled nursing facilities under construction with 268 beds
                  and 3 skilled nursing sites under contract and in development.

         .        Mesquite Community Hospital in Mesquite, Texas, a 172
                  licensed-bed hospital located in Mesquite, Texas, a Dallas
                  suburb. Mesquite Hospital, which opened in 1978, is a general
                  medical/surgical acute care hospital fully accredited by the
                  Joint Commission for the Accreditation of Health Care
                  Organizations.

         Manor Care and its predecessors have been engaged in the construction,
development and acquisition of health care facilities since 1959. Since fiscal
year 1993, Manor Care has completed 72 development projects with a total asset
value of $203 million, including ten skilled nursing facilities with a total
asset value of $76.1 million, fourteen Arden Courts facilities with a total
asset value of $53.2 million, and one Springhouse senior residence with a total
asset value of $7.0

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<PAGE>
 
million. Manor Care has also completed 47 significant additions to its existing
skilled nursing facilities with a total asset value of $66.6 million. Manor Care
Realty plans to develop approximately 200 assisted living facilities for sale
to ManorCare Health Services over the next five years, including approximately
170 Arden Courts and 38 Springhouse senior residences.

         Manor Care Realty will have an experienced management team, with
expertise in market feasibility, regulatory issues, site selection, design, and
project management as well as the acquisition of health care facilities. The
five senior members of Manor Care Realty's development team have worked with
Manor Care for an average of 16.5 years. These individuals have in-depth
knowledge of the health care market with particular expertise in the state
regulatory environment for both skilled nursing and assisted living facilities.
See "Management Of Manor Care Realty After The Distribution." Manor Care Realty
believes that its experienced management and high quality, geographically
diversified portfolio of long term care properties will ensure that it continues
to be one of the nation's leading health care real estate developers and owners.

         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 business. The assisted living business is currently experiencing
unprecedented market demand, according to industry sources. Driven by America's
aging population, increasing life expectancies, health care trends toward
greater diversity of senior support care offerings and services, demand for
assisted living services is expected to grow significantly over the next thirty
years. Over the next five years, Manor Care Realty plans to focus on the
development of over 200 assisted living facilities for sale to ManorCare Health
Services. Manor Care Realty expects that ManorCare Health Services will account
for the vast majority of Manor Care Realty's revenues during this period.

Business Strategy

         Manor Care Realty believes it will benefit from a strong relationship
with ManorCare Health Services, one of the nation's leading providers of
high-quality senior support services within the private pay segment. ManorCare
Health Services will lease and operate ManorCare Realty's Skilled Nursing
Facilities pursuant to long term leases. Subject to certain exceptions, Manor
Care Realty will also have the exclusive right to develop assisted living
facilities for ManorCare Health Services, which plans to acquire approximately
200 assisted living facilities over the next five years. Finally, subject to
certain restrictions in its arrangements with ManorCare Health Services and the
availability of capital, Manor Care Realty will consider diversifying its
portfolio base to include other heath care real estate intensive businesses.
Manor Care Realty plans to maintain its status as a leading developer and owner
of senior support health care service facilities and to enhance its growth and
profitability through the implementation of the following key initiatives:

         .     Benefit From High Quality, Geographically Diverse Portfolio of
               Properties. Manor Care Realty believes that it will have one of
               the highest quality portfolios of skilled nursing facilities in
               the industry, which will be leased, managed and

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<PAGE>
 
                  operated pursuant to the Lease Agreements by ManorCare Health
                  Services, one of the nation's leading providers of senior
                  support health care services. The majority of the Skilled
                  Nursing Facilities were purpose-built (that is designed and
                  built as skilled nursing facilities as opposed to being
                  converted from some other use). Manor Care Realty believes the
                  geographic diversity of the Skilled Nursing Facilities (171
                  facilities in 28 states) makes the portfolio less susceptible
                  to adverse changes in state regulation and regional economic
                  downturns. Manor Care Realty believes these facilities are
                  among the industry leaders in terms of percentage of beds
                  dedicated to specialty products and quality payor mix. A
                  significant portion of the beds in Manor Care Realty's Skilled
                  Nursing Facilities are dedicated to specialty products,
                  including Arcadia (Alzheimer's special care unit), Heritage
                  and Williamsburg (high-end lifestyle products), and Medbridge
                  (high acuity unit). Finally, Manor Care Realty believes its
                  facilities enjoy a more attractive quality mix compared to
                  other long term care operators. Manor Care's private pay
                  residents (whose care is paid for from private sources or by
                  non-government insurance) accounted for approximately 60% of
                  revenues in fiscal year 1997. Manor Care Realty believes it
                  will benefit from its strong portfolio by participating in the
                  operating profit generated by these facilities in accordance
                  with the terms of the Lease Agreements.

            .     Develop Assisted Living Facilities for ManorCare Health
                  Services. Manor Care Realty believes the anticipated increased
                  market demand for assisted living facilities presents Manor
                  Care Realty with opportunities for growth. Manor Care Realty
                  believes it can successfully capitalize on its ability to
                  efficiently develop purpose-built assisted living projects
                  through the planned development of approximately 200 assisted
                  living facilities for sale to ManorCare Health Services over
                  the next five years, including approximately 170 Arden Courts
                  and 38 Springhouse senior residences. Pursuant to the
                  Development Agreement between Manor Care Realty and ManorCare
                  Health Services, ManorCare Health Services will have a
                  two-year option (measured from the time a particular facility
                  opens) to purchase each facility. In addition, if at any time
                  during this two-year stabilization period, occupancy
                  stabilizes at 80% for a period of 30 days ManorCare Health
                  Services will be obligated to purchase the facility. The
                  purchase price for each facility will be at a premium to the
                  total development costs, with the size of the premium based on
                  the number of months elapsed since the opening of the
                  facility. During the two-year stabilization period and pending
                  the purchase of the facility, ManorCare Health Services will
                  manage the facility for Manor Care Realty on a fixed monthly
                  fee basis. In addition to developing assisted living
                  facilities for ManorCare Health Services and leasing the
                  Skilled Nursing Facilities to ManorCare Health Services, Manor
                  Care Realty plans to work closely with ManorCare Health
                  Services to develop new assisted living products aimed at
                  different segments of the assisted living business not
                  currently served by the Springhouse and Arden Courts concepts.

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         .        Diversify Portfolio Base. While Manor Care Realty expects that
                  over the next five years the vast majority of its revenues
                  will be derived from ManorCare Health Services, subject to
                  contractual restrictions and the availability of capital,
                  Manor Care Realty will consider diversifying its operator base
                  and establishing relationships with other leading health care
                  providers.

Industry Overview

         Manor Care Realty will focus on the ownership, development,
construction and acquisition of health care properties, principally in the long-
term care segment of the health care industry. The long-term care industry
encompasses a broad range of accommodations and health care services that are
provided primarily to seniors. For example, seniors requiring limited services
can use home health care or adult day care. Retirement homes, congregate
housing, and continuing care retirement communities are options for those
seniors seeking community housing. As an individual's need for assistance
increases, assisted living facilities offer residents assistance with activities
of daily living ("ADLs") in a residential environment. Finally, seniors
requiring around-the-clock nursing care can be placed in skilled nursing
facilities. The long-term care industry is experiencing significant growth due
to several factors:

         .        Supply/demand imbalance. According to a 1997 report by the
                  National Investment Conference and Price Waterhouse, the
                  demand for seniors housing exceeds the supply of available
                  beds. The Health Insurance Association of America estimates
                  that approximately 7 million elderly will need long-term care
                  in 1997, rising to 9 million by 2005 and to 12 million by
                  2020. Manor Care Realty believes this imbalance will continue
                  into the next century and drive the growth of the long-term
                  care industry.

         .        Favorable demographic trends. According to the U.S. Bureau of
                  the Census, the number of seniors 85 years and older is
                  estimated to increase by approximately 32% from 3.7 million
                  seniors in 1996 to 4.9 million seniors by 2005. According to
                  industry sources, approximately 57% of the population over age
                  85 currently require assistance with ADLs, and more than 50%
                  suffer from Alzheimer's disease or other cognitive disorders.
                  Manor Care Realty believes that the growth of an increasingly
                  frail population will drive demand for long-term care products
                  and services tailored to meet the unique needs of this elderly
                  population, including skilled nursing facilities, assisted
                  living facilities, and Alzheimer's care facilities. In
                  addition, Manor Care Realty believes that the increasing
                  affluence of the elderly will enable them to afford high
                  quality care. According to the U.S. Bureau of the Census, the
                  median net worth of householders age 75 and older has
                  increased from $61,491 in 1988 to $76,541 in 1992.

         .        Increasing awareness of the range of options available to
                  seniors. Manor Care Realty believes that consumers are
                  increasingly aware of the wide range of long-

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                  term care options, from home health to adult day care to
                  assisted living facilities, that are available to meet their
                  housing and health care needs. The availability of information
                  and referral sources such as the National Council on Aging and
                  the Alzheimer's Association, the growth of nationally branded
                  long-term care operators such as Manor Care and the emerging
                  assisted living companies, and increased press coverage of
                  the needs of the aging baby boomer population, have raised the
                  general consumer's awareness of options available to seniors
                  in the long-term care industry.

         .        Changing family dynamics. Due to the growing number of dual
                  income families and the geographic dispersion of families,
                  many children are unable to care for their elderly parents in
                  their own homes. Historically, unpaid women, primarily
                  daughters or daughters-in-law, represented a large portion of
                  the caregivers of the non-institutional elderly. In addition,
                  the greater affluence of these dual income families enables
                  them to better provide financial support to their parents.
                  Manor Care Realty believes that, as a result, adult children
                  are increasingly seeking high quality facilities which will
                  provide their parents with the care and support that they
                  require.

         Manor Care Realty, as one of the premier owners and developers in the
long-term care industry, is well positioned to capitalize on the growth of the
long-term care industry for several reasons:

         .        Increasing use of outside development companies by health care
                  operators. Health care operators are increasingly looking to
                  experienced health care developers to provide them with
                  design, construction management and zoning and regulatory
                  assistance as well as to reduce their investment costs and
                  associated risks.

         .        Need for capital to finance the aggressive development plans
                  of the seniors housing industry. Health care operators are
                  looking for new sources of financing to fuel their growth. The
                  equity markets and, increasingly, health care real estate
                  investment trusts (REITs), have provided a source of capital
                  for many of these companies. However, traditional sources of
                  capital may not be sufficient to meet the projected growth of
                  the seniors housing market.

         .        Complex regulatory environment. The long-term care industry is
                  governed by a wide variety of regulations at the local and
                  state levels. 38 states require certificates of need ("CONs")
                  to build skilled nursing facilities and at least 8 states
                  require CONs for assisted living beds. A number of states are
                  considering adding regulations for assisted living
                  development. In addition, many states have imposed moratoriums
                  on skilled nursing beds which further complicates the process
                  of securing approval to develop new or renovate existing
                  skilled nursing facilities.

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                  Finally, the construction of new skilled nursing and assisted
                  living facilities typically requires local zoning and land use
                  approvals, permits and certificates of occupancy. Manor Care
                  Realty believes that its experience in the regulatory arena
                  and its in-house health planning department provide it with a
                  significant advantage in managing the complex regulatory
                  process at the local and state levels.


Business

         Skilled Nursing Facilities

         Manor Care Realty believes it will be the premier owner of skilled
nursing facilities in the United States. Through a cohesive framework of
proprietary care protocols Manor Care Realty's Skilled Nursing Facilities
provide (i) long-term care for chronically ill and frail elderly individuals who
need 24-hour skilled nursing and physical, occupational and speech therapies;
(ii) high acuity, short-term, post-hospital care for medically complex patients
and persons in need of aggressive rehabilitation; and (iii) long-term care for
individuals with middle to late-stage Alzheimer's disease or related memory
impairment. In all cases these services include appropriate nursing care, room
and board, special diets, occupational, speech, physical and recreational
therapy and other services designed to improve the well-being of the resident.

         ManorCare Health Services will lease, operate and manage Manor Care
Realty's Skilled Nursing Facilities pursuant to Lease Agreements under which
ManorCare Health Services will pay monthly fees to Manor Care Realty. See 
"-- Relationship With Manor Care Health Services -- Lease Agreements."

         Manor Care Realty's skilled nursing facilities target affluent to
middle income seniors in need of skilled nursing care. Manor Care Realty
believes its facilities enjoy a more attractive quality mix compared to other
long-term care operators. Manor Care's private pay residents accounted for
approximately 60% of revenues in fiscal year 1997. Manor Care Realty believes it
will benefit from its strong portfolio by participating in the operating profit
generated by these facilities in accordance with the terms of the Lease
Agreements.

         Manor Care Realty's Skilled Nursing Facilities differentiate themselves
from their competitors by offering unique specialty products designed to meet
the needs of specific customer segments. A significant portion of the beds at
Manor Care Realty's Skilled Nursing Facilities are dedicated to specialty
services, which are attractive because they generate higher per patient day
revenues and profits than standard long-term care. For example, the Heritage and
Williamsburg wings in 107 of Manor Care Realty's Skilled Nursing Facilities
provide residents with upgraded decor, a private lounge and special programs
and, in the case of the Williamsburg wings, concierge services and a private
dining area with a gourmet menu. Manor Care Realty believes that the Heritage
and Williamsburg design concepts contribute to Manor Care's high percentage of
private pay residents compared to the rest of the industry. Within Manor Care
Realty's Skilled

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Nursing Facilities, ManorCare Health Services also will continue to operate 141
Arcadia special-care units providing services to individuals in the middle to
late stages of Alzheimer's disease or afflicted with related memory impairment.
Finally, ManorCare Health Services will continue to operate within the Skilled
Nursing Facilities 22 dedicated MedBridge high acuity units featuring high
staff-to-patient ratios, sophisticated clinical capabilities and
state-of-the-art rehabilitation departments. Manor Care Realty believes these
high-end specialty products will facilitate marketing efforts to attract longer
stay (1-3 years) private pay residents.

         Manor Care is currently constructing 2 skilled nursing facilities and
has 3 nursing sites under contract and in development. A typical skilled nursing
facility built by Manor Care has 120 beds, costs approximately $8.5 million to
build (including the cost of the land) and takes approximately twelve to
thirteen months to construct.

         Assisted Living Facilities

         Assisted living facilities serve elderly persons who require assistance
with activities of daily living but who do not require the constant nursing
supervision that skilled nursing facilities provide. Manor Care Realty currently
has 25 assisted living facilities under construction and 64 sites for new
assisted living facilities under contract and in development. These facilities
will be managed by, and if the requisite occupancy levels are achieved within
two years, purchased by ManorCare Health Services pursuant to the terms of the
Assisted Living Facility Management Agreement and the Development Agreement.
Also, pursuant to the Development Agreement, Manor Care Realty plans to develop
approximately 200 assisted living facilities for sale to ManorCare Health
Services over the next five years, including approximately 170 Arden Courts and
38 Springhouse senior residences. See "-- Relationship With Manor Care Health
Services -- Development Agreement." Manor Care Realty believes that upon
completion of this development plan ManorCare Health Services will be the
nation's largest operator of Alzheimer's assisted living facilities. Manor Care
Realty's assisted living units are generally rented to occupants pursuant to 30-
day or one-year leases, subject to Manor Care's right to terminate the lease if
the occupant becomes too frail for the facility.

         In a strategy similar to that employed in connection with the Skilled
Nursing Facilities, the assisted living facilities to be developed by Manor Care
Realty will target affluent to middle income seniors in need of a full range of
assisted living services to optimize their quality of life. These services will
be available 24 hours a day and generally include meal service, housekeeping,
personal care, nursing and health related services, social and recreational
services, transportation and special services (such as banking and shopping).
Personal services will include bathing, dressing, personal hygiene, grooming,
ambulating and dining assistance. Health-related services, which are tailored to
individual patient needs and applicable state regulatory requirements, may also
include assistance with medication management, skin care and injections, as well
as health care monitoring.

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<PAGE>
 
         The Arden Courts assisted living facilities to be developed by Manor
Care Realty are a distinct product and service segment focused exclusively on
individuals suffering from the early to middle stages of Alzheimer's disease or
related memory impairment. These special purpose assisted living facilities
offer a proprietary, specially designed physical plant with security systems,
structured activities and related resident services and support systems. These
facilities are typically divided into four color-coded houses comprising a total
of 56 units with access to communal living rooms, kitchens, dining rooms and
protected gardens. All aspects of the facilities' operations are managed by an
Executive Director specially trained in the care of Alzheimer's patients. Arden
Courts assisted living facilities are designed to allow residents the freedom to
move about independently while keeping them safely contained within a secured
area. A typical Arden Courts facility has 56 units, costs approximately $4.5
million to build (including the cost of the land) and takes approximately ten
months to construct.

         The Springhouse senior residences to be developed by Manor Care Realty
are freestanding, residential-style facilities designed to meet the needs of
the general assisted living population. These facilities are functionally
arranged to provide a home-like atmosphere. The architectural and interior
design concepts incorporate the Manor Care operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of choice,
encouraging independence and fostering individuality in a home-like setting.
Each facility is operated with certain protocols designed to maintain the health
of the residents and to provide a measure of security and support for those
individuals. Each facility includes common areas designed to promote social
interaction among residents, such as a dining area, a laundry room, a library, a
wellness center, barber and beauty shop, crafts room, spa and a snack room or
ice cream parlor. In addition, Springhouse residents have access to medication
management services, therapy and other ancillary services, as well as dementia
programs and dedicated dementia units in some locations. A typical Springhouse
senior residence has 105 beds, costs approximately $9.5 million to build and
takes approximately twelve to thirteen months to construct.

         Real Estate Development and Acquisition Activities

         Pursuant to the Development Agreement, Manor Care Realty plans to
develop approximately 200 assisted living facilities for sale to ManorCare
Health Services over the next five years. In this regard, Manor Care Realty will
employ an integrated internal development process pursuant to which Manor Care
Realty's market feasibility, health planning, interior design, architecture,
development, and construction personnel will develop and open these facilities.
Manor Care Realty's development process is divided into three discrete phases.

         The first phase of the development process involves market feasibility
and site selection. Manor Care Realty's in-house market feasibility team will be
responsible for identifying and prioritizing the top metropolitan statistical
areas for development on a national basis, based on (i) the demographics of each
market, (ii) fit with Manor Care Health Services' existing cluster markets, and
(iii) the competitive environment in each market. Following market selection,
regionally focused development teams will be responsible for identifying
potential sites, creating

                                      10
<PAGE>
 
site schematics, executing purchase agreements, selecting external civil
engineers and consultants, preparing an initial budget, and obtaining land use
approval. At the same time, Manor Care Realty's health planning department will
perform CON analyses and, if needed, file for any required CONs and obtain CON
approval for each approved site. Manor Care Realty will conduct full market
feasibility studies, including demographic analyses, evaluations of existing and
planned competitors, and rate assessments. The market feasibility and site
selection phase takes approximately nine to twelve months.

         The second phase of the process consists of project planning and
design. During this stage Manor Care Realty's development team will determine
the project schedule and select external fee architects responsible for adopting
prototype designs to local building requirements. Manor Care Realty's
architectural and construction departments will conduct regular review of
progress by the fee architect to ensure that Manor Care Realty's standards are
being met. In addition, Manor Care Realty's centralized construction purchasing
and interior design departments will create finish schedules and preliminary
lists of furniture, fixtures, and equipment (FF&E) for the facility. The
architecture and interior design teams maintain a running log of design issues
during this phase of the process which will be used to refine Manor Care
Realty's prototypes. The final steps of the planning and design phase involve
creating the final project budget, finalizing the financial pro formas, and
securing the relevant permits. The planning and design phase takes approximately
three to six months.

         The last phase of Manor Care Realty's development process is the
construction and licensure of the facility. Regionally focused construction
teams will be responsible for selecting the general contractor, obtaining final
permits and conducting biweekly reviews of progress. These biweekly meetings
involve construction management, the general contractor, the fee architect, and
ManorCare Health Services' district operations team. The construction teams are
also responsible for coordinating with all state and local jurisdictions and
health departments to obtain certificates of occupancy and licensure of
facilities. The construction and licensure phase takes approximately ten months
for an Arden Courts facility and twelve to thirteen months for a Springhouse or
skilled nursing facility.

         In addition to its development efforts, subject to the terms of the
Non-Competition Agreement, Manor Care Realty may selectively acquire assisted
living and skilled nursing operations. Manor Care Realty expects that
acquisition opportunities will be identified through Manor Care Realty's senior
management, industry contacts, leads from real estate brokers and consultants,
and a proactive acquisition review process by Manor Care Realty's acquisitions
group. In reviewing acquisition opportunities, Manor Care Realty considers,
among other factors, the competitive climate, the current reputation of the
facility, the quality of the management team and staff, the need to reposition
the facility in the marketplace and associated costs, and the construction
quality and need for renovations.

                                       11
<PAGE>
 
         Mesquite Community Hospital

         Manor Care Realty will own and operate Mesquite Community Hospital
("Mesquite Hospital"), a 172 licensed-bed hospital located in Mesquite, Texas, a
Dallas suburb. Mesquite Hospital, which opened in 1978, is a general
medical/surgical acute care hospital fully accredited by the Joint Commission
for the Accreditation of Health Care Organizations. Services offered by Mesquite
Hospital include obstetrics, emergency services, coronary/intensive care, day
surgery nursing, and geriatric psychiatry. In addition, Mesquite Hospital's
modern ancillary and diagnostic services include MRI, CT, nuclear medicine,
cardiac catheterization and ultrasound with doppler. The medical staff,
representing virtually every medical and surgical specialty, admits and refers
patients into Mesquite from their private office practices. Patient services are
reimbursed from traditional insurance programs, managed care (HMO and PPO),
Medicare and Medicaid. Renovation of 14,400 square feet of existing hospital
space was completed in October 1996. According to a December 1995 industry
survey, Mesquite Hospital was among the top 100 hospitals in the nation based on
a performance analysis evaluating key measures related to clinical practices,
operations, and financial management.

Relationship with ManorCare Health Services

         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, pursuant to the Lease Agreements or by
separate agreement, the right to operate and manage all of Manor Care Realty's
current and future skilled nursing facilities. Under each Lease Agreement,
ManorCare Health Services' use of the subject facility will be limited to
operating a skilled nursing facility. Manor Care Realty and ManorCare Health
Services will also enter into Lease Agreements or similar arrangements pursuant
to which ManorCare Health Services will also lease and operate skilled nursing
facilities in which Manor Care is a substantial equity investor by joint
venture, common ownership or otherwise.

         Under the Lease Agreements, ManorCare Health Services will be
responsible for operating and managing the facilities and will be subject to
substantially all the risks of operations with respect to the facilities. Under
the Lease Agreement for each facility, Manor Care Health Services will be
obligated to pay Manor Care Realty annual rent ("Premises Rent") equal to the
greater of (i) 77% of Net Operating Profit and (ii) 10% of a value of the
subject facility agreed upon by ManorCare Health Services and Manor Care Realty
(the "Priority Basis"); provided that the Premises Rent for a specific Lease
Year may be reduced below these two amounts as a result of the deferral
mechanism described below. The Premises Rent on a facility is payable in arrears
in 12 monthly installments (each "Monthly Premises Rent"), with each due on the
15th day of the calendar month succeeding the month for which the installment is
owed. Each installment of

                                       12
<PAGE>
 
Monthly Premises Rent shall be equal to (A) the greater of (i) 77% of Net
Operating Profit of the subject facility for the Lease Year through and
including the end of the month in respect of which the Monthly Premises Rent is
payable, and (ii) 10% of the Priority Basis (the "Priority Sum") multiplied by a
fraction, the numerator of which is the number of days in the Lease Year through
and including the end of the month in respect of which the Monthly Premises Rent
is payable and the denominator of which is 360, minus (B) the aggregate amount
of Monthly Premises Rent previously paid by ManorCare Health Services for the
Lease Year. The computation of Net Operating Profit includes as a Project
Expense an amount equal to 6% of Project Revenues ("Tenant's Base Fee"), which
is in effect a base fee out of Project Revenues which ManorCare Health Services
is entitled to retain without reduction.

         In the event that Monthly Premises Rent for a particular month is the
Priority Sum and Net Operating Profit is insufficient to pay all or a portion of
the Priority Sum, the amount of any deficiency (the "Deferred Premises Rent")
may be deferred until such time as Net Operating Profit is available to pay it;
provided that as of the first day of each new Lease Year all Deferred Premises
Rent for the prior Lease Year which has not become due and payable shall be
deemed cancelled and extinguished and shall not thereafter be due and payable.

         In addition to Premises Rent, ManorCare Health Services will also be
obligated to reimburse Manor Care Realty for the aggregate annual amount payable
in respect of real and personal property taxes on the facility and premiums for
insurance coverage.

         Each facility will be operated pursuant to an Operating Budget (as
defined in the Lease Agreements). The initial Operating Budget for each facility
will be agreed upon by Manor Care Realty and ManorCare Health Services.
Thereafter, each Operating Budget will not be subject to Manor Care Realty's
approval unless (i) the Net Operating Profit for the Lease Year (as defined in
the Lease Agreements) immediately prior to the Lease Year with respect to which
the Operating Budget in question is being prepared was less than the greater of
(A) the Priority Sum and (B) 90% of budgeted Net Operating Profit for such Lease
Year or (ii) budgeted Net Operating Profit for the current Lease Year is less
than the greater of (A) the Priority Sum for the current Lease Year and (B) 90%
of budgeted Net Operating Profit for the prior Lease Year. In addition,
ManorCare Health Services will have the right to use 3% of aggregate Project
Revenues (aggregated across all facilities under all Lease Agreements) for
capital expenditures at each facility. Major capital expenditures for repairs
and otherwise will be budgeted by ManorCare Health Services and paid for by
Manor Care Realty.

         The Lease Agreements provide that ManorCare Health Services, on behalf
of the underlying property, will have the right to enter into service agreements
with its affiliates, provided, among other conditions, that such services are
competitively priced. In addition, Manor Care Realty will have the right to
mortgage its interest in each facility to the extent of 75% of the Priority
Basis; such mortgage will be subject to the Lease Agreements. Each Lease
Agreement will have an initial term of 5 years with up to thirty-five 1 (one)
year renewals at the option of ManorCare Health Services; provided that in
certain states total lease terms will not exceed the

                                       13
<PAGE>
 
maximum term permitted by statute such that such Lease Agreement will not be
deemed a change of ownership for real estate transfer tax purposes.

         Manor Care Realty will have the right to terminate a Lease Agreement in
the event that (A) either (i) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive years or (ii) Net Operating
Profit fails to exceed the Priority Sum for two consecutive years, subject to
ManorCare Health Services' right to cure with respect to one year only by making
a cash payment to Manor Care Realty of 105% of the amount by which budgeted Net
Operating Profit or the Priority Sum, as applicable, exceeds actual Net
Operating Profit, (B) the facility is decertified as a skilled nursing facility,
is disqualified from participation in Medicare or Medicaid or ManorCare Health
Services loses its license to operate the subject facility as a skilled nursing
facility or (C) any one of certain additional defaults occurs, such as monetary
default, breach of covenant and bankruptcy defaults. All termination rights will
be subject to "right to cure" provisions, except that ManorCare Health Services
will have no right to cure if the subject facility is disqualified from Medicare
or Medicaid or decertified or if ManorCare Health Services loses its license to
operate a skilled nursing facility.

         In the event that Manor Care Realty terminates a Lease Agreement based
upon actual Net Operating Profit being less than 90% of budgeted Net Operating
Profit for two consecutive Lease Years, Manor Care Realty will be obligated to
pay to ManorCare Health Services a termination fee, which fee will be based on
financial calculations based on the performance of the subject facility, in
accordance with the formula therefor set forth in the Lease Agreements. Unless
ManorCare Health Services consents to the sale, Manor Care Realty will also be
obligated to pay to Manor Care Health Services a termination fee upon the sale
of a facility. The termination fee is formula-based and intended to approximate
ManorCare Health Services' future income from the operation of that facility.

         Development Agreement Relating To Assisted Living Facilities

         Manor Care Realty and ManorCare Health Services will enter into a
Development Agreement (the "Development Agreement") pursuant to which Manor Care
Realty will develop assisted living facilities for ManorCare Health Services and
retain ownership of such facilities until occupancy has stabilized at 80% or
more for a period of 30 days or until such earlier date as ManorCare Health
Services opts to purchase such facility. Prior to the sale of an assisted living
facility to ManorCare Health Services, all income and expenses in connection
therewith will be for the account of Manor Care Realty. Under the Development
Agreement, if stabilized occupancy of 80% or more is achieved within two years
of commencing operations, ManorCare Health Services will be obligated to
purchase the facility. The purchase price for each facility will be at a premium
to the total development costs, which will be based upon the number of months
elapsed since the opening of the facility. If stabilized occupancy is not
achieved within two years of commencing operations, ManorCare Health Services
may, but will be not obligated to, purchase the facility. Pursuant to the
Assisted Living Facility Management Agreement, during the two-year stabilization
period, ManorCare Health Services will manage the facility for Manor Care Realty

                                       14
<PAGE>
 
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 7
years and may be terminated for cause by either Manor Care Realty or ManorCare
Health Services under certain circumstances.

         Assisted Living Facility Management Agreement

         Prior to the commencement of the development of an assisted living
facility, Manor Care Realty and ManorCare Health Services will execute and
deliver an Assisted Living Facility Management Agreement (the "Assisted Living
Facility Management Agreement") pursuant to which ManorCare Health Services will
manage the assisted living facility for the period from the first day of the
calendar month in which the subject facility is opened to the earlier of (a) the
date of the sale of the subject facility by Manor Care Realty to ManorCare
Health Services or (b) the second anniversary of the date on which the subject
facility opened for business. ManorCare Health Services will manage each
facility for Manor Care Realty for a fixed monthly fee.

         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.

         Restrictions on Manor Care Realty. Subject to certain exceptions, Manor
Care Realty may not enter into management agreements with third parties with
respect to its acquired or developed skilled nursing properties unless ManorCare
Health Services has declined to manage such facility. Manor Care Realty may not,
subject to certain exceptions, enter, or make a significant investment in any
entity engaged in, the institutional pharmacy or home health care business.
Subject to certain exceptions, Manor Care Realty will be prohibited from making
assisted living acquisitions and will not be allowed to compete in the business
of managing either skilled nursing or assisted living facilities, except in
cases in which it is managing a facility that it owns and which Manor Care
Health has declined to manage. Manor Care Realty will only be permitted to
develop new assisted living facilities for anyone other than ManorCare Health
Services insofar as ManorCare Health Services has previously declined to pursue
such opportunities and such facilities are not within a five-mile radius of an
assisted living facility owned by or being developed for ManorCare Health
Services.

         Restrictions on ManorCare Health Services. ManorCare Health Services
will be prohibited from developing or acquiring skilled nursing facilities and,
subject to certain exceptions, will be prohibited from entering the hospital
management business. ManorCare Health Services will only be permitted to develop
new assisted living facilities insofar as Manor Care

                                       15
<PAGE>
 
Realty has previously declined to pursue such opportunities and such facilities
are not within a five-mile radius of an assisted living facility owned or being
constructed by Manor Care Realty. ManorCare Health Services will not without
Manor Care Realty's consent (which consent will not be unreasonably withheld) be
permitted to manage skilled nursing facilities owned by anyone but Manor Care
Realty (other than certain skilled nursing facilities held by joint ventures in
which ManorCare Health Services holds an interest) within a five-mile radius of
any Manor Care Realty-affiliated/ManorCare Health Services-operated skilled
nursing facility. ManorCare Health Services will be free to manage any assisted
living facility without regard to the identity of its ownership.

         Employee Benefits and Other Employment Matters Allocation Agreement

         ManorCare Health Services and Manor Care Realty will enter into an
Employee Benefits and Other Employment Matters Allocation Agreement (the
"Employee Benefits Allocation Agreement"), pursuant to which the employee
benefits with respect to employees who remain employed by Manor Care Realty or
its subsidiaries subsequent to the Distribution ("Manor Care Realty Employees")
and the employee benefits of employees who are employed by ManorCare Health
Services after the Distribution ("ManorCare Health Services Employees") will be
allocated.

         The Employee Benefits Allocation Agreement will also provide for the
adjustment of outstanding stock options of ManorCare Health Services. In
connection with the Distribution, it is contemplated that options to purchase
Manor Care common stock will be converted to options to purchase a combination
of ManorCare Health Services Common Stock and Manor Care Realty common stock. In
all cases, however, the exercise prices of the options will be adjusted to
maintain the same financial value to the option holder immediately before and
after the Distribution.

         Employee Benefits Administration Agreement

         ManorCare Health Services and Manor Care Realty will enter into a
Employee Benefits Administration Agreement (the "Employee Benefits
Administration Agreement"), pursuant to which ManorCare Health Services will
administer the employee benefits plans and programs of Manor Care Realty
following the Distribution on a time and materials and/or fixed fee basis as
specified in the Employee Benefits Administration Agreement.

         Office Lease Agreement

         ManorCare Health Services and Manor Care Realty will enter into a lease
agreement with respect to the building complex in Gaithersburg, Maryland at
which the Manor Care Health's principal executive offices are located (the
"Office Lease Agreement").

                                       16
<PAGE>
 
         Distribution Agreement

         Manor Care and ManorCare Health Services will enter into a Distribution
Agreement (the "Distribution Agreement") which will provide for, among other
things, the principal corporate transactions required to effect the transition
to ManorCare Health Services' status as a company separate and independent from
Manor Care and the assumption by ManorCare Health Services of certain
liabilities relating to the Assisted Living Business, the stock of Vitalink and
In Home Health and the operation and management of the Skilled Nursing
Facilities and the allocation between ManorCare Health Services and Manor Care
of certain other liabilities and certain other agreements with respect to the
Distribution. The Distribution Agreement also provides for the Capital
Contribution by Manor Care to ManorCare Health Services. In addition, the
Distribution Agreement provides that the Distribution is subject to the
satisfaction of certain conditions, including, among other things, the transfer
of the Assisted Living Business and the stock of Vitalink and In Home Health to
ManorCare Health Services and the execution of the agreements governing the
relationship of Manor Care Realty and ManorCare Health Services following the
Distribution, certain of which are described herein. Subject to certain
exceptions, ManorCare Health Services will indemnify Manor Care and Manor Care
will indemnify ManorCare Health Services against any loss, liability or expense
incurred or suffered by the indemnified party arising out of or related to the
failure by the indemnifying party, as the case may be, to perform or otherwise
discharge liabilities allocated to and assumed by the indemnifying party under
the Distribution Agreement. The Distribution Agreement will also include
procedures for notice and payment of indemnification claims and generally
provides that the indemnifying party may assume the defense of a claim or suit
brought by a third party.

         None of the foregoing indemnities applies to tax claims or liabilities,
which are addressed in the Tax Sharing Agreement described below.

         Tax Sharing Agreement

         On or prior to the Effective Date, Manor Care 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

                                       17
<PAGE>
 
any judicial or administrative proceeding or otherwise for any taxable period
(including any taxable period ending on or before the Effective Date), relating
to the businesses that will be conducted by ManorCare Health Services following
the Distribution. Conversely, Manor Care Realty will indemnify ManorCare Health
Services from and against any additional income tax liability of ManorCare
Health Services or any of its subsidiaries, resulting from any tax audit or any
judicial or administrative proceeding or otherwise for any taxable period
(including any taxable period ending on or before the Effective Date), relating
to the businesses that will be conducted by Manor Care Realty following the
Distribution. In addition, Manor Care Realty, on the one hand, and ManorCare
Health Services, on the other hand, will each be entitled to any income tax
refund received from any taxing authority to the extent that such refund
relates to the businesses conducted by that party following the Distribution.

         The Tax Sharing Agreement also provides that if the Distribution
(including certain related transactions) fails to qualify as a tax-free
transaction under Sections 355 and 368 of the Code as a result of either party
taking or failing to take certain specified actions, then that party will be
liable for and will indemnify the other party from and against all taxes and
other damages resulting from such failure to qualify. If the failure to qualify
as a tax-free transaction results from both parties taking or failing to take
certain specified actions or neither party taking or failing to take such
actions, then the parties will each be responsible for one-half of any taxes and
other damages resulting from such failure to qualify.

         Tax Administration Agreement

         On or prior to the Effective Date, Manor Care Realty and ManorCare
Health Services will enter a tax administration agreement (the "Tax
Administration Agreement"). The Tax Administration Agreement sets forth the
arms-length terms and conditions pursuant to which ManorCare Health Services
will provide certain tax-related administrative services to Manor Care Realty
following the Distribution. Such services will include audit and compliance work
related to income, real estate, personal property and sales and use taxes.

         Corporate Services Agreement

         Manor Care Realty and ManorCare Health Services will enter into a
Corporate Services Agreement (the "Corporate Services Agreement") pursuant to
which following the Distribution, ManorCare Health Services will provide certain
corporate services, to Manor Care Realty including administrative, payroll and
accounting systems on a time and materials and/or fixed fee basis as specified
in the Corporate Services Agreement. The Corporate Services Agreement will
expire on [_].

         Trademark Agreement

         On the Effective Date, Manor Care Realty and ManorCare Health Services
will enter into a Trademark Agreement (the "Trademark Agreement") pursuant to
which Manor Care Realty will

                                       18
<PAGE>
 
assign approximately fifty (50) registrations and applications to ManorCare
Health Services representing all of the marks necessary for the operations of
the business of ManorCare Health Services. ManorCare Health Services, under a
separate agreement, will license to Manor Care Realty the right to use certain
marks in the business of Manor Care Realty.

         Cash Management Agreement

         ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
ManorCare Health Services will perform cash management services for Manor Care
Realty after the Distribution for a fee, payable quarterly, based on the time
incurred by ManorCare Health Services to perform such services. The Cash
Management Agreement will expire on [_].

         Risk Management Consulting Services Agreement

         Manor Care Realty and ManorCare Health Services will enter into a Risk
Management Consulting Services Agreement (the "Risk Management Consulting
Services Agreement"), pursuant to which ManorCare Health Services will provide
to Manor Care Realty risk management services for an annual fee of $[_]. The
Risk Management Consulting Services Agreement will expire on [_].

         Realty Note

         In connection with the Distribution and in order to fund 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 the Capital Contribution (as herein defined). As part of the Capital
Contribution, Manor Care will contribute to ManorCare Health Services the Realty
Note (as herein defined). ManorCare Health Services expects that the Realty Note
will have the same general terms (including interest rate and maturity) as
certain senior notes proposed to be sold by Manor Care Realty in connection with
the Distribution, except that ManorCare Health Services will have the right to
require Manor Care Realty to redeem the Realty Note at a redemption price equal
to 100% of the principal amount thereof. Manor Care Realty's obligation to
redeem the Realty Note is conditioned on Manor Care Realty's ability to finance
the redemption at an interest rate that does not exceed the interest rate on the
Realty Note plus 2%. If Manor Care Realty is unable to refinance the Realty Note
the interest rate on the Realty Note will increase by 2% per annum. See
"Description of Certain Indebtedness of Manor Care Realty."

Properties

         The real estate portfolio of Manor Care Realty consists of 171 skilled
nursing facilities, 2 skilled nursing and 25 assisted living facilities under
construction, 3 skilled nursing and 64 assisted living facilities under contract
and in development, and one acute care hospital.


                                       19
<PAGE>
 
         The skilled nursing facilities owned by the Company and operated by
ManorCare Health Services range in bed capacity from 48 to 278 beds and have an
aggregate bed capacity of 24,050 beds. Most of the skilled nursing facilities
have been designed to permit private and semi-private patient room
accommodations. Most facilities have individually controlled heating and
air-conditioning units. Each skilled nursing facility contains a fully equipped
kitchen, day room areas, administrative offices and in most cases a physical
therapy room.

         The table below summarizes certain information regarding the Company's
existing facilities:

Skilled Nursing Facilities

<TABLE> 
<CAPTION> 

      Facility Location         Beds            Facility Location        Beds
      -----------------         ----            -----------------        ----
<S>                             <C>       <C>                           <C> 
Arizona                                                
Tucson                           116     
                                          -----                           ---
                                          Total                           116
                                         
California                               
Citrus Heights                   146      Fountain Valley                 147
Sunnyvale                        139      Hemet                           176
Walnut Creek                     154      Palm Desert                     178
Encinitas                         98      Rancho Bernardo                  94
Rossmoor                         129     
                                          -----                         -----
                                          Total                         1,261
                                         
Colorado                                 
Denver                           155      Boulder                         149
                                          -------                         ---
                                          Total                           304
                                         
Delaware                                 
Pike Creek                       151      Wilmington                      138
                                          ----------                      ---
                                          Total                           289
                                         
Florida                                  
Palm Harbor                      179      Naples                          118
Carrollwood                      117      Dunedin                         120
Sarasota                         179      Boca Raton                      180
Boynton Beach                    179      Plantation                      119
Winter Park                      132      Jacksonville                    113
West Palm Beach                  119      Venice                          129
                                          ------                        -----
                                          Total                         1,684
                                         
Georgia                                  
Decatur                          128      Marietta                        116
                                          --------                        ---
                                          Total                           244
</TABLE> 
                                      
                                      
                                                       

                                       20
<PAGE>
 
<TABLE> 
<CAPTION> 
      Facility Location        Beds            Facility Location        Beds
      -----------------        ----            -----------------        ----
<S>                            <C>       <C>                           <C>   
Illinois
South Holland                   176      Orchard Manor                    53
Naperville                      112      Libertyville                    150
Palos Heights                   176      Elgin                            79
Hinsdale                        191      Oak Lawn                        179
Elk Grove                       178      Rolling Meadows                 156
Normal                           96      Peoria                          122
Decatur                          93      Kankakee                        103
Urbana                           98      Champaign                        99
Wilmette                         74      Palos Heights West              120
Arlington Heights               151      Oak Lawn Americana              141
Westmont                        115     
                                         -----                         -----
                                         Total                         2,662
                                        
Indiana                                 
Anderson                        225      Kokomo                           99
Indianapolis North              184      Indianapolis South              117
                                         ------------------              ---
                                         Total                           625
                                        
Iowa                                    
Waterloo                         95      Cedar Rapids                    104
Davenport                       101      Dubuque                          94
                                         -------                        ----
                                         Total                           394
                                        
Kansas                                  
Topeka                          119      Overland Park                   173
Wichita                         123     
                                         -----                           ---
                                         Total                           415
                                        
Maryland                                
Silver Spring                   118      Towson                          126
Ruxton                          222      Largo                           128
Potomac                         136      Chevy Chase                      92
Bethesda                        151      Wheaton                          98
Baltimore                       176      Roland Park                      71
                                         -----------                  ------
                                         Total                         1,318
                                        
Missouri                                
Fremont                         222      Florissant                       97
                                         ----------                     ----
                                         Total                           319
                                        
Michigan                                
Kingsford                       105      Michigan                        188
                                         --------                        ---
                                         Total                           293
                                                       
Nevada                                                 
</TABLE> 
                                                       

                                       21
<PAGE>
 
<TABLE> 
<CAPTION> 
      Facility Location        Beds            Facility Location         Beds
      -----------------        ----            -----------------         ----
<S>                            <C>       <C>                            <C> 
Reno                            151     
                                         -----                            ---
                                         Total                            151
                                        
New Jersey                              
Cherry Hill                     105      West Deptford                    136
Mountainside                    148     
                                         -----                            ---
                                         Total                            389
                                        
New Mexico                              
Camino Vista                    133      Northeast Heights                138
Sandia                          176     
                                         -----                            ---
                                         Total                            447
                                        
North Carolina                          
Pinehurst                       115     
                                         -----                            ---
                                         Total                            115
                                        
North Dakota                            
Minot                           105      Fargo                            108
                                         -----                            ---
                                         Total                            213
                                        
Ohio                                    
Woodside                        143      Cincinnati                       150
Barberton                       117      Lake Shore                       199
Rocky River                     208      Oregon                           108
Westerville                     179      Willoughby                       154
Akron                           102      Belden Village                   143
Sycamore Gen                     98      Mayfield Heights                 149
North Olmstead                  178      Centerville                      141
                                         -----------                   ------
                                         Total                          2,069
                                        
Oklahoma                                
Northwest Oklahoma City         111      Warr Acres                       100
Midwest City                    108      Norman                           110
Windsor Hills                    98      Tulsa                            107
Southwest Oklahoma City         110     
                                         -----                            ---
                                         Total                            744
                                        
Pennsylvania                            
North Hill                      200      Carlisle                         160
McMurray                        150      Bethel Park                      170
Chambersburg                    210      Harrisburg                       250
Camp Hill                       130      Allentown                        164
Bethlehem-I                     221      Laureldale                       185
Bethlehem-II                    217      Easton                           222
Sinking Spring                  211      West Reading                     175
</TABLE> 
                                                       

                                       22
<PAGE>
 
<TABLE> 
<CAPTION> 
      Facility Location        Beds            Facility Location         Beds
      -----------------        ----            -----------------         ----
<S>                            <C>       <C>                            <C> 
Jersey Shore                    118      Kingston East                    175
Pottsville                      175      Sunbury                          121
Williamsport North              151      Williamsport South               125
King of Prussia                 145      Yardley                          139
Lansdale                        169      Yeadon                           195
Dallastown                      200      Lebanon                          157
Pottstown Nursing               157      Whitehall                        169
Manor Care North                160      Manor Care South                 121
Elizabethtown                    95      Manor Care Kingston Court        125
Pittsburgh                      146      Huntingdon Valley                118
Devon Manor                     261      Fitzgerald Mercy                 120
Monroeville                     116     
                                         -----                          -----
                                         Total                          6,123
                                        
South Carolina                          
Columbia                        116      Lexington                        130
Charleston                      117     
                                         -----                            ---
                                         Total                            363
                                        
South Dakota                            
Aberdeen                         98     
                                         -----                            ---
                                         Total                             98
                                        
Texas                                   
Dallas                          201      Fort Worth NRH                   159
Forth Worth NW                  104      San Antonio-Babcock              208
San Antonio-North                92      San Antonio-Northwest            144
San Antonio-Windcrest           185      Temple                           101
Webster                         110      Temple Care                      140
Sharpview                       129     
                                         -----                          -----
                                         Total                          1,573
                                        
Utah                                    
Ogden                           134     
                                         -----                            ---
                                         Total                            134
                                        
Virginia                                
Stratford Hall                  231      Arlington                        191
Fair Oaks                       116      Imperial                         127
                                         --------                         ---
                                         Total                            665
                                        
Washington                              
Lynwood                         112      Spokane                          124
Meadow Park                     125      Gig Harbor                       120
                                         ----------                       ---
                                         Total                            481
</TABLE> 
                                                       

                                       23
<PAGE>
 
<TABLE> 
<CAPTION> 
      Facility Location             Beds         Facility Location         Beds
      -----------------             ----         -----------------         ----
<S>                                 <C>    <C>                            <C> 
Wisconsin                               
Green Bay-East                        78   Green Bay-West                   105
Fond du Lac                          107   Madison                          171
Appleton                             100     
                                           -----                            ---
                                           Total                            561
                                               
                                       
Total skilled nursing facilities     171
                                       
Total skilled nursing beds        24,050
</TABLE> 
         All of the facilities listed in the above table are leased by ManorCare
Health Services except for certain facilities which Manor Care Realty has an
ownership interest pursuant to joint venture agreements. Manor Care Realty owns
35% of the Winter Park facility, 94% of the Decatur facility, and 50% of each of
the Sycamore Glen facility, the Centerville facility and the Fitzgerald Mercy
facility.

         Mesquite hospital is licensed for 172 beds in all private rooms and is
a modern, fully equipped, acute care facility.

         The table below summarizes certain information regarding Manor Care
Realty's facilities under contract and in development or under construction:

<TABLE> 
<CAPTION> 
       State      Springhouses  Springhouses  Arden Courts    Arden     Totals
                     Under           In          Under      Courts In
                  Construction   Development  Construction   Develop-
                                                              ment
- --------------------------------------------------------------------------------
<S>               <C>           <C>           <C>           <C>         <C> 
Arizona                0              1            1           3          5
California             0              1            1           3          5
Colorado               0              1            0           4          5
Connecticut            0              0            0           2          2
Delaware               0              0            1           0          1
Florida                1              0            5           6         12
Georgia                1              0            2           1          4
Illinois               0              2            1           1          4
Kansas                 0              0            1           0          1
Maryland               1              2            1           3          7
Michigan               0              0            0           1          1
Nevada                 0              0            1           0          1
New Jersey             3              1            2           3          9
New York               0              0            0           3          3
North Carolina         0              0            1           1          2
Ohio                   0              1            0           5          6
Pennsylvania           0              3            0           6          9
Texas                  0              2            2           3          7
</TABLE> 

                                       24
<PAGE>
 
<TABLE> 
<CAPTION> 


       State            Springhouses       Springhouses        Arden Courts         Arden          Totals
                           Under                In                Under           Courts In
                        Construction        Development        Construction        Develop-
                                                                                     ment
- ------------------------------------------------------------------------------------------------------------
<S>                  <C>                 <C>                   <C>                <C>              <C> 
Virginia                         0                  1                   0               1             2
Washington                       0                  1                   0               2             3
                              ----               ----                ----            ----          ----
Total                            6                 16                  19              48            89
</TABLE> 

Competition

         Manor Care Realty competes for land, property acquisitions and
development opportunities with health care providers, real estate developers,
health care real estate investment trusts, real estate partnerships, and other
investors. ManorCare Health Services, the operator of the Skilled Nursing
Facilities and the assisted living facilities to be developed by Manor Care
Realty, is subject to competition from the operators of comparable facilities,
including skilled nursing, assisted living, and hospital providers. These
competitors include independent operators as well as regional and national
companies that manage multiple facilities. Certain operators have capital
resources substantially in excess of ManorCare Health Services. These operators
compete on the basis of breadth and quality of services, reputation, location
and physical appearance of the facilities, family preferences, strength of the
operator's referral stream and pricing. Mesquite Hospital encounters competition
in the Mesquite, Texas area where it competes with other hospitals for community
and physician acceptance.

         In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of the present and potential
competitors of ManorCare Health Services operate on a not-for-profit basis or as
charitable organizations, while others have, or may obtain, greater financial
resources than those of ManorCare Health Services. Consequently, there can be no
assurance that ManorCare Health Services will not encounter increased
competition that could limit its ability to attract residents or expand its
business. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may become
saturated. Such an oversupply of facilities could cause ManorCare Health
Services to experience decreased occupancy, depressed margins and lower
operating results which may in turn have an adverse effect on Manor Care
Realty's results of operations.

Government Regulation

         The facilities which Manor Care Realty owns and develops and Mesquite
Hospital are subject to comprehensive and intricate federal, state and local
regulatory schemes. The facilities themselves, as well as their respective
purposes and activities, are also subject to various local building codes and
other ordinances. In most cases compliance with the applicable statutes and
regulations will be the responsibility of ManorCare Health Services. Manor Care
Realty's success will depend in part upon the ability of ManorCare Health
Services to satisfy applicable regulations and requirements and to procure and
maintain required licenses in rapidly changing regulatory environments. The
failure of ManorCare Health Services or Mesquite Hospital to satisfy applicable


                                      25
<PAGE>
 
regulations or to procure or maintain a required license could have a material
adverse effect on Manor Care Realty. Moreover, certain regulatory developments
such as revisions in the building code requirements for assisted living or
skilled nursing facilities, mandatory increases in the scope and quality of care
to be offered to residents and revisions in licensing and certification
standards could also have a material adverse effect on Manor Care Realty.

         Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on licensure
of Manor Care Realty facilities, eligibility for participation in federal and
state programs, permissible activities, costs of doing business or the levels of
reimbursement from governmental, private and other sources. Any one of these
potential developments could have an immediate and very significant effect on
the revenues and profitability of the Skilled Nursing Facilities or Mesquite
Hospital. Apart from extensive existing health care statutes and regulations,
there are numerous initiatives on the federal and state levels for comprehensive
reforms. Manor Care Realty cannot predict the ultimate timing, content or
possible impact of future legislation and regulations affecting the Skilled
Nursing Facilities or Mesquite Hospital and the health care industry in general.
See "Risk Factors -- Regulation."

         Both ManorCare Health Services, as the operator of the Skilled Nursing
Facilities, and Mesquite Hospital are subject to Federal and state laws which
govern financial and other arrangements between health care providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the Federal
"Stark Legislation" which prohibits, with limited exceptions, the referral of
patients for certain services, including home health services, physical therapy
and occupational therapy, by a physician to an entity in which the physician has
an ownership interest and the Federal "anti-kickback law" which prohibits, among
other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients or the
purchasing, leasing, ordering or arranging for any goods, facility services or
items for which payment can be made under Medicare and Medicaid. The Federal
government, private insurers and various state enforcement agencies have
increased their scrutiny of providers, business practices and claims in an
effort to identify and prosecute fraudulent and abusive practices. The Federal
government has issued recent fraud alerts concerning nursing services, double
billing, home health services and the provision of medical supplies to nursing
facilities; accordingly, these areas may come under closer scrutiny by the
government. Some states restrict certain business relationships between
physicians and other providers of health care services and many states prohibit
business corporations from providing, or holding themselves out as a provider
of, medical care. Possible sanctions for violation of any of these restrictions
or prohibitions include loss of licensure or eligibility to participate in
reimbursement programs, as well as civil and criminal penalties. These laws vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies. There can be no assurance that such laws will
ultimately be interpreted in a manner consistent with the practices of ManorCare
Health Services, as the operator of the Skilled Nursing Facilities, or Mesquite
Hospital.

                                      26
<PAGE>
 
         Certificate of Need

         Many of the states in which Manor Care Realty's facilities are leased
and operated have adopted Certificate of Need ("CON") statutes applicable to the
assisted living and skilled nursing facilities. CONs are required to build
skilled nursing facilities in 38 states and in at least 8 states to build
assisted living facilities. CON or similar laws generally require that approval
must be obtained from the designated state health planning agency for certain
acquisitions and capital expenditures, and determine that a need exists prior to
the expansion of existing facilities, construction of new facilities, addition
of beds, acquisition of major items of equipment or introduction of new
services. In addition, many states currently have a moratorium on the
construction of new skilled nursing facilities. Failure to obtain the necessary
state approval may result in (i) the inability to provide services, to operate a
facility or to complete an acquisition, addition or other change; (ii) the
imposition of sanctions; (iii) adverse action on the facility's license; and
(iv) adverse reimbursement action. CONs or other approvals may be required in
connection with Manor Care Realty's future developments and acquisitions. There
can be no assurance that Manor Care Realty or ManorCare Health Services will be
able to obtain the CONs or other approvals necessary for any or all such
projects. There can be no assurance that states with CON laws may not abolish
such laws or that states without such laws will not enact such CON laws.

         Federal and State Assistance Programs

         Substantially all of Manor Care Realty's Skilled Nursing Facilities and
Mesquite Hospital are currently certified to receive benefits under Medicare and
Medicaid. Both initial and continuing qualification of a nursing center or
hospital to participate in such programs depends on many factors including
accommodations, equipment, services, patient care, safety, personnel, physical
environment and adequate policies, procedures and controls.

         Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease the rate of program payments to health care
facilities. Manor Care Realty can give no assurance that payments to ManorCare
Health Services under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the operating and
fixed costs allocable to such patients.

         There have been numerous initiatives on the Federal and state levels
for comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses skilled
nursing facilities for cost reporting periods beginning July 1, 1998. Medicare
is currently a retrospective payment system in which each facility receives an
interim payment during the year, which is later adjusted to reflect actual
allowable direct and indirect costs of services based on the submission of a
cost report at the end of each year. The Budget Act will result in a shift to a
prospective Medicare payment system in which skilled nursing

                                      27
<PAGE>
 
facilities will be reimbursed per diem for specific covered services regardless
of actual cost. Specifically, the Budget Act provides that, over three
reporting periods starting July 1, 1998, the Medicare program will phase into
this prospective payment system. During the first reporting period, skilled
nursing facilities will receive 75% of their reimbursement based on actual costs
and 25% based on a federally-scheduled per diem rate. In the second reporting
period, reimbursement will be 50% cost-based and 50% rate-based, in the third,
25% cost-based and 75% rate-based. Thereafter, skilled nursing facilities will
be reimbursed by Medicare solely based on a prospective payment system. The
Budget Act also gives states greater flexibility in the administration of their
Medicaid programs in that the Budget Act repeals the requirement that payment be
reasonable and adequate to cover the costs of "efficiently and economically
operated" skilled nursing facilities. Manor Care Realty cannot predict the
impact that this change will have on ManorCare Health Systems and, indirectly,
on Manor Care Realty. Manor Care Realty cannot predict whether any other
proposals will be adopted at the Federal or state level or, if adopted and
implemented, what effect, if any, such proposals will have on ManorCare Health
Services and, indirectly, Manor Care Realty. Manor Care Realty believes,
however, that government and private efforts to contain or reduce health care
costs will continue and that these trends are likely to lead to reduced or
slower growth in reimbursement for certain services provided by ManorCare Health
Services, which in turn will affect the revenue derived by Manor Care Realty
from ManorCare Health Services. A significant change in coverage, reduction in
payment rates by third-party payors or the decline in availability of funding
could have a material adverse effect on the business and financial condition of
ManorCare Health Services and, indirectly, Manor Care Realty's results of
operations and financial condition.

         Environmental Regulation

         Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or toxic
substances, that could be located on, in or under such property. Such laws and
regulation often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of the hazardous of toxic substances. The
costs of any required remediation or removal of these substances could be
substantial and the liability of an owner or operator as to any property is
generally not limited under such laws and regulation and could exceed the
property's value and the aggregate assets of the owner or operator. The presence
of these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property, or to borrow
using the property as collateral. Under these laws and regulations, an owner,
operator or an entity that arranges for the disposal of hazardous or toxic
substances at a disposal site may also be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at the disposal
site. In connection with the ownership and leasing to third-parties of its
properties, Manor Care Realty could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. See "-- Legal Proceedings."


                                      28
<PAGE>
 
Legal Proceedings

         One or more subsidiaries or affiliates of Manor Care have been
identified as potentially responsible parties ("PRPs") in a variety of actions
(the "Actions") relating to waste disposal sites which allegedly are subject to
remedial action under the Comprehensive Environmental Response Compensation and
Liability Act, as amended, 42 U.S.C. (S)(S)9601 et seq. ("CERCLA") and similar
state laws. CERCLA imposes retroactive, strict joint and several liability on
PRPs for the costs of hazardous waste clean-up. The Actions arise out of the
alleged activities of Cenco Incorporated and its subsidiary and affiliated
companies ("Cenco"). Cenco was acquired in 1981 by a wholly owned subsidiary of
Manor Care. The Actions allege that Cenco transported and/or generated hazardous
substances that came to be located at the sites in question. The Company
believes these Actions occurred prior to the Manor Care subsidiary's acquisition
of Cenco. Environmental proceedings such as the Actions may involve owners
and/or operators of the hazardous waste site, multiple waste generators and
multiple waste transportation disposal companies. Such proceedings typically
involve efforts by governmental entities and/or private parties to allocate or
recover site investigation and cleanup costs, which costs may be substantial.

         Manor Care believes it has adequate insurance coverage for a
substantial portion of the claims asserted in the actions. Manor Care is engaged
in litigation with its insurers as to the extent of coverage available in
connection with the Actions. Manor Care Realty believes it will ultimately be
successful in settling the claims with its insurers.

         On October 30, 1989, the New Jersey Department of Environmental 
Protection sued Manor Care and other defendants in U.S. District Court, District
of New Jersey, seeking clean-up costs at the Kramer landfill, located in Mantua,
New Jersey, where subsidiaries of Cenco allegedly transported waste. About the
same time, the United States filed a lawsuit against approximately 25 defendants
in the same court seeking recovery of its expenses arising in connection with
this site. Manor Care is also defendant in that suit. Based upon a court
approved final allocation plan, and also in view of its insurance coverage
(assuming Manor Care prevails in its litigation with such insurers), Manor Care
Realty believes that the Kramer Action will not have a material adverse effect
on its financial condition or results of operations. This final allocation plan
is not binding. If the matter is not resolved by settlement, a court would have
to allocate responsibility and Manor Care Realty's allocation could change. In
addition, should Manor Care Realty fail to favorably resolve the litigation with
its insurers, the Actions could have an adverse effect on its financial
condition or results of operations.

         After the Distribution, Manor Care Realty will retain liability for the
Actions and pursuant to the Distribution Agreement will indemnify ManorCare
Health Services against any liabilities and losses arising out of the Actions.
Although Manor Care, together with its insurers, is vigorously contesting its
liability in the Actions, it is not possible at the present time to estimate the
ultimate legal and financial liability of Manor Care Realty in respect to the
Actions. Manor Care Realty believes, however, that any such Action will not be
material.


                                      29
<PAGE>
 
         Manor Care Realty will also retain liability for certain regulatory and
legal actions, investigations or claims for damages that have arisen in the
ordinary course of business. Although it is impossible to predict the outcome of
any legal proceeding and Manor Care Realty cannot estimate the range of the
ultimate liability, if any, relating to these proceedings, Manor Care Realty
believes that it has meritorious defenses to these pending claims and
proceedings and that the outcome of such proceedings should not, individually or
in the aggregate, have a material adverse effect on the results of operations or
financial condition of Manor Care Realty.

Employees

         After consummation of the Distribution, Manor Care Realty will have
approximately 160 full and part-time employees, 100 of whom will be employed in
development operations and the remainder in Manor Care Realty's Headquarters. In
addition, Mesquite Hospital will have approximately 600 full and part-time
employees.


                                      30
<PAGE>
 
            MANAGEMENT OF MANOR CARE REALTY AFTER THE DISTRIBUTION

Directors and Executive Officers of Manor Care Realty

         The name, age, proposed title upon consummation of the Distribution and
business background of certain of the persons who are expected to become on the
Effective Date the directors and executive officers of Manor Care Realty are set
forth below. At or prior to the Effective Date, certain additional individuals
may be appointed as directors or executive officers. The business address of
each of the prospective executive officers is 11555 Darnestown Road,
Gaithersburg, Maryland, 20878, unless otherwise indicated.

<TABLE> 
<CAPTION> 

         Name                     Age                   Position
         ----                     ---                   --------
<S>                             <C>            <C> 
Stewart Bainum, Jr.             51             Director, Chairman of the Board
                                        
Joseph R. Buckley               49             Director, Chief Executive Officer
                                        
Lawrence Godla                  40             Vice President - Construction and
                                               Development
                                        
Donald Feltman                  42             Vice President - Development
                                        
Stewart Bainum                  78             Director
                                        
Kennett L. Simmons              55             Director
                                        
Ann Torre Grant                 38             Director
</TABLE> 

         Stewart Bainum, Jr. Chairman of the Board of Manor Care and Chairman of
the Board of the principal operating subsidiary of Manor Care, which prior to
the Distribution owned and operated Manor Care's assisted living and skilled
nursing facilities ("Old ManorCare Health Services") since March 1987; Chief
Executive Officer of Manor Care since March 1987 and President since June 1989;
Chairman of the Board of Vitalink since February 1997; Vice Chairman of the
Board of Vitalink from February 1995 to February 1997; Chairman of the Board of
Choice since November 1996; Vice Chairman of the Board of Manor Care and
subsidiaries from June 1982 to March 1987; Director of Manor Care since August
1981, of Vitalink since September 1991, of Old ManorCare Health Services since
1976 and of Choice and its predecessors since 1977; Chief Executive Officer of
Old ManorCare Health Services since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987 to
June 1990.


                                      31
<PAGE>
 
         Joseph R. Buckley. Executive Vice President of Manor Care and Old
ManorCare Health Services since March 1996; Director of Vitalink since July
1996; President, Assisted Living Division of Old ManorCare Health Services from
February 1995 to March 1996; Senior Vice President-Information Resources and
Development of Manor Care from June 1990 to February 1995; Vice
President-Information Resources and Development of Manor Care from July 1989 to
June 1990; Vice President-Real Estate from September 1983 to July 1989; Director
of Vitalink since July 1996; Chairman of the Board of In Home Health since June
1997 and Director since October 1995.

         Lawrence Godla.  Vice President of Development and Construction, Manor
Care Inc. since March 1996; Vice President of Construction of Manor Care, Inc.
from March 1993 to March 1996; Director of Construction of Manor Care, Inc. from
January 1990 to March 1993; Vice President of Construction at Spaulding and Slye
Company from January 1984 to January 1990; Project Manager at Omni Construction
from August 1981 to December 1983.

         Donald Feltman. Vice President of Development at Manor Care, Inc. since
March 1993; Director of Development at Marriott Senior Living Services from July
1988 to March 1993; Director of Development and various other development
positions at Manor Care, Inc. from March 1977 to July 1988.

         Stewart Bainum. Vice Chairman of the Board of Manor Care since March
1987; Chairman of the Board of Manor Care from 1968 to March 1987; President of
Manor Care from December 1980 through October 1981, and May 1982 through July
1985; Chairman of the Board of Realty Investment Company, Inc. (a private real
estate investment company) since 1965; Director: Choice Hotels International,
Inc.

         Kennett L. Simmons.  Chairman and Chief Executive Officer of the Metra
Health Companies from June 1994 to October 1995; Senior Advisor to E.M. Warburg,
Pincus & Co. from 1991 to 1994; Chairman and Chief Executive Officer of United
Healthcare Corporation from October 1987 to February 1991; Director of United
Healthcare and Virginia Health Care Foundation.

         Ann Torre Grant.  Executive Vice President, Chief Financial Officer and
Treasurer of NHP Incorporated since February 1995; Vice President and Treasurer
of USAir, Inc. and USAir Group, Inc. from 1991 to January 1995; Director of
Franklin Mutual Series Funds and SLM Holding Corp.


                                      32
<PAGE>
 
                                 RISK FACTORS

Forward-Looking Information

         This Current Statement on Form 8-K 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 Manor Care Realty 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
Manor Care Realty's operating results is Manor Care Realty's ability to
implement its plan to develop 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 Form 8-K including (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.

Substantial Leverage; Ability to Service Indebtedness

         As a result of the Distribution, Manor Care Realty will be highly
leveraged, with indebtedness that is very substantial in relation to its
stockholders equity. After giving pro forma effect to the Distribution and
related transactions (and assuming the holders of 100% of the outstanding Old
Senior Notes accept the Exchange Offer), as of May 31, 1997, Manor Care Realty's
aggregate outstanding indebtedness would have been $816 million and Manor Care
Realty's stockholders' equity would have been $5.4 million. Manor Care Realty
expects that the Credit Facilities will permit Manor Care Realty to incur
additional indebtedness, subject to certain limitations. See "Description of
Certain Indebtedness."

         The degree to which Manor Care Realty is leveraged could have important
consequences, including the following: (i) Manor Care Realty's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of Manor Care Realty's cash flow from operations must be dedicated to
the payment of principal and interest on its indebtedness, thereby reducing the
funds available to Manor Care Realty for its operations; and (iii) certain of
Manor Care Realty's borrowings will be at variable rates of interest, which
causes Manor Care Realty to be vulnerable to increases in interest rates.


                                      33
<PAGE>
 
         Manor Care Realty's ability to make scheduled payments or to refinance
its obligations with respect to its indebtedness depends primarily on the
financial and operating performance of ManorCare Health Services, which, in
turn, is subject to prevailing economic conditions and to financial, business
and other factors beyond its control. Although Manor Care's cash flow from its
operations has been sufficient to meet its debt service obligations in the past,
there can be no assurance that Manor Care Realty's operating results will be
sufficient for payment of Manor Care Realty's indebtedness.

         Manor Care Realty's business is capital intensive and Manor Care Realty
will continue to have significant capital requirements in the future. As a
highly leveraged corporation, any new financings and refinancings by Manor Care
Realty of its existing debt may be at higher interest rates and on less
advantageous terms that would have been the case had the Distribution not taken
place. However, Manor Care Realty will also be able to draw on the $300 million
revolving credit facility Manor Care Realty anticipates establishing prior to
the Effective Date to meet its obligations (including certain planned capital
expenditures). See "Description of Certain Indebtedness - The Credit
Facilities."

Ability to Repay Indebtedness May Be Dependent on Refinancing

         Manor Care Realty's ability to repay the indebtedness to be incurred in
connection with the Distribution at its scheduled maturity is expected to be
dependent in whole or in part on its obtaining refinancing or, alternatively,
the disposition of assets. The Credit Facilities are expected to be secured by
substantially all of the assets of Manor Care Realty. Manor Care Realty's
ability to refinance other indebtedness or seek additional financing may be
impaired as a result of such security. In the event Manor Care Realty is unable
to obtain the necessary funds to repay its indebtedness, Manor Care Realty would
be in default under the terms of its indebtedness. Such a default could result,
among other things, in a foreclosure or other actions by creditors against
collateral securing such indebtedness, and in cross defaults to other
indebtedness resulting in the acceleration of the maturity of all principal and
interest of indebtedness subject to such cross defaults.

Restrictions Imposed by Terms of Manor Care Realty's Indebtedness

         Manor Care Realty anticipates that the Credit Facilities will impose
upon Manor Care Realty certain financial and operating covenants, including,
among others, requirements that Manor Care Realty maintain certain financial
ratios and satisfy certain financial tests, limitations on capital expenditures,
and restrictions on the ability of Manor Care Realty to incur debt, pay
dividends, or take certain other corporate actions, all of which may restrict
Manor Care Realty's ability to expand or to pursue its business strategies.
Changes in economic or business conditions, results of operations or other
factors could in the future cause a violation of one or more covenants in Manor
Care Realty's debt instruments. Failure by Manor Care Realty to comply with such
covenants may result in an event of default which, if not cured or waived, could
have a material adverse effect on Manor Care Realty.

                                      34
<PAGE>
 
Fraudulent Transfer Considerations; Legal Dividend Requirements

         It is a condition to the consummation of the Distribution that the
Board of Directors of the Company shall have received a satisfactory opinion
regarding the solvency of Manor Care and ManorCare Health Services and the
permissibility of the Distribution under Section 170 of the Delaware General
Corporation Law. There is no certainty, however, that a court would find the
solvency opinion rendered by the Company's financial advisor to be binding on
creditors of Manor Care, Manor Care Realty and ManorCare Health Services or that
a court would reach the same conclusions set forth in such opinion in
determining whether Manor Care, Manor Care Realty or ManorCare Health Services
was insolvent at the time of, or after giving effect to, the Distribution. Manor
Care's Board of Directors does not intend to consummate the Distribution unless
it is satisfied regarding the solvency of Manor Care and ManorCare Health
Services and the permissibility of the Distribution of Section 170 of DGCL.

         If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time the
Company effected the Distribution, Manor Care or ManorCare Health Services, as
the case may be, (i) was insolvent, (ii) was rendered insolvent by reason of the
Distribution, (iii) was engaged in a business or transaction for which Manor
Care's or ManorCare Health Services' remaining assets, as the case may be,
constituted unreasonably small capital, or (iv) intended to incur, or believed
it would incur, debts beyond its ability to pay as such debts matured, such
court may be asked to void the Distribution (in whole or in part) as a
fraudulent conveyance and require that the shareholders return the special
dividend (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, 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 Delaware
General Corporation Law (which is applicable to Manor Care in the Distribution)
a corporation generally may make distribution to its shareholders 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, (a) Manor Care Realty and ManorCare Health Services each will be
solvent at the time of the Distribution (in accordance with the foregoing
definitions), will be able to repay its debts as they mature following the
Distribution and will have sufficient capital to carry on its businesses, and
(b) the Distribution will be made entirely out of surplus, as provided under
Section 170 of the Delaware General Corporation Law.

Dependence Upon Single Operator

         ManorCare Health Services will account for the vast majority of Manor
Care Realty's revenues over the next five years. In addition, pursuant to the
terms of the Non-Competition

                                      35
<PAGE>
 
Agreement, ManorCare Realty may not, subject to certain exceptions, enter into
management agreements with third parties with respect to acquired or developed
skilled nursing facilities properties unless ManorCare Health Services has
declined to manage such facilities. Accordingly, Manor Care Realty's financial
and operating performance will depend primarily on the financial and operating
performance of ManorCare Health Services. Poor performance of the Skilled
Nursing Facilities operated by ManorCare Health Services or the assisted living
facilities developed for ManorCare Health Services could force Manor Care Realty
to curtail the five-year development plan or render Manor Care Realty unable to
meet its debt service requirements. Although Manor Care Realty will consider
diversifying its portfolio to include other operators and businesses after
completion of the five-year development plan, there can be no assurance that it
will be successful in this effort. In the event that Manor Care Realty pursues
its strategy to diversify its portfolio, Manor Care Realty may require
substantial additional capital resources.

Dependence by Manor Care Realty 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 Agreement. Pursuant to
the Development Agreement, Manor Care Realty will develop assisted living
facilities for ManorCare Health Services. ManorCare Health Services will have a
two-year option (measured from the time a particular facility opens to purchase
such facility). In addition, if at any time during this two-year period
occupancy stabilizes at 80% for a period of 30 days, ManorCare Health Services
will be obligated to purchase the facility. If ManorCare Health Services does
not acquire a facility within such two-year period, Manor Care Realty will have
the right to sell the facility to a third party. ManorCare Health Services will
retain the rights to the Arden Courts and Springhouse brand names in the event
of a third-party sale. Accordingly, the risks related to construction and the
initial operation of the assisted living facilities developed by Manor Care
Realty will be borne by Manor Care Realty. There can be no assurance that the
requisite occupancy levels will be achieved at a particular facility or, if not,
that ManorCare Health Services will exercise its option to purchase any such
facility. In such event there can be no assurance that Manor Care Realty would
be able to sell the facility to a third party on attractive terms. Pursuant to
the Lease Agreements, Manor Care Realty will lease to ManorCare Health Services
all of its Skilled Nursing Facilities, and Manor Care Realty will grant to
ManorCare Health Services, pursuant to the Lease Agreements or by separate
agreement, the right to manage all of Manor Care Realty's current and future
skilled nursing facilities; and pursuant to the Assisted Living Management
Agreement, ManorCare Health Services will manage assisted living facilities for
Manor Care Realty for a fixed monthly fee during the two-year stabilization
period under the Development Agreement. ManorCare Health Services' revenues will
be dependent on the fees generated by the Lease Agreements and the Assisted
Living Management Agreement.

                                      36
<PAGE>
 
Development and Construction Risks; Need for Additional Financing

         During the next five years, Manor Care Realty plans to develop
approximately 200 new facilities for ManorCare Health Services. The estimated
cost to complete these facilities and sell them to ManorCare Health Services is
approximately $1.2 billion. Manor Care Realty's ability to achieve its
development goals will depend upon a variety of factors, many of which are
beyond Manor Care Realty's control. Manor Care Realty plans to finance this
development with borrowings under the Credit Facilities, proceeds from sales of
assisted living facilities to ManorCare Health Services pursuant to the terms of
the Development Agreement and proceeds from additional financings. In this
regard, within one year of the consummation of the Distribution, Manor Care
Realty plans to issue approximately $100 to $150 million in equity and to use
the proceeds of this offering to reduce indebtedness and to fund the development
of assisted living facilities. Manor Care Realty's stockholders may experience
dilution as a result of any such equity offering. There can be no assurance that
any such additional financings will be available at all, or if available, on
terms acceptable to Manor Care Realty. In addition, Manor Care Realty expects
that its ability to borrow under the Credit Facilities will be subject to Manor
Care Realty's compliance with certain covenants and other conditions and that
the obligation of ManorCare Health Services to purchase assisted living
facilities pursuant to the Development Agreement will be subject to achieving
certain occupancy levels in the facilities. See "Terms of Certain Indebtedness -
the Credit Facilities" and "Business of Manor Care Realty after the Distribu-
tion-Relationship with ManorCare Health Services - Development Agreement". There
can be no assurance that Manor Care Realty will satisfy the conditions to
borrowing under the Credit Facilities or that the requisite occupancy levels
will be achieved at the assisted living facilities developed by Manor Care
Realty for ManorCare Health Services. If Manor Care Realty is unable to obtain
additional financing or if it is unable to satisfy the conditions to borrowing
under the Credit Facilities or if ManorCare Health Services does not purchase
substantially all of the assisted living facilities developed by Manor Care
Realty, Manor Care Realty may be required to delay or eliminate some or all of
its development projects.

         In addition, there can be no assurance that Manor Care Realty will not
suffer delays in its development program. The successful development of
additional facilities will involve a number of risks, including the possibility
that Manor Care Realty will not be able to locate suitable sites at acceptable
prices or may be unable to obtain, or may experience delays in obtaining,
necessary certificates of need, zoning, land use, building, occupancy, licensing
and other required governmental permits and authorizations. Manor Care Realty
may also incur construction costs that exceed original estimates or even
so-called guaranteed maximum cost construction contracts, and may not complete
construction projects on schedule. Manor Care Realty will rely on third-party
general contractors to construct its new facilities. There can be no assurance
that Manor Care Realty will not experience difficulties in working with general
contractors and subcontractors, which could result in increased construction
costs and delays. Further, facility development is subject to a number of
contingencies over which Manor Care Realty will have little control and that
could have a material adverse effect on project cost and completion time,
including shortages of, or the inability to obtain, labor or materials, the
inability of the general contractor or subcontractors to

                                      37
<PAGE>
 
perform under their contracts, strikes, or adverse weather conditions. Moreover,
Manor Care Realty will be a highly leveraged company which may make it more
difficult to secure short-term construction financing for these facilities and
which will make it more immediately vulnerable to adverse changes in prevailing
interest rates and in general business conditions, as well as conditions in the
real estate development industry. The failure of Manor Care Realty to maintain
substantial compliance with its schedule for completing these new assisted
living facilities or to build them at a cost substantially as planned or to
secure all necessary financing for development and construction of the
facilities on acceptable terms could have a material adverse effect on Manor
Care Realty.

The Realty Note

         On or prior to the Effective Date, Manor Care will contribute the
Realty Note to ManorCare Health Services. Manor Care expects that the Realty
Note will have the same general terms (including interest rate and maturity) as
certain senior notes proposed to be sold by Manor Care Realty in connection with
the Distribution, except that ManorCare Health Services will have the right to
require Manor Care Realty to redeem the Realty Note at a redemption price equal
to 100% of the principal amount thereof. Manor Care Realty's obligation to
redeem the Realty Note is conditioned on Manor Care Realty's ability to finance
the redemption at an interest rate that does not exceed the interest rate on the
Realty Note plus 2%. If Manor Care Realty is unable to refinance the Realty
Note, the interest rate on the Realty Note will increase by 2% per annum. There
can be no assurance that Manor Care Realty will be able to redeem the Realty
Note if required to do so by ManorCare Health Services. If Manor Care Realty is
unable to redeem the Realty Note, the resulting increased interest rate on the
Realty Note may adversely affect Manor Care Realty's results of operations.

Significant Bainum Family Interest

         Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.20% and 22.86%,
respectively, of the common stock of Manor Care Realty, in each case including
shares with respect to which voting power is shared with other individuals or
entities. In addition, Mr. Bainum, Jr. will be a director and Chairman of the
Board of Manor Care Realty. As a result, the Bainum family may be in a position
to influence significantly the affairs of Manor Care Realty, including the
election of directors.

Regulation

         Manor Care Realty is affected by government regulation of the health
care industry in that (i) the payments due to Manor Care Realty from ManorCare
Health Services in connection with the Lease Agreements are generally based on
ManorCare Health Services' gross revenue from operations and (ii) the underlying
value of Mesquite Hospital depends on the revenue and profit that facility is
able to generate. In most cases compliance with these regulations will be the
responsibility of Manor Care Health Services. The health care industry is highly
regulated by

                                      38
<PAGE>
 
federal, state and local law, state and local licensing requirements, facility
inspections, reimbursement policies, regulations concerning capital and other
expenditures, certification requirements and other laws, regulations and rules.
The failure of ManorCare Health Services to comply with such laws, requirements
and regulations could affect its ability to operate the Skilled Nursing
Facilities which it leases from Manor Care Realty and thus its ability to pay
rent to Manor Care Realty with respect to such facilities. Certain regulatory
developments such as revisions in the building code requirements for assisted
living or skilled nursing facilities, mandatory increases in the scope and
quality of care to be offered to residents and revisions in licensing and
certification standards could have a material adverse effect on Manor Care
Realty. See "Business -- Government Regulation."

Health Care Reform

         The health care industry is facing various challenges, including
increased government and private payor pressure on health care providers to
control costs, the migration of patients from acute care facilities into
extended care and home care settings and the vertical and horizontal
consolidation of health care providers. The pressure to control health care
costs intensified during 1994 and 1995 as a result of the national health care
reform debate and continued into 1996 as Congress attempted to slow the rate of
growth of federal health care expenditures as part of its effort to balance the
federal budget. Pursuant to the Balanced Budget Act of 1997, starting December
1998, the Medicare payment system will be prospective rather than retrospective.
See "Business of Manor Care Realty after the Distribution -- Government
Regulation." Manor Care Realty cannot predict the impact that this change will
have on ManorCare Health Services and, indirectly, on Manor Care Realty.

         Manor Care Realty believes that government and private efforts to
contain or reduce health care costs will continue. These trends are likely to
lead to reduced or slower growth in reimbursement for certain services provided
by ManorCare Health Services, which in turn will affect the revenue derived by
Manor Care Realty from ManorCare Health Services. However, Manor Care Realty
cannot predict whether any of the above proposals or any proposals will be
adopted and, if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on Manor Care Realty's
financial condition or results of operations.

Dependence on Key Personnel

         Manor Care Realty believes that its continued success depends to a
significant extent on the management and other skills of its chief executive and
chief development officers, as well as its ability to retain other key employees
and to attract skilled personnel in the future to manage the growth of Manor
Care Realty. There can be no assurance that a suitable replacement for any of
the employees could be found in the event of termination of any of their
employment.

                                      39
<PAGE>
 
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. Manor Care Realty
has developed policies with respect to the handling and disposal of medical,
infectious and hazardous waste to ensure compliance with those laws and
regulations. Manor Care Realty believes that it is in material compliance with
applicable laws and regulations governing medical, infectious and hazardous
waste. After the Distribution, Manor Care Realty will retain liability for
certain environmental litigation. See "Business Of Manor Care Realty After The
Distribution -- Government Regulation" and " -- Legal Proceedings."

Potential Conflicts with ManorCare Health Services

         Subsequent to the Distribution, the interests of ManorCare Health
Services and Manor Care Realty may potentially conflict due to the ongoing
relationships between the companies. Such sources of conflict include the fact
that after the Distribution, (i) ManorCare Health Services will lease, manage
and operate Manor Care Realty's skilled nursing facilities pursuant to the Lease
Agreements, (ii) ManorCare Realty will develop assisted living facilities for
ManorCare Health Services and ManorCare Health Services will manage each of
those facilities until certain sustained occupancy targets are achieved, at
which point ManorCare Health Services will be obligated to purchase the facility
pursuant to the Development Agreement, (iii) pending the possible purchase of an
assisted living facility by ManorCare Health Services pursuant to the terms of
the Development Agreement, ManorCare Health Services will manage the facility
for a fixed monthly fee to be agreed upon with Manor Care Realty, (iv) Manor
Care Realty will be indebted to ManorCare Health Services as a result of the
Realty Note, (v) ManorCare Health Services and Manor Care Realty will enter into
the Non-competition Agreement that will limit the competition between the
companies and (vi) ManorCare Health Services may manage assisted living
facilities not developed by Manor Care Realty. See "Business of Manor Care
Realty After the Distribution--Relationship with ManorCare Health Services."
With respect to these matters, the potential exists for disagreements as to the
quality of the services provided by the parties and as to contract compliance.
Nevertheless, ManorCare Health Services believes that there will be sufficient
mutuality of interest between the two companies to result in a mutually
productive relationship. In addition, ManorCare Health Services and Manor Care
Realty will have two common directors, Mr. Stewart Bainum, Jr. and Mr. Kennett
L. Simmons. Messrs. Bainum, Jr. and Simmons, as well as certain other officers
and directors of ManorCare Health Services and Manor Care Realty will also own
shares (and/or options or other rights to acquire shares) in both companies
following the Distribution. Appropriate policies and procedures will be followed
by the board of directors of each company to limit the involvement of the
overlapping directors (and if appropriate, relevant officers of such companies)
in conflict situations, including requiring them to abstain from voting as
directors of either ManorCare Health Services or Manor Care Realty.

                                      40
<PAGE>
 
Transfer of Leases to New Operators

         In the event ManorCare Health Services voluntarily or involuntarily
defaults under the terms of a Lease Agreement or Manor Care Realty exercises its
rights under a particular Lease Agreement to terminate such agreement or
ManorCare Health Services determines not to renew a particular Lease Agreement,
Manor Care Realty may be obliged to find another healthcare provider willing to
lease and operate the facility relating to the Lease Agreement and may have to
negotiate new lease terms, including rentals due, which terms may be less
favorable than those of the defaulted Lease Agreement. Any such default under
several Lease Agreements at the same time could have a material adverse effect
on Manor Care Realty. No assurance can be given that a substitute lessee could
be found without reasonable delay.

Payment by Third-Party Payors

         ManorCare Health Services will account for the vast majority of Manor
Care Realty's revenue over the next five years. Accordingly, Manor Care Realty's
financial and operating performance will depend primarily on the financial and
operating performance of ManorCare Health Services. A portion of the ManorCare
Health Services' revenues from the services it will provide at the Skilled
Nursing Facilities will be dependent upon reimbursement from third-party payors,
including Medicare, state Medicaid programs and private insurers. For the fiscal
years ended May 31, 1995, 1996 and 1997, respectively, the Skilled Nursing
Facilities to be operated by ManorCare Health Services pursuant to the Lease
Agreements and the Assisted Living Business derived approximately 59%, 59% and
57% of their patient service revenue from private pay sources, 18%, 18% and 18%
from Medicare and 23%, 23% and 25% from various state Medicaid agencies. Both
governmental and private third-party payors have employed cost containment
measures designed to limit payments made to health care providers such as
ManorCare Health Services. Those measures include the adoption of initial and
continuing recipient eligibility criteria which may limit payment for services,
the adoption of coverage and duration criteria which limit the services which
will be reimbursed and establishment of payment ceilings which set the maximum
reimbursement that a provider may receive for services. Furthermore, government
payment programs are subject to statutory and regulatory changes, retroactive
rate adjustments, administrative rulings and government funding restrictions,
all of which may materially increase or decrease the rate of program payments to
ManorCare Health Services for its services. There can be no assurance that
payments under governmental and private third-party payor programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. In addition, there can be no assurance that Manor Care Realty's
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, pursuant to the Balanced Budget Act of 1997,
starting December 1998, the Medicare payment system will be prospective rather
than retrospective. Manor Care Realty cannot predict the impact that this change

                                      41
<PAGE>
 
will have on ManorCare Health Systems and, indirectly, on Manor Care Realty.
Also, in certain states there have been proposals to establish or for the
establishment of a case mix prospective payment system pursuant to which the
payment to a facility for a patient is based upon the patient's condition and
need for services. Manor Care Realty cannot at this time predict whether any of
these proposals will be adopted or, if adopted and implemented, what effect, if
any, such proposals will have on ManorCare Health Services' operation of the
Skilled Nursing Facilities pursuant to the Lease Agreements and, indirectly
Manor Care Realty. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures or the assumption by health
care providers of all or a portion of the financial risk through prepaid
capitation arrangements. Efforts to impose reduced allowances, greater discounts
and more stringent cost controls by government and other payors are expected to
continue. See "Business Of Manor Care Realty After The Distribution --
Government Regulation."

Competition; Non-Competition Agreement with ManorCare Health Services

         Manor Care Realty generally competes with real estate investment
trusts, real estate partnerships, healthcare providers, and other investors,
including, but not limited to, banks and insurance companies, in the development
and leasing of health care facilities. ManorCare Health Services competes on a
local and regional basis with operators of facilities that provide comparable
services. Operators compete for patients based on quality of care, reputation,
physical appearance of facilities, services offered, family preferences
physicians, staff and price. See "Business Of Manor Care Realty After The
Distribution -- Competition."

         Following the Distribution, Manor Care Realty will be subject to
certain restrictions in the management of skilled nursing facilities, the
development of assisted living facilities and participation in the institutional
pharmacy and home health care businesses. See "Business of Manor Care Realty
After The Distribution -- Relationship With ManorCare Health Services --
Non-Competition Agreement." The Non-Competition Agreement restricts Manor Care
Realty's ability to pursue lines of business that have historically contributed
a significant portion of Manor Care's net income.

Certain Indemnification Obligations

         Pursuant to the Distribution Agreement and the Tax Sharing and
Administration Agreement, Manor Care Realty will agree to indemnify ManorCare
Health Services with respect to certain losses, damages, claims and liabilities,
including liabilities which may arise from the conduct of the Skilled Nursing
Facilities prior to the Effective Date and certain tax liabilities.

Operating History and Future Prospects

         Manor Care Realty does not have an operating history as an independent
public company, but will own and conduct the operations of Manor Care's real
estate development business and Mesquite Hospital. These businesses were
previously conducted by Manor Care as divisions of a

                                      42
<PAGE>
 
large public company with greater financial strength. In addition, the division
of Manor Care may result in some temporary dislocation and inefficiencies to the
business operations, as well as the organization and personnel structure, of
each company. There can be no assurance that Manor Care Realty's operations will
be profitable in 1998 or future years.

         Manor Care Realty's future success will depend on a number of factors,
including (i) the success of Manor Care Realty's planned development of Assisted
Living Facilities, (ii) ManorCare Health Services' ability to manage and operate
the Skilled Nursing Facilities, (iii) the amount of competition encountered by
Manor Care Realty, see "Business Of Manor Care Realty After The Distribution --
Competition," (iv) the presence of existing governmental regulation and the
potential for health care reform which might be adverse to Manor Care Realty,
see "Business Of Manor Care Realty After The Distribution -- Governmental
Regulation," and (v) Manor Care Realty's transition to an independent, public
company and the costs associated therewith.

Certain Tax Considerations

         Manor Care has requested the Ruling from the IRS which would provide,
among other things, that the Distribution will qualify as a tax-free transaction
under Sections 355 and 368 of the Code and that neither the stockholders of
Manor Care nor Manor Care would recognize any income, gain or loss as a result
of the Distribution. Nevertheless, if Manor Care engages in the Distribution and
the Distribution is held to be taxable, both Manor Care Realty and stockholders
of Manor Care could be subject to a material amount of income tax.


                      THE EXCHANGE OFFER AND SOLICITATION

         Manor Care plans to offer $1,000 principal amount of 7 1/2% Senior
Notes due June 15, 2006 issued by ManorCare Health Services (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.

         The terms of the New MCHS Senior Notes will be identical in all
material respects to the terms of the Old Senior Notes prior to the Proposed
Amendments (as defined below), except that the New Senior Notes (i) will be
issued by ManorCare Health Services and, (ii) will except from the Limitation on
Affiliate Transactions covenant certain additional transactions, including the
Distribution and related transactions as well as certain other transactions
after the Distribution between

                                      43
<PAGE>
 
Manor Care Realty and ManorCare Health Services. Consummation of the Exchange
Offer will result in the effective assumption of all or a part of the
obligations of Manor Care under the Old Senior Notes as they existed prior to
the Distribution.

         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 sole discretion waive
any such conditions and accept for exchange any Old Senior Notes properly
tendered.


           DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANOR CARE REALTY

The Realty Note

         On or prior to the Effective Date, Manor Care will make a capital
contribution to ManorCare Health Services of (i) approximately $250 million in
cash and (ii) the $250 million Realty Note of Manor Care Realty. Manor Care
expects that the Realty Note will have the same general terms (including
interest rate and maturity) as certain senior notes proposed to be sold by Manor
Care Realty to finance the Distribution, except that, ManorCare Health Services
will have the right to require Manor Care Realty to redeem the Realty Note at a
redemption price equal to 100% of the principal amount thereof. Manor Care
Realty's obligation to redeem the Realty Note is conditioned on Manor Care
Realty's ability to finance the redemption at an interest rate that does not
exceed the interest rate on the Realty Note plus 2%. If Manor Care Realty is
unable to refinance the Realty Note, the interest rate on the Realty Note will
increase by 2% per annum.

Other Indebtedness

         Manor Care Realty anticipates entering into new credit facilities to be
provided by a group of banks (the "Credit Facilities") and publicly issuing $350
million aggregate principal amount of debt securities. Manor Care Realty
anticipates that the Credit Facilities will consist of a $300 million revolving
credit facility and a $150 million term loan facility. Manor Care Realty expects
that the Credit Facilities will be secured by substantially all of the assets of
Manor Care Realty and its subsidiaries and will be available for general
corporate and working capital purposes, including acquisitions. Manor Care
Realty expects that the Credit Facilities will contain certain customary
financial and other affirmative and negative covenants, including, without
limitation, covenants that will restrict, subject to certain exceptions, (i)
incurrence of additional indebtedness and other obligations, (ii) certain
mergers and consolidations, (iii) non-ordinary course asset sales, (iv) granting
of liens to secure indebtedness, (v) prepayment or modification of the terms of
other indebtedness, (vi) transactions with affiliates or (vii) declaration or
payment of dividends or distributions on Manor Care Realty's capital stock.
Manor Care Realty also expects that the Credit Facilities will contain various
events of default customary for such type of agreement, including the occurrence
of a change of control of Manor Care Realty.

                                      44
<PAGE>
 
                           PRO FORMA FINANCIAL DATA


The unaudited pro forma consolidated condensed statement of income for the
fiscal year ended May 31, 1997 gives effect to (i) the Distribution and related
transactions including the Exchange Offer, (ii) the terms of the Lease and
Development Agreements and (iii) the terms of the Assisted Living Facility
Management Agreement as if the Distribution occurred on June 1, 1996. The
pro forma statement of income has been prepared by adjusting the historical
consolidated statement of income to reflect the Distribution as if it had been
effected on June 1, 1996. The pro forma consolidated condensed statement of
income and balance sheet are based on preliminary estimates. The actual
recording of the transactions will be based on actual costs.

The unaudited pro forma combined balance sheet at May 31, 1997 gives effect to
(i) the Distribution and related transactions including the Exchange Offer and
(ii) the terms of the Lease and Development Agreements as if the Distribution
had occurred at that date. Such balance sheet has been prepared by adjusting the
historical consolidated balance sheet to reflect the Distribution as if it had
been effected on May 31, 1997. The pro forma consolidated condensed statement of
income and balance sheet are based on preliminary estimates. The actual
recording of the transactions will be based on actual costs.

The unaudited pro forma financial statements should be read in conjunction with
the financial data presented elsewhere herein. The pro forma financial data are
presented for informational purposes only and may not reflect the future results
of operations or financial position of the Company.

                                      45
<PAGE>
 
                               MANOR CARE REALTY
                PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
                              AS OF MAY 31, 1997
                                (In thousands)
<TABLE> 
<CAPTION> 
                                                                       Pro Forma
                                             May 31, 1997             Adjustments            Pro Forma
                                             ------------             -----------            ---------
<S>                                          <C>                    <C>                    <C> 
Cash and cash equivalents                    $     18,396           $  500,000 (e)         $    29,304
                                                                      (250,000)(a)
                                                                      (140,100)(e)
                                                                       (99,000)(e)
                                                                             8 (b)

Other current assets                              175,273              (10,754)(d)             161,968
                                                                            74 (b)
                                                                        (2,625)(g)
                                              -----------            ---------              ----------
Total current assets                              193,669               (2,397)                191,272
Property and equipment, net                       805,793               27,016 (b)             818,238
                                                                       (14,571)(a)

Advances to discontinued
 lodging segment                                  115,723                                      115,723

Other assets                                       79,767               14,500 (f)              73,297
                                                                         1,196 (b)
                                                                       (22,166)(a)
Net investment in discontinued assisted
living, pharmacy and home health segments         277,066             (277,066)(a)                  --
Due from discontinued assisted living,
pharmacy and home health segments                  75,560              (45,560)(g)              30,000
                                              -----------            ---------              ----------
Total assets                                 $  1,547,578           $ (319,048)            $ 1,228,530
                                              ===========            =========              ==========

Total current liabilities                    $    159,951           $    1,215 (b)         $   204,117
                                                                        45,576 (d)
                                                                        (2,625)(g)
Long-term debt                                    491,190             (150,000)(c)             556,530
                                                                       260,900 (e)
                                                                       (45,560)(g)
Other long-term liabilities                       206,006                6,471 (b)             212,477
Due to the discontinued assisted living,
pharmacy and home health segments                      --              250,000 (a)             250,000
                                              -----------            ---------              ----------
Total liabilities                                 857,147              365,977               1,223,124

Total equity                                      690,431             (685,025)(a)               5,406
                                              -----------            ---------              ----------
Total liabilities and shareholders' equity   $  1,547,578           $ (319,048)            $ 1,228,530
                                              ===========            =========              ==========
</TABLE> 

                                      46
<PAGE>
 
MANOR CARE REALTY
CONSOLIDATED CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                                Pro Forma Adjustments
                                                                                                                            Pro
Year ended May 31                                                                            Lease          Management     Forma
 (In thousands of dollars, except per share data)           1997       Distribution        Agreement        Agreement       1997
- ------------------------------------------------            ----       ------------        ---------        ---------       ----
<S>                                                      <C>          <C>              <C>                <C>             <C>
REVENUES                                                 $1,056,095   $   1,603 (a)     $(1,017,570)(c)                   $217,132
                                                                                            177,004 (d)
                                                         ----------   ---------         -----------       --------        --------
EXPENSES
  Operating expenses                                        849,251       2,081 (a)        (733,362)(c)   $    402 (e)      59,013
                                                                             77 (a)         (59,774)(b)
                                                                            338 (b)
  Depreciation and amortization                              60,243         365 (a)                                         60,608
                                                         ----------   ---------         -----------       --------        --------
  Total expenses                                            909,494       2,861            (793,136)           402         119,621
                                                         ----------   ---------         -----------       --------        --------
INCOME FROM CONTINUING OPERATIONS
  BEFORE OTHER INCOME AND EXPENSES
  AND INCOME TAXES                                          146,601      (1,258)            (47,430)          (402)         97,511
                                                         ----------   ---------         -----------       --------        --------
OTHER INCOME AND (EXPENSES)
  Interest income from advances to discontinued
   lodging segment                                           21,221                                                         21,221
  Interest income and other                                   6,400                                                          6,400
  Interest expense                                          (24,514)    (30,594)(f)                                        (66,299)
                                                                        (11,191)(g)
                                                         ----------   ---------         -----------       --------        --------
  Total other income and (expenses), net                      3,107     (41,785)                                           (38,678)
                                                         ----------   ---------         -----------       --------        --------
INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES                                       149,708     (43,043)            (47,430)          (402)         58,833
INCOME TAXES                                                 60,783     (17,023)(h)         (18,759)(g)       (159)(g)      24,842
                                                         ----------   ---------         -----------       --------        --------
INCOME FROM CONTINUING OPERATIONS                            88,925     (26,020)            (28,671)          (243)         33,991
DISCONTINUED ASSISTED LIVING, PHARMACY AND
 HOME HEALTH OPERATIONS
  Income from discontinued assisted living, pharmacy
   and home health operations (net of income taxes of
   $23,917)                                                  36,188     (36,188)(i)               -             -               -
DISCONTINUED LODGING OPERATIONS
  Income from discontinued lodging operations
  (net of income taxes of $8,734)                            11,829                                                         11,829
                                                         ----------   ---------         -----------       --------        --------
NET INCOME                                               $  136,942   $ (62,208)        $   (28,671)      $   (243)       $ 45,820
                                                         ----------   ---------         -----------       --------        --------
WEIGHTED AVERAGE SHARES OF
  COMMON STOCK                                               63,257                                                         63,257
                                                         ----------                                                       --------
INCOME PER SHARE OF COMMON STOCK
  Income from continuing operations                      $     1.40                                                       $   0.53
  Income from discontinued assisted living, pharmacy
   and home health operations                                  0.57                                                              -
  Income from discontinued lodging operations                  0.19                                                           0.19
                                                         ----------                                                       --------
  Net income per share of common stock                   $     2.16                                                       $   0.72
                                                         ==========                                                       ========
</TABLE>


                                      47
<PAGE>
 
Notes to Pro Forma Consolidated Condensed Statement of Income
- -------------------------------------------------------------

a)      Reflects the revenues, income and expenses associated with facilities
        which opened during fiscal year 1997 (the "Developed Properties"). These
        facilities would not have been purchased by ManorCare Health Services
        under the terms of the Development Agreement until such facilities
        achieved 80% occupancy.

b)      Reflects net additional costs associated with staffing of human
        resources, finance, legal, information technology, cash management,
        accounting personnel and directors costs and the transfer of expenses to
        ManorCare Health Services.

c)      Reflects revenues and operating expenses of skilled nursing facilities
        owned by the Company and leased by ManorCare Health Services under the
        terms of the Lease Agreements.

d)      Reflects lease payments from ManorCare Health Services for skilled
        nursing facilities under the terms of the Lease Agreements.

e)      Reflects management fees associated with management of the Developed
        Properties under the terms of the Assisted Living Facility Management
        Agreement.

f)      Reflects interest expense associated with the assumption of additional
        debt, net of the transfer of $150.0 million of 7 1/2% Senior Notes due
        2006.

g)      Reflects adjustments to intercompany interest allocated to ManorCare
        Health Services. These adjustments relate to interest on the Developed
        Properties and Investment and Advances to ManorCare Health Services.

h)      Reflects tax effect of adjustments made pursuant to notes (a) through
        (f).

i)      Reflects the elimination of income from discontinued assisted living,
        pharmacy and home health operations as if the transaction had been
        effected on June 1, 1996.

Notes to Pro Forma Consolidated Condensed Balance Sheet
- -------------------------------------------------------

a)      Reflects cash of $250.0 million, the Realty Note, the net working
        capital of the skilled nursing facilities and other net assets
        contributed to the discontinued assisted living, pharmacy and home 
        health operations at the Effective Date.
  
b)      Reflects the addition of assets and liabilities attributable to the
        Developed Properties. These facilities would not have been purchased by
        ManorCare Health Services under the terms of the Development Agreement
        until such facilities achieved 80% occupancy.

c)      Reflects the transfer of $150.0 million of 7 1/2% Senior Notes due 2006
        to ManorCare Health Services.

d)      Reflects the working capital transfer related to the skilled nursing
        facilities under the terms of the Distribution Agreement.

e)      Reflects the additional $150 million of term debt and $350 million of
        public debt as well as the payoff of the 9 1/2% Senior Subordinated 
        Notes and the Revolver.
  
f)      Reflects capitalized deferred financing fees.

g)      Reflects the transfer of the assisted living mortgages to ManorCare
        Health Services on the Distribution Date.

                                      48
<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 consolidated
financial statements and the schedules referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 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 the basic
financial statements taken as a whole. The schedule attached as Schedule II --
Valuation and Qualifying Accounts is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


                                            /s/ Arthur Andersen LLP
Washington, D.C.
June 27, 1997
(except for the transaction as discussed 
 in the footnote entitled "Discontinued 
 Assisted Living, Pharmacy and Home 
 Health Operations" which is dated 
 September 14, 1997)


                                      49
<PAGE>
 
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME

<TABLE> 
<CAPTION> 

Years ended May 31 (In thousands of dollars, except per share data)                    1997               1996              1995
                                                                                       ----               ----              ----
<S>                                                                                 <C>               <C>               <C> 
REVENUES                                                                            $ 1,056,095       $   985,150       $   893,471
                                                                                    -----------       -----------       -----------

EXPENSES
 Operating expenses                                                                     789,074           735,671           670,987
 Depreciation and amortization                                                           60,243            56,503            48,284
 General corporate and other                                                             60,177            63,127            60,240
 Provisions for asset impairment and restructuring                                            -            25,100                 -
                                                                                    -----------       -----------       -----------
Total expenses                                                                          909,494           880,401           779,511
                                                                                    -----------       -----------       -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
OTHER INCOME AND EXPENSES AND INCOME TAXES                                              146,601           104,749           113,960
                                                                                    -----------       -----------       -----------

OTHER INCOME AND (EXPENSES)
 Interest income from advances to discontinued lodging segment                           21,221            19,673            15,492
 Interest income and other                                                                6,400             3,452             6,372
 Interest expense                                                                       (24,514)          (18,951)          (18,872)
                                                                                    -----------       -----------       -----------
 Total other income and (expenses), net                                                   3,107             4,174             2,992
                                                                                    -----------       -----------       -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES                                                                            149,708           108,923           116,952

INCOME TAXES                                                                             60,783            44,563            46,101
                                                                                    -----------       -----------       -----------

INCOME FROM CONTINUING OPERATIONS                                                        88,925            64,360            70,851

DISCONTINUED ASSISTED LIVING, PHARMACY AND
HOME HEALTH OPERATIONS
Income from discontinued assisted living, pharmacy and home health
operations (net of income taxes of $23,917, $1,437 and $6,055)                           36,188             1,111             6,824

DISCONTINUED LODGING OPERATIONS
Income from discontinued lodging operations (net of income taxes
of $8,734, $14,966 and $13,144, respectively)                                            11,829            20,436            16,811
                                                                                    -----------       -----------       -----------
NET INCOME                                                                          $   136,942       $    85,907       $    94,486
                                                                                    ===========       ===========       ===========
WEIGHTED AVERAGE SHARES OF COMMON STOCK                                                  63,257            62,628            62,480
                                                                                    ===========       ===========       ===========
INCOME PER SHARE OF COMMON STOCK
Income from continuing operations                                                   $      1.40       $      1.03       $      1.13
Income from discontinued assisted living, pharmacy and home                                0.57              0.01              0.11
health operations
Income from discontinued lodging operations                                                0.19              0.33              0.27
                                                                                    -----------       -----------       -----------
Net income per share of common stock                                                $      2.16       $      1.37       $      1.51
                                                                                    ===========       ===========       ===========
</TABLE> 

The accompanying notes are an integral part of these consolidated statements.

                                      50
<PAGE>
 
MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE> 
<CAPTION> 

As of May 31 (In thousands of dollars)                                                                 1997                1996
- --------------------------------------                                                                 ----                ----
<S>                                                                                                 <C>                <C> 
ASSETS
CURRENT ASSETS
 Cash and cash equivalents                                                                          $    18,396         $    38,943
 Receivables (net of allowances for doubtful accounts of $24,670 and $ 21,170)                          126,043              73,558
 Inventories                                                                                             11,273              10,523
 Income taxes                                                                                            32,083              39,237
 Due from discontinued assisted living, pharmacy and home health segments                                 2,625               2,481
 Other                                                                                                    3,249               1,439
                                                                                                    -----------         -----------
  Total current assets                                                                                  193,669             166,181
                                                                                                    -----------         -----------
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION                                        805,793             737,038
                                                                                                    -----------         -----------
GOODWILL, NET OF ACCUMULATED AMORTIZATION                                                                 9,479               5,298
                                                                                                    -----------         -----------
DUE FROM DISCONTINUED ASSISTED LIVING, PHARMACY AND HOME HEALTH SEGMENTS                                 75,560              49,946
                                                                                                    -----------         -----------
ADVANCES TO DISCONTINUED LODGING SEGMENT                                                                115,723             225,723
                                                                                                    -----------         -----------
NET INVESTMENT IN DISCONTINUED LODGING SEGMENT                                                                -             159,537
                                                                                                    -----------         -----------
NET INVESTMENT IN DISCONTINUED ASSISTED LIVING, PHARMACY AND HOME HEALTH SEGMENTS                       277,066             193,807
                                                                                                    -----------         -----------

OTHER ASSETS                                                                                             70,288              55,663
                                                                                                    -----------         -----------
                                                                                                    $ 1,547,578         $ 1,593,193
                                                                                                    ===========         ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
 Current portion of long-term debt                                                                  $    11,649         $    22,171
 Accounts payable                                                                                        53,462              73,712
 Accrued expenses                                                                                        94,840              95,766
 Income taxes payable                                                                                        --               7,889
                                                                                                    -----------         -----------
  Total current liabilities                                                                             159,951             199,538
                                                                                                    -----------         -----------
MORTGAGES AND OTHER LONG-TERM DEBT                                                                      491,190             490,575
                                                                                                    -----------         -----------
DEFERRED INCOME TAXES ($151,138 AND $135,975) AND OTHER                                                 206,006             195,311
                                                                                                    -----------         -----------
SHAREHOLDERS' EQUITY
 Common stock $.10 par, 160.0 million shares authorized, 66.8 million and 65.8
   million shares issued and outstanding                                                                  6,682               6,581
 Contributed capital                                                                                    194,640             174,364
 Retained earnings                                                                                      538,630             571,925
 Cumulative translation adjustment                                                                           --              (1,362)
 Treasury stock, 3.2 million and 3.0 million shares, at cost                                            (49,521)            (43,739)
                                                                                                    -----------         -----------
  Total shareholders' equity                                                                            690,431             707,769
                                                                                                    -----------         -----------
                                                                                                    $ 1,547,578         $ 1,593,193
                                                                                                    ===========         ===========
</TABLE> 

The accompanying notes are an integral part of these consolidated balance 
sheets.

                                      51
<PAGE>
 
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE> 
<CAPTION> 
                                                               Common Stock            Contributed       Retained        Translation
(In thousands of dollars except common shares)            Shares          Amount         Capital         Earnings        Adjustment
- ----------------------------------------------            ------          ------         -------         --------        ----------
<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 options                                  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 options                                 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 options                               1,011,951             101          12,153               -                -
 Cash dividends                                                  -               -               -          (6,108)               -
 Dividend of discontinued lodging segment                        -               -               -        (164,225)           1,362
 Tax benefit of stock option transactions                        -               -           6,818               -                -
 Other                                                           -               -           1,305              96                -
                                                        ----------      ----------      ----------      ----------       ----------

Balance, May 31, 1997                                   66,794,841      $    6,682      $  194,640      $  538,630       $        -
                                                        ==========      ==========      ==========      ==========       ==========
</TABLE> 

The accompanying notes are an integral part of these consolidated statements.

                                      52
<PAGE>
 
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 

Years Ended May 31 (In thousands of dollars)                                                   1997           1996           1995
- -------------------------------------------                                                    ----           ----           ----
<S>                                                                                         <C>            <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                                  $ 136,942      $  85,907      $  94,486
Reconciliation of net income to net cash provided by operating activities:
 Income from discontinued assisted living, pharmacy and home health operations                (36,188)        (1,111)        (6,824)
 Income from discontinued lodging operations                                                  (11,829)       (20,436)       (16,811)
 Depreciation and amortization                                                                 60,243         56,503         48,284
 Provisions for asset impairment and restructuring                                                  -         25,100              -
 Amortization of debt discount                                                                    513            455            499
 Provisions for bad debt                                                                       15,442         13,776         10,723
 Increase (decrease) in deferred taxes                                                         23,538         (5,970)           858
 Gain on sale of healthcare facilities                                                         (7,322)             -              -
Minority interest                                                                                 120            137             82
Changes in assets and liabilities (excluding sold facilities & acquisitions):
Change in receivables                                                                         (69,662)       (27,017)       (18,283)
Change in inventories and other current assets                                                 (2,371)         2,749         (8,118)
Change in current liabilities                                                                 (21,506)        43,805         13,490
Change in income taxes payable                                                                 (5,444)        11,202        (12,598)
Change in other liabilities                                                                    (6,726)         6,164         (1,729)
                                                                                            ---------      ---------      ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS                                                     75,750        191,264        104,059
NET CASH PROVIDED (UTILIZED) BY DISCONTINUED ASSISTED LIVING,
 PHARMACY AND HOME HEALTH OPERATIONS                                                           13,505        (15,305)        17,111
NET CASH PROVIDED BY DISCONTINUED LODGING OPERATIONS                                           40,599         52,682         48,604
                                                                                            ---------      ---------      ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                     129,854        228,641        169,774
                                                                                            ---------      ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment                                                         (128,238)       (90,164)       (58,721)
Investment in systems development                                                             (15,257)       (14,167)        (8,159)
Acquisition of healthcare facilities                                                          (17,793)       (32,369)       (26,560)
Sale of healthcare business                                                                         -              -         13,334
Sale of healthcare facilities                                                                  17,283              -              -
Receipts from (advances to) discontinued lodging segment                                      113,267        (27,201)       (51,461)
Advances to discontinued assisted living segment                                              (75,267)      (102,803)       (42,072)
Other items, net                                                                                7,105         (8,614)          (963)
                                                                                            ---------      ---------      ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS                            (98,900)      (275,318)      (174,602)

NET CASH (UTILIZED) PROVIDED BY INVESTING ACTIVITIES OF DISCONTINUED
ASSISTED LIVING, PHARMACY AND HOME HEALTH OPERATIONS                                         (136,093)        18,454        (18,883)
NET CASH UTILIZED BY INVESTING ACTIVITIES OF DISCONTINUED
 LODGING OPERATIONS                                                                           (29,424)      (169,641)       (92,422)
                                                                                            ---------      ---------      ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES                                                    (264,417)      (426,505)      (285,907)
                                                                                            ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt                                                                  179,400        149,000        207,254
Principal payments of long-term debt                                                         (179,090)       (22,135)      (122,496)
Proceeds from exercise of stock options                                                        12,254          3,307            841
Treasury stock acquired                                                                        (5,782)        (1,131)           (73)
Retirement of debentures                                                                       (9,900)             -              -
Dividends paid                                                                                 (6,108)        (5,502)        (5,489)
                                                                                            ---------      ---------      ---------
NET CASH (UTILIZED) PROVIDED BY FINANCING ACTIVITIES OF CONTINUING
OPERATIONS                                                                                     (9,226)       123,539         80,037
NET CASH PROVIDED (UTILIZED) BY FINANCING ACTIVITIES OF
DISCONTINUED ASSISTED LIVING, PHARMACY AND HOME HEALTH OPERATIONS                             122,588         (3,149)         1,772
                                                                                            
NET CASH PROVIDED BY FINANCING ACTIVITIES OF DISCONTINUED LODGING
OPERATIONS                                                                                        654         43,687         50,008
                                                                                            ---------      ---------      ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                     114,016        164,077        131,817
                                                                                            ---------      ---------      ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS                                                       (20,547)       (33,787)        15,684
                                                                                            ---------      ---------      ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                 38,943         72,730         57,046
                                                                                            ---------      ---------      ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                                    $  18,396      $  38,943      $  72,730
                                                                                            =========      =========      =========
NONCASH ACTIVITIES:
Liabilities assumed in connection with acquisition of property                              $       -      $  13,000      $       -
                                                                                            =========      =========      =========
</TABLE> 

The accompanying notes are an integral part of these consolidated statements.

                                      53
<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 announcement
of its intent to spin-off its assisted living, pharmacy and home health
businesses, the financial statements reflect these segments as a discontinued
operation. 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 segments and the related interest income
and interest expense.

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 as follows.

<TABLE> 
<CAPTION> 
(In thousands of dollars)                                    1997                 1996
- -------------------------                                    ----                 ----
<S>                                                     <C>                  <C>  
Land                                                    $    76,130          $    74,969
Building and improvements                                   815,851              759,273
Capitalized leases                                           12,747               12,747
Furniture, fixtures and equipment                           175,896              161,067
Facilities in progress                                       48,154               39,282
                                                        -----------          -----------
                                                          1,128,778            1,047,338
Less: accumulated depreciation and amortization            (322,985)            (310,300)
                                                        -----------          -----------
                                                        $   805,793          $   737,038
                                                        ===========          ===========
</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 $6.4 million and $6.0 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.


                                      54
<PAGE>
 
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.

Costs incurred for systems development are capitalized and are amortized over
the estimated useful lives of the related assets.

The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1997, $3.3 million; 1996,
$2.6 million; 1995, $1.2 million.

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 $0.2 million, $0.1
million and $0.1 million in each of the years ended May 31, 1997, 1996 and 1995,
respectively.

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 (see
"Discontinued Assisted Living, Pharmacy and Home Health Operations") pro forma
revenues, net income and net equity for fiscal year 1997 would have been $217.0
million, $45.8 million, and $5.4 million, respectively.

Pro forma income per share for 1997, after giving effect to the transaction
described in the pro forma consolidated financial statements, would have been
$0.72. Pro forma income per common share is computed by dividing pro forma net
income by the weighted average number of outstanding common shares, aggregating
63.3 million in 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.

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.


                                      55
<PAGE>
 
Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported or disclosed in its financial
statements and the notes related thereto. Actual results could differ from
those estimates.

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.

ACCRUED EXPENSES

Accrued expenses at May 31, 1997 and 1996 were as follows.

<TABLE> 
<CAPTION> 
(In thousands of dollars)                                1997              1996
- -------------------------                                ----              ----
<S>                                                    <C>               <C> 
Payroll                                                $50,323           $47,108
Taxes other than income                                 12,892            11,568
Insurance                                                9,832            14,079
Interest                                                 6,928             1,246
Other                                                   14,865            21,765
                                                       -------           -------
                                                       $94,840           $95,766
                                                       =======           =======
</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                           $  11,649
1999                               6,042
</TABLE> 

                                       56
<PAGE>
 
<TABLE> 
<S>                             <C> 
2000                               6,523
2001                               5,965
2002                               6,024
2003 to 2024                     466,636
                                --------
                                $502,839
                                ========
</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 write-offs 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 ManorCare Health Services on the Distribution Date.

Interest paid was $34.1 million in 1997, $29.8 million in 1996 and $22.4 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
7.5%.

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 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 $91.6 million was pledged or mortgaged and
approximately $167.4 million of retained earnings was not available for cash
dividends.

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
(In thousands of dollars)                 Leases           Leases
- -------------------------                 ------           ------
<S>                                    <C>             <C> 
1998                                   $  5,123        $   701
1999                                      4,870            702
2000                                      4,677            615
2001                                      4,360            292
</TABLE> 

                                       57
<PAGE>
 
<TABLE> 
<S>                                    <C>             <C> 
2002                                      4,179            292
Thereafter                               36,364          1,904
                                       --------        -------  
Total minimum lease payments           $ 59,573          4,506
                                       ========        =======
Less:  amount representing interest                      1,435
                                                       -------
Present value of lease payments                          3,071
                                                       -------
Less:  current portion                                     414
                                                       -------
Lease obligations included in long-term debt           $ 2,657
                                                       =======
</TABLE> 

Rental expense under noncancelable operating leases was $3.9 million in 1997,
$4.5 million in 1996 and $3.6 million in 1995.

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. 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.

INCOME TAXES

The Company files a consolidated return which includes the assisted living
operations. The income tax provision of the Company is calculated based on a
separate company basis.

Income tax provisions were as follows for the year ended May 31.

<TABLE> 
<CAPTION> 
(In thousands of dollars)           1997               1996             1995
- -------------------------           ----               ----             ----
<S>                               <C>                <C>              <C> 
Current tax expense
  Federal                         $31,171            $41,663          $37,129
  State                             6,074              8,870            8,114

Deferred tax expense
  Federal                          19,112             (4,811)             703
  State                             4,426             (1,159)             155
                                  -------            -------          -------
                                  $60,783            $44,563          $46,101
                                  =======            =======          =======
</TABLE> 

                                       58
<PAGE>
 
Deferred tax assets (liabilities) are comprised of the following at May 31.

<TABLE> 
<CAPTION> 
(In thousands of dollars)                    1997          1996          1995
- -------------------------                    ----          ----          ----
<S>                                       <C>           <C>           <C>  
Depreciation and amortization             $ (92,620)    $ (78,946)    $ (77,802)
Purchased tax benefits                      (44,110)      (45,527)      (46,212)
Other                                       (21,490)      (18,678)      (17,881)
                                          ---------     ---------     ---------
Gross deferred tax liabilities             (158,220)     (143,151)     (141,895)
                                          ---------     ---------     ---------
Tax deposit                                   5,754         5,754        12,000
Reimbursement reserve                         4,389        16,882         4,996
Reserve for doubtful accounts                12,320         9,175         7,561
Deferred compensation                        12,919         9,526         9,409
Other                                         3,636         5,076         7,552
                                          =========     =========     =========
Gross deferred tax assets                    39,018        46,413        41,518
                                          ---------     ---------     ---------
Net deferred tax                          $(119,202)    $ (96,738)    $(100,377)
                                          =========     =========     =========
</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> 
(In thousands of dollars)                            1997         1996         1995
- -------------------------                            ----         ----         ----
<S>                                                <C>          <C>          <C> 
Federal income tax rate                                  35%          35%          35%
                                                   ========     ========     ========
Federal taxes at statutory rate                    $ 52,398     $ 38,123     $ 40,933
State income taxes, net of Federal tax benefit        6,825        5,012        5,375
Minority interest                                       931          (44)         805
Tax credits                                            (143)         (19)        (895)
Other                                                   772        1,491         (117)
                                                   --------     --------     --------
Income tax expense                                 $ 60,783     $ 44,563     $ 46,101
                                                   ========     ========     ========
</TABLE> 

Income taxes paid on a consolidated basis for the years ended May 31, 1997,
1996, 1995 were $47.5 million, $53.1 million, and $68.7 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.

                                       59
<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> 
(In thousands of dollars,
except per share data)                  1997                1996
- ----------------------                  ----                ----
<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 may not 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 and 1996, 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.

                                       60
<PAGE>
 
ACQUISITIONS AND DIVESTITURES

During fiscal year 1997, 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. 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.

During fiscal year 1995, the Company purchased three nursing centers for
approximately $26.6 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.

PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING

The Company recorded provisions of $25.1 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 asset impairment charges of $20.0 million relating to writedowns of
property, equipment and capitalized systems development costs. The Company
periodically reviews the net realizable value of its long-term assets and makes
adjustments accordingly. The impairment of the property and equipment was
recorded in accordance with SFAS No. 121, "Accounting for the Impairment of 
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").

DISCONTINUED ASSISTED LIVING, PHARMACY AND HOME HEALTH OPERATIONS

On September 15, 1997, the Company announced its intention to proceed with a
separation of its assisted living, pharmacy and home health businesses
(collectively, the "Business") from its skilled nursing, real estate and
healthcare facility development business via a spin-off of the Business (the
"Distribution"). The spin-off of the Business will be effected by a distribution
to the Company's shareholders of all the common stock of ManorCare Health
Services, Inc., ("ManorCare Health Services") 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, pharmacy and home health operations as well as manage
the skilled nursing assets owned by the Company. The Board of Directors voted in
September 1997 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 the 1997 calendar year. The Distribution is conditional
upon certain matters, including receipt of a ruling from the Internal Revenue
Service that the spin-off will be tax-free and declaration of the special
dividend by the Company's Board of Directors.

The revenues, income from operations before income taxes and net income from
discontinued assisted living, pharmacy and home health operations for the years
ended May 31, 1997, 1996, and 1995 were as follows.

<TABLE> 
<CAPTION> 
(In thousands of dollars)                                    1997                 1996                1995
- -------------------------                                    ----                 ----                ----
<S>                                                        <C>                  <C>                 <C> 
Revenues                                                   $471,152             $263,047            $125,987
                                                           ========             ========            ========
Income from discontinued assisted living, pharmacy       
 and home health operations before taxes                   $ 60,105             $  2,548            $ 12,879
                                                           ========             ========            ========
</TABLE> 

                                      61
<PAGE>
 
<TABLE> 
<S>                                                                    <C>                  <C>                 <C> 
Net income from discontinued assisted living, pharmacy
and home health operations                                             $  36,188            $    1,111          $   6,824
                                                                       =========            ==========          =========
</TABLE> 

Included in discontinued assisted living, pharmacy and home health operations is
interest expense charged by the Company relating to cash advances provided to
the assisted living segment for the acquisition and construction of assisted
living assets. For the years ended May 31, 1997, 1996, and 1995, interest so
allocated amounted to $11.2 million, $8.4 million and $3.8 million,
respectively. The cash advances related to assisted living acquisitions and
construction are included in net investment in discontinued assisted living,
pharmacy and home health segments. Such advances amounted to $307.1 million and
$193.8 million at May 31, 1997 and 1996, respectively. The advances will be
forgiven at the date of the proposed spin-off.

General corporate expenses of $8.4 million, $9.2 million and $3.0 million,
respectively, were charged to discontinued assisted living, pharmacy and home
health 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 Distribution,
ManorCare Health Services and the Company will enter into various agreements,
including, among others, Lease Agreements, Development Agreement, Assisted
Living Facility Management Agreement, Tax Sharing Agreement, Tax Administration
Agreement, Corporate Services Agreement, Employee Benefits and Other Employment
Matters Allocation Agreement, and Employee Benefits Administration Agreement.
Effective at the Distribution Date, these agreements will provide, among other
things, that ManorCare Health Services (i) will perform certain corporate and
support services, such as accounting, risk management and computer system
support, (ii) will establish or participate in pension, profit sharing and
incentive plans similar to those in place at Manor Care, (iii) will receive
certain miscellaneous administrative services and (iv) will lease skilled
nursing facilities and corporate offices from the Company.

DISCONTINUED LODGING 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 lodging operations before income taxes,
and net income from discontinued lodging operations for the years ended May 31,
1997, 1996, and 1995 were as follows.

<TABLE> 
<CAPTION> 

     (In thousands of dollars)                                  1997                  1996                 1995
     -------------------------                                  ----                  ----                 ----
     <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

                                      62
<PAGE>
 
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 operations 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 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.

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 $464.1 million, $440.6
million, and $391.1 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant.

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.

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.

                                      63
<PAGE>
 
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 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 $3.1 million in 1997, $3.0 million in 1996,
and $3.1 million in 1995.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of long-term debt instruments were determined by discounting future
cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the balance sheet.

The balance sheet carrying amounts of cash, cash equivalents, 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 segments
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
Quarters ended (In thousands of                            Before Other Income and     
dollars, except per share data)    Revenues             (Expenses) and Income Taxes          Net Income        Per Share
- -------------------------------    --------             ---------------------------          ----------        ---------
<S>                              <C>                 <C>                                    <C>               <C>  
FISCAL 1997                                                                                              
August                           $  250,226                    $   29,939                    $   23,685        $     .38
November                            259,336                        37,572                        32,444              .51
February                            269,188                        39,326                        61,392              .97
May                                 277,345                        39,764                        19,421              .30
                                 ----------                    ----------                    ----------        ---------
                                 $1,056,095                    $  146,601                    $  136,942        $    2.16
                                 ==========                    ==========                    ==========        =========
FISCAL 1996
</TABLE> 

                                       64
<PAGE>
 
<TABLE> 
<S>                              <C>                 <C>                                    <C>               <C>  
August                             $236,911                      $ 26,985                     $ 28,426         $    .45
November                            243,451                        32,717                       28,788              .46
February                            250,954                        32,572                       22,302              .36
May                                 253,834                        12,475                        6,391              .10
                                   --------                      --------                     --------         --------
                                   $985,150                      $104,749                     $ 85,907         $   1.37
                                   ========                      ========                     ========         ========
</TABLE> 
QUARTERLY MARKET PRICE RANGE OF
 COMMON STOCK AND DIVIDENDS PAID
(Unaudited)
<TABLE> 
<CAPTION> 
                                                         Cash Dividends Paid
                       Market Price Per Share            Per Share
Quarters Ended         High               Low            Amount        Date
- --------------         ----               ---            ------        ----
<S>                   <C>               <C>              <C>           <C> 
 FISCAL 1997       
August                $39.63*           $31.50*          $0.222        8/27/96
November              $42.25*           $23.75           $0.222        11/27/96
February              $28.00            $24.13           $0.222        2/27/97
May                   $28.38            $21.88           $0.222        5/27/97
                                                                 
FISCAL 1996                                                      
August                $34.25*           $27.78*          $0.222        8/25/95
November              $35.58*           $30.50*          $0.222        11/27/95
February              $40.25*           $32.75*          $0.222        2/27/96
May                   $43.50*           $36.50*          $0.222        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.

                                       65
<PAGE>
 
                                                                     Schedule II

                               MANOR CARE, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                           (In thousands of dollars)
<TABLE> 
<CAPTION> 

      Description           Balance at    Charged to                  Balance at
                            Beginning       Profit                       End
                            of Period      and Loss     Write-offs    of Period
                            ---------      --------     ----------    ---------
<S>                         <C>            <C>          <C>           <C> 
Year ended May 31, 1997
Allowance for doubtful
accounts                     $21,170        $15,442     ($11,942)      $24,670
                                                                       
Year ended May 31, 1996                                                
Allowance for doubtful                                                 
accounts                     $17,418        $13,776     ($10,024)      $21,170
                                                                       
Year ended May 31, 1995                                                
Allowance for doubtful                                                 
accounts                     $14,300        $10,723     ($ 7,605)      $17,418
</TABLE> 

                                       66
<PAGE>
 
                                  EXHIBIT INDEX
                                  -------------


  27  -     Financial Data Schedule.

99.1  -     Press Release.

<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>
<MULTIPLIER>  1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          MAY-31-1997
<PERIOD-END>                               MAY-31-1997
<CASH>                                          18,396
<SECURITIES>                                         0
<RECEIVABLES>                                  150,713
<ALLOWANCES>                                    24,670
<INVENTORY>                                     11,273
<CURRENT-ASSETS>                               193,669
<PP&E>                                       1,128,778
<DEPRECIATION>                                 322,985
<TOTAL-ASSETS>                               1,547,578
<CURRENT-LIABILITIES>                          159,951
<BONDS>                                        491,190
                                0
                                          0
<COMMON>                                             0
<OTHER-SE>                                     690,431
<TOTAL-LIABILITY-AND-EQUITY>                 1,547,578
<SALES>                                              0
<TOTAL-REVENUES>                             1,056,095
<CGS>                                                0
<TOTAL-COSTS>                                  773,632
<OTHER-EXPENSES>                                60,243
<LOSS-PROVISION>                                15,442
<INTEREST-EXPENSE>                              24,514
<INCOME-PRETAX>                                149,708
<INCOME-TAX>                                    60,783
<INCOME-CONTINUING>                             88,925
<DISCONTINUED>                                  48,017
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   136,942
<EPS-PRIMARY>                                     2.16<F1>
<EPS-DILUTED>                                     2.16<F1>
<FN>
<F1>THE COMPANY PRESENTS SIMPLE EARNINGS PER SHARE (EPS) ON THE FACE OF ITS
INCOME STATEMENT AS FULLY DILUTIVE EPS IS AT LEAST 97% OF SIMPLE EPS. THE
FIGURES PRESENTED ABOVE ARE SIMPLE EPS.
</FN>
        

</TABLE>

<PAGE>
 
                                                                    Exhibit 99.1

CONTACT:      Leigh C. Comas, Vice President, Finance and Treasurer
              Kimberly A. Holland, Director, Investor Relations

FOR IMMEDIATE RELEASE


                         MANOR CARE, INC. TO SEPARATE
                         ----------------------------
                  HEALTH CARE SERVICES AND REALTY OPERATIONS
                  ------------------------------------------

       -- ManorCare Health Services to Operate Assisted Living, Skilled
         Nursing, Institutional Pharmacy and Home Health Businesses --

     -- Manor Care Realty to Focus on Accelerated Development of Assisted 
                             Living Facilities --

     Gaithersburg, Maryland, September 15, 1997 -- Manor Care, Inc. (NYSE: MNR)
     today announced that its Board of Directors has approved the separation of
     Manor Care into two public companies, both of which are anticipated to be
     listed on the New York Stock Exchange. This separation will be achieved
     through a one for one, pro rata distribution to stockholders of all
     outstanding shares of ManorCare Health Services, Inc., a newly-formed
     company to own and operate Manor Care's assisted living business and to
     lease and operate Manor Care's skilled nursing facilities. ManorCare Health
     Services will also own Manor Care's institutional pharmacy and home health
     businesses. Manor Care, which will be renamed Manor Care Realty, Inc., will
     be a health care real estate company focused on the ownership,
     construction, development and acquisition of health care properties,
     including skilled nursing and assisted living facilities. Manor Care Realty
     will continue to own its skilled nursing facilities and Mesquite Hospital.

     The proposed separation is subject to receipt of a ruling from the Internal
     Revenue Service that the transaction will be tax free to Manor Care and its
     shareholders and to receipt of a satisfied solvency opinion, necessary
     regulatory approvals and related licensing arrangements. In connection with
     the transaction, Manor Care Realty will incur indebtedness of approximately
     $750 million via a public issue of debentures, intercompany indebtedness
     with ManorCare Health Services and bank borrowings. The new indebtedness is
     expected to be put in place contemporaneously with the completion of the
     distribution transaction which is anticipated to occur before calendar year
     end.

     At the time of the distribution, Manor Care Realty will capitalize
     ManorCare Health Services with approximately $250 million in cash and a
     $250 million intercompany note. This initial funding will provide ManorCare
     Health Services with the financial foundation and flexibility it needs to
     build itself into a leading participant in assisted living.

     Stewart Bainum, Jr., Manor Care's Chairman and Chief Executive Officer,
     said, "Fundamental demographic forces and health care industry trends are
     driving the growth of the assisted living business. The separation of Manor
     Care into distinct real estate and health care services companies will
     provide each company with the financial resources and managerial focus to
     capitalize on this significant opportunity.

     "Specifically, 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.
<PAGE>
 
     "We also believe 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 leading participant in the senior support
     health care industry, can offer them significant and sustainable value."

     ManorCare Health Services

     ManorCare Health Services will provide a full continuum of senior support
     services through its ownership and operation of Manor Care's assisted
     living facilities, its leasing and operation of Manor Care's 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.

     Over the next five years, ManorCare Health Services plans to acquire
     approximately 200 new assisted living facilities to be developed by Manor
     Care Realty. These and other potential acquisitions form the core of
     ManorCare Health Services' strategy to become the nation's foremost
     provider of high-quality senior support 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, and the
     remainder will be Springhouse senior residence facilities, serving the
     general assisted living population.

     Manor Care Realty

     Over the past three years, Manor Care has established itself as a leader in
     the high-growth, high-margin private pay segment of the assisted living
     industry. The assisted living industry is currently experiencing
     unprecedented market demand. Driven by America's aging population,
     increasing life expectancies and health care industry trends toward greater
     diversity of senior support care offerings and services, demand for
     assisted living services is expected to continue to grow significantly over
     the next thirty years.

     Manor Care Realty's strategy is to become one of the largest health care
     real estate companies through its ownership and development of health care
     facilities that serve the senior population. Over the next 5 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, as
     well as the acquisition and development of skilled nursing facilities. The
     Development Agreement contemplates pricing arrangements which will include
     compensation to Manor Care Realty for short-term start-up costs and
     expenses intended to eliminate any dilutive effects of the development
     program on Manor Care Realty's results of operations. In addition to the
     income from these sales, Manor Care Realty will also benefit from a Lease
     Agreement, pursuant to which ManorCare Health Services will lease Manor
     Care Realty's skilled nursing facilities.

     The transaction also contemplates equity financing by Manor Care Realty
     sufficient to provide ManorCare Health Services with funding, financial
     strength and flexibility necessary to execute its accelerated property
     development program, which is expected to entail investment in the range of
     $1.5 billion. In addition, Manor Care, Inc. anticipates calling the
     outstanding $150 million 9 1/2% Senior Subordinated Notes due 2002 on or
     about the first call date of November 15, 1997.

     Joseph R. Buckley, Executive Vice President of Manor Care, Inc., will be
     President and Chief Executive Officer of Manor Care Realty, Inc. Donald C.
     Tomasso, Executive Vice President of
<PAGE>
 
     Manor Care, Inc., will be President and Chief Executive Officer of
     ManorCare Health Services. Stewart Bainum, Jr. will serve as Chairman of
     both companies. The Bainum family, which currently owns approximately 30%
     of Manor Care's outstanding common stock, will retain their current
     holdings in Manor Care Realty and ManorCare Health Services following the
     distribution.

     In addition to Stewart Bainum, Jr. and Donald C. Tomasso, directors of
     ManorCare Health Services will include: Regina Herzlinger, William H.
     Longfield, Frederic V. Malek, Jerry E. Robertson and Kennett L. Simmons.
     Manor Care Realty directors in addition to Stewart Bainum, Jr. will
     include: Stewart Bainum, Joseph R. Buckley, Ann Torre Grant and Kennett L.
     Simmons.

     The company filed a registration statement and 8-K today with the
     Securities and Exchange Commission which explains the proposed distribution
     in detail and provides financial and other important information regarding
     the transaction and both resulting companies. Copies of the registration
     statement and 8-K filing can be obtained from the Securities and Exchange
     Commission.

     SBC Warburg Dillon Read Inc. has served as exclusive financial advisor to
     Manor Care in connection with the transaction. Chase Securities Inc. and
     SBC Warburg Dillon Read have been retained in connection with the debt
     financings anticipated by Manor Care Realty.

     Manor Care, Inc. is one of the largest long-term care providers in the
     United States. The Company operates 206 health care facilities containing
     27,809 beds in 29 states.

                                      ###


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