MANOR CARE INC/NEW, 10-K, 1997-08-29

MANOR CARE INC/NEW
10-K, 1997-08-29
SKILLED NURSING CARE FACILITIES

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 31, 1997
----------------------------

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _______________

Commission File Number 1-8195

MANOR CARE, INC.
(Exact name of registrant as specified in its charter)

Delaware 52-1200376
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

11555 Darnestown Road, Gaithersburg, Maryland 20878
- --------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange On
Title of Each Class Which Registered
- --------------------------------- ------------------------

Common Stock, Par Value $.10 per share New York Stock Exchange
Registrant's Guaranty of 4-3/4% Con-
vertible Subordinated Debentures due
September 1, 1997 issued by Cenco
Incorporated
<PAGE>

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class
---------------------------------------------

9-1/2% Senior Subordinated Notes due November 15, 2002
7-1/2% Senior Notes due June 15, 2006

---------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
---- ----

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S)(S)229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates
was $1,511,705,020 as of August 5, 1997 based upon a closing price of $32.4375
per share.

The number of shares of Manor Care's Common Stock outstanding at May
31, 1997 was 63,621,828.

DOCUMENTS INCORPORATED BY REFERENCE:

PART I 1997 Annual Report to Stockholders
PART II 1997 Annual Report to Stockholders
PART III Proxy Statement dated August 15, 1997

PART I
------

ITEM 1. Business.
- ------ --------

General
- -------

Manor Care, Inc. ("Manor Care"), a Delaware corporation organized in
August 1981, is a holding company that conducts its business through three
principal subsidiaries, ManorCare Health Services, Inc. ("MCHS"), Vitalink
Pharmacy Services, Inc. ("Vitalink") and In Home Health, Inc. ("In Home
Health"). MCHS and its subsidiaries have been engaged since October 1968 in the
business of developing, owning and

2
<PAGE>

managing nursing facilities, which provide skilled nursing and convalescent care
principally for residents over the age of 65. As of May 31, 1997, MCHS owned
approximately 51% of Vitalink, a public company that owns and operates
institutional pharmacies. MCHS also owns approximately 63% of the voting stock
of In Home Health. In Home Health is a public company which specializes in
providing comprehensive health care services to clients of all ages in their
home. MCHS also owns and operates an acute care general hospital, skilled
nursing and rehabilitation facilities and assisted living facilities.

In fiscal year 1997, Manor Care derived approximately 43% of its total
revenues from continuing operations through Medicare and Medicaid programs;
aside from the foregoing, Manor Care has no few or single customers upon whom it
is dependent.

On November, 1, 1996, Manor Care separated its lodging business from the
health care business via tax-free spin-off of the lodging division.

Industry Segments
- -----------------

Manor Care's Consolidated Statements of Income and the information under
the headings "Discontinued Operations" and "Business Segment Information", set
forth on pages 13, 26 and 28, respectively, of the Company's 1997 Annual Report,
are hereby incorporated by reference.

ManorCare Health Services, Inc. - Operations
- --------------------------------------------

Manor Care, through MCHS and its subsidiaries, owns, operates or manages
177 skilled nursing and rehabilitation facilities and 31 assisted living
facilities, which provide high acuity services, long-term skilled-nursing care,
Alzheimer's services and assisted living services, principally for residents
over the age of 65. Manor Care and its subsidiaries also own and operate an
acute care hospital, 56 pharmacies and provide home health services in 19
markets.

Nursing Center Operations
-------------------------

MCHS's nursing facilities provide, in general, three types of services:

-- High acuity services - focuses on short-term, post hospital care for
medically complex residents in need of aggressive rehabilitation. Manor Care
offers high acuity services in most of its skilled nursing and rehabilitation
facilities and operates 22 dedicated MedBridge high acuity units. MedBridge
units offer post-acute care for patients in need of aggressive rehabilitation.
These units feature high staff-to-patient ratios, sophisticated clinical
capabilities, on-staff physicians and state-of-the-art rehabilitation
departments.

-- Long-term care - focuses on chronically ill and frail individuals who
require 24-hour-a-day skilled nursing services and physical, occupational and
speech therapies. Through this core business, Manor Care provided more than five
million patient days in fiscal year 1997.

-- Alzheimer's services - focuses on meeting the needs of individuals in
the middle to late stages

3
<PAGE>

of Alzheimer's disease or related memory impairment. With almost 15 years of
Alzheimer's disease management, Manor Care operates 141Arcadia special-care
units in the Company's nursing centers, 23 of which opened during the 1997
fiscal year.

Services provided to all patients include the required type of nursing
care, room and board, special diets, occupational, speech, physical and
recreational therapy and other services that may be specified by the patient's
physician, who directs the admission, treatment and discharge of that patient.

Each skilled nursing facility is under the direction of a state-licensed
nursing center administrator supported by other professional personnel, such as
a medical director, social worker, dietitian and recreation staff. Nursing
departments in each such facility are under the supervision of a director of
nurses who is state licensed. The nursing staffs are composed of other
registered nurses and licensed practical nurses, as well as nursing assistants.
Staff size and composition vary depending on the size and location of each
facility.

Manor Care has developed a Quality Assurance Program to ensure that high
standards of care are maintained in each facility. The Quality Assurance
Department is composed of registered nurses, dietitians, nutrition specialists,
an environmental services specialist and a recreational therapist. These staff
specialists set corporate standards for delivery of care, direct the Quality
Improvement Program, and provide consulting and educational services to the
facilities.

Manor Care's skilled nursing and rehabilitation facilities range in bed
capacity from 53 to 278 beds and have an aggregate bed capacity of 24,335 beds,
and its assisted living facilities have an aggregate bed capacity of 3,173 beds,
which together achieved an average occupancy rate of 88% during the 1997 fiscal
year. Manor Care's nursing facilities are located in 28 states: Arizona,
California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico, North
Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South
Dakota, Texas, Utah, Virginia, Washington and Wisconsin. Twenty-two MedBridge
units within skilled nursing facilities currently operate in Colorado, Florida,
Illinois, Indiana, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and
Virginia.

The nursing facilities are modern structures generally of wall-bearing
masonry with fire resistive or protective floor and roof suspension systems.
Most have been designed to permit private and semi-private patient room
accommodations, and rooms at some facilities may be converted to accommodate up
to four beds. Most facilities have individually controlled heating and
air-conditioning units. Each nursing facility contains a fully equipped kitchen,
an isolation room, day room areas, administrative offices and most contain a
physical therapy gym. Many of Manor Care's nursing facilities have specialized
wings for assisted living, individuals with catastrophic injuries, and persons
desiring extra amenities and activities. Manor Care believes all of the nursing
facilities and related equipment are in good condition and well maintained.

Patients seeking the services of the nursing facilities come from a
variety of sources, and are principally referred by hospitals and physicians.
Most of Manor Care's nursing facilities participate in state Medicaid programs
and in the Federal Medicare program (see "Federal and State Assistance
Programs"). However, Manor Care attempts to locate and operate its nursing
facilities in a manner designed to attract

4
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patients who pay directly or through insurance to the facilities for services
without benefit of any government assistance program ("private patients").

As a general rule, the profit margin is higher with private patients
than with patients to whom services are rendered with government assistance
programs. The following table sets forth certain information concerning revenues
from government assistance programs for all of Manor Care's health care
operations during fiscal year 1997:

Gross Contractual Net
Revenues Adjustment* Revenues
-------- ----------- --------
<S> <C> <C> <C>
Medicare $429,271,000 $117,012,000 $312,259,000
Medicaid 471,879,000 130,361,000 341,518,000
============ ============ ============

</TABLE>

*Represents the estimated difference between private billing rates and
amounts recoverable under government programs.

Assisted Living Operations
--------------------------

Assisted living is an attractive option for seniors who need some
assistance with the activities of daily living but do not require
around-the-clock skilled nursing care. Manor Care's assisted living operations
during fiscal year 1997 consisted of 19 Springhouse facilities serving the needs
of the general assisted living population and 12 Arden Courts assisted living
facilities meeting the needs of individuals with early to middle-stage
Alzheimer's disease or related memory impairment. These Springhouse facilities
are located in Arizona, California, Florida, Indiana, Illinois, Maryland,
Michigan, and Ohio. During fiscal year 1997, Manor Care opened its first 109-
unit new-construction Springhouse facility, which included a dedicated
Alzheimer's special-care wing, in Tucson, Arizona. The twelve Arden Courts are
located in Florida, Illinois, Maryland, Michigan, New Jersey, Ohio and
Pennsylvania, five of which opened in fiscal year 1997.

Nursing Center and Assisted Living Operations Highlights
--------------------------------------------------------

During fiscal year 1997, the Company acquired or opened twelve nursing
and assisted living facilities ranging in bed capacity from 54 to 180 beds in
Arizona, California, Florida, Illinois, Maryland, Michigan, New Jersey, Ohio,
and Pennsylvania. During fiscal year 1997, Manor Care acquired two nursing
facilities located in California and Michigan for approximately $17,793,000. As
of May 31, 1997, Manor Care had ten nursing and assisted living facilities with
a total of 791 beds under construction in California, Connecticut, Florida,
Georgia, Maryland, New Jersey and Virginia. Additions to four existing
facilities with a total of 53 beds are also under construction. With its Arcadia
units and its Arden Courts assisted living facilities, Manor Care devoted more
than 17% of its beds to Alzheimer's care during the fiscal year.

The following table sets forth certain information concerning occupancy
and revenues of Manor Care's nursing and assisted living facilities and hospital
during fiscal year 1997:

5
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Nursing and
Assisted Living Facilities Hospital
-------------------------- ---------------------------
% of % of % of % of
Occupancy Revenues Occupancy Revenues
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Private patients 56% 58% 30% 50%
Medicaid patients 34% 25% 17% 15%
Medicare patients 10% 17% 53% 35%
----- ----- ----- -----
100% 100% 100% 100%
===== ===== ===== =====

</TABLE>

Pharmacy Operations
-------------------

MCHS owns approximately 51% of Vitalink, a publicly-traded company that
owns and operates 56 pharmacies located in Arizona, California, Colorado,
Delaware, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland,
Michigan, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin and the
District of Columbia.

Vitalink operates institutional pharmacies, which provide, in general,
three types of services:

-- Customized filling of prescription and non-prescription medications
for individual patients pursuant to physician orders delivered to nursing
facilities.

-- Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.

-- Infusion therapy services, consisting of a product (nutrient,
antibiotic, chemotherapy or other drugs or fluids) and its administration by
tube, catheter or intravenously. Vitalink prepares and delivers the product,
which is administered by nursing center staff.

Pursuant to various master agreements, a portion of Vitalink's business
is with Manor Care. As of May 31, 1997, Vitalink had contracts to serve 22,833
Manor Care beds and 149,167 beds not affiliated with Manor Care, resulting in
revenues of $79,868,000 and $194,170,000, respectively, for fiscal 1997.

On July 31, 1996, Vitalink acquired Medisco Pharmacies, Inc. located in
San Bernardino, California for $5,291,000 in cash plus the assumption of
$2,510,000 in liabilities and future payments totaling $1,150,000.

6
<PAGE>

Home Health Care Operations
---------------------------

MCHS owns effective control of approximately 63% of the voting stock of
In Home Health, Inc., a publicly-traded company which provides services in 19
markets located in 14 states. In Home Health offers its clients a broad range of
professional and support services to meet medical and personal needs at home,
including skilled nursing, infusion therapy, hospice, rehabilitation, personal
care and homemaking.

In Home Health has two divisions: a Visit Division and an Extended Hour
Division. The Visit Division provides clients with short-term care, usually up
to two hours per visit. The Extended Care Division provides clients with care up
to 24 hours a day. Through the Visit Division, In Home Health operates infusion
pharmacies which provide pharmaceutical drugs, fluids and supplies.

Hospital Operations
- -------------------

A subsidiary of Manor Care is the general partner and a limited partner
of Mesquite Community Hospital, L.P., which owns and operates Mesquite Community
Hospital in Mesquite, Texas, a Dallas suburb. The 172 licensed bed facility,
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 include obstetrics, emergency services,
coronary/intensive care, day surgery, skilled nursing, and geriatric psychiatry.
Fully equipped, 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,
admit and refer patients into the hospital from their private office practices.
Patient services are reimbursed from traditional insurance programs, managed
care (HMO and PPO), Medicare and Medicaid. Renovation of 14,300 square feet of
existing hospital space was completed in October, 1996.

Regulation
- ----------

Manor Care's health care facilities are subject to certain Federal
statutes and regulations and to regulatory licensing requirements by state and
local authorities. All of Manor Care's facilities are currently so licensed. In
addition, the facilities are subject to various local building codes and other
ordinances.

State and local agencies survey all nursing facilities on a regular
basis to determine whether such facilities are in compliance with governmental
operating and health standards and conditions for participation in government
medical assistance programs. Such surveys include reviews of patient utilization
of health care facilities and standards for patient care. Manor Care endeavors
to maintain and operate its facilities in compliance with all such standards and
conditions. Manor Care believes that at this time, none of its facilities is in
violation of any applicable regulation that would threaten the operation of its
business or materially affect the standard of care provided.

Federal and State Assistance Programs
- -------------------------------------

Substantially all Manor Care's nursing facilities and the Hospital are
currently certified to receive benefits provided under the Federal Health
Insurance for the Aged Act (commonly referred to as

7
<PAGE>

"Medicare"), and under programs administered by the various states to provide
medical assistance to the medically indigent ("Medicaid"). Both initial and
continuing qualification of a nursing center or hospital to participate in such
programs depends upon many factors including accommodations, equipment,
services, patient care, safety, personnel, physical environment, and adequate
policies, procedures and controls.

Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, medications, biologicals,
supplies, and surgical, ancillary diagnostic and other necessary services of the
type provided by extended care or acute care facilities. Under the Medicare
program, the federal government pays the reasonable direct and indirect
allowable costs (including depreciation and interest) of the services furnished.

Under the various Medicaid programs, the Federal government supplements
funds provided by the participating states for medical assistance to medically
indigent persons. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits, at rates based generally on cost reimbursement principles.

Funds received by Manor Care under Medicare and Medicaid are subject to
audit with respect to the proper application of various payment formulas. Such
audits can result in retroactive adjustments of revenue from these programs,
resulting in either amounts due to the government agency from Manor Care or
amounts due Manor Care from the government agency. Manor Care believes that its
payment formulas have been properly applied and that any future adjustments will
not have a material adverse impact on its financial position or results of
operations.

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

Competition
- -----------

Manor Care's nursing facilities compete on a local and regional basis
with other long-term health care providers, some of which have greater financial
resources or operate on a nonprofit basis. The degree of success with which
Manor Care's facilities compete varies from location to location and is
dependent on a number of factors. Manor Care believes that the quality of care
provided, reputation and physical appearance of facilities, and, in the case of
private patients, charges for services, are significant competitive factors.
Accordingly, it seeks to meet competition in each locality by establishing a
reputation within the local medical communities for competent and competitive
nursing center services. There is limited, if any, competition in price with
respect to Medicaid and Medicare patients, since revenues for services to such
patients are strictly controlled and based on fixed rates and cost reimbursement
principles.

8
<PAGE>

Manor Care's Hospital encounters competition in the Mesquite, Texas area
where it competes for community and physician acceptance with other hospitals.
Vitalink's pharmacies compete with other local distributors of pharmaceuticals.
In Home Health competes with hospitals, public health agencies, national
temporary employment agencies, national specialized home care providers and
other independent home care companies.

Employees
- ---------

As of May 31, 1997, Manor Care employed approximately 27,715 full and
part-time employees, 26,576 of whom were employed in health care operations and
the remainder in Manor Care's headquarters.

From time to time, some of Manor Care's nursing facilities and the
Hospital experience shortages of professional nursing help which may require
Manor Care to seek temporary employees through employment agencies at an
increased cost. Manor Care does not believe that use of these contract employees
has had a material adverse effect on its financial position to date.

A majority of the employees are covered by the federal minimum wage
laws, and a few employees are represented by labor unions. Attempts have been
made from time to time to unionize employees of certain other facilities. Manor
Care believes that it enjoys a good relationship with its employees.

Insurance
- ---------

Manor Care maintains property insurance on its health care facilities.
Manor Care insures some of its liability exposures and self insures, either
directly or indirectly through insurance arrangements requiring it to reimburse
insurance carriers, some of its liability risks other than catastrophic
exposures. Physicians and dentists practicing at the Hospital are responsible
for their own professional liability insurance coverage. Manor Care insures its
workers' compensation risks in some states and self insures in others.

ITEM 2. Properties.
- ------ ----------

As of May 31, 1997, Manor Care owned, leased or managed 177 skilled
nursing and rehabilitation facilities and 31 assisted living facilities in 28
states and one acute care general hospital in Texas, as indicated below:

Number Number of
Property Of Units Operating Beds
-------- -------- --------------
<S> <C> <C>
Nursing and Rehabilitation
and Assisted Living Facilities:
Owned 189 25,095
Leased 14 1,721
Managed 5 692
Acute Care Hospital 1 172
---- --------

TOTALS 209 27,680
=== ======

</TABLE>

9
<PAGE>

As of May 31, 1997, Vitalink leased 56 pharmacies in 32 states and its
corporate offices in Naperville, Illinois and Atlanta, Georgia, and In Home
Health leased 41 offices and its corporate offices in Minnetonka, Minnesota.

Manor Care owns three buildings in Silver Spring, Maryland, portions of
two of which are used by employees. The remainder are leased to third parties. A
fourth building in Silver Spring is owned by a partnership, of which certain
subsidiaries of Manor Care are general and limited partners. On August 30, 1995,
Manor Care leased a 400,000 square foot headquarters building and a 200,000
square foot free-standing warehouse in Gaithersburg, Maryland, which lease was
guaranteed by Manor Care and certain of its subsidiaries. Manor Care also owns a
building in Phoenix, Arizona, leased by a third party, and several undeveloped
parcels. Manor Care also leases office space as needed to accommodate regional
employees.

Thirty-seven (37) nursing facilities have been pledged to secure related
mortgage and capital lease obligations.

ITEM 3. 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 substance cleanup. The Actions arise out of the
alleged activities of Cenco Incorporated and its subsidiary and affiliated
companies ("Cenco") which were acquired by MCHS in 1981. The Actions allege that
such parties transported and/or generated hazardous substances that came to be
located at the sites in question. These Actions allegedly occurred prior to
MCHS'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 of 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.

The most significant Action for Manor Care arises from the Kramer
landfill, located in Mantua, New Jersey. 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 site
where subsidiaries of Cenco allegedly transported waste. At 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 a defendant in the latter suit. Based upon a court approved
final allocation plan, and also in view of its insurance coverage, Manor Care
believes that the Kramer Action will not have a material adverse effect on its
financial condition or results of operation. 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's allocation could change.

10
<PAGE>

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 in respect
to the Actions. Manor Care, believes, however, that any such Action will not be
material.

Manor Care also is subject to other regulatory and legal actions,
investigations or claims for damages that arise from time to time in the
ordinary course of business. Manor Care is defending the claims against it and
believes that these proceedings will not have a material adverse effect on its
financial condition or results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------

No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1997.

EXECUTIVE OFFICERS OF MANOR CARE, INC.

The name, age, title, present principal occupation, business address and
other material occupations, positions, offices and employment of each of the
executive officers of Manor Care, Inc. ("Manor Care") are set forth below. The
business address of each executive officer is 11555 Darnestown Road,
Gaithersburg, Maryland 20878-3200, unless otherwise indicated.

Stewart Bainum, Jr. (51) Chairman of the Board of Manor Care and MCHS
------------------
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 Hotels International, Inc. ("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 MCHS since 1976 and of Choice and its
predecessors since 1977; Chief Executive Officer of MCHS 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.

James H. Rempe. (67) Senior Vice President, General Counsel and
--------------
Secretary of Manor Care since August 1981, of Choice and its predecessors from
February 1981 to November 1996 and of MCHS since December 1980; Secretary of
Vitalink from January 1983 to January 1997 and a Director since September 1994;
Senior Vice President and a Director of Vitalink from January 1983 to September
1991; Director of In Home Health, Inc. since October 1995.

Margarita A. Schoendorfer. (48) Vice President-Controller of Manor Care
-------------------------
and MCHS since November 1990; Vice President-Controller of Choice from November
1990 to November 1996; Corporate Controller of Manor Care, MCHS and Choice from
April 1986 to November 1990; Assistant Corporate Controller of Manor Care, MCHS
and Choice from August 1981 to April 1986.

11
<PAGE>

Donald C. Tomasso. (52) Executive Vice President of Manor Care and
-----------------
President of MCHS since September 1996; President, Long-Term Care Division, of
MCHS from February 1995 to August 1996 and a Director of MCHS since June 1991;
President and Chief Operating Officer of MCHS from May 1991 to February 1995;
Chairman and Chief Executive Officer of Vitalink from February 1995 to February
1997 and Vice Chairman from September 1991 to February 1995; previously employed
by Marriott Corporation for more than five years, including as Executive Vice
President/General Manager of the Roy Rogers Division; Director of In Home
Health, Inc. since October 1995.

Joseph R. Buckley. (49) Executive Vice President of Manor Care and MCHS
-----------------
since March 1996; Director of Vitalink since July 1996; President, Assisted
Living Division, of MCHS 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 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, Inc. since
June 1997 and Director since October 1995.

Scott J. Van Hove. (40) Senior Vice President and Chief Administrative
-----------------
Officer of Manor Care since December 1995; Executive Vice President, Operations
of MCHS since February 1997; Senior Vice President of MCHS from December 1995 to
January 1997; Vice President of Operations, of Manor Care from March 1990 to
December 1995.

Leigh C. Comas. (31) Vice President, Finance and Treasurer of Manor Care
--------------
and MCHS since September 1996; Vice President, Finance and Assistant Treasurer
of Manor Care from September 1995 to September 1996; Assistant Treasurer of
Manor Care and MCHS from September 1993 to September 1995.

Wolfgang von Maack. (57) President and Chief Executive Officer of In
------------------
Home Health, Inc. since May 1997; Senior Vice President, Healthcare Services of
MCHS since June 1990; Vice President, Operations of MCHS from March 1988 to June
1990.

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------

The shares of Manor Care's Common Stock are listed and traded on the New
York Stock Exchange. Information on the high and low sales prices of Manor
Care's Common Stock during the past two years is included on page 29 of the 1997
Annual Report and is incorporated herein by reference.

As of August 5, 1997, there were 3,746 record holders of Manor Care
Common Stock.

Information required on the frequency and amount of any dividends
declared during the past two years with respect to such Common Stock is included
on page 29 the 1997 Annual Report and is incorporated herein by reference.

12
<PAGE>

<TABLE>
<CAPTION>
Pages
-----
<S> <C> <C>
ITEM 6. Selected Financial Data.
- ------ -----------------------

The required information is included in the
specified pages of the 1997 Annual Report and
is incorporated herein by reference. Preceding 1

ITEM 7. Management's Discussion and Analysis of
- ------ ---------------------------------------
Financial Condition and Results of Operations.
---------------------------------------------

The required information is included in the
specified pages of the 1997 Annual Report
and is incorporated herein by reference. 14,18-19

ITEM 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------

The required information is included in the
specified pages of the 1997 Annual Report
and is incorporated herein by reference. See
Item 14 for index to financial statements 13, 15-17,
and schedules. 21-29

ITEM 9. Changes in and Disagreements with Accountants
- ------ ---------------------------------------------
on Accounting and Financial Disclosure.
--------------------------------------

Not applicable.

PART III
--------

ITEM 10. Directors and Executive Officers of the
- ------- ---------------------------------------
Registrant.
----------

The required information on directors is included
in the specified pages of the Proxy Statement dated
August 15, 1997 and is incorporated herein by reference. 2-3,4
The required information on executive officers is set
forth in Part I of this Form 10-K under an unnumbered
item captioned "Executive Officers of Manor Care, Inc."
</TABLE>

13
<PAGE>

<TABLE>
<S> <C> <C>
ITEM 11. Executive Compensation.
- ------- ----------------------

The required information is included in the
specified pages of the Proxy Statement dated
August 15, 1997 and is incorporated herein
by reference. 7-12

ITEM 12. Security Ownership of Certain Beneficial Owners
- ------- -----------------------------------------------
and Management.
--------------

The required information is included in the
specified pages of the Proxy Statement dated
August 15, 1997 and is incorporated herein by
reference. 2-3

ITEM 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------

The required information is included in the
specified pages of the Proxy Statement dated
August 15, 1997 and is incorporated herein by
reference. 15

PART IV
-------

ITEM 14. Exhibits, Financial Statement Schedules, and
- ------- --------------------------------------------
Reports on Form 8-K.
-------------------

(a) 1. Financial Statements

Included on the following pages of the 1997 Annual Report:

Consolidated Statements of Income 13

Consolidated Balance Sheets 15

Consolidated Statements of Shareholders' Equity 16

Consolidated Statements of Cash Flows 17
</TABLE>

14
<PAGE>

<TABLE>
<S> <C>
Management's Report and Report of 20
Independent Public Accountants

Notes to Consolidated Financial Statements 21-29

2. Financial Statement Schedules

The following Report and Schedule are filed herewith on the
pages indicated:

Report of Independent Public Accountants 19

Schedule II - Valuation and Qualifying Accounts 20

All other schedules are not applicable
<CAPTION>

3. Exhibits

<S> <C>
3.1 - Articles of Incorporation, as amended. Exhibit 3.1 to
Form 10-Q for the quarter ended August 31, 1994 is
incorporated herein by reference.

3.2 - By-Laws, as amended. Exhibit 3.2 to Form 10-K for the
year ended May 31, 1988 is incorporated herein by
reference.

4.1 - Indenture dated as of November 15, 1992 covering
9-1/2% Senior Subordinated Notes due 2002 between
Manor Care, Inc. and Chemical Bank. Exhibit 4.1 to
Registration Statement No. 33-52734 is incorporated
herein by reference.

4.2 - Indenture dated as of June 4, 1996 between Manor
Care, Inc. and Wilmington Trust Company, Trustee.
Exhibit 4.1 to Form 8-K dated June 4, 1996 is
incorporated herein by reference.

4.3 - Supplemental Indentures dated as of June 4, 1996
between Manor Care, Inc. and Wilmington Trust
Company, Trustee. Exhibit 4.2 to Form 8-K dated
June 4, 1996 is incorporated herein by reference.

4.4 - Indenture dated as of November 22, 1996 between Manor
Care, Inc. and Chase Manhattan Bank. Exhibit 4.1 to
Report on Form 8-K dated November 5, 1996 is
incorporated herein by reference.

10.1 - Supplemental Executive Retirement Plan. Exhibit 10.2
to Form 10-K for the year ended May 31, 1986 is
incorporated herein by reference.
</TABLE>

15
<PAGE>

<TABLE>
<S> <C>
10.2 - Form of Executive Cash Incentive Plan. Exhibit 10.2
to Form 10-K for the year ended May 31, 1995 is
incorporated herein by reference.

10.3 - Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan. Exhibit A to the
Proxy Statement dated August 10, 1994 is incorporated
herein by reference.

10.4 - Long-Term Incentive Plan. Exhibit A to Proxy
Statement dated August 28, 1995 which is Exhibit 99
to Form 10-K for the year ended May 31, 1995 is
incorporated herein by reference.

10.5 - Non-Employee Director Stock Compensation Plan.
Exhibit A to Proxy Statement dated August 28, 1996
which is Exhibit 99 to the Report on Form 10-K for
the year ended May 31, 1997 is incorporated herein by
reference.

10.6 - Master Aircraft Lease Agreement dated September 1,
1994 between Manor Care, Inc. and Wilderness
Investment Company, Inc. Exhibit 10.17 to Form 10-K
for the year ended May 31, 1995 is incorporated
herein by reference.

10.7 - Lease dated as of August 30, 1995 between The
Gaithersburg Realty Trust and Manor Care, Inc.
Exhibit 10.11 to Form 10-K for the year ended
May 31, 1996 is incorporated herein by reference.

10.8 - Guarantee dated as of August 30, 1995 made by Manor
Care, Inc., ManorCare Health Services, Inc., Choice
Hotels International, Inc., Quality Hotels Europe,
Inc., Four Seasons Nursing Center, Inc., MNR
Financial Corp., Boulevard Motel Corp. and Chemical
Bank. Exhibit 10.12 to Form 10-K for the year ended
May 31, 1996 is incorporated herein by reference.

10.9 - Loan Agreement dated as of November 1, 1996 between
MNR Finance Corp. and Choice Hotels International,
Inc. Exhibit 2.6 to Report on Form 8-K dated
November 5, 1996 is incorporated herein by reference.

10.10 - Amended and Restated Competitive Advance and Multi-
Currency Revolving Credit Facility Agreement dated as
of November 30, 1994, as amended and restated as of
September 6, 1996 between Manor Care, Inc. and Chase
Manhattan Bank. Exhibit 10.1 to the Report on Form
8-K dated November 5, 1996 is incorporated herein by
reference.

13 - 1997 Annual Report to Stockholders (information
incorporated by reference).

21 - Subsidiaries of the Registrant.
</TABLE>

16
<PAGE>

<TABLE>
<S> <C>
23 - Consent of Independent Public Accountants.

27 - Financial Data Schedule.

99 - Proxy Statement dated August 15, 1997.
</TABLE>

(b) Reports on Form 8-K.

No Reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended May 31, 1997.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: August 28, 1997 MANOR CARE, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Stewart Bainum, Jr. Chairman, Director, August 28, 1997
- ------------------------------ President and Chief
Stewart Bainum, Jr. Executive Officer

/s/ Stewart Bainum Vice Chairman August 28, 1997
- ------------------------------ and Director
Stewart Bainum

/s/ Kennett L. Simmons Director August 28, 1997
- ------------------------------
Kennett L. Simmons

/s/ Regina E. Herzlinger Director August 28, 1997
- ------------------------------
Regina E. Herzlinger
</TABLE>

17
<PAGE>

<TABLE>
<S> <C> <C>
/s/ William H. Longfield Director August 28, 1997
- ------------------------------
William H. Longfield

/s/ Frederic V. Malek Director August 28, 1997
- ------------------------------
Frederic V. Malek

/s/ Jerry E. Robertson Director August 28, 1997
- ------------------------------

/s/ Margarita Schoendorfer Vice President- August 28, 1997
- ------------------------------ Corporate Controller
Margarita Schoendorfer
</TABLE>

18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS OF MANOR CARE, INC.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Manor Care, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated June 27, 1997. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in the index in Item 14(a)2 is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.,
June 27, 1997

19
<PAGE>

Schedule II

MANOR CARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)

<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Profit End
Description of Period and Loss Other Write-offs of Period
----------- --------- -------- ----- ---------- ---------

<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997
Allowance for doubtful accounts $24,311 $20,341 $10,644/(A)/ $(13,803) $41,493

Year ended May 31, 1996
Allowance for doubtful accounts $18,797 $16,190 $ 1,030/(A)/ $(11,706) $24,311

Year ended May 31, 1995
Allowance for doubtful accounts $15,481 $12,587 $ - $(9,271) $18,797
</TABLE>

/(A)/Represents reserves of acquired companies.

20
<PAGE>

==================================================================

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

--------

EXHIBITS

FORM 10-K

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

--------

MANOR CARE, INC.

==================================================================

21
<PAGE>

EXHIBIT INDEX
-------------

13 - 1997 Annual Report to Stockholders (information incorporated by
reference).

21 - Subsidiaries of the Registrant.

23 - Consent of Independent Public Accountants.

27 - Financial Data Schedule.

99 - Proxy Statement dated August 15, 1997.

<PAGE>

EXHIBIT 13

(Annual Report)
<PAGE>

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 $ 1,527,247 $ 1,248,197 $ 1,019,458
...................................................................................................................................
EXPENSES
Operating expenses 1,202,836 963,081 769,998
Depreciation and amortization 80,378 68,086 54,374
General corporate and other 68,563 72,322 63,197
Provisions for asset impairment and restructuring -- 26,300 --
...................................................................................................................................
Total expenses 1,351,777 1,129,789 887,569
...................................................................................................................................
INCOME FROM CONTINUING OPERATIONS BEFORE OTHER INCOME AND
EXPENSES AND INCOME TAXES 175,470 118,408 131,889
...................................................................................................................................
OTHER INCOME AND (EXPENSES)
Interest income from advances to discontinued lodging segment 21,221 19,673 15,492
Gain on issuance of Vitalink stock 50,271 -- --
Interest income and other 8,683 5,416 7,348
Minority interest expense (4,001) (1,688) (2,129)
Interest expense (41,831) (30,338) (22,769)
...................................................................................................................................
Total other income and (expenses), net 34,343 (6,937) (2,058)
...................................................................................................................................
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 209,813 111,471 129,831
INCOME TAXES 84,700 46,000 52,156
...................................................................................................................................
INCOME FROM CONTINUING OPERATIONS 125,113 65,471 77,675
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 $ 1.98 $ 1.04 $ 1.24
Income from discontinued lodging operations 0.19 0.33 0.27
...................................................................................................................................
Net income per share of common stock $ 2.16/(a)/ $ 1.37 $ 1.51
- -----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

The accompanying notes are an integral part of these consolidated statements.
/(a)/ Fiscal year 1997 does not add due to rounding.
<PAGE>

MANAGEMENT'S REVIEW OF OPERATING RESULTS

Revenues and Margins

Healthcare revenues increased $279.1 million (22%) to $1.527 billion in fiscal
year 1997, while operating expenses increased $239.8 million (25%) to $1.203
billion. This compares to an increase in revenues of $228.7 million (22%) and an
increase in operating expenses of $193.1 million (25%) in fiscal year 1996.
Operating margin compression in fiscal year 1997 was primarily attributable to
lower margin operations at TeamCare and In Home Health, Inc. ("IHHI"), as well
as new assisted living and skilled nursing development. Operating margin
compression in fiscal year 1996 was principally due to the inclusion of lower
margin home health operations relating to the Company's investment in IHHI as
well as a significant level of new assisted living and skilled nursing
development. Operating margins excluding the results of TeamCare and IHHI were
23.9% and 22.8% for fiscal years 1997 and 1996, respectively.

Revenue increases in fiscal year 1997 reflect the continued growth of Manor
Care, Inc. and its subsidiaries (the "Company") in the skilled nursing area and
the Company's increased participation in the assisted living, pharmacy and home
health markets. Fiscal year 1997 revenue growth resulted primarily from the
merger of Vitalink Pharmacy Services, Inc. ("Vitalink") with TeamCare ($94.6
million), capacity increases ($67.4 million), rate increases ($51.4 million),
the impact of a full year of revenues from IHHI ($50.2 million), and the
purchase of a pharmacy by Vitalink ($12.4 million). The Company achieved
capacity growth through the purchase of two nursing centers, the development and
opening of four skilled nursing centers and five assisted living facilities and
additional bed development in previously owned nursing centers, offset by the
sale of four nursing centers and transfer of an assisted living facility to the
discontinued lodging segment. Revenue increases in fiscal year 1996 were
predominantly due to additional capacity ($102.2 million) from the opening of
newly developed skilled nursing and assisted living facilities and the purchase
of four skilled nursing centers and six assisted living facilities with five
attached skilled nursing units, entry into the home health market ($74.2
million), and rate increases ($52.3 million).

Operating Expenses

The increase in operating expenses of $239.8 million in fiscal year 1997 results
from Vitalink's merger with TeamCare ($82.4 million), the impact of a full year
of IHHI operations ($53.3 million), capacity increases, higher patient acuity,
increases in wage rates, more complex product offerings, and the purchase of a
pharmacy. Operating expense increases in fiscal year 1996 resulted from higher
patient acuity, more complex product and service offerings, capacity increases,
and increases in wage rates and healthcare supply costs at the Company's skilled
nursing centers.

Other Expenses

General corporate and other expenses represented 4.5% of revenue in fiscal year
1997 and 5.8% of revenue in fiscal year 1996. General corporate and other
expenses include all indirect operating expenses as well as risk management,
information systems, treasury, accounting, legal and other administrative
support for the Company and its various subsidiaries. The reduction of general
corporate and other expenses is partially due to a reduction in employees
related to the discontinued lodging segment and reengineering efforts in both
organizational and financial systems. Additionally, general corporate and other
expenses for fiscal year 1997 included a gain of $7.3 million from the sale of
four nursing centers and charitable contributions expense of $5.0 million.

Interest expense increased 38% in fiscal year 1997 primarily as a result of the
assumption of $106.4 million of TeamCare debt in February 1997 as well as
additional borrowings in connection with newly developed facilities and
acquisitions, as discussed above. The interest expense increase of 33% in fiscal
year 1996 was primarily attributable to additional borrowings in connection with
newly developed facilities and acquisitions.

Minority interest expense increased $2.3 million during fiscal year 1997 to $4.0
million. The increase results primarily from Vitalink's merger with TeamCare.

The Company recorded provisions of $26.3 million in fiscal year 1996 related to
the impairment of certain long lived assets and costs associated with the
Company's restructuring of its healthcare business. The most significant
components of the provisions were non-cash asset impairment charges of $21.2
million relating to writedowns of property, equipment, and capitalized system
development costs.

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

14
<PAGE>

CONSOLIDATED BALANCE SHEETS

As of May 31 (In thousands of dollars) 1997 1996
...........................................................................................................................
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,882 $ 62,533
Receivables (net of allowances for doubtful accounts of $41,493 and $24,311) 215,191 107,267
Inventories 37,724 18,734
Income taxes 41,856 40,420
Other 9,817 6,107
...........................................................................................................................
Total current assets 337,470 235,061
...........................................................................................................................
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION 1,027,571 918,207
...........................................................................................................................
GOODWILL 356,460 54,646
...........................................................................................................................
ADVANCES TO DISCONTINUED LODGING SEGMENT 115,723 225,723
...........................................................................................................................
NET INVESTMENT IN DISCONTINUED LODGING SEGMENT -- 159,537
...........................................................................................................................
OTHER ASSETS 142,480 88,666
...........................................................................................................................
$ 1,979,704 $ 1,681,840
- ---------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 14,845 $ 23,984
Accounts payable 82,457 85,804
Accrued expenses 130,519 113,426
Income taxes payable -- 8,614
...........................................................................................................................
Total current liabilities 227,821 231,828
...........................................................................................................................
MORTGAGES AND OTHER LONG-TERM DEBT 596,473 490,575
...........................................................................................................................
DEFERRED INCOME TAXES ($202,937 AND $151,410) AND OTHER 279,014 218,256
...........................................................................................................................
MINORITY INTEREST 185,965 33,412
...........................................................................................................................
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
...........................................................................................................................
$ 1,979,704 $ 1,681,840
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands of dollars, Common Stock Contributed Retained Translation
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 common
stock transactions related to
employee benefit plans -- -- 6,818 -- --
Other -- -- 1,305 96 --
.................................................................................................................
Balance, May 31, 1997 66,794,841 $6,682 $194,640 $538,630 $ --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

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

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

16
<PAGE>

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:
Gain on issuance of Vitalink stock (50,271) -- --
Income from discontinued lodging operations (11,829) (20,436) (16,811)
Depreciation and amortization 80,378 68,086 54,374
Provisions for asset impairment and restructuring -- 26,300 --
Amortization of debt discount 513 455 499
Provisions for bad debts 20,341 16,190 12,587
Increase (decrease) in deferred taxes 48,200 (4,314) 1,579
Gain on sale of healthcare facilities (7,322) -- --
Minority interest 4,001 1,688 2,129
Changes in assets and liabilities (excluding sold facilities and acquisitions):
Change in receivables (87,205) (39,551) (20,128)
Change in inventories and other current assets (6,528) (1,569) (9,115)
Change in current liabilities (27,812) 48,366 15,839
Change in income taxes payable (6,169) 12,879 (12,681)
Change in other liabilities (13,088) 5,306 (1,998)
.............................................................................................................................
NET CASH PROVIDED BY CONTINUING OPERATIONS 80,151 199,307 120,760
NET CASH PROVIDED BY DISCONTINUED LODGING OPERATIONS 40,599 52,682 48,604
.............................................................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 120,750 251,989 169,364
.............................................................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (167,716) (121,896) (83,500)
Acquisition of assisted living facilities -- (19,050) --
Investment in systems development (15,753) (14,436) (8,400)
Acquisition of pharmacy business (97,400) -- --
Acquisition of healthcare facilities (17,793) (32,369) (56,745)
Acquisition of pharmacies (5,291) (6,270) (2,451)
Acquisition of Vitalink stock (30,000) -- --
Purchase of home health business -- (22,950) --
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)
Other items, net (5,832) (14,946) (2,490)
.............................................................................................................................
NET CASH UTILIZED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS (209,235) (259,118) (191,713)
NET CASH UTILIZED BY INVESTING ACTIVITIES OF DISCONTINUED
LODGING OPERATIONS (29,424) (169,641) (92,422)
.............................................................................................................................
NET CASH UTILIZED BY INVESTING ACTIVITIES (238,659) (428,759) (284,135)
.............................................................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 277,381 149,000 207,254
Principal payments of long-term debt (180,241) (23,030) (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 PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS 87,604 122,644 80,037
NET CASH PROVIDED BY FINANCING ACTIVITIES OF DISCONTINUED
LODGING OPERATIONS 654 43,687 50,008
.............................................................................................................................
NET CASH PROVIDED BY FINANCING ACTIVITIES 88,258 166,331 130,045
.............................................................................................................................
NET CHANGE IN CASH AND CASH EQUIVALENTS (29,651) (10,439) 15,274
.............................................................................................................................
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 62,533 72,972 57,698
.............................................................................................................................
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,882 $ 62,533 $ 72,972
- -----------------------------------------------------------------------------------------------------------------------------
NON CASH ACTIVITIES:
Liabilities assumed in connection with acquisition of property $ 172,778 $ 68,250 $ --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>

MANAGEMENT'S REVIEW OF FINANCIAL POSITION AND CASH FLOWS

Liquidity and Capital Resources

The Company maintains adequate capital resources, including strong operating
cash flows and committed lines of credit, to support ongoing operations and to
fulfill capital requirements in the foreseeable future.

On November 1, 1996, the Company separated its lodging business from its
healthcare business via a tax-free spin-off of the lodging division. Management
believes the ability to raise both debt and equity capital is enhanced by the
spin-off transaction. As of May 31, 1997, the Company had cash advances totaling
$115.7 million outstanding from the lodging segment. The cash advances are to be
repaid within three years from the date of the spin-off. Interest is charged at
an annual rate of 9% on the indebtedness. In April 1997, the Company received a
prepayment of $110.0 million on the advances to the discontinued lodging
segment. The proceeds were used to repay bank debt.

In September 1996, the Company amended its existing $250.0 million competitive
advance and multi-currency revolving credit facility to provide for the spin-off
of the lodging division. The amended facility expires in September 2001. At May
31, 1997, bank lines totaled $275.0 million, of which $176.5 million remained
unused. In June 1996, the Company completed a public offering of unsecured
Senior Notes in the amount of $150.0 million, the proceeds of which were used to
repay bank debt. The notes are due in 10 years and carry a 7 1/2 % interest
rate.

The Company maintains adequate debt capacity and the Company's senior debt
carries investment grade ratings from both of the major debt rating agencies.
The Company's long-term debt to equity ratio was 0.9 to 1 at May 31, 1997 and
0.7 to 1 at May 31, 1996. In evaluating leverage and debt capacity, the Company
considers cash flow and interest coverage. The Company's consolidated interest
coverage ratio and consolidated debt ratio, as defined by the Company's bank
agreement, were 6.99 to 1 and .47 to 1, respectively, for fiscal year 1997. The
Company's bank agreement requires a consolidated interest coverage ratio minimum
of 3 to 1 and prohibits a consolidated debt ratio in excess of .67 to 1.
Furthermore, a significant portion of the Company's property and equipment
remains unencumbered.

The Company's working capital ratio was 1.5 at May 31, 1997 and 1.0 at May 31,
1996. The Company attempts to minimize its investment in net current assets, and
believes that the maintenance of minimal working capital is an appropriate
objective given the strength of the Company's operating cash flows and the depth
of its financial resources.

Property and Acquisitions

During fiscal 1997, investment in property and equipment utilized in continuing
operations and systems development amounted to $183.4 million. On February 12,
1997, Vitalink completed a merger with TeamCare, the pharmacy subsidiary of
GranCare, Inc. Vitalink issued 11.4 million shares in exchange for all of the
outstanding shares of GranCare. In addition, Vitalink funded the redemption of
$98.2 million of GranCare's 9 3/8% Senior Subordinated Notes and assumed
approximately $10.0 million of additional GranCare indebtedness. On May 21,
1997, the Company successfully completed its tender offer to purchase 1.5
million shares of Vitalink common stock. As a result of the tender offer, the
Company's interest in Vitalink was increased to approximately 51%. The net
pretax gain resulting from these transactions in Vitalink stock was $50.3
million. The Company also purchased two nursing centers for $17.8 million and
Vitalink purchased a pharmacy for $5.3 million. During fiscal 1996, investment
in property and equipment utilized in continuing operations and systems
development amounted to $136.3 million. Additionally, during fiscal 1996, $51.4
million was spent to acquire four additional nursing centers and six assisted
living facilities, with five attached skilled nursing units. Vitalink also
purchased two pharmacies for $6.3 million. In October 1995, the Company
purchased approximately 41% of IHHI's common stock for $22.9 million and
invested another $20.0 million for 100% of its outstanding voting convertible
preferred stock and for warrants to purchase an additional 6.0 million shares of
common stock.

Long-Term Debt

Total long-term debt was $611.3 million at May 31, 1997 compared to $514.6
million at May 31, 1996. The amounts exclude debt related to discontinued
lodging operations of $68.5 million at May 31, 1996. The increase in long-term
debt is mainly attributable to the assumption of $106.4 million of TeamCare debt
as well as the acquisition of the above mentioned nursing and assisted living
facilities. The current portion of debt as of May 31, 1997 amounted to $14.8
million.

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

18
<PAGE>

Shareholders' Equity

Shareholders' equity decreased to $690.4 million at May 31, 1997 from $707.8
million at May 31, 1996. This decrease was primarily due to the $164.2 million
dividend of the discontinued lodging segment and $6.1 million of dividends paid,
offset by net income of $136.9 million and stock options exercised of $12.3
million.

Impact of New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), which
is effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier adoption is not permitted. However, an entity is permitted to
disclose pro forma earnings per share amounts computed under SFAS 128 in the
notes to the financial statements in periods prior to adoption. The statement
requires restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is substantially similar to
the standard recently issued by the International Accounting Standards Committee
entitled "International Accounting Standards, Earnings Per Share." The Company
plans to adopt SFAS 128 in fiscal year 1998 and has not determined the impact of
adoption.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of comprehensive
income and its components. The Company plans to adopt SFAS 130 in fiscal year
1999 and has not determined the impact of adoption.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS 131 in
fiscal year 1999 and has not determined the impact of adoption.
<PAGE>

MANAGEMENT'S REPORT

The Company has developed and maintains internal control systems designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed and recorded in accordance with management authorization. Control
systems are supported by written policies and are regularly evaluated by the
Company's internal auditors.

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which require that
business judgments be applied. While management is responsible for the
preparation of the financial statements, the Company's outside auditors have
examined the financial statements as described in their report.

The Audit Committee of the Company's Board of Directors is comprised of three
external directors. This Committee meets periodically with management, the
internal auditors, and the external auditors. The Committee monitors and reviews
the audit programs conducted by both the Company's internal audit department and
the external auditors. Audit Committee meetings are scheduled so as to
facilitate any private communications with the Committee desired by either the
internal or external auditors.

/s/ Stewart Bainum, Jr.

Stewart Bainum, Jr.
Chairman, President and Chief Executive Officer

/s/ Leigh C. Comas

Leigh C. Comas
Vice President, Finance and Treasurer

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Manor Care, Inc.:

We have audited the accompanying consolidated balance sheets of Manor Care, Inc.
(a Delaware Corporation) and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above (appearing on pages
13, 15, 16, 17 and 21-29) 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.

/s/ Author Anderson LLP

Washington, D.C.
June 27, 1997

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

20
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Manor Care, Inc.
and its subsidiaries (the "Company"). As a result of the Company's spin-off of
its lodging operations, the accompanying financial statements reflect the
lodging segment as a discontinued operation. All significant intercompany
transactions have been eliminated, except for advances to the discontinued
lodging segment and the related interest income.

Cash

The Company considers all highly liquid securities purchased with a maturity of
three months or less to be cash equivalents.

Property and Equipment

The components of property and equipment at May 31, were:
<TABLE>
<CAPTION>

(In thousands of dollars) 1997 1996
................................................................................
<S> <C> <C>
Land $ 97,569 $ 92,884
Building and improvements 971,850 887,184
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 242,143 209,035
Facilities in progress 58,200 49,067
................................................................................
1,382,509 1,250,917
Less: Accumulated depreciation
and amortization (354,938) (332,710)
................................................................................
$ 1,027,571 $ 918,207
- --------------------------------------------------------------------------------
</TABLE>

Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows.

Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years

Accumulated depreciation includes $9.4 million and $9.7 million at May 31, 1997
and 1996, respectively, relating to capitalized leases. Capitalized leases are
amortized on a straight-line basis over the lesser of the lease term or the
remaining useful life of the leased property.

Capitalization Policies

Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is taken into income. Maintenance, repairs, and minor replacements are
charged to expense.

Construction overhead and costs incurred to ready a project for its intended use
are capitalized for major development projects and are amortized over the lives
of the related assets.

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, $4.6 million; 1996,
$3.1 million; 1995, $1.8 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 $4.5 million, $1.0
million and $0.7 million in each of the years ended May 31, 1997, 1996 and 1995,
respectively.

Minority Interest

The Company has controlling investments in certain entities which are not wholly
owned. Amounts reflected as minority interest represent the minority owners'
share of income in these entities. Minority interest liability represents the
cumulative minority owners' share of income in these entities.

Self-Insurance Programs

The Company self-insures for certain levels of general and professional
liability, automobile liability, and workers' compensation coverage. The
estimated costs of these programs are accrued at present values at a discount
rate of 7% based on actuarial projections for known and incurred but not
reported claims.

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.
<PAGE>

Net Income Per Common Share

Net income per common share has been computed based on the weighted average
number of shares of common stock outstanding. Stock options are included in the
calculation when dilutive.

Use of Estimates

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

Reclassifications

Certain amounts previously presented have been reclassified to conform to the
1997 presentation.

Impact of New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share" ("SFAS 128"), which is effective for fiscal years ending
after December 15, 1997, including interim periods. Earlier adoption is not
permitted. However, an entity is permitted to disclose pro forma earnings per
share amounts computed under SFAS 128 in the notes to the financial statements
in periods prior to adoption. The statement requires restatement of all
prior-period earnings per share data presented after the effective date. SFAS
128 specifies the computation, presentation, and disclosure requirements for
earnings per share and is substantially similar to the standard recently issued
by the International Accounting Standards Committee entitled "International
Accounting Standards, Earnings Per Share." The Company plans to adopt SFAS 128
in fiscal year 1998 and has not determined the impact of adoption.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes standards for
reporting and display of comprehensive income and its components. The Company
plans to adopt SFAS 130 in fiscal year 1999 and has not determined the impact of
adoption.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997.
The Company plans to adopt SFAS 131 in fiscal year 1999 and has not determined
the impact of adoption.

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 $ 63,783 $ 53,986
Taxes, other than income 14,507 12,302
Insurance 18,271 22,310
Interest 8,100 1,875
Other 25,858 22,953
...............................................................................
$ 130,519 $ 113,426
- -------------------------------------------------------------------------------
<CAPTION>

LONG-TERM DEBT

Maturities of long-term debt at May 31, 1997 were as follows.

Fiscal year (In thousands of dollars)
..............................................................................
<S> <C>
1998 $ 14,845
1999 8,605
2000 7,891
2001 6,536
2002 6,279
2003 to 2024 567,162
..............................................................................
$ 611,318
- ------------------------------------------------------------------------------
</TABLE>

Long-term debt, consisting of mortgages, capital leases, Senior Notes, and
Senior Subordinated Notes, was net of discount of $1.2 million and $1.0 million
at May 31, 1997 and 1996, respectively. Amortization of discount was $0.5
million in 1997, 1996, and 1995, including the write-off associated with debt
redemptions. At May 31, 1997, the Company had mortgages and capital leases of
$80.2 million.

Interest paid was $35.6 million in 1997, $29.9 million in 1996 and $22.5 million
in 1995. During fiscal year 1997, interest rates on subordinated debt ranged
from 4.8% to 9.5%. Interest rates on mortgages and other long-term debt ranged
from 2.6% to 12.0%. The weighted average interest rate in fiscal year 1997 was
7.2%.

In June 1996, the Company issued $150.0 million of 7 1/2% Senior Notes due
2006. These notes are redeemable at the option of the Company at any time at a
price equal to the greater of (a) the principal amount or (b) the sum of the
present values of the remaining scheduled payments of principal and interest,
discounted with an applicable treasury rate plus 15 basis points, plus accrued
interest to the date of redemption. The proceeds of this offering were used to
repay borrowings under the Company's $250.0 million competitive advance and
multi-currency revolving credit facility (the "Facility").

In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

22
<PAGE>

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 $145.8 million was pledged or mortgaged and
approximately $167.4 million of retained earnings was not available for cash
dividends.

During fiscal year 1997, Vitalink entered into a $200 million revolving credit
facility (the "Vitalink Credit Facility"), which expires February 12, 2002, with
Chase Manhattan Bank. Amounts totaling $97.4 million were drawn under the
Vitalink Credit Facility to redeem $98.2 million of GranCare's $100.0 million
Senior Subordinated Notes. Borrowings under the Vitalink Credit Facility are at
an interest rate of LIBOR plus 25 basis points. Vitalink is subject to a 0.15%
facility fee for the total amount of the Vitalink Credit Facility payable on a
quarterly basis. Borrowings under the Vitalink Credit Facility are classified as
long-term as Vitalink has the ability and intention to refinance the amount
drawn. The terms of the Vitalink Credit Facility contain, among other
provisions, requirements for maintaining defined levels of net worth, annual
capital expenditures, and interest coverage and consolidated leverage ratios.
Vitalink was in compliance with the terms of the Vitalink Credit Facility for
the fiscal year ended May 31, 1997. In conjunction with Vitalink's merger with
TeamCare, Vitalink assumed $1.8 million of GranCare's 9 3/8% Senior Subordinated
Notes due September 15, 2005. The notes require semi-annual interest payments. A
$0.6 million premium has been recorded on the Senior Subordinated Notes to
reflect the fair market value as of the merger date of February 12, 1997.

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 $13,458 $1,825
1999 11,678 1,045
2000 10,028 719
2001 8,715 292
2002 7,101 292
Thereafter 45,862 1,904
...............................................................................
Total minimum lease payments $96,842 $6,077
- -------------------------------------------------------------------------------
Less: Amount representing interest 1,606
...............................................................................
Present value of lease payments 4,471
...............................................................................
Less: Current portion 1,445
...............................................................................
Lease obligations included in long-term debt $3,026
- -------------------------------------------------------------------------------
</TABLE>

Rental expense under noncancelable operating leases was $11.9 million in 1997,
$8.0 million in 1996 and $4.9 million in 1995.

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.
<PAGE>

INCOME TAXES

Because of the relative ownership percentages, the Company files separate income
tax returns for the Company's 51% owned pharmacy subsidiary, Vitalink Pharmacy
Services, Inc. ("Vitalink") (effective February 1, 1997) and In Home Health,
Inc. ("IHHI"). The consolidated tax provision, therefore, is based upon the
separate tax provisions of each of the companies.

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

(In thousands of dollars) 1997 1996 1995
.............................................................................................................................
Current tax expense:
Federal $30,001 $41,427 $41,432
State 6,499 8,887 9,145
Deferred tax expense:
Federal 39,341 (3,450) 1,296
State 8,859 (864) 283
.............................................................................................................................
$84,700 $46,000 $52,156
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Deferred tax assets (liabilities) are comprised of the following at May 31.

(In thousands of dollars) 1997 1996 1995
.............................................................................................................................
<S> <C> <C> <C>
Depreciation and amortization $ (117,213) $ (83,237) $ (80,554)
Purchased tax benefits (44,110) (45,527) (46,212)
Gain on stock issuance (37,187) (11,896) (11,896)
Other (23,368) (19,514) (17,956)
.............................................................................................................................
Gross deferred tax liabilities (221,878) (160,174) (156,618)
.............................................................................................................................
Tax deposit 5,754 5,754 12,000
Reimbursement reserve 9,550 16,882 5,064
Reserve for doubtful accounts 20,267 10,206 8,309
Deferred compensation 13,982 9,526 9,476
Acquisition costs 3,833 -- --
Other 7,263 6,816 8,030
- -----------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 60,649 49,184 42,879
.............................................................................................................................
Net deferred tax $ (161,229) $(110,990) $ (113,739)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows.

(In thousands of dollars) 1997 1996 1995
.............................................................................................................................
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
- -----------------------------------------------------------------------------------------------------------------------------
Federal taxes at statutory rate $73,435 $39,015 $45,441
State income taxes, net of Federal tax benefit 9,983 5,215 6,128
Minority interest 2,289 499 1,521
Tax credits (143) (19) (910)
Other (864) 1,290 (24)
.............................................................................................................................
Income tax expense $84,700 $46,000 $52,156
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Income taxes paid on a consolidated basis for the years ended May 31, 1997,
1996, and 1995 were $54.0 million, $54.3 million, and $69.7 million,
respectively.

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

24
<PAGE>

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.

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 are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to fiscal year 1996 and additional
awards are anticipated in future years.

The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
the Company has assumed a risk-free interest rate equal to approximately 6.36%
and 6.37% for fiscal years 1997 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.

ACQUISITIONS AND DIVESTITURES

On February 12, 1997, Vitalink completed a merger with TeamCare, the pharmacy
subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in exchange for
all of the outstanding shares of GranCare. In addition, Vitalink funded the
redemption of $98.2 million of GranCare's 9 3/8% Senior Subordinated Notes and
assumed approximately $10.0 million of additional GranCare indebtedness. As a
result of the excess of fair value of Vitalink shares over the book value of
TeamCare, Vitalink recorded approximately $292.5 million of goodwill. As a
result of the merger, the Company's ownership interest in Vitalink decreased to
45%. On May 21, 1997, the Company successfully completed its tender offer to
purchase
<PAGE>

1.5 million shares of Vitalink common stock. As a result of the tender offer,
the Company's interest in Vitalink was increased to approximately 51%. The
Company's net pretax gain resulting from these transactions was $50.3 million.

During fiscal year 1997, Vitalink purchased a pharmacy in California which
services 5,100 institutional beds for a total of $5.3 million. In addition, the
Company acquired a nursing center in California for $4.4 million and a nursing
center in Michigan for $13.4 million. Through new construction, the Company
opened four skilled nursing centers and six assisted living facilities. The
Company sold four nursing centers in Indiana, Iowa, Illinois, and Texas for
$17.3 million and transferred an assisted living facility with an approximate
net book value of $4.9 million to the discontinued lodging segment.

During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was cash
and the remainder was assumed liabilities. Additionally, six assisted living
facilities, with five attached skilled nursing units, were purchased for $74.3
million, of which $19.0 million was cash and the remainder was assumed
liabilities. Vitalink purchased a pharmacy servicing 2,200 institutional beds
and an infusion therapy business for a total of $6.3 million. In October 1995,
the Company purchased for $22.9 million approximately 41% of the common stock of
IHHI, a provider of home health services. The Company paid an additional $20.0
million to IHHI for 100% of its outstanding voting convertible preferred stock
and for warrants to purchase an additional 6.0 million shares of common stock.
As a result of this transaction, the Company currently has effective control of
approximately 63% of the voting stock of IHHI. IHHI is consolidated in the
Company's financial statements.

During fiscal year 1995, the Company purchased nine nursing centers and assisted
living facilities for approximately $56.7 million. Vitalink purchased a pharmacy
servicing 1,300 institutional beds for $2.5 million. In March 1995, the Company
sold its investment in a physicians' practice management business for $13.3
million. The physicians' practice management investment was made in fiscal year
1994 in the amount of $10.0 million.

Unless otherwise noted, acquisitions are accounted for as purchases. Acquisition
costs in excess of fair market value of the assets acquired are allocated to
goodwill.

The following unaudited pro forma statement of operations information gives
effect to the TeamCare merger transactions described above as though they had
occurred on June 1, 1995, after giving effect to certain adjustments, including
amortization of goodwill, additional depreciation and amortization expense,
increased interest expense on debt related to the merger, and related income tax
effects. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the merger occurred at the
beginning of the respective years.

Pro forma Statement of Operations Information
<TABLE>
<CAPTION>

Years ended May 31,
(In thousands of dollars,
except per share data) 1997 1996
..............................................................................
<S> <C> <C>
Total net revenues $1,719,611 $1,480,559
Income from continuing
operations before
income taxes $ 211,791 $ 114,407
Income from discontinued operations $ 11,829 $ 20,436
Net income $ 134,745 $ 82,816
Net income per share $ 2.13 $ 1.32
..............................................................................
</TABLE>

PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING

The Company recorded provisions of $26.3 million in fiscal year 1996 related to
the impairment of certain long-lived assets and costs associated with the
Company's restructuring of its healthcare business. The most significant
components of the provisions were non-cash asset impairment charges of $21.2
million relating to writedowns of property, equipment and capitalized system
development costs. 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 OPERATIONS

On November 1, 1996, the Company completed the spin-off of its lodging segment.
The Company's shareholders of record on October 10, 1996 received one share of
Choice Hotels International, Inc. common stock for each outstanding share of
Manor Care common stock. Accordingly, lodging results are reported as
discontinued operations for all periods presented.

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

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997
26
<PAGE>

27
<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 recognized as the
discontinued lodging segment generated income between the measurement date and
the date of the spin-off.

Included in discontinued lodging operations is interest expense charged by the
continuing healthcare segment to the discontinued lodging segment relating to
cash advances provided to the discontinued lodging segment for the acquisition
and renovation of lodging assets. For the years ended May 31, 1997, 1996, and
1995, interest so allocated amounted to $3.4 million, $19.7 million, and $15.5
million, respectively. The indebtedness related to lodging acquisitions and
renovations is reflected as advances to discontinued lodging segment in the
consolidated balance sheets. Such advances amounted to $115.7 million and $225.7
million at May 31, 1997 and 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 $652.1 million, $549.1
million, and $431.0 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant.

As of May 31, 1997, the Company had contractual commitments of $58.2 million
relating to its internal construction program.

Vitalink has a limited guarantee to Health Retirement Properties Trust ("HRPT")
of up to $15.0 million for default mortgage payments of GranCare facility leases
assumed in connection with the merger. In return, Vitalink is the beneficiary of
a $15.0 million line of credit from GranCare in the event that any of the
facilities defaults on its mortgage to HRPT.
<PAGE>

BUSINESS SEGMENT INFORMATION

The Company operates principally in four segments: skilled nursing operations,
pharmacy services, assisted living operations and home health operations.
Revenues for the pharmacy segment include sales to skilled nursing and assisted
living facilities which are subsequently eliminated in consolidation. Income
(loss) from operations consists of total revenues less operating, depreciation
and amortization, and general corporate expenses.

<TABLE>
<CAPTION>
Skilled Assisted Home
(In thousands of dollars) Nursing Pharmacy Living Health Eliminations Total
...............................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
1997
Revenues $ 1,118,208 $ 274,038 $ 54,853 $ 124,354 $ (44,206) $ 1,527,247
Income (loss) from operations 144,865 33,109 (2,739) (2,928) 3,163 175,470
Identifiable assets 1,223,808 516,805 178,684 60,407 -- 1,979,704
Depreciation and amortization 61,068 9,527 6,723 3,060 -- 80,378
Capital expenditures 122,812 4,648 55,967 42 -- 183,469

1996
Revenues $ 1,034,190 $ 141,115 $ 37,276 $ 74,153 $ (38,537) $ 1,248,197
Income (loss) from operations 99,174/(a)/ 22,301 (6,982)/(a)/ 67 3,848 118,408
Identifiable assets 1,383,072 79,013 147,157 72,598 -- 1,681,840
Depreciation and amortization 56,362 4,363 5,613 1,748 -- 68,086
Capital expenditures 109,063 3,537 23,170 562 -- 136,332

1995
Revenues $ 938,946 $ 112,257 $ 12,368 -- $ (44,113) $ 1,019,458
Income (loss) from operations 110,691 18,726 (1,202) -- 3,674 131,889
Identifiable assets 1,153,648 63,825 72,344 -- -- 1,289,817
Depreciation and amortization 48,675 3,753 1,946 -- -- 54,374
Capital expenditures 62,509 2,163 27,228 -- -- 91,900

...............................................................................................................................
</TABLE>
/(a)/ Includes total provisions for asset impairment and restructuring of $26.3
million, of which $25.1 million relates to skilled nursing operations and $1.2
million relates to assisted living operations.

PENSION, PROFIT SHARING AND INCENTIVE PLANS

The Company has various pension and profit sharing plans, including a
supplemental executive retirement plan, and contributes to certain union welfare
plans. The provision for these plans amounted to $11.8 million in 1997, $11.6
million in 1996, and $11.0 million in 1995. All vested benefits under retirement
plans are funded or accrued.

The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees. Contributions of up to 6% of each covered
employee's salary are determined based on the employee's level of contribution
to the plan, years of service and Company profitability. The cost of the plan
totaled $7.2 million in 1997, $5.8 million in 1996, and $4.8 million in 1995.

Also included in the Company's retirement plans is a defined benefit pension
plan covering substantially all of its employees. The benefits are based on
service credits for years of participation after January 1, 1992. In addition,
there is a prior benefit equal to the accrued benefit at December 31, 1991 for
certain individuals who were participants in a predecessor plan. No new
participants were eligible to enter this plan after August 15, 1996 and service
credits for all participants were frozen as of December 31, 1996.

Service cost benefits earned during fiscal years 1997, 1996 and 1995
approximated the plan's annual costs of $4.0 million, $2.8 million, and $2.7
million, respectively. As of February 28, 1997, 1996, and 1995, plan assets 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%.

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

28
<PAGE>

The Company also has various incentive compensation plans for certain personnel.
Incentive compensation expense was $5.3 million in 1997, $4.4 million in 1996,
and $4.1 million in 1995.

As part of the Vitalink merger with TeamCare, a temporary 401(k) plan has been
established for employees who were former participants in the GranCare 401(k)
plan. Vitalink expects to establish a permanent plan in fiscal year 1998.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The balance sheet carrying amounts of cash, cash equivalents, and receivables
approximate fair value due to the short-term nature of these items. Management
believes that the fair value of the advances to the discontinued lodging segment
approximates the carrying value.

Total fair market value for the outstanding interest rate swap agreements at May
31, 1997 and 1996 was $1.4 million and $1.8 million, respectively. Fair values
were determined based on quoted rates.

SUMMARY OF QUARTERLY RESULTS
(Unaudited)
<TABLE>
<CAPTION>
Income from
Continuing
Operations Before
Quarters ended Other Income and
(In thousands of dollars (Expenses) and
except per share data) Revenues Income Taxes Net Income Per Share
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997
August $ 336,479 $ 36,126 $ 23,685 $ .38
November 351,585 41,706 32,444 .51
February 388,747 46,792 61,392 .97
May 450,436 50,846 19,421 .30
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,527,247 $ 175,470 $ 136,942 $ 2.16
- ----------------------------------------------------------------------------------------------------------------------------------

FISCAL 1996
August $ 273,992 $ 30,512 $ 28,426 $ .45
November 299,722 38,050 28,788 .46
February 334,404 36,844 22,302 .36
May 340,079 13,002 6,391 .10
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,248,197 $ 118,408 $ 85,907 $ 1.37
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK AND DIVIDENDS PAID
(Unaudited)
<TABLE>
<CAPTION>
Market Price Per Share Cash Dividends Paid
Per Share
Quarters ended High Low Amount Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997
August $39.63* $31.50* $.022 8/27/96
November $42.25* $23.75 $.022 11/27/96
February $28.00 $24.13 $.022 2/27/97
May $28.38 $21.88 $.022 5/27/97
FISCAL 1996
August $34.25* $27.78* $.022 8/25/95
November $35.58* $30.50* $.022 11/27/95
February $40.25* $32.75* $.022 2/27/96
May $43.50* $36.50* $.022 5/24/96
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Market prices prior to November 1, 1996, are reflective of the stock value
prior to the spin-off of the discontinued lodging business.
<PAGE>

DIRECTORS AND OFFICERS

BOARD OF DIRECTORS

Stewart Bainum, Jr.

Chairman of the Board, Manor Care, Inc., Choice Hotels International, Inc. and
Vitalink Pharmacy Services, Inc.

Stewart Bainum

Vice Chairman of the Board, Manor Care, Inc. Director: Choice Hotels
International, Inc.

Regina E. Herzlinger

Nancy R. McPherson Professor of Business Administration, Harvard University
Graduate School of Business Administration Director: C.R. Bard, Inc., Cardinal
Health, Inc., Deere & Company, Schering-Plough Corporation and Total Renal Care,
Inc.

William H. Longfield

Chairman, Chief Executive Officer, C.R. Bard, Inc. Director: Atlantic Health
System, C.R. Bard, Inc., Centenary College, Horizon Mental Health Management,
Inc., The West Company and United Dental Care, Inc.

Frederic V. Malek

Chairman, Thayer Capital Partners Director: American Management Systems, Inc.,
Automatic Data Processing Corp., CB Commercial Real Estate Group, Choice Hotels
International, Inc., FPL Group, Inc., Northwest Airlines, Inc. and various
PaineWebber Mutual Funds

Jerry E. Robertson, Ph.D.

Retired Executive Vice President, 3M Life Sciences Sector and Corporate Services
Director: Allianz Life Insurance Company of North America, Cardinal, Inc.,
Choice Hotels International, Inc., Coherent, Inc., Haemonetics, Inc., Medwave,
Inc., Project Hope and Steris Corporation

Kennett L. Simmons

Senior Advisor, E.M. Warburg, Pincus Company Director: United Healthcare
Corporation and Virginia Health Care Foundation

DIRECTOR EMERITUS

David W. Moore

EXECUTIVE OFFICERS

Stewart Bainum, Jr.

Chairman, President & Chief Executive Officer

Joseph R. Buckley

Executive Vice President Chairman of the Board, In Home Health, Inc. Director:
Vitalink Pharmacy Services, Inc.

Leigh C. Comas

Vice President, Finance & Treasurer

James H. Rempe

Senior Vice President, General Counsel & Secretary Director: In Home Health,
Inc. and Vitalink Pharmacy Services, Inc.

Margarita A. Schoendorfer

Vice President, Controller

Donald C. Tomasso

Executive Vice President President, ManorCare Health Services, Inc. Director: In
Home Health, Inc.

Scott J. Van Hove

Senior Vice President & Chief Administrative Officer Executive Vice President,
Operations, ManorCare Health Services, Inc.

Wolfgang von Maack

President & Chief Executive Officer, In Home Health, Inc.

WE LEAD
MANOR CARE, INC. ANNUAL REPORT 1997

<PAGE>

EXHIBIT 21

MANOR CARE, INC.
SUBSIDIARIES OF THE COMPANY

The following list sets forth the principal subsidiaries of the Company and
the place of their incorporation. Except as otherwise noted, all of these
subsidiaries are directly or indirectly wholly-owned by the Company.

l. ManorCare Health Services, Inc., a Delaware corporation - includes 56
active omitted subsidiaries operating in the United States.

2. Four Seasons Nursing Facilities, Inc., a Delaware corporation.

3. Vitalink Pharmacy Services, Inc., a Delaware corporation, of which the
Company owns approximately 51% of the Common Stock - includes 3 active
omitted subsidiaries operating in the United States.

4. In Home Health, Inc., a Minnesota corporation, of which the Company
effectively controls approximately 63% of the voting capital stock.

5. MNR Finance Corp., a Delaware corporation.

6. Community Hospital of Mesquite, Inc., a Texas Corporation

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated June 27, 1997, included and incorporated by
reference in Manor Care, Inc.'s Form 10-K for the year ended May 31, 1997, into
the Company's previously filed Registration Statement File Nos. 2-80129,
2-73420, 33-9766, 33-20241, 33-27834, 33-36213, 2-78242, 33-52734, 33-64680,
33-67850, 33-58903, 33-58907, 33-63965, 333-14165, 333-16669 and 333-18607.

ARTHUR ANDERSEN LLP

Washington, D.C.
August 27, 1997

<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>

<FN>
<F2>The Company presents simple earnings per share (EPS) on the face of its
income statement as fully dilutive EPS is within 97% of simple EPS. The figures
presented above are simple EPS.
</FN>

</TABLE>

<PAGE>

EXHIBIT 99

(Proxy Statement dated August 15, 1997)
<PAGE>

[LOGO OF MANOR CARE APPEARS HERE]

NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT

------------------------------------

MANOR CARE, INC.

------------------------------------

ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 15, 1997
<PAGE>

MANOR CARE, INC.

11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 15, 1997

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Manor Care,
Inc. (the "Company"), will be held in the Auditorium of Manor Care's corporate
headquarters, 11555 Darnestown Road, Gaithersburg, Maryland, on September 15,
1997, at 9:00 a.m., to consider and vote upon the following matters:

1. To elect a Board of Directors consisting of seven persons to serve until
the next Annual Meeting of Stockholders of the Company and until their
successors are duly elected and qualified.
2. To transact such other business as may properly come before such meeting
or any adjournment thereof.

The close of business on August 5, 1997, has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting or any adjournment thereof.
Your management sincerely desires the presence in person of every stockholder
able to attend the meeting; however, in order to be assured of the representa-
tion of the greatest number of stockholders either in person or by proxy, it
is requested that you date and sign the accompanying proxy and return it as
promptly as possible in the enclosed self-addressed envelope. No postage is
required if mailed in the United States.
If you attend the meeting in person, you may revoke your proxy at such meet-
ing and cast your vote in person. If you receive more than one proxy because
your shares are held in various names or accounts, each proxy should be com-
pleted and returned.

By Order of the Board of Directors:

/s/ James H. Rempe

James H. Rempe
Secretary

Gaithersburg, Maryland
August 15, 1997
<PAGE>

MANOR CARE, INC.

11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878
301-979-4000

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 15, 1997

INTRODUCTION

The enclosed proxy is solicited by and on behalf of the Board of Directors of
Manor Care, Inc. (the "Company"), a Delaware corporation, to be used at the
1997 Annual Meeting of Stockholders to be held on Monday, September 15, 1997,
at 9:00 a.m., in the Auditorium of Manor Care's corporate headquarters, 11555
Darnestown Road, Gaithersburg, Maryland, and at any and all adjournments
thereof. All shares represented by proxies will be voted at the meeting in ac-
cordance with the specifications marked thereon, or if no specifications are
made, proxies will be voted FOR all matters set forth in the attached Notice
of Meeting and in the discretion of the proxy holder as to any other business
which comes before the meeting. Any stockholder giving a proxy may revoke the
same at any time prior to the voting of such proxy by giving written notice of
revocation to the Secretary, by submitting a later dated proxy or by attending
the meeting and voting in person. The Proxy Statement is first being mailed to
stockholders on or about August 15, 1997.
The Company's Annual Report (including certified financial statements) for
the fiscal year ended May 31, 1997, is accompanying this Proxy Statement. The
Annual Report is not a part of the proxy soliciting material.
Except where the context requires otherwise, the term "Company" includes
Manor Care, Inc. and its subsidiaries.

VOTING AT THE ANNUAL MEETING

The Board of Directors has fixed August 5, 1997 (the "Record Date") as the
record date for determination of stockholders entitled to notice of and to
vote at the Annual Meeting. On that date, there were outstanding 66,709,912
shares of Common Stock, par value $.10 per share (the "Common Stock"). Each
such share of Common Stock is entitled to one vote. The presence in person or
by proxy of the holders of a majority of the Company's outstanding shares of
Common Stock will constitute a quorum.
A plurality of the shares of Common Stock present and voting at the Annual
Meeting, in person or by proxy, will be necessary for the election of direc-
tors. The affirmative vote of a majority of the Company's outstanding shares
of Common Stock present and voting at the Annual Meeting, in person or by
proxy, will be necessary for the taking of all other action at the Annual
Meeting.
A stockholder who is present in person or by proxy at the Annual Meeting and
who abstains from voting on any or all proposals will be included in the num-
ber of stockholders present at the meeting for the purpose of determining the
presence of a quorum. However, an abstention with respect to any matter will
not be counted either in favor of or against such matter.
Brokers who hold shares for the account of their clients may vote such shares
either as directed by their clients or in their own discretion if permitted by
the exchange or other organization of which they are members. Members of the
New York Stock Exchange are permitted to vote their clients' proxies in their
own discretion as to the election of directors. Proxies which are voted by
brokers on some but not all of the proposals are referred to as "broker non-
votes." Broker non-votes will be included in determining the presence of a
quorum. However, a broker non-vote is not treated as being in favor of or
against the particular proposal under consideration.
If any nominee for election to the Board of Directors named in this Proxy
Statement shall become unavailable for election for any reason, the proxy will
be voted for a substitute nominee selected by the Board of Directors, or the
Board of Directors may elect not to fill the vacancy and reduce the number of
directors.

SOLICITATION OF PROXIES

The cost of the proxy solicitations will be borne by the Company. In addition
to the use of the mails, proxies may be solicited by the directors, officers
and employees of the Company without additional compensation, by personal in-
terview, telephone, telegram or otherwise. Arrangements may also be made with
brokerage firms and other custodians,

1
<PAGE>

nominees and fiduciaries for the forwarding of soliciting material to the ben-
eficial owners of Common Stock held of record by such persons, and the Company
will reimburse such respective brokers, custodians, nominees and fiduciaries
for the reasonable out-of-pocket expenses incurred by them in connection
therewith.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Ex-
change Act") requires the Company's reporting officers and directors, and per-
sons who own more than ten percent of the Company's Common Stock, to file re-
ports of ownership and changes in ownership on Forms 3, 4 and 5 with the Secu-
rities and Exchange Commission (the "Commission"), the New York Stock Exchange
and the Company. Based solely on the Company's review of the forms filed with
the Commission and written representations from reporting persons that they
were not required to file Form 5 for certain specified years, the Company be-
lieves that all of its reporting officers, directors and greater than ten per-
cent beneficial owners, except for Joseph R. Buckley, complied with all filing
requirements applicable to them during the fiscal year ended May 31, 1997. Mr.
Buckley was one day late filing a Form 4 for the month of February 1997 due to
an error by a courier service.

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table sets forth as of the Record Date the amount of the
Company's Common Stock beneficially owned by (1) each director and nominee,
(2) the chief executive officer and the four other most highly compensated ex-
ecutive officers, (3) all executive officers and directors as a group, and (4)
all persons who own beneficially more than 5% of the Company's Common Stock.
Unless otherwise specified, the address for each of them is:

<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER TOTAL OF CLASS(1)
------------------------ ---------- -----------
<S> <C> <C>
Stewart Bainum 10,140,743(2) 15.20%
Stewart Bainum, Jr. 15,269,851(3) 22.86%
Regina E. Herzlinger 7,731(4) *
William H. Longfield 9,207(5) *
Frederic V. Malek 5,457(6) *
Jerry E. Robertson, Ph. D. 19,125(7) *
Kenneth L. Simmons 792
Donald C. Tomasso 143,424(8) *
James H. Rempe 61,162(9) *
Joseph R. Buckley 101,631(10) *
Scott J. Van Hove 83,181(11) *
All Directors and Officers as a Group (14
persons) 20,279,164(12) 30.21%
Ronald Baron 7,976,459(13) 11.96%
Barbara Bainum 5,485,815(14) 8.22%
Bruce Bainum 5,482,302(15) 8.21%
</TABLE>
- ----------------
* Less than 1% of class.

(1) Percentages are based on 66,709,912 shares outstanding on the Record Date
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(2) Includes 3,765,478 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum; his
joint interest in 895,466 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,082,857 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his wife
as a limited partner and as such has the right to acquire at any time a
number of shares equal in value to the liquidation preference of their
limited partnership interest; 3,567,869 shares held direct by Realty
Investment Company, Inc. ("Realty Investment"), a real estate investment
and management company in which Mr Bainum and his wife have shared voting
authority; and 40,305 shares held by the Commonweal Foundation of which
Mr. Bainum is Chairman of the Board of Directors and has shared voting
authority. Also includes 792 shares of restricted stock granted pursuant
to the Manor Care, Inc. Non-Employee Director Stock Compensation Plan.
Also

2
<PAGE>

includes 798,711 shares held by the Jane L. Bainum Declaration of Trust,
the sole trustee of which is Mr. Bainum's wife. Also includes 3,665 shares
which Mr. Bainum has the right to acquire pursuant to stock options which
are presently exercisable or which become exercisable within 60 days after
the Record Date. Does not include shares owned beneficially by Stewart
Bainum, Jr., Mr. Bainum's son, whose interests are stated in the above
table, except shares owned by Bainum Associates, MC Investments and the
Commonweal Foundation in which Mr. Bainum has a beneficial interest. Also
does not include shares held by his other three adult children.
(3) Includes 20,598 shares held directly by Mr. Bainum, Jr.; also includes
5,417,761 shares owned by Bainum Associates and 4,415,250 shares owned by
MC Investments, in both of which Mr. Bainum, Jr. is managing general
partner with the sole right to dispose of the shares. Authority to vote
such shares is held by the voting general partner, Mr. B. Houston McCeney.
Also includes 1,779,628 shares owned by Mid Pines, in which Mr. Bainum,
Jr. is managing general partner and has shared voting authority; 3,567,869
shares held by Realty Investment in which Mr. Bainum, Jr. has shared
voting authority. Also includes 88,000 shares which Mr. Bainum, Jr. has
the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after the Record
Date, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the Manor Care, Inc. Retirement Savings
and Investment Plan (the "401(k) Plan") and the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified
Savings Plan") (based upon a report of each plan's trustee for June 1997).
(4) Includes 3,159 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(5) Includes 5,791 shares which Mr. Longfield has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date.
(6) Includes 3,665 shares which Mr. Malek has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after the Record Date.
(7) Includes 13,500 shares held by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority; also includes 3,665 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are presently exercisable
or which become exercisable within 60 days after the Record Date.
(8) Includes 40 shares held by adult children of Mr. Tomasso who share the
same household. Beneficial ownership of such shares is disclaimed. Also
includes 135,984 shares which Mr. Tomasso has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date, and 326 shares and 574
shares, respectively, which Mr. Tomasso has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and the Nonqualified Savings Plan (based upon a report of
each plan's trustee for June 1997).
(9) Includes 3,552 shares which Mr. Rempe has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after the Record Date, and 780 shares and 424 shares,
respectively, which Mr. Rempe has the right to receive upon termination of
his employment with the Company pursuant to the terms of the 401(k) Plan
and Nonqualified Savings Plan (based upon a report of each plan's trustee
for June 1997).
(10) Includes 100,423 shares which Mr. Buckley has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date, and 668 shares and 540
shares, respectively, which Mr. Buckley has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and the Nonqualified Savings Plan (based upon a report of
each plan's trustee for June 1997).
(11) Includes 81,823 shares which Mr. Van Hove has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date, and 337 shares and 376
shares, respectively, which Mr. Van Hove has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and Nonqualified Savings Plan (based upon a report of
each plan's trustee for June 1997).
(12) Includes a total of 410,173 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60
days after the Record Date, and a total of 2,592 shares and 3,220 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Nonqualified Savings Plan (based upon a
report of each plan's trustee for June 1997).
(13) As of May 28, 1997, based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission. Mr. Baron's address is
450 Park Avenue, Suite 2800, New York, New York 10022.
(14) Includes 98,013 shares held directly by Ms. Bainum; 3,567,869 shares held
by Realty Investment, and 1,779,628 shares held by Mid Pines, in both of
which Ms. Bainum has shared voting authority. Also includes 40,305 shares
held by the Commonweal Foundation in which Ms. Bainum has shared voting
authority.
(15) Includes 94,500 shares held directly by Mr. Bainum; 3,567,869 shares held
by Realty Investment, 1,779,628 shares held by Mid Pines and 40,305
shares held by the Commonweal Foundation, all of which Mr. Bainum has
shared voting authority in.

3
<PAGE>

NOMINATION AND ELECTION OF DIRECTORS

The entire Board of Directors, which consists of seven (7) members, will be
elected to serve until the next Annual Meeting of Stockholders of the Company
and until their successors are duly elected and qualified.
Stewart Bainum, Jr. is Stewart Bainum's son. Aside from the foregoing, no nom-
inee has any family relationship with any other director or executive officer
of the Company.
The following table sets forth information with respect to each nominee for
election as a Director of the Company. All of the nominees have previously been
elected by the stockholders of the Company.

<TABLE>
<CAPTION>
SERVED AS POSITIONS WITH THE COMPANY; BUSINESS
NAME AND AGE DIRECTOR SINCE EXPERIENCE: OTHER DIRECTORSHIPS
- ------------ -------------- ------------------------------------------------------------
<S> <C> <C>
Stewart Bainum, Jr. (51) 1976 Chairman of the Board and Chief Executive Officer since
March 1987; also President since June 1989; Vice Chairman
from June 1982 to March 1987. Director: Choice Hotels
International, Inc. and Vitalink Pharmacy Services, Inc.
Stewart Bainum (78) 1968 Vice Chairman of the Board since March 1987; Chairman of the
Board from 1968 to March 1987; President from December 1980
through October 1981, and May 1982 through July 1985;
Chairman of the Board of Realty Investment Company, Inc.
(private real estate investment company) since 1965.
Director: Choice Hotels International, Inc.
Regina E. Herzlinger 1992 Nancy R. McPherson Professor of Business Administration,
(53) Harvard Business School, since 1971. Director: C. R. Bard,
Inc., Deere & Company, Cardinal Health Care, Inc., Schering-
Plough Corporation and Total Renal Care Inc.
William H. Longfield 1989 Chairman and Chief Executive Officer of C. R. Bard, Inc.
(59) (medical devices) since September 1995; President and Chief
Executive Officer from June 1994 to September 1995;
President and Chief Operating Officer of C. R. Bard, Inc.
from September 1991 to June 1994; Executive Vice President
and Chief Operating Officer of C. R. Bard, Inc. from
February 1989 to September 1991. Director: C. R. Bard, Inc.,
Horizon Mental Health Management, Inc., United Dental Care,
Inc., The West Company and Atlantic Health Systems.
Frederic V. Malek (60) 1990 Chairman, Thayer Capital Partners since March 1993; Co-
chairman of CB Commercial Real Estate Group, Inc. from April
1989 to October 1996; Campaign Manager, Bush-Quayle '92
Campaign from January 1992 to December 1992; Vice Chairman
of NWA, Inc. (airlines) from July 1990 to December 1991.
Director: American Management Systems, Inc., Automatic Data
Processing Corp., CB Commercial Real Estate Group, Inc.
Choice Hotels International, Inc., FPL Group, Inc.,
Northwest Airlines, Inc. and various Paine Webber mutual
funds.
Jerry E. Robertson, 1989 Retired; Executive Vice President of 3M Life Sciences Sector
Ph.D. (64) and Corporate Services from November 1984 to March 1994.
Director: Allianz Life Insurance Company of North America,
Cardinal Inc., Choice Hotels International, Inc., Coherent,
Inc., Haemonetics Corporation, Medwave, Inc., Project Hope
and Steris Corporation.
Kennett L. Simmons (55) 1996 Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to
E. M. Warburg, Pincus & Co. from 1991 to 1994; Chairman and
Chief Executive Officer of United Healthcare Corporation
from October 1987 to February 1991. Director: United
Healthcare Corporation and Virginia Health Care Foundation.
</TABLE>

4
<PAGE>

STRUCTURE AND FUNCTIONING OF THE BOARD OF DIRECTORS

The Board of Directors held six meetings during the fiscal year ended May 31,
1997. During such fiscal year, each incumbent attended 75% or more of the ag-
gregate of (1) the total number of meetings of the Board of Directors and (2)
the total number of meetings of all Committees on which such director served.
The standing committees of the Board include the Audit Committee, the Quality
Assurance Committee, the Compensation/Key Executive Stock Option Plan Commit-
tee, the Compensation/Key Executive Stock Option Plan Committee No. 2, and the
Nominating/Governance Committee, the current members of which are as follows:

<TABLE>
<CAPTION>
Compensation/Key Executive
Stock Option Plan Committee Finance Committee
--------------------------- -----------------
(elimination in April 1997)

<S> <C>
Jerry E. Robertson, Chairman Stewart Bainum, Chairman
Stewart Bainum Stewart Bainum, Jr.
William H. Longfield Frederic V. Malek
Frederic V. Malek Jerry E. Robertson
<CAPTION>

Compensation/Key Executive Stock
Option Plan Committee No. 2 Audit Committee
-------------------------------- -------------------

<S> <C>
Jerry E. Robertson, Chairman Regina E. Herzlinger, Chairwoman
Frederic V. Malek William H. Longfield
Kennett L. Simmons
<CAPTION>

Nominating/Governance Committee Quality Assurance Committee
------------------------------- ---------------------------

<S> <C>
Frederic V. Malek, Chairman William H. Longfield, Chairman
Regina E. Herzlinger Regina E. Herzlinger
Kennett L. Simmons Kennett L. Simmons
</TABLE>

The Compensation/Key Executive Stock Option Plan Committee held five meetings
during the 1997 fiscal year. Except with respect to the CEO and the four most
highly compensated officers in a particular fiscal year, the Committee admin-
isters the Company's stock option plans and grants stock options thereunder,
reviews compensation of officers and key management employees, recommends de-
velopment programs for employees such as training, bonus and incentive plans,
pensions and retirement, and reviews other employee fringe benefit programs.
The Compensation/Key Executive Stock Option Plan Committee No. 2, which held
one meeting in fiscal year 1997, was formed in fiscal year 1996 to comply with
certain provisions of the Omnibus Budget Reconciliation Act of 1993 and Rule
16b-3 under the Exchange Act. The Committee administers the Company's stock
option plans, grants stock options thereunder and reviews the compensation of
the CEO and the four most highly compensated officers (and others potentially
in that classification) for each fiscal year.
The Finance Committee, which held three meetings during the 1997 fiscal year,
reviews the financial affairs of the Company and recommends financial objec-
tives, goals and programs to the Board of Directors and to management. In
April 1997, the Board of Directors eliminated the Finance Committee.
The Audit Committee, which held two meetings during the 1997 fiscal year, re-
views the scope and results of the annual audit, reviews and approves the
services and related fees of the Company's independent public accountants, re-
views the Company's internal accounting controls and reviews the Company's In-
ternal Audit Department and its activities.
The Quality Assurance Committee, which met once during the 1997 fiscal year,
reviews the operations of the Company and facilities to determine if accept-
able standards of quality are being maintained.

5
<PAGE>

The Nominating/Governance Committee, which held one meeting during the 1997
fiscal year, recommends to the Board of Directors the members to serve on the
Board of Directors during the ensuing year and deals with corporate governance
issues. The Committee does not consider nominees recommended by stockholders.
Directors who are full-time employees of the Company receive no separate re-
muneration for their services as directors. Beginning in fiscal year 1997, the
remuneration of all non-employee directors for Board retainer and Board meet-
ing fees is a grant of restricted stock, the fair market value of which is
equal to $30,000, pursuant to the Manor Care, Inc. Non-Employee Director Stock
Compensation Plan. Non-employee directors also receive $1,610 per diem for
Committee meetings attended, except where the Committee meeting is on the same
day as a Board meeting. In addition, directors are also reimbursed for travel
expenses and other out-of-pocket costs incurred in attending meetings.
The purpose of the Non-Employee Director Stock Compensation Plan is to en-
courage stock ownership by directors and to further align the interests of di-
rectors and stockholders.
Pursuant to the Manor Care, Inc. Non-Employee Director Stock Option and De-
ferred Compensation Stock Purchase Plan, approved by the stockholders on Sep-
tember 9, 1994 ("1994 Plan"), eligible non-employee directors may elect, prior
to May 31 of each year, to defer a minimum of 25% of committee fees earned
during the ensuing fiscal year. The fees which are so deferred will be used to
purchase Common Stock on the open market within 15 days after December 1, Feb-
ruary 28 and May 31 of such fiscal year. Pending such purchases, the funds are
credited to an Interest Deferred Account, which will be interest bearing.
Stock which is so purchased is deposited in a Stock Deferred Account pending
distribution in accordance with the Plan. Two of the incumbent Directors
(Messrs. Robertson and Longfield) have elected to participate in the 1994 Plan
for the 1998 fiscal year. The amount of compensation that will accrue to such
participating directors is not currently determinable.
In addition, pursuant to the 1994 Plan, eligible non-employee directors will
be granted options to purchase 5,000 shares of Common Stock on their date of
initial election and will be granted options to purchase 1,000 shares on the
date of election in subsequent calendar years. Pursuant to the 1994 Plan, on
September 30, 1996, Messrs. Bainum, Longfield, Malek, Simmons and Robertson
and Professor Herzlinger were granted options to purchase 1,000 shares at
$37.88 (which was adjusted in connection with the Choice Spin-off, defined be-
low, to $23.9867). The amount of compensation that will accrue to such direc-
tors is not currently determinable.

6
<PAGE>

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth certain information concerning the annual and
long term compensation for services in all capacities to the Company for the
fiscal years ended May 31, 1997, 1996 and 1995, of the chief executive officer
and the four other most highly compensated executive officers in the Company's
employ at May 31, 1997 and two additional persons who were officers during the
fiscal year, but upon the distribution by the Company of the shares of its
wholly-owned subsidiary, Choice Hotels International, Inc. ("Choice") on No-
vember 1, 1996, via a tax-free spin-off (the "Choice Spin-off"), became offi-
cers of Choice.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------- -----------------------
RESTRICTED
STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS(#) SHARES(#)(1) COMPENSATION(2)
- --------------------------- ---- -------- -------- ----- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. 1997 $568,062 $340,837 (3) - 60,000(4) $35,074
Chairman, President and 1996 625,102 337,555 (3) - 60,000(4) 33,543
Chief Executive Officer 1995 572,308 343,385 (3) - - 9,000
Donald C. Tomasso 1997 428,002 235,401 (3) - 35,000(5) 18,760
Executive Vice Presi-
dent; 1996 400,005 145,602 (3) - 50,000(6) 5,750
President, ManorCare
Health 1995 345,737 190,155 (3) - - 2,250
Services, Inc.
James H. Rempe 1997 281,507 140,754 (3) $271,250 15,000(9) 16,727
Senior Vice President, 1996 269,048 121,072 (3) - 15,000(10) 15,969
General Counsel and Sec-
retary 1995 267,349 133,675 (3) - - 9,000
Joseph R. Buckley 1997 255,154 140,335 (3) - 20,000(7) 15,466
Executive Vice President 1996 233,617 69,209 (3) - 30,000(8) 13,406
1995 205,000 102,500 (3) - - 9,000
Scott J. Van Hove 1997 240,192 116,753 (3) - 50,000(11) 14,542
Senior Vice President
and 1996 210,310 89,754 (3) - 40,000(12) 8,690
Chief Administrative Of-
ficer; 1995 183,393 68,311 (3) - - 6,750
Executive Vice Presi-
dent--Operations,
ManorCare Health Servic-
es, Inc.
James A. MacCutcheon
(13) 1997 104,526 52,263 (3) - 67,500(14) -
Executive Vice President
and 1996 301,517 135,682 (3) - 25,000(15) 13,176
Chief Financial Officer 1995 273,199 136,600 (3) - - 13,176
Choice Hotels Interna-
tional, Inc.
Donald J. Landry (16) 1997 168,437 - (3) - 100,000(17) -
President, 1996 366,702 201,686 (3) - - 5,000
Choice Hotels Interna-
tional, Inc. 1995 311,635 171,399 (3) - 40,000(18) 2,250
</TABLE>
- ----------------
(1) In connection with the Choice Spin-off, outstanding options to purchase
Company Common Stock were converted into options to purchase Company
Common Stock and options to purchase Choice common stock. In all cases,
however, the exercise prices of the converted options were adjusted to
maintain the same financial value to option holder before and after the
Choice Spin-off.
(2) Represents amounts contributed by the Company for fiscal 1997, 1996 and
1995 for the five individuals named in the above Summary Compensation
Table (the "Named Officers") under the 401(k) Plan and the Nonqualified
Savings Plan, which provide retirement and other benefits to eligible
employees, including the Named Officers. Amounts contributed in cash or
stock by the Company during fiscal 1997 under the 401(k) Plan for the
Named Officers were as follows: Mr. Bainum, Jr. $9,000; Mr. Tomasso,
$6,253; Mr. Buckley, $4,933; Mr. Rempe, $5,591; and Mr. Van Hove, $4,655.
Amounts contributed in cash or stock by the Company during fiscal 1997
under the Nonqualified Savings Plan for the Named Officers were as
follows: Mr. Bainum, $26,074; Mr. Tomasso, $12,507; Mr. Buckley, $10,534;
Mr. Rempe, $11,137; and Mr. Van Hove, $9,887.
(3) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(4) In connection with the Choice Spin-off, these options were converted on a
pro rata basis into options to purchase Company Common Stock and options
to purchase Choice common stock.

7
<PAGE>

(5) In connection with the Choice Spin-off, these options were converted into
options to purchase 55,272 shares of Company Common Stock at an adjusted
exercise price of $25.0505 per share.
(6) In connection with the Choice Spin-off, these options were converted into
options to purchase 74,617 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 7,500 shares to purchase Choice
common stock at an adjusted exercise price of $11.1168.
(7) In connection with the Choice Spin-off, these options were converted into
options to purchase 27,239 shares of Company Common stock at an adjusted
exercise price of $25.0505 per share and 7,500 shares of Choice common
stock at an adjusted exercise price of $14.5095.
(8) In connection with the Choice Spin-off, these options were converted into
options to purchase 39,557 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 13,500 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(9) In connection with the Choice Spin-off, these options were converted into
options to purchase 20,430 shares of Company Common stock at an adjusted
exercise price of $25.0505 per share and 5,625 shares of Choice common
stock at an adjusted exercise price of $14.5095.
(10) In connection with the Choice Spin-off, these options were converted into
options to purchase 19,306 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 7,568 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(11) In connection with the Choice Spin-off, 25,000 of these options were
converted into options to purchase 39,480 shares of Company Common stock
at an adjusted exercise price of $25.0505 per share.
(12) In connection with the Choice Spin-off, these options were converted into
options to purchase 37,309 shares and 22,385 shares of Company Common
stock at an adjusted exercise price of $21.4918 and 19.1932,
respectively, per share and 3,750 shares and 2,250 shares of Choice
common stock at adjusted exercise prices of $12.4482 and $11.1168,
respectively, per share.
(13) At the time of the Choice Spin-off on November 1, 1996, Mr. MacCutcheon
resigned as Senior Vice President, Chief Financial Officer and Treasurer
of the Company and assumed the position of Executive Vice President,
Chief Financial Officer and Treasurer of Choice.
(14) In connection with the Choice Spin-off, these options were converted into
options to purchase 6,563 shares of Company Common stock at an adjusted
exercise price of $25.0505 and 36,387 shares and 136,326 shares of Choice
common stock at adjusted exercise prices of $14.5095 and $13.8933,
respectively, per share.
(15) In connection with the Choice Spin-off, these options were converted into
options to purchase 10,462 shares of Company Common stock at an adjusted
exercise price of $19.1932 and 50,102 shares of Choice common stock at
adjusted exercise prices of $11.1168.
(16) As of the Choice Spin-off on November 1, 1997, Mr. Landry was no longer
deemed an employee of the Company.
(17) In connection with the Choice Spin-off, these options were converted into
options to purchase 272,727 shares of Choice common stock at an adjusted
exercise price of $14.5095 per share.
(18) In connection with the Choice Spin-off, these options were converted into
options to purchase 109,061 shares of Choice common stock at an adjusted
exercise price of $10.5007 per share.

8
<PAGE>

The following tables set forth certain information at May 31, 1997, and for
the fiscal year then ended concerning stock options granted to the Named Offi-
cers. All Common Stock figures and exercise prices have been adjusted to re-
flect stock dividends and stock splits effective in prior fiscal years. In
connection with the Choice Spin-off, existing options to purchase Company Com-
mon Stock were converted into options to purchase Company Common Stock and
Choice common stock.

STOCK OPTION GRANTS IN FISCAL 1997

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
------------------------------------------------------- ---------------------
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF GRANTED TO ALL EXERCISE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME COMPANY GRANTED(1) FISCAL 1997 PER SHARE DATE 5%(3) 10%(4)
---- ------- ---------- -------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5) MNR 60,000 6.3% $25.0505 7/1/06 $ 945,246 $2,395,440
CHI 60,000 (6) $14.5095 7/1/06 547,494 1,387,464
------- ---------- ----------
Total 120,000 1,492,750 3,783,904
Donald C. Tomasso(5) MNR 55,272 3.7%(7) $25.0505 7/1/06 $ 870,760 $2,206,679
CHI 0 - - - -
------- ---------- ----------
Total 55,272 870,760 2,206,679
James H. Rempe(5) MNR 20,430 1.6%(7) $25.0505 7/1/06 $ 321,856 $ 815,647
CHI 5,625 (6) $14.5095 7/1/06 51,327 130,075
------- ---------- ----------
Total 26,055 373,183 945,722
Joseph R. Buckley(5) MNR 27,239 2.1%(7) $25.0505 7/1/06 $ 429,126 1,087,490
CHI 7,500 (6) $14.5095 7/1/06 68,437 173,433
------- ---------- ----------
Total 34,739 497,563 1,260,923
Scott J. Van Hove(5) MNR 39,480 2.6%(7) $25.0505 7/1/06 $ 621,972 $1,576,199
MNR 25,000 2.6% $27.0000 1/15/07 424,500 1,075,750
CHI 0 - - - -
------- ---------- ----------
Total 64,480 1,046,472 2,651,949
James A. MacCutcheon(5) MNR 6,563 7.1%(7) $25.0505 7/1/06 $ 103,394 $ 262,021
CHI 136,326 (6) $13.8933 9/30/06 1,191,135 $3,018,571
CHI 36,387 (6) $14.5095 7/1/06 332,028 841,428
------- ---------- ----------
Total 179,276 $1,626,557 $4,122,020
Donald J. Landry(5) MNR 0 - - - $ - $ -
CHI 272,727 (6) $14.5095 7/1/06 2,488,607 6,306,648
------- ---------- ----------
Total 272,727 $2,488,607 $6,306,648
</TABLE>

9
<PAGE>

- ----------------
* References to "MNR" are to the Company and "CHI" are to Choice.

(1) All of the options shown, except for Mr. Van Hove's 25,000 MNR options,
were granted prior to the Choice Spin-off. In connection with the Choice
Spin-off, the existing options were converted, in some cases, into options
to purchase Company Common Stock and options to purchase Choice common
stock. In all cases, the exercise prices were adjusted to maintain the
same financial value to the option holder before and after the Choice
Spin-off. The number of options set forth in the above table represent the
number and exercise prices of the options after the Choice Spin-off.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the Company's stock price. Since options are granted at market
price, a zero percent gain in the stock price will result in no realizable
value to the optionees.
(3) A 5% per year appreciation in stock price from $25.0505 per share yields
$40.8046, from $14.5095 per share yields $23.6344, from $13.8933 per share
yields $22.6344 and from $27.00 per share yields $43.98.
(4) A 10% per year appreciation in stock price from $25.0505 per share yields
$64.9745, from $14.5095 per share yields $37.6339, from $13.8933 per share
yields $36.0356 and from $27.00 per share yields $70.03.
(5) The options granted to the officers vest at the rate of 20% per year
commencing on the first through the fifth anniversary of the date of the
stock option grant.
(6) Information is not available for the total number of Choice options
granted during fiscal year 1997.
(7) This percentage relates to the number of options granted to the officers
prior to the conversion of such options in the Choice Spin-off. The
converted number of options is listed in this table.

AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS AT MAY 31, 1997 IN-THE-MONEY OPTIONS
COMPANY ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE AT MAY 31, 1997(1)
------- ----------- ---------- ----------- ------------- -------------------------
# $ # # EXERCISABLE UNEXERCISABLE
----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. MNR 293,791 $2,318,180 174,000 221,000 $3,633,404 $2,749,771
CHI 465,000 3,105,452 239,000 221,000 2,758,324 1,334,863
Donald C. Tomasso MNR - - 109,138 278,734 1,178,161 3,491,641
CHI - - 66,500 0 612,534 -
James H. Rempe MNR 30,587 543,625 22,835 82,881 352,453 1,086,277
CHI - - 57,374 28,000 600,600 205,906
Joseph R. Buckley MNR 11,180 164,712 98,053 121,830 2,053,587 1,543,129
CHI - - 94,500 40,500 1,088,257 286,514
Scott J. Van Hove MNR - - 61,894 212,142 1,159,075 2,415,701
CHI - - 45,000 0 457,268 -
James A. MacCutcheon MNR - - 91,362 46,563 1,962,041 704,946
CHI - - 162,639 335,408 1,858,096 1,708,638
Donald J. Landry MNR - - 0 0 - -
CHI - - 151,321 625,810 1,376,894 2,897,138
</TABLE>
- ----------------
* References to "MNR" are to the Company and "CHI" are to Choice.

(1) The closing price of the Company's Common Stock and for Choice common
stock as reported by the New York Stock Exchange on May 30, 1997, was
$28.625 and $15.75, respectively. The value is calculated on the basis of
the difference between the option exercise price and such closing price
multiplied by the number of shares of Common Stock underlying the option.

10
<PAGE>

RETIREMENT PLANS
In February 1985, the Board of Directors adopted the Supplemental Executive
Retirement Plan (the "SERP"). Participants are selected by the Board and are
at the level of Senior Vice President or above. A total of six officers of the
Company, including Messrs. Bainum, Jr., Rempe, Tomasso, Buckley and Van Hove
have been selected to participate in the SERP.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment, which produces the highest
average, prior to the first occurring of the early retirement date or the nor-
mal retirement date. The normal retirement age is 65, and participants must
have a minimum of 15 years of service. Participants may retire at age 60 and
may elect to receive reduced benefits commencing prior to age 65, each subject
to Board approval. All of the Named Officers who are participants, except for
Mr. Rempe, are age 55 or younger. With respect to such named officers, except
for Mr. Rempe, none of their compensation reported above would be included in
the final average salary calculation.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service would be as follows:

<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. 23.5 38
Donald C. Tomasso 6 19
Joseph R. Buckley 17 33
Scott J. Van Hove 10 35
</TABLE>

Mr. Rempe has twenty-seven current years of service and had twenty-five years
of service at age sixty-five.
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for Social Security and other
amounts.

<TABLE>
<CAPTION>
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
---------------------------------------------------------------
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ---------- ------------ ------------
<S> <C> <C> <C>
$300,000 $ 45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>

Effective January 1, 1992, the Company established the Manor Care, Inc. Re-
tirement Savings and Investment Plan (the "401(k) Plan"), a defined contribu-
tion retirement, savings and investment plan for its employees and the employ-
ees of its participating affiliated companies. The 401(k) Plan is qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and includes a cash or deferred arrangement under Section 401(k) of
the Code. All employees age 21 or over and who have worked for the Company for
a twelve month period during which such employee completed at least 1,000
hours are eligible to participate. Subject to certain non-discrimination re-
quirements, each employee may contribute an amount to the 401(k) Plan on a
pre-tax basis up to 15% of the employee's salary, but not more than the cur-
rent federal limit of $9,500. The Company will match contributions made by its
employees subject to certain limitations described in greater detail below.
The amount of the match will be equal to a percentage of the amount of salary
reduction contribution made on behalf of a participant during the plan year
based upon a formula that involves the profits of the Company for the year and
the number of years of service of the participant. In no event will the Com-
pany make a matching contribution which exceeds 6% of a participant's salary.
Amounts contributed by the Company pursuant to the 401(k) Plan for the Named
Officers for the three fiscal years ended May 31, 1997, 1996 and 1995 are in-
cluded in the Summary Compensation Table under the column headed "All Other
Compensation".

11
<PAGE>

Effective January 1, 1992, the Company adopted the Manor Care, Inc. Nonquali-
fied Retirement Savings and Investment Plan (the "Nonqualified Savings Plan").
Certain select highly compensated members of management of the Company are el-
igible to participate in the Nonqualified Savings Plan. The Nonqualified Sav-
ings Plan mirrors the provisions of the 401(k) Plan, to the extent feasible,
and is intended to provide the participants with a pre-tax savings vehicle to
the extent that pre-tax savings are limited under the 401(k) Plan as a result
of various governmental regulations, such as non-discrimination testing. All
of the Named Officers have elected to participate in the Nonqualified Savings
Plan. Amounts contributed by the Company under the Nonqualified Savings Plan
for fiscal years ended May 31, 1997, 1996 and 1995 for the Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation."
The Company match under the 401(k) Plan and the Nonqualified Savings Plan is
limited to a maximum aggregate of 6% of the annual salary of a participant.
Prior to January 1, 1997, participants were given the right to elect to re-
ceive the Company matching contribution either in Company stock or cash or a
combination. After January 1, 1997, the Company matching contribution is made
only in Company Stock. Participant contributions under the two plans may not
exceed the aggregate of 15% of the annual salary of a participant.
Effective January 1, 1992, the Company adopted a non-contributory Cash Accu-
mulation Retirement Plan (the "CARP") maintained by the Company for its em-
ployees and those employees of its participating affiliated companies. The
CARP is qualified under Section 401(a) of the Code. All employees age 21 or
over and who have worked for the Company for a twelve month period during
which such employee completed at least 1,000 hours are automatically members
of the CARP. Each year the account of each employee is adjusted to reflect in-
terest at a rate calculated in accordance with the CARP. Amounts accrued under
the CARP become fully vested after five years of service. On July 2, 1996, the
Board of Directors voted to not allow any new participants in the CARP after
August 15, 1996, and to discontinue the annual benefit accrual by the Company
after December 31, 1996. However, the interest will continue on the balance of
a participating employee's account. Until December 31, 1996, the annual bene-
fit accrual was made by the Company based on salary as follows:

<TABLE>
<CAPTION>
BASE PERCENTAGE BASE PERCENTAGE BASE PERCENTAGE
IF AGE PLUS SERVICE IF AGE PLUS SERVICE IF AGE PLUS SERVICE
ANNUAL SALARY IS LESS THAN 45 IS 45 TO 54 IS 55 OR MORE
- ------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
First $12,000 3% 3.5% 4%
Next $6,000 2% 2.5% 3%
Additional Compensation
up to $100,000 1% 1.5% 2%
</TABLE>

COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
REPORT ON EXECUTIVE COMPENSATION

The compensation philosophy of Manor Care, Inc. (the "Company") is to be com-
petitive with the leading service companies and selected direct competitors in
the marketplace, to attract, retain and motivate a highly qualified workforce,
and to provide career opportunities. The Company uses various compensation
surveys, primarily conducted and evaluated by independent consultants, to pro-
vide data to support the development of competitive compensation plans which
reinforce this philosophy. Summary data on service companies of similar size
participating in each survey are utilized as the basis for the evaluations
along with comparable data from peer group companies. This is the same philos-
ophy applied by the Compensation/Key Executive Stock Option Plan Committee and
the Compensation/Key Executive Stock Option Plan Committee No. 2 ("Committee
No. 2") of the Board of Directors (collectively, the "Committee") in determin-
ing compensation for the CEO and executive officers. In evaluating the CEO's
performance, the Committee, in addition to financial performance, considers
factors important to the Company such as ethical business conduct, progress
against the Company's strategic plan objectives, management succession plan-
ning, customer service satisfaction and the general overall perception of the
Company by financial leaders and customers.
The Committee is responsible for setting and administering the policies which
govern executive compensation and the stock based programs of the Company. The
members of the Committee are Messrs. Robertson (Chairman), Bainum (not a mem-
ber of Committee No. 2), Longfield (not a member of Committee No. 2) and
Malek. Mr. Bainum served as Chairman and CEO prior to March 1987.

12
<PAGE>

Compensation of the Company's officers is reviewed annually by the Committee.
Changes proposed for these employees are evaluated and approved by the Commit-
tee on an individual basis.
There are three components in the Company's executive compensation program:

1. Base salary
2. Cash bonus
3. Long-term incentive compensation

The Committee continues to believe that compensation for the CEO and other
executive officers should be weighted in favor of more "pay at risk" or "vari-
able pay."

BASE SALARY
Base salary is the only component that is not variable. Scope and complexity
of the position as well as external market factors are used to determine base
salary levels. The base salary practice is to target pay at the median of the
market range among the comparison group. Salary changes are based on guide-
lines established for all employees using individual performance to determine
the change. Mr. Bainum, Jr.'s base salary paid in fiscal 1997 is shown under
the heading "Salary" in the Summary Compensation Table.

CASH BONUS
Awards under the Annual Cash Bonus Program for fiscal year 1997 were based on
certain performance measurements consisting of return on beginning equity,
business unit revenue and profit and customer satisfaction surveys of the
business unit. These measurements were used to focus management's attention on
customer services, financial results, and the effective use of Company assets.
For fiscal year 1997, the performance measurements were met or exceeded.

LONG-TERM INCENTIVE COMPENSATION
Long-term compensation has been established to:

a. Focus attention on the Company's and stockholders' long term goals;
b. Increase ownership and retention in the Company's stock.

The Manor Care, Inc. 1995 Long-Term Incentive Plan ("Long-Term Incentive
Plan") provides the Committee with the discretion to grant Restricted Shares,
Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights
or Performance Shares as it may determine to be desirable in order to recruit
and retain management and to focus the optionees on the long term goals of the
Company to be more closely aligned with the interests of stockholders. In July
1996, the Compensation Committee reviewed and approved a Stock Option
Guidechart to be used to determine stock option awards for executives. The
Stock Option Guidechart utilized a market based salary multiple based on per-
formance of the Company.
The Committee believes the Company has an overall compensation plan which
fulfills current Company philosophy and, in addition, promotes increased
stockholder value through performance-based compensation.

EXECUTIVE STOCK OWNERSHIP PROGRAM
Effective June 1, 1995, the Company established an Executive Stock Ownership
program for the Chairman and the officers who report directly to the Chairman.
The program requires the relevant officers to own qualifying Common Stock as a
condition of employment in order to ensure a direct relationship between such
executives and the stockholders. The relevant officers will be required to
reach and maintain ownership of a specified amount of Common Stock within five
years from the effective date of the program, or upon the fifth anniversary of
employment as Chairman or a direct report officer, whichever is later. The
amount of shares of Common Stock required to be owned by each officer is de-
termined by the beginning base salary times a multiple which varies from 2.5
to 6 depending upon the level of responsibility of the particular officer.

IMPACT OF INTERNAL REVENUE CODE SECTION 162(M)
The Omnibus Budget Reconciliation Act of 1993 disallows, effective January 1,
1994, a federal income tax deduction for compensation, other than certain per-
formance-based compensation, in excess of $1 million annually paid by the

13
<PAGE>

Company to any currently serving Named Officer identified in the Summary Com-
pensation Table. Stock option awards under the Key Executive Stock Option Plan
of 1969, which expired in 1993, and under the Key Executive Stock Option Plan
of 1993, which has been terminated, qualify as performance-based compensation
and are exempt from consideration for purposes of calculating the one million
dollar limit. With respect to the 1995 Long-Term Incentive Plan, appropriate
steps have been and will continue to be taken to qualify awards made thereun-
der as performance-based compensation and thus be exempt from consideration
for purposes of calculating the one million dollar limit. No individual named
in the Summary Compensation Table is likely to receive compensation, not in-
cluding performance-based compensation, in fiscal 1997 which would be in ex-
cess of $1 million. The Committee intends to monitor the Company's compensa-
tion programs with respect to such laws.

COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE

Jerry E. Robertson, Ph.D., Chairman
Stewart Bainum (not a member of Committee No. 2)
William H. Longfield (not a member of Committee No. 2)
Frederic V. Malek

PERFORMANCE GRAPH-STOCKHOLDER RETURN

The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock against the cumulative
total return on the S&P Composite-500 Stock Index and a peer group selected by
the Company for the five fiscal years ended May 31, 1997, assuming reinvest-
ment of dividends.

COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG MANOR CARE, INC., S&P500 AND PEER GROUP

[BAR GRAPH APPEARS HERE]

Assumes $100 invested on June 1, 1992 in the Common Stock of Manor Care,
Inc., the S&P500 Index and Peer Group Companies (weighted by market capital-
ization). Total return assumes reinvestment of dividends.

<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Manor Care, Inc. 100 133 163 185 247 286
S&P 500 100 112 116 140 180 232
Peer Group (Weighted Average) 100 131 168 166 188 216
</TABLE>

14
<PAGE>

The Peer Group consists of ten other companies involved in the Company's
lines of business. Nine of the companies are involved in ownership and opera-
tion of nursing homes: Beverly Enterprises, Inc., GranCare, Inc., Horizon/CMS
Healthcare Corp., Integrated Health Services, Inc., Mariner Health Group,
Inc., National HealthCare, L.P., Regency Health Services, Inc., Sun Healthcare
Group, Inc. and Vencor, Inc. One company is involved in the institutional
pharmacy business: Omnicare, Inc. Doubletree Corp., LaQuinta Motor Inns, Inc.
and Red Lion Inns, L.P., which were in the Peer Group last year, were excluded
due to the spin-off of the Company's lodging business. Regency Health Servic-
es, Inc. and Sun Healthcare Group, Inc., owners and operators of nursing
homes, have replaced Geriatric and Medical Centers, Inc. and Healthsouth
Corp., which were in the Peer Group last year. Geriatric and Medical Centers,
Inc. was replaced because it was acquired in October 1996. Healthsouth Corp.
was replaced because it primarily operates rehabilitation hospitals rather
than nursing homes.

CERTAIN TRANSACTIONS

On September 1, 1994, the Company entered into a Master Aircraft Lease Agree-
ment with Wilderness Investment Company, Inc. ("Wilderness"), a corporation
which is solely owned by Stewart Bainum. The lease permits the Company to
lease from time to time a Cessna Citation VI owned by Wilderness. During fis-
cal year 1997, the Company incurred a total of $52,095 for aircraft usage pur-
suant to the lease and Vitalink Pharmacy Services, Inc., a subsidiary of the
Company, incurred a total of $32,925 for aircraft usage.
In connection with the Choice Spin-off, the Company entered into certain
agreements with Choice, of which Mr. Bainum is a director and Mr. Bainum, Jr.
is Chairman of the Board and each beneficially owns approximately 17.39% and
26.48%, respectively, of the outstanding Choice common stock.

CHOICE LEASE AGREEMENTS
The Company and Choice entered into a lease agreement with respect to the
complex in Silver Spring, Maryland at which Choice's principal executive of-
fices are located (the "Silver Spring Lease"). Pursuant to the Silver Spring
Lease, Choice leases from the Company for a period of 30 months certain office
space (approximately 38% of the complex initially, with provisions to allow
Choice to use additional square footage as needed) at a monthly rental rate
equal to one-twelfth of the operating expenses (as defined therein) of the
complex net of third party rental income paid to the Company by other tenants
of the complex, less a pro rata portion of the operating expenses attributable
to the space occupied by the Company (initially approximately 39% of the com-
plex). At the beginning of each fiscal year following the November 1 (the date
of the Choice distribution) date, the Company's occupancy percentage is rede-
termined. Operating expenses include all of the costs associated with operat-
ing and maintaining the complex including, without limitation, supplies and
materials used to maintain the complex, wages and salaries of employees who
operate the complex, insurance for the complex, costs of repairs and capital
improvements to the complex, the fees of the property manager (which may be
the Company), costs and expenses associated with leasing space at the complex
and renovating space rented to tenants, costs of environmental inspection,
testing or cleanup, principal and interest payable on indebtedness secured by
mortgages against the complex, or any portion thereof, and charges for utili-
ties, taxes and facilities services. Choice and the Company also entered into
(i) a sublease agreement with respect to certain office space in Gaithersburg,
Maryland (the "Gaithersburg Lease") pursuant to which Choice is obligated to
rent from the Company, on terms similar to the Silver Spring Lease, certain
additional space as such space becomes available during the 30 month period
following the date of the Choice Spin-off and (ii) a sublease agreement with
respect to the Comfort Inn, N.W., Pikesville, Maryland, pursuant to which
Choice subleases the property from the Company on the same terms and condi-
tions that govern the Company's rights and interests under the lease relating
to such property.

THE CHOICE LOAN AGREEMENT
On November 1, 1996, Choice and a subsidiary of the Company entered into a
loan agreement (the "Loan Agreement"), governing the repayment by Choice of an
aggregate of $225.7 million previously advanced to Choice by the Company. In-
terest on the amount of the loan is payable semiannually at a rate of 9% per
annum. The loan will mature on November 1, 1999 and may be prepaid in whole or
in part, together with accrued interest, at the option of Choice. If prepay-
ment is made on or before November 1, 1997, Choice will pay a penalty equal to
the difference between the stated interest rate and the annualized interest
rate on a U.S. Treasury Note or Bill for a relevant period until November 1,
1997. If prepayment is made after November 1, 1997, there is no penalty.
On April 23, 1997, Choice, through its wholly-owned subsidiary First Choice
Properties, completed an offering of mortgage securities. The net proceeds of
$110 million from the offering were used to prepay a portion of the loan. A
total yield maintenance payment of $1.9 million will be made to the Company as
a result of the prepayment.

15
<PAGE>

CORPORATE SERVICES AGREEMENT
The Company and Choice entered into the Corporate Services Agreement which
provides for the provision by the Company of certain corporate services, in-
cluding administrative and accounting systems on a time and materials and/or
fixed fee basis and, for a fixed annual fee of $1.0 million, certain consult-
ing services.

RISK MANAGEMENT CONSULTING SERVICES
Pursuant to the Risk Management Agreement between the Company and Choice, the
Company provides Choice with risk management services for an annual fee of
$438,000. The term of the agreement is thirty months from November 1, 1996 and
the agreement can be terminated by Choice at any time upon sixty days prior
written notice.

EMPLOYEE BENEFITS ALLOCATION AND OTHER MATTERS AGREEMENT
The Company and Choice entered into an Employee Benefits Allocation and Other
Matters Agreement which provided for the allocation of employee benefits upon
the Choice Spin-off. Pursuant to the agreement, Choice paid to the Company for
the months of November and December 1996 an amount equal to 2.1% of the pay-
roll for all Choice employees in consideration of the Company assuming all re-
sponsibilities for funding obligations and current plan year matching contri-
butions attributable to certain retirement and savings plans. During the same
period, Choice also paid to the Company a fee for each Choice employee receiv-
ing services and benefits under Company medical plans. The agreement also pro-
vides for cross-guaranties between the Company and Choice with respect to the
payment of benefits under certain plans and for cross-indemnification with re-
spect to pre-Choice Spin-off employment-related claims. The term of the agree-
ment is thirty months from November 1, 1996.

TIME SHARING AGREEMENT
The Company and Choice entered into a Time Sharing Agreement which provides
for the leasing by Choice of the Company's aircraft. Choice may terminate the
agreement at any time upon sixty days prior written notice. For fiscal year
1997, Choice paid $100,255 to the Company for aircraft usage under the Time
Sharing Agreement.
In the opinion of management, the foregoing transactions were on terms at
least as advantageous to the Company as could have been obtained from non-af-
filiated persons.

RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS

Arthur Andersen LLP has been the Company's independent public accountants
since June 1976. In the Spring of 1998, the Board of Directors will select the
Company's independent public accountants to audit the accounts of the Company
for the current fiscal year. Representatives of Arthur Andersen LLP are ex-
pected to be present at the Meeting, and will have an opportunity, if they so
desire, to make a statement and will be available to respond to appropriate
questions.

STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING

The Company's 1998 Annual Meeting is presently scheduled to be held on Sep-
tember 29, 1998. Stockholder proposals must be submitted to the Secretary no
later than April 18, 1998, in order to be eligible for inclusion in the
Company's proxy materials for such meeting.

OTHER BUSINESS

As of the date of the Proxy Statement, management does not know of any busi-
ness other than that mentioned above which will be presented for considera-
tion. However, if any other matter should properly come before the Meeting, it
is the intention of the persons named in the accompanying form of proxy to
vote the proxies in accordance with their judgment on such matter.
After the business session and a report to the stockholders on the progress
of the Company, a discussion period will take place during which stockholders
will have an opportunity to discuss matters of interest concerning the Compa-
ny.

- ----------------
A COPY OF THE COMPANY'S 1997 FORM 10-K (EXCLUDING EXHIBITS) FILED WITH THE SE-
CURITIES AND EXCHANGE COMMISSION WILL BE MADE AVAILABLE TO STOCKHOLDERS, WITH-
OUT CHARGE, UPON WRITTEN REQUEST TO THE TREASURER OF MANOR CARE, INC., 11555
DARNESTOWN ROAD, GAITHERSBURG, MARYLAND 20878. THE REPRODUCTION COST WILL BE
CHARGED IF EXHIBITS ARE REQUESTED.