<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NO. 333-37599
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MANOR CARE, INC.
(WHICH WILL CHANGE ITS NAME TO MANOR CARE REALTY, INC. AFTER
THE DISTRIBUTION REFERRED TO HEREIN)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11555 DARNESTOWN ROAD 52-1200376
(STATE OR OTHER GAITHERSBURG, MARYLAND 20878 (I.R.S. EMPLOYER
JURISDICTION OF (301) 979-4000 IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
SEE TABLE OF ADDITIONAL CO-REGISTRANTS INCLUDED HEREWITH
---------------
JAMES H. REMPE
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
MANOR CARE, INC.
11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878
(301) 979-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
J. MICHAEL SCHELL MICHAEL A. BECKER
MARK C. SMITH CAHILL GORDON & REINDEL
SKADDEN, ARPS, SLATE, 80 PINE STREET
MEAGHER & FLOM LLP NEW YORK, NEW YORK 10005
NEW YORK 10022 (212) 701-3000
(212) 735-3000
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
TABLE OF ADDITIONAL CO-REGISTRANTS
<TABLE>
<CAPTION>
(EXACT NAME OF CO-REGISTRANT (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER) OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
- ---------------------------- --------------------------------- -------------------
<S> <C> <C>
Archive Retrieval
Systems, Inc. .......... Maryland 52-1734402
Archive Acquisition,
Inc. ................... Maryland 52-1840315
American Hospital
Building Corporation.... Delaware 52-0985621
Americana Healthcare
Center of Palos
Township, Inc. ......... Illinois 52-1352950
Americana Healthcare
Corporation of Georgia.. Georgia 37-1087694
Americana Healthcare
Corporation of Naples... Florida 37-1087695
Baily Nursing Home,
Inc. ................... Pennsylvania 23-1674218
Chesapeake Manor, Inc. .. Maryland 52-0902288
Colewood Realty Corp. ... Maryland 52-1777225
Community Hospital of
Mesquite, Inc. ......... Texas 52-1095067
DeKalb Healthcare
Corporation............. Delaware 37-1019112
Devon Manor Corporation.. Pennsylvania 23-2093337
Distco, Inc. ............ Maryland 52-0853907
Executive Advertising,
Inc. ................... Maryland 52-0912751
Four Seasons Nursing
Centers, Inc. .......... Delaware 73-0783484
Healthcare Construction
Corp. .................. North Carolina 52-1519915
Industrial Wastes, Inc. . Pennsylvania 25-1264509
Jacksonville Healthcare
Corporation............. Delaware 37-1069936
Leader Nursing and
Rehabilitation Center of
Bethel Park, Inc. ...... Delaware 52-1642046
Leader Nursing and
Rehabilitation Center of
Gloucester, Inc. ....... Maryland 52-1352949
Leader Nursing and
Rehabilitation Center of
Scott Township, Inc. ... Delaware 52-1462056
Leader Nursing and
Rehabilitation Center of
Virginia, Inc. ......... Virginia 52-1363206
Manor Care of Akron,
Inc. ................... Ohio 52-0970447
Manor Care of Arizona,
Inc. ................... Delaware 52-1751861
Manor Care of Arlington,
Inc. ................... Virginia 52-1067426
Manor Care of Bethesda,
Inc..................... Maryland 52-0958809
Manor Care of Boca Raton,
Inc. ................... Florida 52-1297340
Manor Care of Canton,
Inc. ................... Ohio 52-1019576
Manor Care of Charleston,
Inc. ................... South Carolina 52-1187059
Manor Care of Cincinnati,
Inc. ................... Ohio 52-0943592
Manor Care of Columbia,
Inc. ................... South Carolina 52-0940578
ManorCare Health Services
of Northampton County,
Inc..................... Pennsylvania 52-2004471
ManorCare Health
Services, Inc.(1)....... Delaware 52-0886946
ManorCare Health Services
of Virginia, Inc. ...... Delaware 52-2002773
Manor Care of Hinsdale,
Inc. ................... Illinois 52-0970446
Manor Care of Kansas,
Inc. ................... Delaware 52-1462071
Manor Care of Kingston
Court, Inc. ............ Pennsylvania 52-1314648
Manor Care of Largo,
Inc. ................... Maryland 52-1065213
Manor Care of Lexington,
Inc. ................... South Carolina 52-1048770
Manor Care Management
Corporation............. Delaware 52-2004467
Manor Care of Meadow
Park, Inc. ............. Washington 52-1339988
Manor Care of Mesquite,
Inc. ................... Texas 52-2004472
Manor Care of North
Olmsted, Inc. .......... Ohio 52-0970448
Manor Care of Pinehurst,
Inc. ................... North Carolina 52-1069744
Manor Care of Plantation,
Inc. ................... Florida 52-1383874
Manor Care Properties,
Inc..................... Delaware 52-2061834
Manor Care of Rolling
Meadows, Inc. .......... Illinois 52-1077856
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(EXACT NAME OF CO-REGISTRANT (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER) OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
- ---------------------------- --------------------------------- -------------------
<S> <C> <C>
Manor Care of Rossville,
Inc. ................... Maryland 52-1077857
Manor Care of Willoughby,
Inc. ................... Ohio 52-0970449
Manor Care of Wilmington,
Inc. ................... Delaware 52-1252362
Manor Care of York
(North), Inc. .......... Pennsylvania 52-1314645
Manor Care of York
(South), Inc. .......... Pennsylvania 52-1314644
Medical Aid Training
Schools, Inc. .......... Delaware 52-0963178
Mid-Atlantic Post Acute
Network, Inc. .......... Delaware 52-2004469
Nightingale Nursing Home,
Inc. (The).............. Pennsylvania 23-1719762
MNR Finance Corp. ....... Delaware 51-0348281
MRS, Inc. ............... Delaware 52-1164725
Peak Rehabilitation,
Inc. ................... Delaware 52-1833202
PLM, Inc. ............... Delaware 37-1031568
Pneumatic Concrete, Inc.
........................ Tennessee 62-0716951
Portfolio One, Inc. ..... New Jersey 22-1604502
Rehab Source Inc. ....... Illinois 52-1707884
Roland Park Nursing
Center, Inc. ........... Maryland 52-1890169
Silver Spring--Wheaton
Nursing Home, Inc. ..... Maryland 52-0245649
Stratford Manor, Inc. ... Virginia 52-0902020
Stutex Corp. ............ Texas 52-0884091
TotalCare Clinical
Laboratories, Inc. ..... Delaware 52-1740933
</TABLE>
- --------
(1) ManorCare Health Services, Inc. will be renamed Manor Care Real Estate
Corp. following the Distribution.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 15, 1997
PROSPECTUS
$350,000,000
MANOR CARE REAL ESTATE CORP.
% SENIOR NOTES DUE 2008
FULLY AND UNCONDITIONALLY GUARANTEED BY
MANOR CARE REALTY, INC.
AND EACH OF THE OTHER GUARANTORS NAMED HEREIN
----------
The % Senior Notes due 2008 (the "Notes") are being offered (the
"Offering") by Manor Care Real Estate Corp. ("Manor Care Real Estate") in
connection with the distribution (the "Distribution") by its parent Manor Care,
Inc. ("Manor Care") to its stockholders of 100% of the outstanding common
stock, par value $.01 per share, of New ManorCare Health Services, Inc., a
newly formed wholly owned subsidiary of Manor Care.
As a result of the Distribution, Manor Care will separate into two separate
publicly traded companies: Manor Care Realty, Inc. ("Manor Care Realty") and
ManorCare Health Services, Inc. ("ManorCare Health Services"). Manor Care
Realty will (i) be a health care real estate company focused on the ownership,
construction, development and acquisition of health care properties and (ii)
own Mesquite Community Hospital in Mesquite, Texas. ManorCare Health Services
will (i) own all of the business and assets of, and, subject to certain
exceptions, be responsible for the liabilities associated with, Manor Care's
assisted living business, (ii) operate and manage the 168 skilled nursing
facilities owned by Manor Care Realty, (iii) own a 50% joint venture interest
in and operate and manage three additional skilled nursing facilities, and (iv)
own all of Manor Care's stock of Vitalink Pharmacy Services, Inc. and In Home
Health, Inc. ManorCare Health Services will not provide any credit support with
respect to the Notes. At or prior to the Distribution, Manor Care will make or
cause to be made a capital contribution (the "Capital Contribution") to
ManorCare Health Services of (i) approximately $250 million in cash and (ii) an
inter-company senior note of Manor Care Real Estate in an aggregate principal
amount of up to $250 million (the "Realty Note"). In connection with the
Distribution, ManorCare Health Services plans to offer to exchange $1,000
principal amount of its 7 1/2% Senior Notes due 2006 (the "New MCHS Senior
Notes") for each $1,000 principal amount of 7 1/2% Senior Notes due 2006 of
Manor Care (the "Old Senior Notes") properly tendered (the "Exchange Offer")
and Manor Care Real Estate will enter into new credit facilities aggregating
$450 million (the "Credit Facilities"). The Credit Facilities are being entered
into and the Notes offered hereby are being issued as part of the financing
necessary to effect the Distribution. The Realty Note and the Credit Facilities
will be guaranteed to the same extent as the Notes. See "Use of Proceeds."
The Notes will be fully and unconditionally and jointly and severally
guaranteed on a senior unsecured basis by Manor Care Realty (the "Parent
Guarantor"), of which Manor Care Real Estate will be a wholly owned subsidiary,
and all of the Restricted Subsidiaries other than inactive Restricted
Subsidiaries with no material assets (the "Subsidiary Guarantors" and, together
with the Parent Guarantor, the "Guarantors"). As of the Issue Date, all of the
subsidiaries of Manor Care Realty and Manor Care Real Estate will be Restricted
Subsidiaries. The Guarantees (as defined) of the Subsidiary Guarantors are
subject to release in certain circumstances. The Notes will be general
unsecured obligations of Manor Care Real Estate ranking senior to all
subordinated indebtedness of Manor Care Real Estate and pari passu in right of
payment with all other indebtedness of Manor Care Real Estate, including
borrowings under the Credit Facilities and the Realty Note. The Guarantees will
be general unsecured obligations of the Guarantors ranking senior to all
subordinated indebtedness of the Guarantors and pari passu with all other
indebtedness of the Guarantors, including guarantees of the Credit Facilities
and the Realty Note. However, obligations under the Credit Facilities will be
secured by a majority of the assets of Manor Care Realty and Manor Care Real
Estate, by a pledge of the capital stock of Manor Care Real Estate and Manor
Care Realty's other subsidiaries and by an assignment of certain agreements
with ManorCare Health Services. After giving pro forma effect to the Offering,
the use of proceeds thereof, the Distribution and related transactions (and
assuming the holders of 100% of the outstanding Old Senior Notes accept the
Exchange Offer), as of August 31, 1997, Manor Care Realty's aggregate
outstanding indebtedness would have been approximately $805 million, including
approximately $205 million of secured borrowings, and unused commitments under
the Credit Facilities would have been $272 million.
Interest on the Notes will be payable semi-annually on and of
each year, commencing , 1998. The Notes are redeemable at the option of
Manor Care Real Estate, in whole or in part, at any time on or after ,
2003 at the redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time
and from time to time on or prior to , 2001, Manor Care Real Estate may
redeem up to 35% of the aggregate principal amount of the Notes with the net
cash proceeds of one or more Public Equity Offerings by the Parent Guarantor or
Manor Care Real Estate, at a redemption price equal to % of the principal
amount to be redeemed, together with accrued and unpaid interest, if any, to
the date of redemption, provided that at least 65% aggregate principal amount
of the Notes originally issued remains outstanding after each such redemption.
Upon a Change of Control (as defined herein) each holder of the Notes may
require Manor Care Real Estate to repurchase such Notes at 101% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the date of repurchase.
Manor Care Real Estate does not intend to apply for listing of the Notes on
any securities exchange or on any automated dealer quotation system.
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON
PAGE 15 HEREIN.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) MANOR CARE(3)
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<S> <C> <C> <C>
Per Note................................ % % %
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Total................................... $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from , 1998 the date of original
issue.
(2) Manor Care Real Estate and the Parent Guarantor have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses of the offering payable by Manor Care Real
Estate, estimated at $ .
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by the Underwriters, subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify any such offer and to reject orders in whole or in part. It is expected
that delivery of the Notes will be made in New York, New York on or about
, 1998 at the offices of Chase Securities Inc., 270 Park Avenue, New
York, New York.
----------
CHASE SECURITIES INC. SBC WARBURG DILLON READ INC.
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
Manor Care is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Manor Care with the Commission may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. Additionally, the Commission maintains a Web site
containing reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The address for such Web site is http://www.sec.gov. Certain of Manor Care's
securities are listed on the New York Stock Exchange (the "NYSE"). Such
reports, proxy statements and other information concerning Manor Care also may
be inspected at the offices of the NYSE located at 20 Broad Street, New York,
New York 10005.
Manor Care has filed with the Commission a Registration Statement on Form S-
3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act") with respect to the Notes offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information, reference is made to the Registration Statement,
which may be examined without charge at the public reference facilities
maintained by the Commission at the Public Reference Room of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies thereof may be obtained from the Commission upon payment of the
prescribed fees.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed by Manor Care with the Commission pursuant to
the Exchange Act (File No. 1-8195) are incorporated in this Prospectus by
reference and are made a part hereof:
(1) Annual Report on Form 10-K for the fiscal year ended May 31, 1997.
(2) Quarterly Report on Form 10-Q for the three month period ended August
31, 1997.
(3) Current Report on Form 8-K dated September 15, 1997.
All documents filed by Manor Care with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities made
hereby shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated
herein by reference shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Manor Care will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon oral or written
request of such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents).
Written or telephone requests should be directed to Manor Care, Inc. at its
principal executive offices at 11555 Darnestown Road, Gaithersburg, Maryland
20878, Attention: Secretary; telephone (301) 979-4000.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVER-ALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto set forth elsewhere in
this Prospectus. As used herein, "Manor Care" refers to Manor Care, Inc. and
its subsidiaries prior to the Distribution, "Manor Care Realty" refers to Manor
Care, Inc. and its subsidiaries, including Manor Care Real Estate, after the
Distribution and "ManorCare Health Services" refers to New ManorCare Health
Services, Inc. and its subsidiaries after the Distribution. See "Risk Factors"
for a discussion of certain factors that should be considered in connection
with an investment in the Notes. As used herein "Distribution" means,
collectively, the Contribution of Assets, the Assumption of Liabilities, the
Capital Contribution, and the distribution of the capital stock of ManorCare
Health Services to Manor Care's shareholders.
BACKGROUND
The Notes are being offered in connection with the distribution by Manor Care
to its stockholders of 100% of the outstanding stock of ManorCare Health
Services, a newly formed wholly owned subsidiary of Manor Care. As a result of
the Distribution, Manor Care will have separated into two separate publicly
traded companies: Manor Care Realty and ManorCare Health Services. Manor Care
Realty will (i) be a health care real estate company focused on the ownership,
construction, development and acquisition of health care properties including
skilled nursing and assisted living facilities and (ii) own Mesquite Community
Hospital in Mesquite, Texas. ManorCare Health Services will (i) own and operate
all of the business and assets of, and, subject to certain exceptions, be
responsible for the liabilities associated with, Manor Care's assisted living
business, (ii) operate and manage Manor Care Realty's 168 skilled nursing
facilities, (iii) own a 50% joint venture interest in three additional skilled
nursing facilities, and (iv) own all of Manor Care's stock in Vitalink Pharmacy
Services, Inc., a public company that owns and operates institutional
pharmacies ("Vitalink") and In Home Health, Inc. a public company that provides
comprehensive health care services to clients in their homes ("In Home
Health").
MANOR CARE REALTY
Manor Care Realty will own 168 skilled nursing facilities in 28 states (the
"Skilled Nursing Facilities") and will be a leading health care real estate
company focused on the ownership, construction, development and acquisition of
health care properties, including skilled nursing and assisted living
facilities. Manor Care Realty will also own and operate Mesquite Community
Hospital, a 172 licensed bed medical/surgical acute care hospital located in
Mesquite, Texas ("Mesquite Hospital"). At or prior to the Distribution, Manor
Care Realty will enter into a series of agreements with ManorCare Health
Services pursuant to which ManorCare Health Services will lease and operate all
of Manor Care Realty's 168 Skilled Nursing Facilities and Manor Care Realty
will develop assisted living facilities for sale to ManorCare Health Services.
See "Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution." Manor Care and its predecessor companies have been engaged
in the development, construction and acquisition of health care properties
since 1959.
Over the next five years, Manor Care Realty plans to focus principally on the
development of over 200 assisted living facilities for sale to ManorCare Health
Services, including approximately 170 Arden Courts, serving persons with early
to middle-stage Alzheimer's disease or related memory impairment, and 38
Springhouse senior residences, serving the general assisted living population.
Following the Distribution, Manor Care Realty's principal sources of revenue
will arise from payments pursuant to the lease of the Skilled Nursing
Facilities to ManorCare Health Services, the proceeds of the sale to ManorCare
Health Services of assisted living facilities developed by Manor Care Realty
and revenues derived from Mesquite Hospital. Manor Care Realty's principal
expenditures will include the costs incurred in developing the assisted living
facilities for ManorCare
3
<PAGE>
Health Services, the costs of operating the assisted living facilities prior to
their sale to ManorCare Health Services and financing costs, including interest
expense. On a pro forma basis, after giving effect to the Distribution and
related transactions, for the fiscal year ended May 31, 1997, Manor Care Realty
would have had approximately $217 million in revenue.
Manor Care Realty's geographically diversified portfolio of properties will
include:
. 168 Skilled Nursing Facilities in 28 states, which facilities contain
approximately 23,725 beds.
. 25 assisted living facilities under construction in 12 states.
. 64 sites for assisted living facilities under contract and in
development, including 48 Arden Court sites and 16 Springhouse sites.
. Two skilled nursing facilities under construction with 268 beds and three
skilled nursing sites under contract and in development.
. Mesquite Community Hospital, a 172 licensed-bed hospital located in
Mesquite, Texas, a Dallas suburb.
Since fiscal year 1993, Manor Care has completed 72 development projects,
including ten skilled nursing facilities, 15 assisted living facilities and 47
significant additions to its existing skilled nursing facilities.
The following table sets forth for the period specified, the percentage of
private patients, Medicare patients and Medicaid patients in Manor Care's
skilled nursing facilities.
<TABLE>
<CAPTION>
SKILLED NURSING
FACILITIES
LATEST TWELVE
MONTHS AS OF
5/31/97
------------------
% OF % OF
OCCUPANCY REVENUES
--------- --------
<S> <C> <C>
Private Pay Patients..................................... 51% 55%
Medicare Patients........................................ 11% 19%
Medicaid Patients........................................ 38% 26%
--- ---
Total.................................................. 100% 100%
=== ===
</TABLE>
Private pay patients accounted for a majority of Manor Care's skilled nursing
revenues in fiscal 1997 compared to a 1996 industry average of approximately
30% for for-profit nursing care providers. As of May 31, 1997, all of the
residents of Manor Care's assisted living facilities were private pay.
Manor Care Realty will have an experienced management team, with specific
expertise in market feasibility, regulatory issues, site selection, design, and
project management as well as in the acquisition of health care facilities. The
five senior members of Manor Care Realty's development team have worked with
Manor Care for an average of 16.5 years. These individuals have in-depth
knowledge of the health care market with particular expertise in the state
regulatory environment for both skilled nursing and assisted living facilities.
See "Management of Manor Care Realty After The Distribution." Manor Care Realty
believes that its experienced management and high quality, geographically
diversified portfolio of long term care properties will ensure that it
continues to be one of the nation's leading health care real estate developers
and owners.
After the Distribution, ManorCare Health Services will be a leading provider
of a full-range of senior support health care services, including skilled
nursing, assisted living, institutional pharmacy and home health care and
additional support services for the frail elderly living at home. ManorCare
Health Services will strive to become the nation's foremost provider of high-
quality senior support health care services within the private pay segment.
Application has been made to list the common stock of ManorCare Health Services
on the New York Stock Exchange.
4
<PAGE>
The long-term care industry in which Manor Care Realty participates is
experiencing significant growth due, in large part, to favorable demographic
trends. According to the U.S. Bureau of the Census, the number of seniors 85
years and older is estimated to increase by approximately 32% from 3.7 million
seniors in 1996 to 4.9 million seniors by 2005. According to industry sources,
approximately 57% of the population over age 85 currently require assistance
with activities of daily living ("ADLs"), such as dressing, bathing, eating and
medication management, and more than 50% suffer from Alzheimer's disease or
other cognitive disorders. Manor Care Realty believes that the growth of an
increasingly frail population will drive demand for long-term care products and
services tailored to meet the unique needs of this elderly population,
including skilled nursing facilities, assisted living facilities, and
Alzheimer's care facilities. In addition, Manor Care Realty believes that the
increasing affluence of the elderly and their children will enable them to
afford high quality care. According to the U.S. Bureau of the Census, the
median net worth of householders age 75 and older has increased from $61,491 in
1988 to $76,541 in 1991.
Business Strategy. Manor Care Realty plans to maintain its status as a
leading developer and owner of senior support health care service facilities
and to enhance its growth and profitability through the following key
initiatives:
. Generate Consistent Cash Flows From High Quality Portfolio of
Properties. Upon consummation of the Distribution, Manor Care Realty
believes that it will have one of the highest quality portfolios of
skilled nursing facilities in the industry. The majority of the Skilled
Nursing Facilities were purpose-built (that is, designed and built as
skilled nursing facilities as opposed to having been converted from some
other use). Manor Care Realty believes these facilities are among the
industry leaders in terms of percentage of beds dedicated to specialty
products and quality payor mix. A significant portion of the beds in
Manor Care Realty's Skilled Nursing Facilities are dedicated to specialty
products, including Arcadia (Alzheimer's special care unit), Heritage and
Williamsburg (high-end lifestyle products), and Medbridge (high acuity
unit). For fiscal years 1997 and 1996, Manor Care's occupancy rates for
skilled nursing facilities that had been operated by Manor Care for at
least two years were 89.8% and 90.3%, respectively.
. Maintain Geographically Diverse Portfolio of Properties. Manor Care
Realty's portfolio of properties will include 168 facilities in 28
states. Manor Care Realty believes the geographic diversity of the
Skilled Nursing Facilities makes the portfolio less susceptible to
adverse changes in state regulation and regional economic downturns.
. Benefit From Strategic Relationship with ManorCare Health Services. Manor
Care Realty believes it will benefit from a strategic relationship with
ManorCare Health Services, one of the nation's leading providers of high-
quality senior support health care services within the private pay
segment. Under the terms of the Lease Agreements (as defined herein),
ManorCare Health Services will operate Manor Care Realty's 168 Skilled
Nursing Facilities. Manor Care Realty believes that the operation of the
Skilled Nursing Facilities by ManorCare Health Services will allow Manor
Care Realty to benefit from the strong brand name recognition, well
established treatment protocols and reputation for high quality,
personalized care standards of ManorCare Health Services. The Lease
Agreements provide Manor Care Realty with annual lease payments generally
equal to the greater of 10% of the value of each facility (as agreed to
by Manor Care Realty and ManorCare Health Services) or 77% of the Net
Operating Profit (as defined herein) of each facility, subject to
reduction in certain circumstances. Manor Care Realty believes this
structure will provide a base level of rent (subject to reduction in
certain circumstances) along with the opportunity to participate in the
operating performance of the Skilled Nursing Facilities. In addition, by
serving as a developer of assisted living facilities for ManorCare Health
Services, Manor Care Realty believes it will be well positioned to profit
from the anticipated growth in the demand for assisted living care.
Pursuant to the Development Agreement, Manor Care Realty will develop
assisted living facilities for sale to ManorCare Health Services. If at
any time
5
<PAGE>
during the two-year period following the time a particular facility opens
occupancy reaches 75% for a period of five days, ManorCare Health
Services will be obligated to purchase the facility. The purchase price
for each facility will be at a 15-34% premium to total approved
development costs of Manor Care Realty, based on the number of months
elapsed since the opening of the facility. Total approved development
costs include expenses incurred in connection with the development and
construction of the facilities, but do not include operating losses
incurred during the two-year stabilization period. The premium to total
approved development costs is intended to compensate Manor Care Realty
for the increasing value of its investment over time as well as for the
risks it takes in connection with developing assisted living facilities,
including the risks inherent in operating the facilities during the two
year stabilization period. Prior to purchase by ManorCare Health
Services, ManorCare Health Services will operate Manor Care Realty's
assisted living facilities for a fixed monthly fee pursuant to the
Assisted Living Facility Management Agreement. See "Relationship Between
Manor Care Realty and ManorCare Health Services After the Distribution."
. Capitalize On Growth in Demand for Assisted Living Services. Manor Care
Realty believes the anticipated increased market demand for assisted
living facilities presents Manor Care Realty with opportunities for
growth. Manor Care Realty believes it can successfully capitalize on its
ability to efficiently develop purpose-built assisted living projects
through the planned development of approximately 200 assisted living
facilities for sale to ManorCare Health Services over the next five
years, including approximately 170 Arden Courts and 38 Springhouse senior
residences. In addition to developing assisted living facilities for
ManorCare Health Services and leasing the Skilled Nursing Facilities to
ManorCare Health Services, Manor Care Realty and ManorCare Health
Services plan to work closely together to develop new assisted living
products aimed at segments of the assisted living business not currently
served by the Springhouse and Arden Courts concepts.
. Establish Relations with Other Leading Health Care Providers. While Manor
Care Realty expects that over the next five years the vast majority of
its revenues will be derived from ManorCare Health Services, subject to
contractual restrictions and capital constraints, Manor Care Realty may
diversify its operator base, establish relationships with other health
care providers to develop and lease health care properties and pursue
selective acquisition opportunities.
Manor Care was incorporated in August 1981 in the State of Delaware. Manor
Care's principal executive offices are located at 11555 Darnestown Road,
Gaithersburg, Maryland 20878-3200 and its telephone number is: (301) 979-4000.
DESCRIPTION OF THE TRANSACTIONS
The Distribution. Pursuant to the Distribution Agreement to be entered into
between Manor Care and ManorCare Health Services (the "Distribution
Agreement"), on or prior to the date the Distribution is effected (the
"Effective Date"), Manor Care will convey or cause to be conveyed to ManorCare
Health Services, among other things, (i) all of the business and assets of
Manor Care's assisted living business (the "Assisted Living Business"); (ii)
the shares of Common Stock owned by Manor Care of Vitalink Pharmacy Services,
Inc., a public company that owns and operates institutional pharmacies
("Vitalink"); (iii) the shares of Common and Preferred Stock owned by Manor
Care of In Home Health, Inc., a public company that provides comprehensive
health care services to clients in their homes ("In Home Health"); and (iv) the
50% partnership interests (the "Joint Venture Interests") owned by Manor Care
in the partnerships owning three additional skilled nursing facilities
(collectively, the "Contribution of Assets").
Manor Care will assign to ManorCare Health Services and ManorCare Health
Services will assume certain liabilities, including, subject to certain
exceptions, all liabilities arising from (i) the operation of the Assisted
Living Business or the ownership or use of assets or other activities in
connection therewith arising after the
6
<PAGE>
Effective Date, (ii) the operation of Manor Care Realty's 168 Skilled Nursing
Facilities after the Effective Date and (iii) the ownership of stock in
Vitalink or In Home Health and the ownership of the Joint Venture Interests
whether arising before, on or after the Distribution (collectively, the
"Assumption of Liabilities"). However, the assumption of such liabilities will
not release Manor Care Realty therefrom, if ManorCare Health Services should
fail, for any reason, to perform its obligations pursuant to such assumed
liabilities.
At or prior to the Distribution, Manor Care will make or cause to be made a
capital contribution (the "Capital Contribution") to ManorCare Health Services
consisting of (i) approximately $250 million in cash and (ii) an intercompany
senior note of Manor Care Real Estate in an aggregate principal amount of up to
$250 million (the "Realty Note"). For a description of the terms of the Realty
Note see "Description of the Transactions--The Realty Note." Manor Care may
determine to reduce the principal amount of the Realty Note prior to issuance
or to reduce the amount of the cash portion of the Capital Contribution to the
extent that Old Senior Notes remain outstanding upon consummation of the
Exchange Offer.
Following the Contribution of Assets, the Assumption of Liabilities and the
Capital Contribution, Manor Care will distribute to the holders of record of
Manor Care's common stock, par value $.01 per share ("Manor Care Common
Stock"), one share of the common stock, par value $.01 per share, of ManorCare
Health Services for every share of Manor Care Common Stock. Following the
Distribution, Manor Care will change its name to Manor Care Realty, Inc.
The Distribution is conditioned upon, among other things, (i) the receipt of
all necessary regulatory approvals and consents of third parties; (ii) the
execution of the agreements relating to the financing necessary to consummate
the Distribution and the related transactions and the receipt of the requisite
funds pursuant to such financing agreements; and (iii) the receipt by the Board
of Directors of Manor Care of an opinion of a reputable appraisal or financial
advisory, in a form satisfactory to the Board of Directors, with respect to the
solvency, prior to the Distribution of Manor Care and, after the Distribution,
of each of Manor Care Realty and ManorCare Health Services.
The Credit Facilities. Manor Care, on behalf of Manor Care Real Estate, is
negotiating a commitment letter (the "Commitment Letter") with The Chase
Manhattan Bank ("Chase") and Chase Securities Inc. ("CSI") relating to an
eight-year $150 million term loan facility, subject to earlier maturity under
certain circumstances, (the "Term Facility") and a five-year $300 million
revolving credit facility (the "Revolving Facility" and, together with the Term
Facility, the "Credit Facilities"). Manor Care anticipates that the Credit
Facilities will be secured by a majority of the assets of Manor Care Realty and
Manor Care Real Estate, by a pledge of the capital stock of Manor Care Real
Estate and Manor Care Realty's other subsidiaries and by an assignment of
certain agreements with ManorCare Health Services. In addition, Manor Care
anticipates that the Credit Facilities will be fully and unconditionally
guaranteed by Manor Care Realty and substantially all of Manor Care Realty's
present and future subsidiaries. Manor Care anticipates that the Credit
Facilities will be available, subject to the terms and conditions thereof, for
general corporate purposes and working capital purposes, including funding
development and operating costs and acquisitions. Borrowings under the Credit
Facilities will be used together with part of the proceeds from the sale of the
Notes to fund the cash portion of the Capital Contribution. The Offering is
conditioned on the effectiveness of the Credit Facilities. See "Description of
Certain Indebtedness--The Credit Facilities."
The Exchange Offer. ManorCare Health Services plans to offer to exchange
$1,000 principal amount of its 7 1/2% Senior Notes due 2006 (the "New MCHS
Senior Notes") for each $1,000 principal amount of 7 1/2% Senior Notes due 2006
of Manor Care (the "Old Senior Notes") properly tendered (the "Exchange
Offer"). In addition, consents to certain amendments of the covenants governing
the Old Senior Notes will be sought in connection with the Exchange Offer.
Consummation of the Exchange Offer is conditioned upon, among other things,
acceptance of the Exchange Offer by holders of at least a majority in principal
amount of the Old Senior Notes (the "Minimum Tender Condition") and
consummation of the Distribution. ManorCare Health Services may in its
reasonable discretion waive any such conditions and accept for exchange any Old
Senior Notes properly tendered. As a result of the Exchange Offer, ManorCare
Health Services, not Manor Care Realty, will be the obligor on the New MCHS
Senior Notes; and Manor Care Realty, not ManorCare Health Services, will
7
<PAGE>
remain the obligor on the Old Senior Notes. Pro forma information contained
herein assumes that all Old Senior Notes are properly tendered in the Exchange
Offer and that, after giving effect to the Exchange Offer, no Old Senior Notes
will be outstanding. See "Description of the Transactions--The Exchange Offer
and Solicitation."
Related Party Agreements. Following the Distribution, Manor Care Realty will
have a continuing relationship with ManorCare Health Services as a result of
the agreements being entered into in connection with the Distribution,
including the Lease Agreements, the Development Agreement, the Non-Competition
Agreement, the Assisted Living Facility Management Agreement, the Distribution
Agreement, the Tax Sharing Agreement, the Tax Administration Agreement, the
Employee Benefits and Other Employment Matters Allocation Agreement, the
Employee Benefits Administration Agreement, the Office Lease Agreement, the
Corporate Services Agreement, the Trademark Agreement, the License Agreement,
the Design Services Agreement, the Cash Management Agreement, and the Risk
Management Consulting Services Agreement. See "Relationship between Manor Care
Realty and ManorCare Health Services after the Distribution."
Manor Care Realty and ManorCare Health Services will enter into Lease
Agreements pursuant to which Manor Care Realty will lease to ManorCare Health
Services all the Skilled Nursing Facilities owned by Manor Care Realty and
Manor Care Realty will grant to Manor Care Health Services the right to operate
and manage the Skilled Nursing Facilities. Under the Lease Agreement for each
facility, ManorCare Health Services will pay annual rent to Manor Care Realty
equal to the greater of (i) 77% of Net Operating Profit and (ii) 10% of the
asset value of the subject facility (as agreed upon by Manor Care Realty and
Manor Care Health Services); provided that the rent for a specific year may be
reduced below these two amounts in certain circumstances.
In connection with the Distribution, Manor Care Realty and ManorCare Health
Services will enter into a Development Agreement pursuant to which Manor Care
Realty will develop assisted living facilities for sale to ManorCare Health
Services. ManorCare Health Services will be obligated to purchase each such
facility if occupancy reaches 75% for a period of five days during the two year
period measured from the time a particular facility opens. The purchase price
for each facility will be at a premium to Manor Care Realty's total approved
development costs, such premium ranging from 15% to 34% based on the number of
months elapsed since the opening of the relevant facility. If ManorCare Health
Services does not acquire a facility within such two year period, Manor Care
Realty may sell the facility to a third party. Total approved development costs
include expenses incurred in connection with the development and construction
of the facilities, but do not include operating losses incurred during the two-
year stabilization period. The premium to total approved development costs is
intended to compensate Manor Care Realty for the increasing value of its
investment over time as well as for the risks it takes in connection with
developing assisted living facilities, including the risks inherent in
operating the facilities during the two year stabilization period. During the
two year stabilization period (or such lesser time if stabilized occupancy is
achieved and ManorCare Health Services purchases the facility) ManorCare Health
Services will manage the assisted living facilities for Manor Care Realty for a
fixed monthly fee.
See "Risk Factors" and "Relationship Between Manor Care Realty and ManorCare
Health Services after the Distribution" for a more detailed description of the
relationship between ManorCare Health Services and Manor Care Realty after the
Distribution and of the terms of the Lease Agreements, the Development
Agreement and the other agreements referred to above.
8
<PAGE>
Set forth below is a chart which illustrates the corporate structure of Manor
Care prior to the Distribution and the corporate structure of Manor Care Realty
and ManorCare Health Services after giving effect to the Distribution and
related transactions:
[CHART DIPICTING MANOR CARE, INC. BEFORE THE DISTRIBUTION]
9
<PAGE>
The following table illustrates the estimated sources and uses of funds,
assuming the Distribution was consummated on August 31, 1997 and that all
holders of the outstanding Old Senior Notes accept the Exchange Offer:
<TABLE>
<CAPTION>
AMOUNT
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
SOURCES:
Use of existing cash................................... $ 29.9
Working capital reimbursement from ManorCare Health
Services.............................................. 12.5
Revolving Credit Facility(1)........................... 28.0
Term Loan.............................................. 150.0
Gross proceeds of the Offering......................... 350.0
Realty Note(2)......................................... 250.0
------
Total Sources........................................ $820.4
======
USES:
Contribution of Cash to ManorCare Health Services(2)... $250.0
Redemption of the 9 1/2% Senior Subordinated Notes due
2002(3)............................................... 140.1
Repayment of amounts outstanding under Existing
Revolving Credit Facility............................. 145.0
Repayment of amounts outstanding under Promissory Note. 14.3
Repayment of certain mortgage bond indebtedness ....... 0.5
Contribution of the Realty Note to ManorCare Health
Services(2)........................................... 250.0
Fees and Expenses(4)................................... 20.5
------
Total Uses........................................... $820.4
======
</TABLE>
- --------
(1) For a description of the availability of borrowings under the Revolving
Credit Facility, see "Description of Certain Indebtedness--The Credit
Facilities."
(2) Manor Care may reduce the principal amount of the Realty Note prior to
issuance or reduce the amount of the cash portion of the Capital
Contribution to the extent Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
(3) The Senior Subordinated Notes were redeemed on November 17, 1997 at a
redemption price of 103.56% with the proceeds of borrowings under the
Existing Revolving Credit Facility.
(4) Excludes fees and expenses to be reimbursed by ManorCare Health Services.
Manor Care Realty believes that, following the consummation of the Offering,
it will have sufficient capital resources and liquidity, including cash flow
from operations and availability under the Credit Facilities and other sources
of debt and equity capital, to meet its anticipated borrowing needs, fund
anticipated capital expenditures and pursue its business strategy.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF MANOR CARE
AND PRO FORMA FINANCIAL DATA OF MANOR CARE REALTY
The following table sets forth a summary of selected historical financial
data of Manor Care and pro forma financial data of Manor Care Realty. The
historical financial data are not necessarily indicative of the results of
operations or financial position that would have been obtained if Manor Care
Realty had been a separate company during the periods shown nor necessarily
indicative of Manor Care Realty's future performance as a company. See "Risk
Factors--Operating History and Future Prospects." The historical statements of
income data for the fiscal years ended May 31, 1995, 1996 and 1997 and the
historical balance sheet data as of May 31, 1996 and 1997 are derived from the
audited consolidated financial statements of Manor Care. The historical
financial data set forth below should be read in conjunction with Manor Care's
Consolidated Financial Statements and the notes thereto found elsewhere in this
Prospectus.
The consolidated balance sheet as of August 31, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the
three months ended August 31, 1997 and 1996, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows at August 31, 1997 and for all
periods presented have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with Manor
Care's audited consolidated financial statements and notes thereto found
elsewhere in this Prospectus. The results of operations and cash flows for the
three month periods ended August 31, 1997 and 1996 are not necessarily
indicative of the operating results or cash flows for the full year.
The summary pro forma financial data make adjustments to the historical
balance sheet and the historical statements of income, as if the Distribution
and related transactions (including the Exchange Offer) had occurred on August
31, 1997 for purposes of the pro forma balance sheet, and on June 1, 1996 and
June 1, 1997, respectively, for purposes of the pro forma statement of income.
The pro forma financial statements of Manor Care Realty may not reflect the
future results of operations or financial position of Manor Care Realty or what
the results of operations would have been if Manor Care Realty had been a
separate company during such period. The pro forma adjustments reflect the
impact of the Distribution and related transactions, including the Credit
Facilities and the Realty Note, the Lease Agreements, the Assisted Living
Facility Management Agreements, net additional costs associated with general
corporate functions, the consummation of the Exchange Offer, the Offering and
the use of proceeds thereof, and the related income tax effects of these
adjustments. See "Pro Forma Financial Data" and the accompanying footnotes for
a discussion of the principal adjustments made in the preparation of the pro
forma financial information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, THREE MONTHS ENDED AUGUST 31,
------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
-------- -------- ---------- ----------- -------- ----------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Income Da-
ta:
Revenues................ $893,471 $985,150 $1,056,095 $217,132 $250,226 $274,054 $41,429
Expenses:
Operating.............. 670,987 735,671 789,074 59,013 191,539 208,247 5,559
Depreciation and
amortization.......... 48,284 56,503 60,243 60,608 14,586 15,985 16,245
General corporate and
other................. 60,240 63,127 60,177 -- 14,163 11,265 --
Provisions for asset
impairment and
restructuring......... -- 25,100 -- -- -- -- --
-------- -------- ---------- -------- -------- -------- -------
Total expenses......... 779,511 880,401 909,494 119,621 220,288 235,497 21,804
-------- -------- ---------- -------- -------- -------- -------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 113,960 104,749 146,601 97,511 29,938 38,557 19,625
-------- -------- ---------- -------- -------- -------- -------
Interest income from
advances to
discontinued lodging
segment............... 15,492 19,673 21,221 21,221 5,079 2,604 2,604
Interest expense....... (18,872) (18,951) (24,514) (64,414) (5,302) (6,829) (17,118)
Interest income and
other................. 6,372 3,452 6,400 6,400 1,653 2,592 2,592
-------- -------- ---------- -------- -------- -------- -------
Income from continuing
operations before
income taxes........... 116,952 108,923 149,708 60,718 31,368 36,924 7,703
Income taxes............ 46,101 44,563 60,783 25,587 12,327 14,100 2,892
-------- -------- ---------- -------- -------- -------- -------
Income from continuing
operations............. 70,851 64,360 88,925 35,131 19,041 22,824 4,811
Income from discontinued
assisted living,
pharmacy and home
health operations...... 6,824 1,111 36,188 -- 1,225 (2,964) --
Income from discontinued
lodging operations..... 16,811 20,436 11,829 11,829 3,419 -- --
-------- -------- ---------- -------- -------- -------- -------
Net income.............. $ 94,486 $ 85,907 $ 136,942 $ 46,960 $ 23,685 $ 19,860 $ 4,811
======== ======== ========== ======== ======== ======== =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
---------------------- -----------------------
PRO FORMA
1996 1997 1997 1997
---------- ---------- ---------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $ (33,357) $ 33,718 $ 200,813 $ 124,001
Total assets............ 1,593,193 1,547,578 1,638,292 1,192,977
Long-term debt.......... 490,575 491,190 551,507 804,547
Total equity............ 707,769 690,431 710,677 14,224
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
---------- ---------- ---------- ----------- -------- ------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial and
Operating Data:
Operating margin........ 12.8% 10.6% 13.9% 44.9% 11.9% 14.1% 47.4%
EBITDA(1)............... $162,244 $186,352 $206,844 $158,119 $44,524 $54,542 $35,870
EBITDA margin........... 18.16% 18.92% 19.59% 72.82% 17.79% 19.90% 86.58%
Number of operating
beds................... 22,252 23,227 23,865 23,510 23,221 24,079 23,724
Ratio of EBITDA to
interest expense....... 8.60x 9.83x 8.44x 2.45x 8.40x 7.99x 2.10x
Ratio of earnings to
fixed charges(2) ...... 6.43x 5.62x 6.03x 1.73x n/a 5.46x 1.31x
Cash provided by (used
in) continuing
operating activities... 104,059 191,264 75,750 n/a (3,930) (286) n/a
Cash used in investing
activities............. (174,602) (275,318) (98,900) n/a (45,351) (48,769) n/a
Cash provided by (used
in) financing
activities............. 80,037 123,539 (9,226) n/a 31,808 60,722 n/a
</TABLE>
- --------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and certain other special charges, including $25.1 million in
fiscal year 1996 relating to the impairment of assets. EBITDA is presented
to assist in understanding Manor Care and Manor Care Realty's operating
results. Additionally certain covenants in the Notes, the Realty Note and
the Credit Facilities are expected to be calculated based on EBITDA. EBITDA
is not intended to represent cash flows for the period, is not presented as
an alternative to operating income as an indicator of operating
performance, may not be comparable to other similarly titled measures of
other companies and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. The items excluded from the
calculation of EBITDA are significant components in understanding and
assessing the financial performance of Manor Care and Manor Care Realty.
EBITDA is included herein to provide additional information with respect to
the ability of Manor Care Realty to meet future debt service, capital
expenditures and working capital requirements. See Manor Care's
consolidated financial statements and the notes thereto appearing elsewhere
in this Prospectus.
(2) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before provision for
income taxes including dividends from less than 50% owned companies and
Manor Care's share of pre-tax income of 50%-owned companies carried at
equity, before fixed charges net of capitalized interest. Fixed charges
comprise interest on long-term and short-term debt, including capitalized
interest, the portion of rentals representative of an interest factor and
Manor Care's share of fixed charges of 50%-owned companies carried at
equity.
12
<PAGE>
THE OFFERING
Issuer............ Manor Care Real Estate Corp.
Securities
Offered.......... $350,000,000 aggregate principal amount of % Senior Notes
due 2008.
Maturity..........
, 2008.
Interest Payment and , commencing , 1998.
Dates............
Sinking Fund...... None.
Optional
Redemption....... Except as described below, Manor Care Real Estate may not
redeem the Notes prior to , 2003. On or after such date,
Manor Care Real Estate may redeem the Notes, in whole or in
part, at the redemption prices set forth herein, together
with accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time and from time to time
on or prior to , 2001, Manor Care Real Estate may
redeem up to 35% of the aggregate principal amount of the
Notes with the net cash proceeds of one or more Public
Equity Offerings by Manor Care Real Estate or Manor Care
Realty, at a redemption price equal to % of the principal
amount to be redeemed together with accrued and unpaid
interest, if any, to the date of redemption, provided that
at least 65% aggregate principal amount of the Notes
originally issued remains outstanding after each such
redemption. See "Description of the Notes--Optional
Redemption."
Change of Upon the occurrence of a Change of Control Triggering Event
Control..... (as defined), each holder of Notes will be entitled to
require Manor Care Real Estate to purchase any or all of
the Notes held by such holder at a price in cash equal to
101% of the principal amount thereof plus accrued and
unpaid interest to the date of purchase. See "Description
of the Notes--Offer to Purchase upon a Change of Control
Triggering Event," "Description of the Notes--Certain
Definitions" and "Risk Factors--Change of Control."
Guarantees........
Manor Care Real Estate's obligations under the Notes will
be fully and unconditionally and jointly and severally
guaranteed on a senior unsecured basis (the "Guarantees")
by Manor Care Realty (the "Parent Guarantor") and all of
the Restricted Subsidiaries other than inactive Restricted
Subsidiaries with no material assets (the "Subsidiary
Guarantors" and, together with the Parent Guarantor, the
"Guarantors"). As of the Issue Date, all of the
subsidiaries of Manor Care Realty and Manor Care Real
Estate will be Restricted Subsidiaries. The indenture under
which the Notes will be issued (the "Indenture") will
provide that if (1) all or substantially all of the assets
of any Subsidiary Guarantor or all of the Equity Interests
of any Subsidiary Guarantor are sold (including by issuance
or otherwise) by Manor Care Real Estate or by the Parent
Guarantor and its Subsidiaries in accordance with the terms
of the Indenture, or (2) the unsecured senior Indebtedness
of the Parent Guarantor, without benefit of any credit
enhancement, shall have been rated the Minimum Rating (as
defined), or (3) a Subsidiary Guarantor shall no longer be
required to guarantee the obligations of Manor Care Real
Estate under the Credit Facilities, or otherwise be an
obligor under, or provide credit support with respect to,
the Credit Facilities, then such Subsidiary Guarantor or
all Subsidiary Guarantors, as the case may be, shall
automatically be released
13
<PAGE>
and discharged of all guaranteed obligations with respect
to the Indenture and the Notes. See "Description of the
Notes--Guarantees" and "Risk Factors--Holding Company
Structure" and "Fraudulent Transfer Considerations; Legal
Dividend Requirements."
Ranking...... The Notes and the Guarantees will be unsecured senior
obligations of Manor Care Real Estate and the Guarantors,
respectively, and will rank pari passu with all other
existing and future senior Indebtedness of Manor Care Real
Estate and the Guarantors, including the Realty Note and
the Credit Facilities. However, the Notes and the
Guarantees will be effectively subordinated to secured
Indebtedness of Manor Care Real Estate and the Guarantors
to the extent of the assets securing such Indebtedness,
including all Indebtedness under the Credit Facilities.
After giving pro forma effect to the Offering, the use of
proceeds thereof, the Distribution and related transactions
(and assuming the holders of 100% of the outstanding Old
Senior Notes accept the Exchange Offer), as of August 31,
1997, Manor Care Realty's aggregate outstanding
indebtedness would have been approximately $805 million,
including approximately $205 million of secured borrowings
(including indebtedness under the Credit Facilities and
mortgage bond indebtedness), and unused commitments under
the Credit Facilities would have been $272 million. See
"Risk Factors--Asset Encumbrances."
Restrictive
Covenants... The Indenture will limit, among other things, (i) the
incurrence of additional indebtedness by Manor Care Realty
and its Restricted Subsidiaries, (ii) the payment of
dividends on, and redemption of, capital stock of Manor
Care Realty and its Restricted Subsidiaries, (iii)
investments by Manor Care Realty and its Restricted
Subsidiaries, (iv) sales of assets by Manor Care Realty and
its Restricted Subsidiaries and Restricted Subsidiary
stock, (v) transactions with affiliates, (vi) the creation
of liens by Manor Care Realty and its Restricted
Subsidiaries and (vii) consolidations, mergers and
transfers of all or substantially all of the assets of
Manor Care Realty or Manor Care Real Estate. The Indenture
will also prohibit certain restrictions on distributions
from Restricted Subsidiaries. However, all of these
limitations and prohibitions are subject to a number of
important qualifications and exceptions. Certain of such
covenants will not apply and will have no force or effect
from and after such time as unsecured senior indebtedness
of Manor Care Realty, without benefit of any credit
enhancement, shall have achieved the Minimum Rating. Except
as described under "Description of the Notes--Offer to
Purchase upon a Change of Control Triggering Event," the
Indenture does not contain provisions that permit the
holders of the Notes to require Manor Care Real Estate to
repurchase or redeem Notes in the event of a highly
leveraged transaction. See "Description of the Notes--
Certain Covenants."
Use of Proceeds...
The gross proceeds of $350 million from the issuance of the
Notes offered hereby (before deduction of discounts and
commissions), together with borrowings under the Credit
Facilities, will be used to effect the Distribution,
including financing the cash portion of the Capital
Contribution to ManorCare Health Services, refinancing
certain debt of Manor Care and paying related fees and
expenses. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers in evaluating an investment in the Notes.
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RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in or incorporated by reference in this Prospectus, the
following factors before purchasing the Notes offered hereby.
FORWARD-LOOKING INFORMATION; HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
This Prospectus contains various forward-looking statements and information
that are based on management's belief as well as assumptions made by and
information currently available to management. When used in this document, the
words "anticipate," "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties and assumptions. All of
these forward-looking statements are based on estimates and assumptions made
by management of Manor Care Realty which, although believed by management of
Manor Care Realty to be reasonable, are inherently uncertain. Therefore, undue
reliance should not be placed upon such estimates and statements. No assurance
can be given that any of such estimates will be realized and it is likely that
actual results will differ materially from those contemplated by such forward-
looking statements. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, projected or expected.
Among the key factors that may have a direct bearing on Manor Care Realty's
operating results is Manor Care Realty's ability to implement its plan to
construct, develop, acquire or sell skilled nursing and assisted living
facilities. In addition, actual future results and trends may differ
materially depending on a variety of factors discussed in this "Risk Factors"
section and elsewhere in this Prospectus. Factors that may affect such plans
or results include, without limitation, (i) Manor Care Realty's success in
implementing its business strategy, including its success in arranging
financing where required, (ii) the nature and extent of future competition,
(iii) the extent of future health care reform and regulation, including cost
containment measures, (iv) ManorCare Health Services' ability to manage and
operate the Skilled Nursing Facilities, (v) the loss or retirement of key
members of management or significant changes in the shareholder bases of Manor
Care Realty or ManorCare Health Services, (vi) increases in Manor Care
Realty's cost of borrowing, (vii) any costs associated with Manor Care
Realty's transition to a separate public company, (viii) changes in the mix of
payment sources for patient services provided by ManorCare Health Services,
including any decrease in the amount and percentage of revenues derived from
private payors, (ix) the ability of ManorCare Health Services to continue to
deliver high quality care and to attract private pay residents, and (x)
changes in general economic conditions and/or in the markets in which Manor
Care Realty may, from time to time, compete. Many of such factors are beyond
the control of Manor Care Realty and its management. Because Manor Care Realty
will be dependent to a large extent on ManorCare Health Services, Manor Care
Realty will also be affected adversely to the extent that any of the above
factors affect ManorCare Health Services.
The historical financial statements and data of Manor Care included, or
incorporated by reference herein, do not give effect to the Distribution and
related transactions. Manor Care, prior to the Distribution, had different
management, revenue base and cost structures, as well as significantly
different capitalization. In addition, Manor Care Realty did not operate as a
separate company during such periods. Consequently, the historical financial
statements and data included herein do not indicate the results of operations
or financial condition of Manor Care Realty that would have been reported for
the periods indicated. In addition, the pro forma financial statements and
data, which give effect to the Distribution and related transactions, are
included herein for informational purposes and, while management believes that
they may be helpful in understanding the operations of Manor Care Realty, on
such a pro forma basis, undue reliance should not be placed thereon. Such pro
forma financial statements and data do not reflect the future results of Manor
Care Realty.
NO OPERATING HISTORY AS AN INDEPENDENT PUBLIC COMPANY AND UNCERTAINTY OF
FUTURE PROSPECTS
Manor Care Realty does not have an operating history as an independent
public company. However, Manor Care Realty will own and conduct the operations
of Manor Care's real estate development business and Mesquite Hospital. These
businesses were previously conducted by Manor Care as divisions of a large
public company with greater financial strength. In addition, the division of
Manor Care may result in some temporary dislocation and inefficiencies to the
business operations, as well as to the organizational and personnel structure.
There can be no assurance that Manor Care Realty's operations will be
profitable in 1998 or in future years.
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SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
As a result of the Distribution, Manor Care Realty will be highly leveraged,
with indebtedness that is very substantial in relation to its stockholders'
equity. After giving pro forma effect to the Offering, the use of proceeds
thereof, the Distribution and related transactions (and assuming the holders of
100% of the outstanding Old Senior Notes accept the Exchange Offer), as of
August 31, 1997, Manor Care Realty's aggregate outstanding indebtedness would
have been $805 million and Manor Care Realty's stockholders' equity would have
been $14.2 million. The indebtedness consists of the following: (i) $350
million aggregate principal amount of Notes offered hereby, (ii) the Realty
Note, in an aggregate principal amount of up to $250 million, (iii) $178
million drawn under the Credit Facilities, which bear interest at either LIBOR
or Chase's base rate plus a variable margin, of which $150 million applies to
the Term Facility (the Term Facility amortizes in years six through eight), and
$28 million applies to the Revolving Facility (the Revolving Facility has a
bullet maturity), and (iv) $27 million of facility-specific mortgage bond
indebtedness with maturities and interest rates ranging from one to twenty-six
years, and 4% to 12%, respectively. Manor Care Realty expects that the Credit
Facilities and the Indenture will permit Manor Care Realty to incur additional
indebtedness, subject to certain limitations. Manor Care Realty will need to
incur additional indebtedness over the next five years to fund the planned
development of skilled nursing and assisted living facilities over the next
five years, and it is expected that this will be funded through the Revolving
Credit Facility. The Credit Facilities will be subject to mandatory prepayment
in certain circumstances. See "Description of Certain Indebtedness."
Manor Care Realty's ability to repay the indebtedness to be incurred in
connection with the Distribution at its scheduled maturity is expected to be
dependent in whole or in part on its obtaining additional debt and/or equity
financing or, alternatively, the disposition of assets. The Credit Facilities
are expected to be secured by a majority of the assets of Manor Care Realty and
Manor Care Real Estate and by a pledge of the capital stock of Manor Care Real
Estate and Manor Care Realty's other subsidiaries and by an assignment of
certain agreements with ManorCare Health Services, including the Lease
Agreements and the Development Agreement. No assurances can be given as to
Manor Care Realty's ability to repay other indebtedness with a combination of
operating cash flow and refinancings or seek additional financing, which
ability may be impaired as a result of such security. However, based on current
management expectations and assuming no material change in general economic
conditions, Manor Care Realty believes that it will be able to repay its
maturing indebtedness with a combination of operating cash flow and
refinancings in the capital and bank markets, as applicable, as it is currently
scheduled to become due. In the event Manor Care Realty is unable to obtain the
necessary funds to repay its indebtedness, Manor Care Realty would be in
default under the terms of its indebtedness. Such a default could result in,
among other things, a foreclosure or other actions by creditors against
collateral securing such indebtedness, and in cross defaults to other
indebtedness resulting in the acceleration of the maturity of all principal and
interest of indebtedness subject to such cross defaults. In the event of such a
default and a resulting foreclosure on the skilled nursing facilities, Manor
Care Realty would not receive any further lease payments from ManorCare Health
Services under the terms of the Lease Agreements. The loss of lease payments
payable to Manor Care Realty under the Lease Agreements would have a material
adverse effect on Manor Care Realty's revenues and results of operations.
The degree to which Manor Care Realty is leveraged could have important
consequences, including the following: (i) Manor Care Realty's ability to
obtain additional financing in the future to fund construction of facilities,
for working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired; (ii) a substantial portion of Manor Care Realty's
cash flow from operations must be dedicated to the payment of principal and
interest on its indebtedness, thereby reducing the funds available to Manor
Care Realty for its operations; (iii) certain of Manor Care Realty's borrowings
will be at variable rates of interest, which will cause Manor Care Realty to be
vulnerable to increases in interest rates; and (iv) Manor Care Realty's
substantial leverage may make it more vulnerable to cost increases and adverse
economic conditions and limit its ability to withstand competitive pressures or
take advantage of business opportunities.
Manor Care Realty's ability to make scheduled principal payments or to
refinance its obligations with respect to its indebtedness depends primarily on
the financial and operating performance of ManorCare Health Services, which, in
turn, is subject to prevailing economic conditions and to financial, business,
industry and
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other factors which are beyond its control. See "--Forward-Looking Information;
Historical and Pro Forma Financial Information" for a description of certain
factors that may affect Manor Care Realty's and ManorCare Health Service's
financial and operating performance. There can be no assurance that Manor Care
Realty's operating results will be sufficient for payment of Manor Care
Realty's indebtedness.
Manor Care Realty currently anticipates investing between $1.5 billion and
$1.9 billion over the next five years in the development of skilled nursing and
assisted living facilities. This includes acquisitions of existing skilled
nursing facilities and includes capital improvements for new and existing
facilities. The amount of additional indebtedness required to fund this capital
requirement currently is anticipated to be approximately $250 million. The
balance is currently expected to be funded from the proceeds from the sales of
assisted living facilities to ManorCare Health Services, an equity offering
expected to occur in late fiscal year 1998, and from cash provided from
operating activities. There can be no assurances that Manor Care Realty will be
able to obtain debt or equity financing on terms acceptable to it or that the
proceeds of such financings will be available or sufficient to fund assisted
living and skilled nursing development over the next five years.
Manor Care Realty's business is capital intensive and Manor Care Realty will
continue to have significant capital requirements in the future. As a highly
leveraged corporation, any new financings and refinancings by Manor Care Realty
of its existing debt may be at higher interest rates and on less advantageous
terms than would have been the case had the Distribution not taken place. Manor
Care Realty's ability to meet certain financial tests in the Credit Facilities
will be dependent upon its ability to reduce its leverage over the next three
to five years. Such reductions may require Manor Care Realty to raise
additional equity, which will be dependent upon conditions then prevailing in
the United States equity capital markets. See "Description of Certain
Indebtedness--The Credit Facilities."
HOLDING COMPANY STRUCTURE
Manor Care Realty is a holding company with no material business operations,
sources of income or assets of its own other than the shares of its
subsidiaries, and Manor Care Real Estate conducts a significant portion of its
operations through subsidiaries. Because substantially all of Manor Care
Realty's and a significant portion of Manor Care Real Estate's operations are
conducted through subsidiaries, each of Manor Care Realty's and Manor Care Real
Estate's cash flow and, consequently, their respective abilities to meet their
respective debt service obligations, including as to payment of principal,
premium, if any, and interest on the Notes, is dependent upon the cash flow of
their respective subsidiaries and the payment of funds by those subsidiaries in
the form of loans, dividends, fees or otherwise. The subsidiaries are separate
and distinct legal entities and will have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether in the form of loans, dividends or otherwise,
except pursuant to the Guarantees, which are subject to release under certain
circumstances. See "--Fraudulent Transfer Considerations, Legal Dividend
Requirements." Any right of Manor Care Realty or Manor Care Real Estate, as the
case may be, to receive assets of any of its subsidiaries upon its liquidation
or reorganization (and the consequent right of the holders of the Notes to
participate in the distribution of proceeds from those assets) will be
effectively subordinated to the claims of such subsidiary's creditors
(including tax authorities, trade creditors, the lenders under the Credit
Facilities, and subject to the considerations described under "--Fraudulent
Transfer Considerations; Legal Dividend Requirements," the holders of the
Notes, as well as other lenders to those subsidiaries), except to the extent
that Manor Care Realty or Manor Care Real Estate, as the case may be, is itself
a creditor of such subsidiary, in which case such entity's claims would still
be subordinated to any security interest in the assets of such subsidiary and
indebtedness of such subsidiary senior to that held by such entity. See "--
Asset Encumbrances." The terms of the Indenture will provide for the release of
a Subsidiary Guarantor's Guarantee under the Indenture in the event such
Subsidiary Guarantor is not an obligor under the Credit Facilities. In
addition, although the Indenture limits the ability of Manor Care Realty's
Restricted Subsidiaries to incur additional indebtedness and to enter into
agreements that restrict the ability of each Restricted Subsidiary to pay
dividends or make or repay loans or other payments to Manor Care Realty, Manor
Care Realty's Restricted Subsidiaries may nevertheless be able to incur
substantial additional indebtedness. See "Description of the Notes--Covenants."
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ASSET ENCUMBRANCES
The Notes and the Guarantees will be effectively subordinated to any secured
Indebtedness of Manor Care Real Estate and the Guarantors, respectively, to
the extent of the assets securing such Indebtedness. It is expected that the
Credit Facilities will be secured (i) by a pledge of the capital stock of
Manor Care Real Estate and Manor Care Realty's other subsidiaries, (ii) by a
majority of the assets of Manor Care Realty and Manor Care Real Estate, and
(iii) by an assignment of certain agreements between Manor Care Real Estate or
a subsidiary of Manor Care Real Estate on the one hand, and ManorCare Health
Services, on the other hand, including the Lease Agreements and the
Development Agreement. The Lease Agreements and the Development Agreement are
expected to generate substantially all of the revenues and cash flow of Manor
Care Real Estate. On a pro forma basis after giving effect to the Distribution
and related transactions (and assuming the holders of 100% of the outstanding
Old Senior Notes accept the Exchange Offer), as of August 31, 1997, Manor Care
Realty would have had approximately $205 million of secured borrowings
(including $178 million of indebtedness under the Credit Facilities and $27
million of mortgage bond indebtedness), and unused commitments under the
Credit Facilities of $272 million. The Indenture will permit Manor Care
Realty, Manor Care Real Estate and the Restricted Subsidiaries to incur
additional secured Indebtedness, subject to certain limitations.
RESTRICTIONS IMPOSED BY TERMS OF MANOR CARE REALTY'S INDEBTEDNESS
The Indenture will restrict, among other things, the ability of Manor Care
Realty and its subsidiaries, other than the Unrestricted Subsidiaries, to
incur additional indebtedness, incur liens, pay dividends or make certain
other restricted payments. In addition, Manor Care Realty anticipates that the
Credit Facilities will impose upon Manor Care Realty certain financial and
operating covenants, including, among others, requirements that Manor Care
Realty maintain certain financial ratios and satisfy certain financial tests,
limitations on capital expenditures, and restrictions on the ability of Manor
Care Realty to incur debt, pay dividends, or take certain other corporate
actions, all of which may restrict Manor Care Realty's ability to expand or to
pursue its business strategies. The terms of the Indenture will provide for
the release of a Subsidiary Guarantor's Guarantee under the Indenture in the
event such Subsidiary Guarantor is not an obligor under the Credit Facilities.
There can be no assurance that Manor Care Realty will be able to comply with
the covenants and in addition, changes in economic or business conditions,
results of operations or other factors could in the future cause a violation
of one or more covenants in Manor Care Realty's debt instruments. Failure by
Manor Care Realty to comply with such covenants may result in an event of
default which, if not cured or waived, could have a material adverse effect on
Manor Care Realty. See "--Substantial Leverage; Ability to Service
Indebtedness," "Description of the Notes" and "Description of Certain
Indebtedness."
THE REALTY NOTE
The Realty Note provides that after the three year anniversary of the
issuance thereof, ManorCare Health Services may request that Manor Care Realty
redeem the Realty Note at a redemption price equal to 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption.
Manor Care Realty may not have adequate funds to effect such redemption and in
such case may seek to obtain funds therefor through additional debt or equity
financing. The anticipated terms of the Credit Facility will not permit Manor
Care Realty to refinance the Realty Note with the proceeds of borrowings
thereunder; the Indenture will permit Manor Care Realty to refinance the
Realty Note. In the event that ManorCare Health Services requests that Manor
Care Realty redeem the Realty Note and Manor Care Realty does not redeem the
Realty Note, the interest rate on the Realty Note will increase by 200 basis
points; provided that such interest rate will not be so increased unless, as
of the time such request for redemption is made, the aggregate amount of rent
paid by ManorCare Health Services under the Lease Agreements with respect to
all properties subject to such Lease Agreements shall equal or exceed the
aggregate Priority Sum for all such properties on a cumulative, annual basis
from the Effective Date through the third anniversary thereof (such aggregate
amount of rent being herein referred to as the "Threshold Rent"). Solely for
purposes of calculating the Threshold Rent, (i) the aggregate Priority Sum for
the fiscal year ended May 31, 1999 shall be deemed to be the aggregate
Priority Sum calculated pursuant to the Lease Agreements plus $5 million and
(ii) the aggregate Priority Sum for the fiscal year ended May 31, 2000 and
thereafter shall be deemed to be the aggregate Priority Sum calculated
pursuant to the Lease Agreements plus $10 million. Any such increased interest
rate on the Realty Note may have a material adverse affect on Manor Care
Realty.
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FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that each of Manor
Care Realty and ManorCare Health Services shall have received an opinion
satisfactory to the Board of Directors regarding the solvency of Manor Care
Realty and ManorCare Health Services and the permissibility of the
Contribution of Assets, the Capital Contribution, the Assumption of
Liabilities and the Distribution under Section 170 of the Delaware General
Corporation Law (the "DGCL"). Manor Care's Board of Directors does not intend
to consummate the Distribution unless it is satisfied regarding the
permissibility of the Distribution under Section 170 of DGCL and the solvency
of Manor Care and ManorCare Health Services as of the declaration by Manor
Care of the distribution of the capital stock of ManorCare Health Services to
Manor Care's shareholders and as of the consummation of the Distribution.
There is no certainty, however, that a court would reach the same conclusions
set forth in such opinion in determining whether Manor Care Real Estate, Manor
Care Realty or ManorCare Health Services was insolvent at the time of, or
after giving effect to, the Contribution of Assets, the Capital Contribution,
the Assumption of Liabilities and the Distribution.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time
Manor Care effected the Distribution, Manor Care, Manor Care Real Estate or
any of the Guarantors (i) (a) was insolvent, (b) was rendered insolvent by
reason of the Distribution or the incurrence of the indebtedness represented
by the Notes and the Guarantees, (c) was engaged in a business or transaction
for which its remaining assets, as the case may be, constituted unreasonably
small capital, or (d) intended to incur, or believed it would incur, debts
beyond its ability to pay as such debts matured and received less than fair
consideration or reasonably equivalent value or (ii) made the Distribution,
issued the Notes or guaranteed the Notes with actual intent to hinder, delay
or defraud existing or future creditors of Manor Care, Manor Care Real Estate
or the Guarantors, such court may be asked to void the Distribution (in whole
or in part), the Notes and/or the Guarantees as fraudulent conveyances. If a
court finds that the Distribution or the Offering and use of proceeds thereof
constituted a fraudulent conveyance of assets of Manor Care, Manor Care Real
Estate or the Guarantors, such court may void or subordinate the obligations
of the Notes and/or the Guarantees. The measure of insolvency for purposes of
the foregoing will vary depending upon the jurisdiction whose law is being
applied. Generally, however, Manor Care, Manor Care Real Estate or a
Subsidiary Guarantor would be considered insolvent if the fair value of its
assets were less than the amount of its liabilities or if it incurred debt
beyond its ability to repay such debt as it matures. In determining the debts
of Manor Care, Manor Care Real Estate or a Subsidiary Guarantor for such
purpose, a court may disregard, in whole or in part, the effect of the
Assumption of Liabilities by ManorCare Health Services if it finds that
ManorCare Health Services was at the time of the Assumption of Liabilities
unable to pay assumed debts.
After giving pro forma effect to the Distribution and related transactions
as if they occurred on August 31, 1997, (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care's
indebtedness, (ii) liabilities of Manor Care relating to benefits and workers'
compensation of approximately $49.8 million, (iii) current liabilities of the
skilled nursing facilities of approximately $55.5 million, and (iv) deferred
tax liabilities of Manor Care of approximately $38.4 million. In addition,
pursuant to the Distribution Agreement, ManorCare Health Services will assume
certain contingent liabilities of Manor Care. If, applying the foregoing
standards, ManorCare Health Services is found to have effected a fraudulent
conveyance in assuming debts of Manor Care pursuant to the Assumption of
Liabilities, a court in a suit by an unpaid creditor or representative of
creditors may void the Assumption of Liabilities (in whole or in part) with
the result that Manor Care Realty may be required to pay all or part of such
liabilities.
Manor Care's Board of Directors and management believe that, in accordance
with the solvency opinion rendered in connection with the Distribution, both
prior to and immediately following the consummation of the Distribution, (i)
Manor Care, Manor Care Realty and ManorCare Health Services each (a) will be
solvent (in accordance with the foregoing definitions), (b) will be able to
repay its debts as they mature, and (c) will have sufficient capital to carry
on its businesses and (ii) the Distribution will be made entirely out of Manor
Care's surplus, as required under Section 170 of the Delaware General
Corporation Law. Manor Care's Board of
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Directors and management further believe that neither Manor Care nor ManorCare
Health Services is entering into the Distribution with any actual intent to
hinder, delay or defraud existing or future creditors of Manor Care Realty or
ManorCare Health Services. Therefore, the Notes should not be voided as a
fraudulent conveyance. The Board is not expected to receive an opinion,
however, with respect to the solvency of each Subsidiary Guarantor.
The ability of Manor Care Real Estate, Manor Care Realty and the Subsidiary
Guarantors to honor their obligations under the Notes may depend, in part, on
the continued payment of rentals under one or more leases entered into between
Manor Care Real Estate or a subsidiary thereof as lessor and ManorCare Health
Services or a subsidiary thereof as lessee. However, in the event that
ManorCare Health Services becomes the subject of bankruptcy proceedings, a
trustee in bankruptcy for ManorCare Health Services, or ManorCare Health
Services as "debtor in possession," may elect to reject such leases, with the
result that rental payments under such leases may terminate. Pending
assumption or rejection of leases, Manor Care Realty may be subjected to delay
in receiving rental payments. Although, in the event of such a rejection of
leases, Manor Care Realty may be able to assert claims for damages against
ManorCare Health Services, the permissible amount of such claims may be
limited by provisions of bankruptcy law, and no assurance can be given as to
the ranking of Manor Care Realty's claims. In addition, in the event of a
ManorCare Health Services bankruptcy, no assurance can be given that Manor
Care Real Estate will be permitted to reduce its liability to ManorCare Health
Services under the Realty Note by setting off liabilities owed to it by
ManorCare Health Services, whether arising from the rejection or termination
of leases or otherwise. Further, the benefit of any such offset may be claimed
by the secured lenders. Manor Care Realty and Manor Care Real Estate may be
deemed "insiders" of ManorCare Health Services for purposes of the
preferential transfer provisions of the federal bankruptcy law. As a result,
it is possible that payments made by ManorCare Health Services to or for the
benefit of Manor Care Realty or Manor Care Real Estate on account of pre-
existing debts within one year of the commencement of bankruptcy proceedings
for ManorCare Health Services may be voided and recovered from Manor Care
Realty as preferential transfers. Payments made by ManorCare Health Services
to third parties under the Assumption of Liabilities may be deemed payments
for the benefit of Manor Care Realty for this purpose, and as a result, such
payments, if made within one year of the commencement of bankruptcy
proceedings, may be recoverable from Manor Care Realty.
DEPENDENCE UPON MANORCARE HEALTH SERVICES
ManorCare Health Services will account for the vast majority of Manor Care
Realty's revenues over at least the first five years after the Distribution.
Following the Distribution, Manor Care Realty's principal sources of revenue
will arise from payments pursuant to the lease of the Skilled Nursing
Facilities to ManorCare Health Services, the proceeds of the sale to ManorCare
Health Services of assisted living facilities developed by Manor Care Realty
and revenues derived from Mesquite Hospital. In addition, pursuant to the
terms of the Non-Competition Agreement, Manor Care Realty may not, subject to
certain exceptions, enter into management agreements with third parties with
respect to acquired or developed skilled nursing facilities properties unless
ManorCare Health Services has declined to manage such facilities. The Non-
Competition Agreement imposes other restrictions on Manor Care Realty. See
"Relationship between Manor Care Realty and ManorCare Health Services after
the Distribution-- Non-Competition Agreement." Accordingly, Manor Care
Realty's financial and operating performance will depend primarily on the
financial and operating performance of ManorCare Health Services. Poor
performance of the Skilled Nursing Facilities operated by ManorCare Health
Services or the assisted living facilities developed for ManorCare Health
Services would have a material adverse effect on Manor Care Realty or render
Manor Care Realty unable to meet its debt service requirements. Although Manor
Care Realty will consider, subject to capital constraints and the terms of the
Non-Competition Agreement, diversifying its business, there can be no
assurance that it will be able to do so or if able, to be successful in this
effort. In the event that Manor Care Realty pursues its strategy to diversify
its business, Manor Care Realty may require substantial additional capital
resources. See "Business of Manor Care Realty after the Distribution."
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DEPENDENCE BY MANOR CARE REALTY ON RELATED PARTY AGREEMENTS WITH MANORCARE
HEALTH SERVICES; FAILURE TO ACHIEVE OCCUPANCY RATES AT NEWLY DEVELOPED
ASSISTED LIVING FACILITIES
In connection with the Distribution, Manor Care Realty will enter into
agreements with ManorCare Health Services, including the Development
Agreement, the Lease Agreements and the Assisted Living Management Agreement.
Pursuant to the Development Agreement, Manor Care Realty will develop assisted
living facilities for ManorCare Health Services. ManorCare Health Services
will be obligated to purchase such facility if at any time during the two-year
period measured from the time a particular facility opens occupancy reaches
75% for a period of five days. Such purchases shall be at fixed prices based
upon a stated premium to approved construction costs as determined under the
Development Agreement. Total approved development costs include expenses
incurred in connection with the development and construction of the
facilities, but do not include operating losses incurred during the two-year
stabilization period. The premium to total approved development costs is
intended to compensate Manor Care Realty for the increasing value of its
investment over time as well as for the risks it takes in connection with
developing assisted living facilities, including the risks inherent in
operating the facilities during the two year stabilization period. Pursuant to
the Assisted Living Facility Management Agreement, ManorCare Health Services
will manage assisted living facilities for Manor Care Realty for a fixed
monthly fee during the two-year stabilization period under the Development
Agreement. Given that the assisted living facilities will be managed by
ManorCare Health Services during the two-year stabilization period, the
occupancy levels in these facilities depend on ManorCare Health Services'
ability to manage the facilities. See "Relationship between Manor Care Realty
and ManorCare Health Services after the Distribution-Development Agreement."
The 14 Arden Courts facilities, including seven mature facilities
(facilities that have been operated by Manor Care for a minimum of two years)
and seven start-up facilities, had an average occupancy of 87% as of December
1, 1997. Twelve of the Arden Courts attained occupancy of 75% or greater as of
December 1, 1997. For the 12 facilities that have reached 75% occupancy, the
75% occupancy level was achieved on average in 11 months. With the three most
recent openings, Manor Care has intensified pre-marketing efforts in an
attempt to shorten the time period required to reach full occupancy.
The 21 Springhouse senior residences, including nineteen mature facilities
and two start-up facilities, had an average occupancy of 86% as of December 1,
1997. Eighteen of the Springhouse senior residences were acquired and two were
built in the late 1980's. Manor Care recently developed a prototypical design
for the future development of its Springhouse product and opened the first
such facility in February, 1997 in Tucson, Arizona. The Tucson Springhouse
facility had an occupancy of 53% as of December 1, 1997.
If ManorCare Health Services does not acquire a facility within the two-year
stabilization period, Manor Care Realty will have the right to sell the
facility to a third party. ManorCare Health Services will retain the rights to
the Arden Courts and Springhouse brand names in the event of a third-party
sale. Accordingly, the risks related to construction and the initial occupancy
and operation of the assisted living facilities developed by Manor Care Realty
will be borne by Manor Care Realty. There can be no assurance that the
requisite occupancy levels will be achieved at a particular facility. In such
event there can be no assurance that Manor Care Realty would be able to sell
the facility to a third party on attractive terms. Pursuant to the Lease
Agreements, Manor Care Realty will lease to ManorCare Health Services all of
its Skilled Nursing Facilities, and Manor Care Realty will grant to ManorCare
Health Services, pursuant to the Lease Agreements or by separate agreement,
the right to manage all of Manor Care Realty's current and future skilled
nursing facilities. Under the Lease Agreements, Manor Care Realty will, in
effect, bear the economic and other costs associated with the operation of the
Skilled Nursing Facilities and share in a portion of the operating profit of
each such facility. Lease payments payable to Manor Care Realty under the
Lease Agreements are, in effect, subordinated to operating expenses and
certain management fees payable to ManorCare Health Services under the Lease
Agreements. Manor Care Realty's revenues will be dependent on the fees
generated by the Lease Agreements and revenues derived from Mesquite Hospital
as well as on any proceeds received from the sale of assisted living
facilities to ManorCare Health Services under the Development Agreement;
however, Manor Care Realty will, in effect, bear the risks that the Skilled
Nursing Facilities cannot be operated profitably and that the assisted living
facilities will not be
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developed within their budget or will not reach 75% occupancy within two years
of their opening. Pursuant to the Distribution Agreement, Manor Care Realty
(and not ManorCare Health Services) will remain liable for certain pre-
Distribution liabilities (other than certain tax liabilities which are the
subject of the Tax Sharing Agreement). However, the assumption of such
liabilities will not release Manor Care Realty therefrom if ManorCare Health
Services should fail for any reason to perform its obligations pursuant to
such assumed liabilities. See "Relationship Between Manor Care Realty and
ManorCare Health Services after the Distribution."
The financial terms of the Lease Agreements were structured by Manor Care's
management under the general direction of Manor Care's Board of Directors to
create a risk/reward sharing arrangement at each of the Skilled Nursing
Facilities pursuant to which each of the companies would be fairly and
reasonably compensated for the contributions it made and the risks it assumed.
Manor Care did not seek proposals from unaffiliated third parties. Such a
solicitation would not have been practical in view of the proposed
relationship and make-up of the two companies to be parties to the Lease
Agreements. However, after the terms of the Lease Agreements were finalized,
Manor Care's Board of Directors reviewed them in light of the objectives
listed above taking into account that alternative third party proposals were
not solicited. Based on that review, the Board concurred with management's
judgement that the terms of the Lease Agreements are no less favorable to
either party than would be available from an unaffiliated third party.
Similarly, the financial terms of the Development Agreement and the Assisted
Living Facility Management Agreements were structured to achieve the following
objectives: (i) Manor Care Realty should receive a fair return on its capital
invested in developing new assisted living facilities; (ii) ManorCare Health
Services should be required to purchase a facility immediately upon its
achievement of a profitable occupancy level; and (iii) each party should
receive returns based on the magnitude and duration of risks assumed by that
party pursuant to the Development Agreement and the Assisted Living Facility
Management Agreement. After the terms of the Development Agreement and the
Assisted Living Facility Management Agreements were finalized, Manor Care's
Board of Directors reviewed them in light of the objectives listed above
taking into account that Manor Care Realty would be functioning substantially
as ManorCare Health Services' developer of assisted living facilities. Based
on that review, the Board concurred with management's judgement that the terms
of the Development Agreement and the Assisted Living Facility Management
Agreements are no less favorable to either party than would be available from
an unaffiliated third party.
NEED FOR ADDITIONAL FINANCING TO FUND DEVELOPMENT OF ASSISTED LIVING
FACILITIES
During the first five years after the Distribution, Manor Care Realty plans
to develop approximately 200 new facilities for ManorCare Health Services. The
estimated cost to complete these facilities is approximately $1.4 billion.
Manor Care Realty's ability to achieve its development goals will depend upon
a variety of factors, many of which are beyond Manor Care Realty's control.
Manor Care Realty plans to finance this development with borrowings under the
Credit Facilities, proceeds from sales of assisted living facilities to
ManorCare Health Services pursuant to the terms of the Development Agreement,
cash flow from operations and proceeds from additional debt and/or equity
financings. In this regard, within one year of the consummation of the
Distribution, Manor Care Realty plans to raise approximately $100 to $150
million in equity and may use the proceeds of such offering to reduce
indebtedness and/or to fund the development of assisted living facilities.
Such equity financing will be dependent upon conditions then prevailing in the
United States equity capital markets. There can be no assurance that any such
additional financings will be available at all, or if available, on terms
acceptable to Manor Care Realty. In addition, Manor Care Realty expects that
its ability to borrow under the Credit Facilities will be subject to Manor
Care Realty's compliance with certain covenants and other conditions and that
the obligation of ManorCare Health Services to purchase assisted living
facilities pursuant to the Development Agreement will be subject to achieving
certain occupancy levels in the facilities. See "Description of Certain
Indebtedness--The Credit Facilities" and "Relationship Between Manor Care
Realty and ManorCare Health Services After the Distribution--Development
Agreement Relating to Assisted Living Facilities". There
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can be no assurance that Manor Care Realty will satisfy the conditions to
borrowing under the Credit Facilities or that the requisite occupancy levels
will be achieved at the assisted living facilities developed by Manor Care
Realty for sale to ManorCare Health Services. If Manor Care Realty is unable
to obtain additional financing or if it is unable to satisfy the conditions to
borrowing under the Credit Facilities or if ManorCare Health Services does not
purchase substantially all of the assisted living facilities developed by
Manor Care Realty, Manor Care Realty may be required to delay or eliminate
some or all of its development projects all of which could have a material
adverse effect on Manor Care Realty.
DEVELOPMENT AND CONSTRUCTION RISKS
There can be no assurance that Manor Care Realty will not suffer delays in
its development program. The successful development of additional facilities
will involve a number of risks, including the possibility that Manor Care
Realty will not be able to locate suitable sites at acceptable prices or may
be unable to obtain, or may experience delays in obtaining, necessary
certificates of need, zoning, land use, building, occupancy, licensing and
other required governmental permits and authorizations. Manor Care Realty may
also incur construction costs that exceed original estimates or even so-called
guaranteed maximum cost construction contracts, and may not complete
construction projects on schedule. Manor Care Realty will rely on third-party
general contractors to construct its new facilities. There can be no assurance
that Manor Care Realty will not experience difficulties in working with
general contractors and subcontractors, which could result in increased
construction costs and delays. Further, facility development is subject to a
number of contingencies over which Manor Care Realty will have little control
and that could have a material adverse effect on project cost and completion
time, including shortages of, or the inability to obtain, labor or materials,
the inability of the general contractor or subcontractors to perform under
their contracts, strikes, or adverse weather conditions. Moreover, Manor Care
Realty will be a highly leveraged company which may make it more difficult to
secure short-term construction financing for these facilities and which will
make it more immediately vulnerable to adverse changes in prevailing interest
rates and in general business conditions, as well as conditions in the real
estate development industry. The failure of Manor Care Realty to maintain
substantial compliance with its schedule for completing these new assisted
living facilities or to build them at a cost substantially as planned or to
secure all necessary financing for development and construction of the
facilities on acceptable terms could have a material adverse effect on Manor
Care Realty.
SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.20% and 22.86%,
respectively, of the common stock of Manor Care Realty, in each case including
shares with respect to which voting power is shared with each other and other
individuals or entities. In addition, Mr. Bainum, Jr. will be a director and
Chairman of the Board of Manor Care Realty. Collectively, members of the
Bainum family are expected to own beneficially approximately 29.95% of the
Common Stock. As a result, the Bainum family may be in a position to influence
significantly the affairs of Manor Care Realty, including the election of
directors.
REGULATION
Manor Care Realty is affected by government regulation of the health care
industry in that (i) the payments due to Manor Care Realty from ManorCare
Health Services in connection with the Lease Agreements are generally based on
ManorCare Health Services' gross revenue from its management of skilled
nursing facilities and (ii) the underlying value of Mesquite Hospital depends
on the revenue and profit that facility is able to generate. Compliance with
these regulations at the Skilled Nursing Facilities will be the responsibility
of ManorCare Health Services. The health care industry is highly regulated by
federal, state and local law, state and local licensing requirements, facility
inspections, reimbursement policies, regulations concerning capital and other
expenditures, certification requirements and other laws, regulations and
rules. The failure of ManorCare Health Services to comply with such laws,
requirements and regulations could affect ManorCare Health Services' ability
to operate the Skilled Nursing Facilities which it leases from Manor Care
Realty and thus its ability to pay rent to Manor Care Realty with respect to
such facilities. Such failure could, therefore, have a material adverse effect
on Manor Care Realty.
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In addition, since the assisted living industry is relatively new, the
manner and extent to which it is regulated at the federal, state and local
levels are evolving. Changes in laws or new interpretations of existing laws
as applied to the assisted living business may have a significant impact on
ManorCare Health Services' methods and costs of doing business. ManorCare
Health Services' success will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses in rapidly changing regulatory environments. Any failure to satisfy
applicable regulations or to procure or maintain a required license could have
a material adverse effect on ManorCare Health Services which could in turn
negatively impact Manor Care Realty. Certain regulatory developments such as
revisions in the building code requirements for assisted living or skilled
nursing facilities, mandatory increases in the scope and quality of care to be
offered to residents and revisions in licensing and certification standards
could have a material adverse effect on Manor Care Realty. See "Business of
Manor Care Realty After the Distribution--Government Regulation."
HEALTH CARE REFORM
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control
costs, the migration of patients from acute care facilities into extended care
and home care settings and the vertical and horizontal consolidation of health
care providers. The pressure to control health care costs intensified during
1994 and 1995 as a result of the national health care reform debate and
continued into 1996 and 1997 as Congress attempted to slow the rate of growth
of federal health care expenditures as part of its effort to balance the
federal budget. Pursuant to the Balanced Budget Act of 1997, between November
1998 and June 1999, the Medicare payment system for ManorCare Health Services
will become prospective rather than retrospective. See "Business of Manor Care
Realty after the Distribution--Government Regulation." Manor Care Realty
cannot predict the impact that this change will have on ManorCare Health
Services and, indirectly, on Manor Care Realty.
Manor Care Realty believes that government and private efforts to contain or
reduce health care costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by
Manor Care Realty at Mesquite Hospital and ManorCare Health Services, which in
turn will affect the revenue derived by Manor Care Realty from ManorCare
Health Services. However, Manor Care Realty cannot predict whether any of the
above proposals or any proposals will be adopted and, if adopted, no assurance
can be given that the implementation of such reforms will not have a material
adverse effect on Manor Care Realty.
DEPENDENCE ON KEY PERSONNEL
Manor Care Realty believes that its success depends to a significant extent
on the management and other skills of its chief executive and chief
development officers, as well as its ability to retain other key employees and
to attract skilled personnel in the future to manage the growth of Manor Care
Realty. Although Manor Care Realty believes it has incentive and compensation
programs designed to retain key employees, there can be no assurance that
these key employees will remain with Manor Care Realty. There can be no
assurance that a suitable replacement for any of the employees could be found
in the event of termination of any of their employment.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property or an
entity that arranges for the disposal or treatment of hazardous or toxic
substances at a disposal site may be held jointly and severally liable for the
cost of removal or remediation of certain hazardous or toxic substances,
including, without limitation, asbestos-containing material, that could be
located on, in or under such property. Such laws and regulations often impose
liability whether or not the owner, operator or otherwise responsible party
knew of, or caused, the presence of the hazardous or toxic substances. The
costs of any required remediation or removal of these substances can be
substantial and the liability of a responsible party as to any property is
generally not limited under such laws and regulations and could exceed the
property's value and the aggregate assets of the liable party.
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Certain federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. Failure to comply with such laws or the
regulations promulgated thereunder could subject an entity covered by these
laws to fines, criminal penalties and other enforcement actions. Manor Care
Realty has developed policies with respect to the handling and disposal of
medical, infectious and hazardous waste to ensure compliance with those laws
and regulations. Manor Care Realty believes that it is in material compliance
with applicable laws and regulations governing medical, infectious and
hazardous waste.
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
Liability Act, as amended, 42 U.S.C. (S)(S)9601 et seq. ("CERCLA") and similar
state laws. CERCLA imposes retroactive, strict joint and several liability on
PRPs for the costs of hazardous waste clean-up. The Actions arise out of the
alleged activities of Cenco, Incorporated and its subsidiary and affiliated
companies ("Cenco"). Cenco was acquired in 1981 by a wholly owned subsidiary
of Manor Care. The Actions allege that Cenco transported and/or generated
hazardous substances that came to be located at the sites in question. The
Company believes the waste disposal activities at issue occurred prior to the
Manor Care subsidiary's acquisition of Cenco. Environmental proceedings such
as the Actions may involve owners and/or operators of the hazardous waste
site, multiple waste generators and multiple waste transportation disposal
companies. Such proceedings involve efforts by governmental entities and/or
private parties to allocate or recover site investigation and clean-up costs,
which costs may be substantial. The potential liability exposure for currently
pending environmental claims and litigation, without regard to insurance
coverage, cannot be quantified with precision because of the inherent
uncertainties of litigation in the Actions and the fact that the ultimate cost
of the remedial actions for some of the waste disposal sites where Manor Care
is alleged to be a potentially responsible party has not yet been quantified.
Manor Care believes that the potential environmental liability exposure, after
consideration of insurance coverage, is approximately $3 million. Future
liabilities for the pending environmental claims and litigation, without
regard to insurance, currently are not expected to exceed approximately $46
million. After the Distribution, Manor Care Realty will retain liability for
certain environmental litigation, including the Actions. See "Business Of
Manor Care Realty After The Distribution--Government Regulation" and "--Legal
Proceedings."
CONFLICTS WITH MANORCARE HEALTH SERVICES
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing
relationships between the companies. Such sources of conflict include the fact
that after the Distribution, (i) ManorCare Health Services will lease, manage
and operate Manor Care Realty's skilled nursing facilities pursuant to the
Lease Agreements, (ii) Manor Care Realty will develop assisted living
facilities for ManorCare Health Services and ManorCare Health Services will
manage each of those facilities until certain sustained occupancy targets are
achieved, at which point ManorCare Health Services will be obligated to
purchase the facility pursuant to the Development Agreement at pre-determined
prices, (iii) pending the possible purchase of an assisted living facility by
ManorCare Health Services pursuant to the terms of the Development Agreement,
ManorCare Health Services will manage the facility for a fixed monthly fee to
be agreed upon with Manor Care Realty, (iv) Manor Care Realty will be indebted
to ManorCare Health Services as a result of the Realty Note, (v) ManorCare
Health Services and Manor Care Realty will enter into the Non-Competition
Agreement that will limit the competition between the companies, (vi)
ManorCare Health Services may manage assisted living facilities not developed
by Manor Care Realty and (vii) other corporate and administrative services
will be provided by ManorCare Health Services to Manor Care Realty.
Consequently, Manor Care Realty will be dependent upon ManorCare Health
Services for the vast majority of its revenues for the first five years and
for the operation of its skilled nursing facilities. See "Relationship between
Manor Care Realty and ManorCare Health Services after the Distribution."
With respect to these matters, the potential exists for disagreements as to
the quality of the services provided by the parties and as to contract
compliance. However, Manor Care believes that Manor Care Realty and ManorCare
Health Services will benefit from a strategic relationship with each other as
a result of the Lease Agreements, the Development Agreement, the Assisted
Living Facility Management Agreement and the other related party agreements.
As a result of the strategic relationship between the two companies, each
company's
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revenues are dependent in part on the other company and thus Manor Care
believes that Manor Care Realty and ManorCare Health Services will have a
mutual interest in resolving any contract compliance disagreements. Manor Care
believes that there will be sufficient mutuality of interest between the two
companies to result in a mutually productive relationship. However, despite
the anticipated mutuality of interest, and the significant equity ownership
interest of the Bainum family, Manor Care Realty and ManorCare Health Services
will have separate management and public shareholder groups whose interests
may differ from one another.
ManorCare Health Services and Manor Care Realty will have two common
directors, Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs. Bainum,
Jr. and Simmons, as well as certain other officers and directors of ManorCare
Health Services and Manor Care Realty initially will also own shares (and/or
options or other rights to acquire shares) in both companies following the
Distribution. Appropriate policies and procedures will be adopted by the board
of directors of each company to address the involvement of the overlapping
directors (and if appropriate, relevant officers of such companies) in
conflict situations, including requiring them to abstain from voting as
directors of either ManorCare Health Services or Manor Care Realty in certain
situations. Such procedures will include requiring Messrs. Bainum, Jr. and
Simmons (or such other executive officers or directors having a significant
ownership interest in both companies) to abstain from voting as directors of
either company, with respect to matters that present a significant conflict of
interest between the companies. Whether or not a significant conflict of
interest situation exists will be determined on a case-by-case basis depending
on such factors as the dollar value of the matter, the degree of personal
interest of Messrs. Bainum, Jr. and Simmons (or such other executive officers
and directors having a significant ownership interest in both companies) in
the matter, the respective interests of the shareholders of ManorCare Health
Services or Manor Care Realty and the likelihood that resolution of the matter
will have significant strategic, operational or financial implications for the
business of the respective companies.
TRANSFER OF LEASES TO NEW OPERATORS
In the event ManorCare Health Services voluntarily or involuntarily defaults
under the terms of a Lease Agreement or Manor Care Realty exercises its rights
under a particular Lease Agreement to terminate such agreement or ManorCare
Health Services determines not to renew a particular Lease Agreement, Manor
Care Realty may be obliged to find another healthcare provider willing to
lease and operate the facility relating to the Lease Agreement and may have to
negotiate new lease terms, including rentals, which terms may be less
favorable to Manor Care Realty than those of the Manor Care Realty/ManorCare
Health Services Lease Agreement. In addition, Manor Care Realty and/or any
substitute lessee will be required to apply for and obtain appropriate
licenses to operate such facilities. Any such circumstances relating to
several Lease Agreements at the same time could have a material adverse effect
on Manor Care Realty. No assurance can be given that a substitute lessee could
be found without reasonable delay.
PAYMENT BY THIRD-PARTY PAYORS AT THE SKILLED NURSING FACILITIES
As described above, Manor Care Realty's financial and operating performance
will depend primarily on the financial and operating performance of ManorCare
Health Services. A significant portion of Manor Care Realty's revenues derived
from the operation of the Skilled Nursing Facilities by ManorCare Health
Services will be dependent upon reimbursement from third-party payors,
including Medicare, state Medicaid programs and private insurers. Third party
payors also include private commercial insurers, managed care organizations,
health maintenance organizations and preferred provider organizations. Managed
care organizations and other third party payors have continued to consolidate
in order to enhance their ability to influence the delivery of healthcare
services. Consequently, the health care needs of a large percentage of the
United States population are increasingly served by a small number of managed
care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the
extent such organizations terminate ManorCare Health Services as a preferred
provider and/or engage ManorCare Health Services' competitors as preferred or
exclusive providers, it could have a material adverse effect on Manor Care
Realty. For the fiscal year ended May 31, 1997, the Skilled Nursing Facilities
to be operated by ManorCare Health Services pursuant to the Lease Agreements
derived the majority of their patient service revenue from non-government
sources. Both governmental and private third-party payors have employed cost
containment measures designed to limit payments made to health care providers
such as ManorCare Health Services. Those
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measures include the adoption of initial and continuing recipient eligibility
criteria which may limit payment for services, the adoption of coverage and
duration criteria which limit the services which will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government payment programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially increase or decrease the rate of program payments to ManorCare
Health Services for its services. There can be no assurance that payments
under governmental and private third-party payor programs will remain at
levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. In addition, there can be no assurance that Manor Care Realty's
Skilled Nursing Facilities, or the provision of services and supplies by
ManorCare Health Services, now or in the future will meet or continue to meet
the requirements for participation in such programs.
ManorCare Health Services (and consequently Manor Care Realty) could be
adversely affected by the continuing efforts of governmental and private
third-party payors to contain the amount of reimbursement for health care
services. For example, pursuant to the Balanced Budget Act of 1997, between
November 1998 and June 1999, the Medicare payment system for ManorCare Health
Services will become prospective rather than retrospective. Manor Care Realty
cannot predict the impact that this change will have on ManorCare Health
Services and, consequently on Manor Care Realty. Also, in certain states there
has been established or there are proposals for the establishment of a case
mix prospective payment system pursuant to which the payment to a facility for
a patient is based upon the patient's condition and need for services. Manor
Care Realty cannot at this time predict whether or where any of these
proposals will be adopted or, if adopted and implemented, what effect, if any,
such proposals will have on ManorCare Health Services' and, consequently on
Manor Care Realty. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures or the assumption by
health care providers of all or a portion of the financial risk through
prepaid capitation arrangements. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue. Any of such changes could have a material adverse effect
on Manor Care Realty. See "Business Of Manor Care Realty After the
Distribution--Government Regulation."
ADEQUACY OF CERTAIN INSURANCE
Manor Care Realty and ManorCare Health Services maintain liability insurance
providing coverage which they believe to be adequate. In addition, Manor Care
Realty and ManorCare Health Services maintain property, business interruption,
and workers' compensation insurance covering facilities in amounts deemed
adequate by Manor Care Realty and ManorCare Health Services. There can be no
assurance that any future claims will not exceed applicable insurance coverage
or that Manor Care Realty or ManorCare Health Services will be able to
continue its present insurance coverage on satisfactory terms, if at all.
COMPETITION; NON-COMPETITION AGREEMENT WITH MANORCARE HEALTH SERVICES
Manor Care Realty generally competes with real estate investment trusts,
real estate partnerships, healthcare providers and others, including, but not
limited to, banks, insurance companies and other financial sources, in the
development and leasing of health care facilities. Manor Care Realty's
competitors in the health care real estate business are Alternative Living
Services, American Health Properties, Inc., American Retirement Corp., ARV
Assisted Living, Assisted Living Concepts, Inc., Atria Communities, Inc.,
Beverly Enterprises, Inc., Capstone Capital Corp., Carematrix Corp.,
Extendicare, Inc., Genesis Health Ventures, Inc., G & L Realty Corp.,
Greenbriar Corp., Harborside Healthcare Corp., Health Care Property Investors,
Inc., Healthcare Realty Trust Inc., Health Care REIT, Inc., Health Care &
Retirement Corp., Health and Retirement Property Trust, Integrated Health
Services, Integrated Living Communities, Kapson Senior Quarters, Inc.,
Karrington Health, Inc., LTC Properties, Inc., Mariner Health Group, Inc.,
Meditrust Corporation, National Healthcare L.P., National Health Investors,
Inc., Nationwide Health Properties, Inc., Newcare Health Corp., Omega
Healthcare Investors, Inc., Paragon Health Network, Inc., Regent Assisted
Living, Retirement Care Associates, Summit Care Corp., Sun Healthcare Group,
Inc., Sunrise Assisted Living, Inc., Unison Healthcare Corp., Universal Health
Realty Income Trust, and Vencor, Inc. ManorCare Health Services competes on a
local and regional basis with operators of facilities that provide comparable
services. Operators compete for patients based on quality of care, reputation,
physical appearance of facilities, services offered, family preferences,
physicians, staff and price. Furthermore,
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some of ManorCare Health Services' competitors are significantly larger and
have, or may obtain, greater financial resources than ManorCare Health
Services. ManorCare Health Services' competitors in the skilled nursing
industry are Advocat, Inc., Beverly Enterprises, Inc., Extendicare, Inc.,
Genesis Health Ventures, Inc., Health Care and Retirement Corporation,
Integrated Health Services, Inc., Mariner Health Group, Inc., National
HealthCare L.P., Paragon Health Network, Inc., Sun Healthcare Group, Inc. and
Vencor, Inc. See "Business Of Manor Care Realty After the Distribution--
Competition."
Following the Distribution, pursuant to the Non-Competition Agreement, Manor
Care Realty will be subject to certain contractual restrictions in the
management of skilled nursing facilities, the development of assisted living
facilities and participation in the institutional pharmacy and home health
care businesses. See "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution--Non-Competition Agreement." The Non-
Competition Agreement restricts Manor Care Realty's ability to pursue lines of
business that have historically contributed a significant portion of Manor
Care's net income.
CERTAIN INDEMNIFICATION OBLIGATIONS
Pursuant to the Distribution Agreement and the Tax Sharing and
Administration Agreement, Manor Care Realty will agree to indemnify ManorCare
Health Services with respect to certain losses, damages, claims and
liabilities, including liabilities which may arise from the operation of the
Skilled Nursing Facilities prior to the Effective Date and certain tax
liabilities. Pursuant to the Distribution Agreement, Manor Care Realty (and
not ManorCare Health Services) will remain liable for certain pre-Distribution
liabilities (other than certain tax liabilities). However, the assumption of
such liabilities will not release Manor Care Realty therefrom if ManorCare
Health Services should fail, for any reason, to perform its obligations
pursuant to such assumed liabilities. See "Relationship between Manor Care
Realty and ManorCare Health Services after the Distribution." In addition, in
connection with the distribution of its lodging operations in November 1996,
Manor Care agreed, subject to certain exceptions, to indemnify Choice Hotels
International, Inc. ("Choice"), against any loss, liability or expense
incurred or suffered by Choice arising out of or related to the failure by
Manor Care to perform or otherwise discharge the liabilities retained by Manor
Care under the distribution agreement between Manor Care and Choice and
certain tax liabilities.
ABSENCE OF PUBLIC MARKET
There is currently no established trading market for the Notes and Manor
Care Real Estate does not intend to apply for listing of the Notes on any
securities exchange or on any automated dealer quotation system. Manor Care
Real Estate has been advised by the Underwriters that each presently intends
to make a market in the Notes but neither of the Underwriters is under any
obligation to do so and any such market-making may be discontinued at any time
without notice by either or both of the Underwriters, at the sole discretion
of such Underwriter. Accordingly, no assurance can be given as to the prices
or liquidity of, or trading markets for, the Notes. The liquidity of any
market for the Notes will depend upon the number of holders of the Notes, the
interest of securities dealers in making a market in the Notes, prevailing
interest rates, the market for similar securities and other factors, including
general economic conditions and the financial condition and performance of,
and prospects for, Manor Care Real Estate. The absence of an active market for
the Notes could adversely affect the market price and liquidity of the Notes.
CERTAIN TAX CONSIDERATIONS
Manor Care has received a private letter ruling (the "Ruling") from the IRS
which provides, among other things, that the Distribution will qualify as a
tax-free transaction under Section 355 of the Code and that neither the
stockholders of Manor Care nor Manor Care will recognize any income, gain or
loss as a result of the Distribution. The Ruling is based upon various factual
representations that were made to the IRS. If any such factual representations
are determined to be inaccurate, absent the receipt of a supplemental ruling
from the IRS, the Ruling generally cannot be relied upon by any party. There
can be no assurance that, in such an event, Manor Care Realty would be able to
obtain a supplemental ruling from the IRS. If Manor Care engages in the
Distribution and the Distribution is held to be taxable, both Manor Care
Realty and stockholders of Manor Care could recognize income or gain and thus
become liable for the payment of a material amount of income tax.
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THE YEAR 2000 ISSUE
Manor Care has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue,
which affects most corporations, concerns the inability of information
systems, primarily computer software programs, to properly recognize and
process date sensitive information relating to the year 2000 and beyond. Manor
Care is in the process of determining the costs and expenditures associated
with the Year 2000 Issue and has several information system improvement
initiatives underway to ensure that its computer systems will be Year 2000
compliant. Manor Care Realty does not expect to incur significant expenditures
to address this issue. The failure by third party payors, such as private
insurers, managed care organizations, health maintenance organizations,
preferred provider organizations and federal and state government agencies
that administer Medicare and/or Medicaid, to adequately address their Year
2000 Issues could adversely affect Manor Care Realty.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control Triggering Event, each holder of
Notes will be entitled to require Manor Care Real Estate to purchase any or
all of the Notes held by such holder at a price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
purchase. As Manor Care Real Estate may not have adequate funds to effect such
a purchase and, in such case, may seek to obtain such funds through additional
debt or equity financing. There can be no assurance that Manor Care Real
Estate would be able to obtain such funds. The Credit Facilities contain
similar provisions requiring repayment in full upon a change of control and,
further, will prohibit Manor Care Real Estate from making required purchases
with respect to the Notes prior to repayment in full of all amounts
outstanding under the Credit Facilities. Consequently, any such purchase of
Notes could constitute an event of default under the Credit Facilities. Manor
Care Real Estate's ability to repurchase the Notes upon a Change of Control
Triggering Event may also be limited by the terms of other existing
contractual obligations of Manor Care Real Estate and its subsidiaries. If
Manor Care Real Estate fails to purchase all of the Notes tendered for
purchase upon the occurrence of a Change of Control Triggering, such failure
will constitute an Event of Default under the Indenture.
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction,
has no clearly established meaning under relevant law and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of a person
and therefore it may be unclear whether a Change of Control has occurred and
whether the Notes are subject to an offer to purchase.
The Change of Control provision may deter certain takeover attempts which
trigger the obligation to purchase because such provision could require a
potential new controlling person to obtain additional financing to purchase
tendered Notes or to use cash on hand at Manor Care Real Estate for such
purpose. Notwithstanding the Change of Control provision, Manor Care Real
Estate could enter into certain highly leveraged transactions, including a
reorganization, restructuring, merger or other similar transaction, that could
increase the amount of debt outstanding and adversely affect the holders,
because such transactions may not involve a shift in voting power or
beneficial ownership or, even if they do, may not involve a shift of the
magnitude required under the definition of Change of Control to trigger such
provisions or may not result in a downgrade in ratings of the Notes as
required under the definition of Change of Control Triggering Event. Except as
described under "Description of the Notes--Offer to Purchase upon a Change of
Control Triggering Event," the Indenture does not contain provisions that
permit the holders of the Notes to require Manor Care Real Estate to
repurchase or redeem the Notes in the event of a highly leveraged transaction.
29
<PAGE>
USE OF PROCEEDS
The gross proceeds from the issuance of the Notes (before deduction of
discounts and commissions), together with borrowings under the Credit
Facilities, will be used to effect the Distribution, including financing the
cash portion of the Capital Contribution to ManorCare Health Services,
refinancing certain debt of Manor Care (including all amounts outstanding
under (i) Manor Care's existing revolving credit facility (the "Existing
Revolving Credit Facility"), (ii) Manor Care's existing promissory note (the
"Promissory Note") and (iii) certain mortgage bond indebtedness of Manor Care)
and paying related fees and expenses.
The following table illustrates the estimated sources and uses of funds,
assuming the Distribution was consummated on August 31, 1997 and that all
holders of the outstanding Old Senior Notes accept the Exchange Offer:
<TABLE>
<CAPTION>
AMOUNT
(DOLLARS
IN MILLIONS)
------------
<S> <C>
Sources:
Use of existing cash....................................... $ 29.9
Working capital reimbursement from ManorCare Health Servic-
es........................................................ 12.5
Revolving Credit Facility (1).............................. 28.0
Term Loan.................................................. 150.0
Gross proceeds of the Offering............................. 350.0
Realty Note(2)............................................. 250.0
------
Total Sources............................................ $820.4
======
Uses:
Contribution of Cash to ManorCare Health Services(2)....... $250.0
Redemption of the 9 1/2% Senior Subordinated Notes due
2002(3) .................................................. 140.1
Repayment of amounts outstanding under Existing Revolving
Credit Facility .......................................... 145.0
Repayment of amounts outstanding under Promissory Note..... 14.3
Repayment of certain mortgage bond indebtedness............ 0.5
Contribution of Realty Note to ManorCare Health Servic-
es(2)..................................................... 250.0
Fees and expenses(4)....................................... 20.5
------
Total Uses............................................... $820.4
======
</TABLE>
- --------
(1) For a description of the availability of borrowings under the Revolving
Credit Facility, see "Description of Certain Indebtedness--The Credit
Facilities."
(2) Manor Care may reduce the principal amount of the Realty Note prior to
issuance or reduce the amount of the cash portion of the Capital
Contribution to the extent Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
(3) The 9 1/2% Senior Subordinated Notes due 2002 were redeemed on November
17, 1997 at a redemption price of 103.56% with the proceeds of borrowings
under the Existing Revolving Credit Facility.
(4) Excludes fees and expenses to be reimbursed by ManorCare Health Services.
The Existing Revolving Credit Facility, which was amended and restated in
September 1996, provides for revolving credit borrowings by Manor Care of up
to $250 million and matures in September 2001. At August 31, 1997, the
outstanding balance under the Existing Revolving Credit Facility allocated to
Manor Care Realty was $145 million. Additional amounts were borrowed to fund
the redemption of the 9 1/2% Senior Subordinated Notes due 2002 on November
17, 1997. The Existing Revolving Credit Facility bears interest at a
fluctuating LIBOR-based rate. At August 31, 1997 the weighted average interest
rate of Manor Care's outstanding borrowings under the Existing Revolving
Credit Facility was 5.88%. The Promissory Note provides for revolving credit
borrowings by Manor Care of up to $25.0 million and matures on December 30,
1997. At August 31, 1997, the outstanding balance under the Promissory Note
was $14.3 million. The Promissory Note bears interest at a fluctuating Federal
30
<PAGE>
funds-based rate. At August 31, 1997, the weighted average interest rate of
Manor Care's outstanding borrowings under the Promissory Note was 5.81%. As of
November 30, 1997, the outstanding principal amount, current interest rate and
maturity date of the mortgage bonds to be prepaid were as follows: (i) Mellon
Bank N.A., $1.8 million outstanding principal amount, current interest rate of
7.93%, matures at June 1, 2006; (ii) Mellon Bank N.A., $1.5 million
outstanding principal amount, current interest rate of 7.84%, matures at May
1, 2006; (iii) Lincoln National Life Insurance, $0.9 million outstanding
principal amount, current interest rate of 8.75%, matures at September 1,
2000; (iv) Union Mutual Life Insurance Company, $0.1 million outstanding
principal amount, current interest rate of 10.00%, matures at July 1, 1998;
(v) Bank of Pennsylvania, $67,000 outstanding principal amount, current
interest rate of 8.25%, matures at October 1, 1998; (vi) First Union National
Bank, $0.4 million outstanding principal amount, current interest rate of
8.00%, matures at January 1, 2005; (vii) First Union National Bank, $1.0
million outstanding principal amount, current interest rate of 9.50%, matures
at January 1, 2005 and (viii) MTGLQ Investors, L.P., $0.4 million outstanding
principal amount, matures on August 1, 2004, current interest rate of 6.90%.
The principal fees and expenses to be paid by Manor Care Realty in connection
with the Offering and related transactions are expected to consist of
underwriting discounts and commissions relating to the Offering, financial
advisory services in connection with the Distribution and legal and accounting
fees and expenses.
31
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of Manor Care Realty at
August 31, 1997 and as adjusted to give pro forma effect to the Distribution
and related borrowings, including the Credit Facilities and the Realty Note,
the consummation of the Exchange Offer and the consummation of the Offering
and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
AUGUST 31, 1997
--------------------
ACTUAL PRO FORMA
---------- ---------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-Term Debt:
Old Senior Notes......................................... $ 149,500 $ --
Senior Subordinated Notes(1)............................. 140,100 --
Existing Revolving Credit Facility....................... 175,000 --
Promissory Note.......................................... 14,300 --
Revolving Credit Facility................................ -- 28,000
Term Loan................................................ -- 150,000
The Notes................................................ -- 350,000
Mortgage and Capital Leases.............................. 72,607 26,547
Realty Note(2)........................................... -- 250,000
---------- --------
Total Long-Term Debt................................... 551,507 804,547
Shareholders' Equity:
Total shareholders' equity............................. 710,677 14,224
---------- --------
Total Capitalization....................................... $1,262,184 $818,771
========== ========
</TABLE>
- --------
(1) The Senior Subordinated Notes were redeemed on November 17, 1997 at a
price of 103.56% with the proceeds of borrowings under the Existing
Revolving Credit Facility.
(2) Manor Care may determine to reduce the principal amount of the Realty Note
prior to issuance or to reduce the amount of the cash portion of the
Capital Contribution to the extent that Old Senior Notes remain
outstanding upon consummation of the Exchange Offer. See "Description of
the Transactions--The Exchange Offer."
32
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MANOR CARE
The statements of income data for the fiscal years ended May 31, 1997, 1996
and 1995 and the balance sheet data for the fiscal years ended May 31, 1997
and 1996 are derived from the audited consolidated financial statements of
Manor Care. The statements of income data for the fiscal years ended May 31,
1994 and May 31, 1993 and the balance sheet data at May 31, 1995, May 31, 1994
and May 31, 1993 are derived from the unaudited consolidated financial
statements of Manor Care that, in the opinion of Manor Care, reflect all
adjustments consisting of normal recurring adjustments necessary to present
fairly the information set forth below. The following selected historical
financial data of Manor Care should be read in conjunction with the historical
combined financial statements and notes thereto included elsewhere in this
Prospectus. The historical consolidated financial statements of Manor Care may
not necessarily reflect the results of operations or financial position that
would have been obtained had Manor Care operated as a separate company.
Earnings per share data are presented elsewhere in the Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED MAY 31, AUGUST 31,
-------------------------------------------------------- -------------------------------
1993 1994 1995 1996 1997 1996 1997
-------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Income
Data:
Revenues................ $757,524 $816,934 $893,471 $985,150 $1,056,095 $250,226 $274,054
Expenses:
Operating.............. 570,070 602,623 670,987 735,671 789,074 191,539 208,247
Depreciation and
amortization.......... 43,656 44,680 48,284 56,503 60,243 14,586 15,985
General corporate and
other................. 45,477 52,807 60,240 63,127 60,177 14,163 11,265
Provisions for asset
impairment and
restructuring......... -- -- -- 25,100 -- -- --
-------- ---------- ---------- ---------- ---------- -------- --------
Total expenses......... 659,203 700,110 779,511 880,401 909,494 220,288 235,497
-------- ---------- ---------- ---------- ---------- -------- --------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 98,321 116,824 113,960 104,749 146,601 29,938 38,557
-------- ---------- ---------- ---------- ---------- -------- --------
Interest income from
advances to
discontinued lodging
segment............... -- -- 15,492 19,673 21,221 5,079 2,604
Interest expense....... (35,386) (25,743) (18,872) (18,951) (24,514) (5,302) (6,829)
Interest income and
other................. 14,495 15,135 6,372 3,452 6,400 1,653 2,592
-------- ---------- ---------- ---------- ---------- -------- --------
Income from continuing
operations before
income taxes .......... 77,430 106,216 116,952 108,923 149,708 31,368 36,924
Income taxes............ 28,232 44,210 46,101 44,563 60,783 12,327 14,100
-------- ---------- ---------- ---------- ---------- -------- --------
Income from continuing
operations............. 49,198 62,006 70,851 64,360 88,925 19,041 22,824
Income from discontinued
assisted living,
pharmacy and home
health operations...... 5,531 6,697 6,824 1,111 36,188 1,225 (2,964)
Income from discontinued
lodging operations..... 7,654 9,659 16,811 20,436 11,829 3,419 --
Loss from extraordinary
item................... (3,019) -- -- -- -- -- --
-------- ---------- ---------- ---------- ---------- -------- --------
Net income.............. $ 59,364 $ 78,362 $ 94,486 $ 85,907 $ 136,942 $ 23,685 $ 19,860
======== ========== ========== ========== ========== ======== ========
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
-------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997
-------- ---------- ---------- ---------- ---------- ------------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $ (6,379) $ 3,073 $ 51,053 $ (33,357) $ 33,718 $ 200,813
Total assets............ 992,351 1,048,265 1,247,241 1,593,193 1,547,578 1,638,292
Long-term debt.......... 330,189 223,892 315,271 490,575 491,190 551,507
Total equity............ 361,642 533,815 624,873 707,769 690,431 710,677
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED MAY 31, AUGUST 31,
-------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996 1997
-------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial and
Operating Data:
EBITDA(1)............... $141,977 $ 161,504 $ 162,244 $ 186,352 $ 206,844 $ 44,524 $ 54,542
EBITDA margin........... 18.74% 19.77% 18.16% 18.92% 19.59% 17.79% 19.90%
Operating margin........ 13.0% 14.3% 12.8% 10.6% 13.9% 11.9% 14.1%
Operating beds.......... 21,971 21,692 22,252 23,227 23,865 23,221 24,079
Ratio of EBITDA to
interest expense....... 4.01x 6.27x 8.60x 9.83x 8.44x 8.40x 7.99x
Ratio of earnings to
fixed charges(2)....... 3.04x 4.87x 6.43x 5.62x 6.03x N/A 5.46x
Cash provided by
continuing operating
activities............. n/a n/a 104,059 191,264 75,750 (3,930) (286)
Cash utilized in
investing activities... n/a n/a (174,602) (275,318) (98,900) (45,351) (48,769)
Cash provided by
(utilized in) financing
activities............. n/a n/a 80,037 123,539 (9,226) 31,808 60,722
</TABLE>
(Footnotes on following page)
33
<PAGE>
- --------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and certain other special charges, including
$25.1 million in fiscal year 1996 relating to the impairment of certain
assets. EBITDA is presented to assist in understanding Manor Care and Manor
Care Realty's operating results. Additionally certain covenants in the
Notes and the Credit Facilities are expected to be calculated based on
EBITDA. EBITDA is not intended to represent cash flows for the period, is
not presented as an alternative to operating income as an indicator of
operating performance, may not be comparable to other similarly titled
measures of other companies and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with
generally accepted accounting principles. The items excluded from the
calculation of EBITDA are significant components in understanding and
assessing the financial performance of Manor Care and Manor Care Realty.
EBITDA is included herein to provide additional information with respect to
the ability of Manor Care Realty to meet future debt service, capital
expenditures and working capital requirements. See Manor Care's
consolidated financial statements and the notes thereto appearing elsewhere
in this Prospectus.
(2) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before provision for
income taxes including dividends from less than 50% owned companies and
Manor Care's share of pre-tax income of 50%-owned companies carried at
equity, before fixed charges net of capitalized interest. Fixed charges
comprise interest on long-term and short-term debt, including capitalized
interest, the portion of rentals representative of an interest factor and
Manor Care's share of fixed charges of 50%-owned companies carried at
equity.
34
<PAGE>
MANOR CARE REALTY PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated condensed statements of income of Manor
Care Realty for the fiscal year ended May 31, 1997 and the three month period
ended August 31, 1997 give effect to the Distribution and related
transactions, including the Credit Facilities and the Realty Note, the Lease
Agreements, the Assisted Living Facility Management Agreements, net additional
costs associated with general corporate functions, the consummation of the
Exchange Offer, the Offering and the use of proceeds therefrom as if such
transactions occurred on June 1, 1996 and June 1, 1997, respectively. The
unaudited pro forma consolidated condensed statements of income for the fiscal
year ended May 31, 1997 and the three month period ended August 31, 1997 have
been prepared by adjusting the historical consolidated statements of income to
reflect the Distribution and related transactions as if they had been effected
on June 1, 1996 and June 1, 1997, respectively. The unaudited pro forma
consolidated condensed balance sheet of Manor Care Realty at August 31, 1997
gives effect to such transactions as if such transactions had occurred at that
date. Such balance sheet has been prepared by adjusting the historical
consolidated balance sheet to reflect the Distribution and related
transactions as if they had been effected on August 31, 1997. The unaudited
pro forma financial statements should be read in conjunction with the
financial data presented elsewhere herein. The pro forma financial data are
presented for informational purposes only and may not reflect the future
results of operations or financial position of Manor Care Realty.
35
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY 31,
-----------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------------------
PRO
HISTORICAL LEASE MANAGEMENT FORMA
1997 DISTRIBUTION AGREEMENTS AGREEMENT 1997
---------- ------------ ----------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................. $1,056,095 $ 1,603 (a) $(1,017,570)(c) $217,132
177,004 (d)
EXPENSES
Operating expenses...... 849,251 2,081 (a) (733,362)(c) $ 402 (e) 59,013(j)
77 (a) (59,774)(b)
338 (b)
Depreciation and
amortization........... 60,243 365 (a) 60,608
---------- --------- ----------- ------ --------
Total expenses.......... 909,494 2,861 (793,136) 402 119,621
---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS BEFORE OTHER
INCOME AND EXPENSES AND
INCOME TAXES............ 146,601 (1,258) (47,430) (402) 97,511
---------- --------- ----------- ------ --------
OTHER INCOME AND
(EXPENSES)
Interest income from
advances to
discontinued lodging
segment................ 21,221 21,221
Interest income and
other.................. 6,400 6,400
Interest expense........ (24,514) (28,709)(f) (64,414)
(11,191)(g)
---------- --------- ----------- ------ --------
Total other income and 3,107 (39,900) -- -- (36,793)
(expenses), net........ ---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES................... 149,708 (41,158) (47,430) (402) 60,718
INCOME TAXES............. 60,783 (16,278)(h) (18,759)(h) (159)(h) 25,587
---------- --------- ----------- ------ --------
INCOME FROM CONTINUING
OPERATIONS.............. 88,925 (24,880) (28,671) (243) 35,131
DISCONTINUED ASSISTED
LIVING, PHARMACY AND
HOME HEALTH OPERATIONS
Income from discontinued
assisted living,
pharmacy and home
health operations (net
of income taxes of
$23,917)................. 36,188 (36,188)(i) --
DISCONTINUED LODGING
OPERATIONS..............
Income from discontinued
lodging operations (net
of income taxes of
$8,734).................. 11,829 11,829
---------- --------- ----------- ------ -------- ---
NET INCOME............... $ 136,942 $ (61,068) $ (28,671) $ (243) $ 46,960
---------- --------- ----------- ------ -------- ---
WEIGHTED AVERAGE SHARES
OF COMMON STOCK......... 63,257 63,257
---------- -------- ---
INCOME PER SHARE OF
COMMON STOCK
Income from continuing
operations.............. $ 1.40 $ 0.55
Income from discontinued
assisted living,
pharmacy and home
health operations...... 0.57 --
Income from discontinued
lodging operations..... 0.19 0.19
---------- --------
Net income per share of
common stock........... $ 2.16 $ 0.74
========== ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed statement of income.
36
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED AUGUST 31, 1997
------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
----------------------------------------
LEASE MANAGEMENT
HISTORICAL DISTRIBUTION AGREEMENT AGREEMENT PRO FORMA
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................. $274,054 $ 1,035 (a) $ (278,102)(c) $41,429
44,442 (d)
EXPENSES
Operating expenses...... 219,512 1,099 (a) (205,385)(c) $ 70 (e) 5,559 (j)
73 (a)
85 (b) (9,895)(b)
Depreciation and
amortization........... 15,985 260 (a) 16,245
-------- ------- ---------- ---- -------
Total expenses.......... 235,497 1,517 (215,280) 70 21,804
-------- ------- ---------- ---- -------
INCOME BEFORE OTHER
INCOME AND (EXPENSES)
AND INCOME TAXES........ 38,557 (482) (18,380) (70) 19,625
OTHER INCOME AND
(EXPENSES)
Interest income from
advances to
discontinued lodging
segment................ 2,604 2,604
Interest income and
other.................. 2,592 2,592
Interest expense........ (6,829) (7,177)(f) (17,118)
(3,112)(g)
-------- ------- ---------- ---- -------
INCOME BEFORE INCOME
TAXES................... 36,924 (10,771) (18,380) (70) 7,703
INCOME TAXES............. 14,100 (4,260)(h) (6,920)(h) (28)(h) 2,892
Income from discontinued
assisted living,
pharmacy and home
health operations (net
of income taxes of
$750).................. (2,964) 2,964 (i) --
-------- ------- ---------- ---- -------
NET INCOME............... $ 19,860 $(3,547) $ (11,460) $(42) $ 4,811
======== ======= ========== ==== =======
WEIGHTED AVERAGE SHARES
OF COMMON STOCK......... 63,708 63,708
-------- -------
INCOME PER SHARE OF
COMMON STOCK
Income from continuing
operations............. $ 0.36 $ 0.08
Income from discontinued
assisted living,
pharmacy and home
health operations...... (0.05) --
-------- -------
Net income per share of
common stock........... $ 0.31 $ 0.08
======== =======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed statement of income.
37
<PAGE>
MANOR CARE REALTY PRO FORMA CONSOLIDATED CONDENSED BALANC E SHEET AS OF
AUGUST 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
AUGUST 31, 1997 ADJUSTMENTS PRO FORMA
--------------- ---------------------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equiva-
lents.................. $ 30,063 $ 500,000 (e) $ 168
(250,000)(a)
12,500 (d)
30,000 (b)
(329,900)(e)
(20,495)(f)
28,000 (e)
Advances to discontinued
lodging segment........ 115,723 -- 115,723(j)
Other current assets.... 224,612 (2,625)(b) 183,295
(12,956)(d)
(25,901)(g)
165 (i)
---------- --------- ----------
Total current assets.... 370,398 (71,212) 299,186
Property and equipment,
net.................... 830,457 (14,605)(a) 834,400
18,548 (i)
Due from discontinued
assisted living, phar-
macy and home health
segments............... 75,560 (75,560)(b) --
Net investment in dis-
continued assisted liv-
ing, pharmacy and home
health segments........ 277,235 (277,235)(a) --
Other assets............ 84,642 (28,516)(a) 59,391
14,500 (f)
(11,994)(g)
759 (i)
---------- --------- ----------
Total assets............ $1,638,292 $(445,315) $1,192,977
========== ========= ==========
Total current liabili-
ties................... $ 169,585 $ (2,625)(b) $ 175,185
51,134 (d)
(24,326)(g)
(19,092)(h)
509 (i)
Long-term debt.......... 551,507 (149,500)(c) 554,547
(45,560)(b)
198,100 (e)
Realty Note............. -- 250,000 (a) 250,000
Other long-term liabili-
ties................... 206,523 (25,500)(g) 199,021
17,339 (h)
659 (i)
---------- --------- ----------
Total liabilities....... 927,615 251,138 1,178,753
Total shareholders' eq-
uity................... 710,677 (820,356)(a) 14,224
1,753 (h)
149,500 (c)
(51,590)(d)
(5,995)(f)
11,931 (g)
18,304 (i)
---------- --------- ----------
Total liabilities and $1,638,292 $(445,315) $1,192,977
shareholders' equity... ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed balance sheet.
38
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
a) Reflects the revenues, income and expenses associated with facilities which
opened during fiscal year 1997 (the "Developed Properties"). These
facilities would not have been purchased by ManorCare Health Services under
the terms of the Development Agreement until such facilities achieved 75%
occupancy. All revenues and expenses associated with the operations of
assisted living facilities during the stabilization period of operations
will be reported in the income statement of Manor Care Realty. When an
assisted living facility is sold to ManorCare Health Services, all
subsequent operations of that facility will be recorded on ManorCare Health
Services' income statement.
b) Reflects net additional costs annually of $0.3 million, or $0.1 million per
quarter, associated with staffing of human resources, finance, legal,
information technology, cash management and accounting personnel, directors
costs and the transfer of expenses to ManorCare Health Services.
Transferred expenses of $59.8 million for the fiscal year ended May 31,
1997 and $9.9 million for the three months ended August 31, 1997 are
related to functions which will be transferred to ManorCare Health
Services. These functions include finance and accounting, information
resources, legal, human resources, community and program development,
product management, and acquisitions. Costs are transferred based on the
historical costs incurred for these functions by Manor Care, Inc.
c) Reflects revenues and operating expenses of skilled nursing facilities
owned by Manor Care Realty and leased by ManorCare Health Services under
the terms of the Lease Agreements.
d) Reflects lease payments from ManorCare Health Services for skilled nursing
facilities under the terms of the Lease Agreements.
e) Reflects management fees associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreements. See Note (a).
f) Reflects additional interest expense associated with the indebtedness under
the Credit Facilities at an estimated interest rate of 8.25% ($12.4 million
for the fiscal year ended May 31, 1997 and $3.1 million for the three
months ended August 31, 1997), the issuance of $350 million aggregate
principal amount of notes offered hereby at an estimated rate of 8.75%
($30.6 million and $7.6 million, respectively), the issuance of the $250
million Realty Note ($21.9 million and $5.5 million, respectively), the
redemption of the Senior Subordinated Notes ($13.3 million and $3.3 million
of interest savings, respectively), the repayment of the Existing Revolving
Credit Facility and the Promissory Note ($9.4 million and $2.4 million of
interest savings, respectively), additional borrowings of $28 million under
the New Credit Facilities ($1.8 million and $.5 million, respectively),
capitalized interest related to development of Arden Courts and Springhouse
facilities of ($4.0 million and $1.0 million, respectively), and interest
savings due to the Exchange Offer ($11.2 million and $2.8 million,
respectively). Exchange Offer interest savings are calculated assuming that
the holders of 100% of the Old Senior Notes accept the Exchange Offer.
Consummation of the Exchange Offer is conditioned on the minimum tender
condition. To the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer, the principal amount of the Realty Note
or the amount of the cash portion of the Capital Contribution to ManorCare
Health Services may be reduced.
g) Reflects reversal of intercompany interest allocated to ManorCare Health
Services.
h) Reflects tax effect of adjustments made pursuant to notes (a) through (g).
i) Reflects the elimination of income from discontinued assisted living,
pharmacy and home health operations as if the transaction had been effected
on June 1, 1996 for the pro forma combined condensed statement of income
for the fiscal year ended May 31, 1997 and on June 1, 1997 for the pro
forma combined condensed statement of income for the three months ended
August 31, 1997.
j) Pro forma operating expenses consist of Mesquite Hospital operating
expenses, property taxes on the facilities, management fees associated with
the management by ManorCare Health Services of the Developed Properties
under the terms of the Assisted Living Facility Management Agreements and
general corporate expenses.
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NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
a) Reflects cash of $250.0 million, the Realty Note and other net assets
contributed to the discontinued assisted living, pharmacy and home health
operations at the Effective Date.
b) Reflects the transfer of the assisted living facility mortgages of $48.2
million to ManorCare Health Services on the Effective Date, and the
repayment by ManorCare Health Services of its allocated portion of the
Existing Revolving Credit Facility ($30.0 million).
c) Reflects consummation of the Exchange Offer (net of discount), assuming
that the holders of 100% of the Old Senior Notes accept the Exchange Offer.
Consummation of the Exchange Offer is conditioned on the Minimum Tender
Condition. To the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer, the principal amount of the Realty Note
or the amount of the cash portion of the Capital Contribution to ManorCare
Health Services may be reduced. Also reflects the redemption of the Senior
Subordinated Notes.
d) Reflects the non-cash working capital of the skilled nursing facilities to
be transferred to ManorCare Health Services pursuant to the terms of the
Distribution Agreement. The working capital will be transferred to
ManorCare Health Services as lessee, operator and manager of these
facilities pursuant to the Lease Agreements. Accordingly, the functions of
cash collections and payments will be assumed by ManorCare Health Services
after the Distribution. ManorCare Realty will dividend the working capital
to ManorCare Health Services at the date of Distribution; ManorCare Health
Services will reimburse Manor Care Realty for up to $12.5 million of this
amount.
e) Reflects the additional $150 million of Term Loan indebtedness and $350
million of Manor Care Notes offered hereby as well as the redemption of
$140 million of Senior Subordinated Notes, the repayment of the amount
outstanding under the Existing Revolving Credit Facility and the Promissory
Note, the repayment of certain mortgages of skilled nursing facilities of
$0.5 million, and $28 million drawn from the New Credit Facilities.
f) Reflects capitalized deferred financing fees of $14.5 million and payment
of transaction fees of $6.0 million.
g) Reflects the transfer of benefits and workers' compensation liabilities to
ManorCare Health Services pursuant to the Employee Benefits Allocation
Agreement.
h) Reflects the allocation of deferred tax liabilities to ManorCare Health
Services pursuant to the Tax Sharing Agreement.
(i) Reflects the assets and liabilities attributable to the Developed
Properties.
(j) The advances to discontinued lodging segment were repaid on October 15,
1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion is based on the operations of the skilled nursing
facilities before the Distribution and related transactions. The operations of
the skilled nursing facilities will continue to have a material impact on
Manor Care Realty after the Distribution because of the Lease Agreements.
However, the information contained herein does not indicate the results of
operations or financial condition of Manor Care Realty that would have been
reported for the periods indicated had the Distribution occurred on the first
day of the periods discussed. Following the Distribution, Manor Care Realty's
principal sources of revenue will be payments pursuant to the leasing of the
skilled nursing facilities to ManorCare Health Services, the operations of the
developed assisted living facilities prior to sale, the proceeds of the sale
of assisted living facilities, and revenues of Mesquite Hospital. Manor Care
Realty's principal operating expenses will be related to the development of
the assisted living facilities, the operation of the assisted living
facilities prior to sale and the operating expenses of Mesquite Hospital. The
following review of operating results includes the historical results of the
skilled nursing facilities for the specified periods. The results of the
Company's assisted living, pharmacy and home health segments have been
reported as discontinued operations.
Three Months ended August 31, 1997 compared to August 31, 1996
Revenues increased from $250.2 million to $274.1 million ($23.8 million or
9.5%) in the three months ended August 31, 1997 as compared to the three
months ended August 31, 1996. The increase in revenue is partially
attributable to increases in rates of 5.8% ($14.5 million) and a 3.2% net
increase in bed capacity. The increase in rates includes the incremental
impact of settlements with government agencies related to prior period cost
reports of approximately $4 million. The growth in bed capacity is
attributable to the purchase of 2 nursing facilities (279 beds), openings of
newly constructed facilities (497 beds) and is net of the sale of four
facilities (498 beds) in the second quarter of 1997.
Operating expenses increased from $191.5 million to $208.2 million ($16.7
million, or 8.7%). The increase in operating expenses is attributable to
additional capacity ($4.4 million) and increased staffing, necessitated by
higher patient acuity and more complex product and service offerings. This
increase is net of a reduction in operating expenses associated with the sale
of the skilled nursing facilities, discussed above. As a result, the gross
profit associated with the operation of the skilled nursing facilities
increased to $65.8 million from $58.7 million in the previous period. Gross
margin as a percentage of sales increased from 23.5% to 24.0%.
Depreciation and amortization increased from $14.6 million to $16.0 million
($1.4 million or 9.6%) for the three month period ended August 31, 1997 when
compared to the same period last year as a result of acquisitions, new
construction and increases in property and equipment resulting from the
additions and renovations to existing facilities during the past twelve
months.
General corporate and other expense decreased from $14.2 million to $11.3
million ($2.9 million or 20.5%) for the three months ended August 31, 1997
when compared to the same period last year. This decrease was primarily
because of downsizing due to reengineering efforts in both organizational and
financial systems. General corporate and other expenses represented 4.1% of
revenues during the three months ended August 31, 1997 compared to 5.7% for
the same period last year. General corporate and other expense includes risk
management, information systems, treasury, accounting, legal, human resources
and other administrative support functions.
Interest income from advances to the discontinued lodging operations
decreased from $5.1 million to $2.6 million ($2.5 million or 48.7%) for the
three months ended August 31, 1997 when compared to the same period last year.
This reduction was attributable to the prepayment of approximately $110.0
million of indebtedness due
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from discontinued lodging operations in the fourth quarter of 1997. Interest
income and other increased to $2.6 million from $1.7 million in the prior
year.
Interest expense increased from $5.3 million to $6.8 million ($1.5 million
or 28.8%) for the three months ended August 31, 1997 when compared to the same
period last year. The increase was attributable to the increase in the average
outstanding balance of the Existing Revolving Credit Facility during the
current period when compared to the same period last year. Interest
capitalized in conjunction with construction programs amounted to $0.8 million
and $1.1 million in the three months ended August 31, 1997 and 1996,
respectively.
The effective income tax rate of 38.2% in the quarter ended August 31, 1997
is consistent with 39.3% effective tax rate in the comparable period in the
prior year.
Income from continuing operations was $22.8 million ($0.36 per share)
compared to $19.0 million ($0.30 per share) in the prior period.
Fiscal 1997 compared to Fiscal 1996
Revenues increased from $985.2 million to $1.1 billion ($71.0 million or 7%)
in fiscal 1997 compared to the prior year. The increase in revenues is
attributable to an increase in average daily rates of approximately 6% ($61
million) and an increase in bed capacity of approximately 5.7%. The increase
in average rates includes the incremental impact of settlements with
government agencies related to prior period cost reports of $4 million. The
growth in bed capacity is attributable to the purchase of two nursing
facilities (279 beds), openings of newly constructed facilities (398 beds),
and additional bed development at existing centers (467 beds) and is net of
the sale of four facilities (498 beds) in the second quarter of 1997.
Operating expenses increased from $735.7 million in 1996 to $789.1 million
in 1997 ($53.4 million or 7%). Additional capacity accounts for $20.5 million
of this increase. The remainder of the increase is caused by increased
staffing, necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales was flat at 25.3% in
fiscal years 1997 and 1996.
Depreciation and amortization increased from $56.5 million to $60.2 million
($3.7 million or 6.6%) in fiscal year 1997. The increase was attributable to
investments in property and equipment.
General corporate and other expenses represent 5.7% of revenue in fiscal
year 1997 compared to 6.4% of revenue in fiscal 1996. This represents a
decrease of approximately $2.9 million from fiscal year 1996 to fiscal year
1997. This decrease is principally the result of a $7 million gain on the sale
of the four nursing facilities offset by an increase in charitable
contributions of $5 million.
Interest income from advances to the discontinued lodging operations
increased to $21.2 million from $19.7 million in the same period last year.
This increase was attributable to the prepayment penalty of $1.9 million in
connection with the prepayment by the discontinued lodging operations of
approximately $110.0 million of the indebtedness in the fourth quarter of
1997. Interest income and other increased from $3 million in 1996 to $6
million in 1997.
Interest expense increased by $6 million to $25 million from $19 million.
The increase was primarily attributable to the June 1996 issuance of the $150
million 7 1/2% Senior Notes. This increase was offset by the use of a portion
of those proceeds to reduce borrowings under the revolver.
The effective income tax rate of 40.6% is consistent with the prior year
effective income tax rate of 40.9%.
Income from continuing operations was $88.9 million ($1.40 per share)
compared to $64.4 million ($1.03 per share). The effect of the provision for
asset impairment and restructuring charge in 1996, net of income taxes is
$14.8 million or $0.24 per share.
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Fiscal 1996 compared to Fiscal 1995
Revenues increased from $893.5 million to $985.2 million in fiscal year 1996
($91.7 million or 10.3%). The increase in revenues is attributable to an
increase in average daily rates of approximately 6% ($59 million) and an
increase in bed capacity of approximately 3.3%. The increase in rates includes
the incremental impact of settlements with government agencies related to
prior period cost reports of approximately $7 million. The growth in bed
capacity is attributable to the purchase of four nursing facilities (569
beds), openings of newly constructed facilities (360 beds) and additional bed
development at existing centers (35 beds).
Operating expenses increased from $671.0 million in 1995 to $735.7 million
in 1996 ($64.7 million or 9.6%). The increase in operating expenses was
attributable to additional capacity of $8.3 million as well as increased
staffing, necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales increased slightly
from 24.9% to 25.3% from fiscal year 1995 to 1996.
Depreciation and amortization increased from $48.3 million to $56.5 million
($8.2 million or 17.0%). The increase was attributable to investments in
property and equipment.
General corporate and other expenses represent 6.4% of revenue in fiscal
year 1996 compared to 6.7% of revenue in fiscal 1995. General corporate
expense includes all indirect operating expenses as well as risk management,
information systems, treasury, accounting, legal and other administrative
support for the Company and its various subsidiaries.
Interest income from advances to the discontinued lodging operations
increased to $19.7 million in fiscal 1996 from $15.5 million in the previous
year. This increase was attributable to the increase in balance of Advances to
the Discontinued Lodging Segment during fiscal year 1996. Interest income and
other decreased from $6.4 million in 1995 to $3.5 million in 1996.
Interest expense remained level at $18.9 million for fiscal years 1996 and
1995.
The effective income tax rate of 40.9% is consistent with the prior year
effective income tax rate of 39.4%.
Income from continuing operations was $64.4 million ($1.03 per share) for
fiscal year 1996 compared to $70.9 million ($1.13 per share) for fiscal year
1995. The effect of the provision for asset impairment and restructuring
charge in 1996, net of income taxes, is $14.8 million or $0.24 per share.
LIQUIDITY AND CAPITAL RESOURCES
Following the Distribution, Manor Care Realty's principal capital
requirements will be financing the development of skilled nursing and assisted
living facilities. Manor Care Realty expects to invest between $1.5 billion
and $1.9 billion over the next five years to develop skilled nursing and
assisted living facilities. This includes acquisitions of existing skilled
nursing facilities and includes capital improvements for new and existing
facilities. Manor Care Realty expects to fund these activities with proceeds
of borrowings under the Credit Facilities, proceeds from the sale of
facilities to ManorCare Health Services pursuant to the Development Agreement
and cash provided from operating activities, including payments from ManorCare
Health Services under the Lease Agreements. Completing this development plan
will require additional debt and equity financing, including proceeds from an
equity offering expected to occur in 1998. There can be no assurance that
Manor Care Realty will be able to obtain debt or equity financing on terms
acceptable to it or that the proceeds of such financings will be available or
sufficient to fund Manor Care Realty's capital requirements. Manor Care Realty
believes that, following the consummation of the Offering, it will have
sufficient capital resources and liquidity, including cash flow from
operations and availability under the Credit Facilities and other sources of
debt and equity capital, to meet its anticipated borrowing needs, fund
anticipated capital expenditures and pursue its business strategy. For a
description of the Credit Facilities see "Description of Certain
Indebtedness."
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On September 15, 1997, Manor Care announced its intention to proceed with a
separation of its assisted living, pharmacy, and home health businesses
(collectively, the "Business") from its skilled nursing, real estate and
healthcare facility development business via a spin-off of the Business (the
"Distribution"). The spin-off of the Business will be effected by a
distribution to Manor Care's shareholders of all the common stock of ManorCare
Health Services, Inc., a wholly owned subsidiary of Manor Care, which as of the
date of the spin-off, will own and operate all Manor Care's assisted living
operations as well as manage the skilled nursing assets owned by Manor Care.
Following the Distribution, New ManorCare Health Services, Inc. will change its
name to ManorCare Health Services, Inc. and Manor Care will change its name to
Manor Care Realty, Inc. The Board of Directors voted to approve in principle
the transaction subject to receipt of other approvals and consents and
satisfactory implementation of the arrangements for the Distribution. The Board
of Directors voted to approve in principle the transaction subject to receipt
of other approvals and consents and satisfactory implementation of the
arrangements for the Distribution. Manor Care anticipates that the transaction
will be completed during the third quarter of fiscal year 1998. The
Distribution is conditional upon certain matters, including receipt of the
Solvency Opinion and declaration of the special dividend by Manor Care's Board
of Directors. As of August 31, 1997, Manor Care had cash advances totaling
$277.2 million outstanding from the Business. These advances will be forgiven
at the date of the spin-off.
On November 1, 1996, Manor Care separated its lodging business from its
healthcare business via a tax- free spin-off of the lodging division. In
conjunction with this spin-off, Manor Care received a three year, 9%, $225.7
million note from its lodging segment. In April 1997, Manor Care received a
prepayment of $110.0 million on this note, resulting in remaining cash advances
at August 31, 1997 of $115.7 million. This remaining balance was prepaid in
full in October 1997. The proceeds in each case were used to prepay borrowings
under the Existing Revolving Credit Facility.
In September 1996, Manor Care 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
August 31, 1997, bank lines totaled $275.0 million, of which $85.7 million
remained unused. Manor Care intends to establish a new revolving credit
facility in conjunction with the Distribution. To that end, Manor Care, on
behalf of Manor Care Real Estate, is negotiating a Commitment Letter with Chase
and CSI relating to a five-year $300 million Revolving Facility to become
effective as of the Distribution. See "Description of Certain Indebtedness--The
Credit Facilities."
In June 1996, Manor Care completed a public offering of unsecured Senior
Notes in the amount of $150.0 million, the proceeds of which were used to repay
borrowings under the Existing Revolving Credit Facility. The notes are due in
June 2006 and carry a 7 1/2% interest rate. In connection with the
Distribution, Manor Care Health Services plans to offer to exchange $1,000
principal amount of its 7 1/2% Senior Notes due 2006 for each $1,000 principal
amount of the 7 1/2% Senior Notes due 2006 of Manor Care properly tendered. See
"Description of the Transactions--The Exchange Offer and Solicitation."
Property and Acquisitions
During fiscal 1997, investment in property and equipment utilized in
continuing operations amounted to $143.5 million. Manor Care also purchased two
skilled nursing facilities for $17.8 million.
During fiscal 1996, investment in property and equipment utilized in
continuing operations and systems development amounted to $104.3 million.
Additionally, during fiscal 1996, $32.4 million was spent to acquire four
additional nursing centers.
During the five years following the Distribution, Manor Care Realty will be
investing between $1.5 billion and $1.9 billion in the development of skilled
nursing and assisted living facilities. See "--Liquidity and Capital
Resources."
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PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net
realizable value, an impairment loss is recorded in the period the impairment
is determined.
The Company recorded provisions of $25.1 million in fiscal year 1996 related
to the impairment of certain long-lived assets and costs associated with the
Company's restructuring. The most significant components of the provisions
were non-cash impairment charges of $20.0 million relating to writedowns of
property, equipment and capitalized systems development costs and $5.1 million
related to the spinoff of the lodging segment in fiscal year 1996.
In fiscal year 1996, the Company determined that it incurred costs in excess
of the original amount expected to complete a systems development project for
billing and receivables which began in fiscal year 1995. Intensive testing
during a six month pilot identified over 100 major system problems. At this
time, it was determined that the newly developed system was not functional and
that a major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs. The carrying amount was
determined to be in excess of the fair value and accordingly, the related
assets were written down by $13 million to the net realizable value.
Long-Term Debt
Long-term debt was $ 551.5 million at August 31, 1997 compared to $502.8
million at May 31, 1997. The amounts exclude pharmacy debt of $116.6 million
and $107.0 million at August 31, 1997 and May 31, 1997, respectively. The
amounts related to assisted living mortgages are included in long-term debt as
well as in a receivable from the assisted living, pharmacy and home health
segments, as these mortgages will be transferred to the discontinued assisted
living, pharmacy and home health segments at the Distribution Date. The
current portion of debt as of August 31, 1997 amounted to $11.6 million.
On November 17, 1997, Manor Care redeemed all outstanding 9 1/2% Senior
Subordinated Notes due 2002 at a redemption price of 103.56% with the proceeds
of borrowings under the Existing Revolving Credit Facility.
After giving pro forma effect to the Offering, the use of proceeds thereof,
the Distribution and related transactions (and assuming that the holders of
100% of Manor Care's 7 1/2% Senior Notes accept the Exchange Offer), as of
August 31, 1997, Manor Care Realty's aggregate outstanding indebtedness would
have been $805 million.
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 business 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 in 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. Manor Care Realty plans to adopt SFAS 130 in fiscal
year 1999 and has not determined the impact of adoption.
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BUSINESS OF MANOR CARE REALTY AFTER THE DISTRIBUTION
Manor Care Realty will own 168 skilled nursing facilities in 28 states and
believes it will be a leading health care real estate company focused on the
ownership, construction, development and acquisition of health care
properties, including skilled nursing and assisted living facilities. Manor
Care Realty will also own and operate Mesquite Community Hospital, a 172
licensed bed medical/surgical acute care hospital located in Mesquite, Texas.
At or prior to the Distribution, Manor Care Realty will enter into a series of
agreements with ManorCare Health Services pursuant to which ManorCare Health
Services will lease and operate all of Manor Care Realty's 168 Skilled Nursing
Facilities and Manor Care Realty will develop assisted living facilities for
sale to ManorCare Health Services. See "Relationship Between Manor Care Realty
and ManorCare Health Services After the Distribution." Manor Care and its
predecessor companies have been engaged in the development, construction and
acquisition of health care properties since 1959.
Over the next five years, Manor Care Realty plans to focus principally on
the development of over 200 assisted living facilities for sale to ManorCare
Health Services, including approximately 170 Arden Courts and 38 Springhouse
senior residences. Following the Distribution, Manor Care Realty's principal
sources of revenue will arise from payments pursuant to the lease of the
Skilled Nursing Facilities to ManorCare Health Services, the proceeds of the
sale to ManorCare Health Services of assisted living facilities developed by
Manor Care Realty and revenues derived from Mesquite Hospital. Manor Care
Realty's principal expenditures will include the costs incurred in developing
the assisted living facilities for ManorCare Health Services, the costs of
operating the assisted living facilities prior to their sale to ManorCare
Health Services and financing costs, including interest expense.
Manor Care Realty's geographically diversified portfolio of properties will
include:
. 168 Skilled Nursing Facilities in 28 states, which facilities contain
approximately 23,725 beds.
. 25 assisted living facilities under construction in 12 states.
. 64 sites for assisted living facilities under contract and in
development, including 48 Arden Court sites and 16 Springhouse sites.
. Two skilled nursing facilities under construction with 268 beds and
three skilled nursing sites under contract and in development.
. Mesquite Community Hospital, a 172 licensed-bed hospital located in
Mesquite, Texas, a Dallas suburb.
Since fiscal year 1993, Manor Care has completed 72 development projects,
including ten skilled nursing facilities, 15 assisted living facilities and 47
significant additions to its existing skilled nursing facilities.
Manor Care Realty will have an experienced management team, with specific
expertise in market feasibility, regulatory issues, site selection, design,
and project management as well as in the acquisition of health care
facilities. The five senior members of Manor Care Realty's development team
have worked with Manor Care for an average of 16.5 years. These individuals
have in-depth knowledge of the health care market with particular expertise in
the state regulatory environment for both skilled nursing and assisted living
facilities. See "Management Of Manor Care Realty After The Distribution."
Manor Care Realty believes that its experienced management and high quality,
geographically diversified portfolio of long term care properties will ensure
that it continues to be one of the nation's leading health care real estate
developers and owners.
After the Distribution, ManorCare Health Services will be a leading provider
of a full-range of senior support health care services, including skilled
nursing, assisted living, institutional pharmacy and home health care and
additional support services for the frail elderly living at home.
ManorCare Health Services will strive to become the nation's foremost
provider of high-quality senior support health care services within the
private pay segment. Private pay patients accounted for a majority of Manor
Care's skilled nursing revenues in fiscal 1997 compared to a 1996 industry
average of approximately 30%
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for for-profit nursing care providers. Application has been made to list the
common stock of ManorCare Health Services on the New York Stock Exchange.
BUSINESS STRATEGY
Manor Care Realty plans to maintain its status as a leading developer and
owner of senior support health care service facilities and to enhance its
growth and profitability through the following key initiatives:
. Generate Consistent Cash Flows From High Quality Portfolio of
Properties. Upon consummation of the Distribution, Manor Care Realty
believes that it will have one of the highest quality portfolios of
skilled nursing facilities in the industry. The majority of the Skilled
Nursing Facilities were purpose-built (that is, designed and built as
skilled nursing facilities as opposed to having been converted from
some other use). Manor Care Realty believes these facilities are among
the industry leaders in terms of percentage of beds dedicated to
specialty products and quality payor mix. A significant portion of the
beds in Manor Care Realty's Skilled Nursing Facilities are dedicated to
specialty products, including Arcadia (Alzheimer's special care unit),
Heritage and Williamsburg (high-end lifestyle products), and Medbridge
(high acuity unit). For fiscal years 1997 and 1996, Manor Care's
occupancy rates for skilled nursing facilities that had been operated
by Manor Care for at least two years were 89.8% and 90.3%,
respectively.
. Maintain Geographically Diverse Portfolio of Properties. Manor Care
Realty's portfolio of properties will include 168 facilities in 28
states. Manor Care Realty believes the geographic diversity of the
Skilled Nursing Facilities makes the portfolio less susceptible to
adverse changes in state regulation and regional economic downturns.
. Benefit From Strategic Relationship with ManorCare Health
Services. Manor Care Realty believes it will benefit from a strategic
relationship with ManorCare Health Services, one of the nation's
leading providers of high-quality senior support health care services
within the private pay segment. Under the terms of the Lease Agreements
(as defined herein), ManorCare Health Services will operate Manor Care
Realty's 168 Skilled Nursing Facilities. Manor Care Realty believes
that the operation of the Skilled Nursing Facilities by ManorCare
Health Services will allow Manor Care Realty to benefit from the strong
brand name recognition, well established treatment protocols and
reputation for high quality, personalized care standards of ManorCare
Health Services. The Lease Agreements provide Manor Care Realty with
lease payments equal to the greater of 10% of the value of each
facility (as agreed to by Manor Care Realty and ManorCare Health
Services) or 77% of the Net Operating Profit (as defined herein) of
each facility, Manor Care Realty believes this structure will provide a
base level of rent along with the opportunity to participate in any
improvements in operating performance of the Skilled Nursing
Facilities. In addition, by serving as a developer of assisted living
facilities for ManorCare Health Services, Manor Care Realty believes it
will be well positioned to profit from the anticipated growth in the
demand for assisted living care. Pursuant to the Development Agreement,
Manor Care Realty will develop assisted living facilities for sale to
ManorCare Health Services. If at any time during the two-year period
following the time a particular facility opens occupancy reaches 75%
for a period of five days, ManorCare Health Services will be obligated
to purchase the facility. The purchase price for each facility will be
at a 15-34% premium to total approved development costs of Manor Care
Realty, based on the number of months elapsed since the opening of the
facility. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but
do not include operating losses incurred during the two-year
stabilization period. The premium to total approved development costs
is intended to compensate Manor Care Realty for the time its capital is
at risk and the increasing value of its investment, but does not
compensate Manor Care Realty for any operating losses incurred during
the two-year stabilization period. The premium to total approved
development costs is intended to compensate Manor Care Realty for the
increasing value of its investment over time as well as for the risks
it takes in connection with developing assisted living facilities,
including the risks inherent in operating the facilities during the two
year stabilization period. Prior to purchase by ManorCare Health
Services, ManorCare Health Services will operate
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Manor Care Realty's assisted living facilities for a fixed monthly fee
pursuant to the Assisted Living Facility Management Agreement. See
"Relationship Between Manor Care Realty and ManorCare Health Services
After the Distribution."
. Capitalize On Growth in Demand for Assisted Living Services. Manor Care
Realty believes the anticipated increased market demand for assisted
living facilities presents Manor Care Realty with opportunities for
growth. Manor Care Realty believes it can successfully capitalize on its
ability to efficiently develop purpose-built assisted living projects
through the planned development of approximately 200 assisted living
facilities for sale to ManorCare Health Services over the next five
years, including approximately 170 Arden Courts and 38 Springhouse
senior residences. In addition to developing assisted living facilities
for ManorCare Health Services and leasing the Skilled Nursing Facilities
to ManorCare Health Services, Manor Care Realty and ManorCare Health
Services plan to work closely together to develop new assisted living
products aimed at segments of the assisted living business not currently
served by the Springhouse and Arden Courts concepts.
. Establish Relations with Other Leading Health Care Providers. While
Manor Care Realty expects that over the next five years the vast
majority of its revenues will be derived from ManorCare Health Services,
subject to contractual restrictions and capital constraints, Manor Care
Realty may diversify its operator base, establish relationships with
other leading health care providers to develop and lease health care
properties and pursue selective acquisition opportunities.
INDUSTRY OVERVIEW
Manor Care Realty will focus on the ownership, development, construction and
acquisition of health care properties, principally in the long-term care
segment of the health care industry. The long-term care industry encompasses a
broad range of accommodations and health care services that are provided
primarily to seniors. For example, seniors requiring limited services can use
home health care or adult day care. Retirement homes, congregate housing, and
continuing care retirement communities are options for those seniors seeking
community housing. As an individual's need for assistance increases, assisted
living facilities offer residents assistance with ADLs, such as dressing,
bathing, eating and medication management, in a residential environment.
Finally, seniors requiring around-the-clock nursing care can be placed in
skilled nursing facilities. The long-term care industry is experiencing
significant growth due to several factors:
. Favorable demographic trends. According to the U.S. Bureau of the
Census, the number of seniors 85 years and older is estimated to
increase by approximately 32% from 3.7 million seniors in 1996 to 4.9
million seniors by 2005. According to industry sources, approximately
57% of the population over age 85 currently require assistance with
ADLs, and more than 50% suffer from Alzheimer's disease or other
cognitive disorders. Manor Care Realty believes that the growth of an
increasingly frail population will drive demand for long-term care
products and services tailored to meet the unique needs of this elderly
population, including skilled nursing facilities, assisted living
facilities, and Alzheimer's care facilities. In addition, Manor Care
Realty believes that the increasing affluence of the elderly will enable
them to afford high quality care. According to the U.S. Bureau of the
Census, the median net worth of householders age 75 and older has
increased from $61,491 in 1988 to $76,541 in 1991.
. Supply/demand imbalance. The long term care industry is benefitting from
a favorable supply and demand relationship in the U.S. According to a
1997 report by the National Investment Conference and Price Waterhouse,
the demand for seniors housing exceeds the supply of available beds. The
Health Insurance Association of America estimates that approximately
seven million elderly will need long-term care in 1997, rising to nine
million by 2005 and to 12 million by 2020. Manor Care Realty believes
this imbalance will continue into the next century and drive the growth
of the long-term care industry. Despite increased demand, growth in the
supply of beds has been minimal.
. Increasing awareness of the range of options available to seniors. Manor
Care Realty believes that consumers are increasingly aware of the wide
range of long-term care options, from home health to
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adult day care to assisted living facilities, that are available to meet
their housing and health care needs. The availability of information and
referral sources such as the National Council on Aging and the
Alzheimer's Association, the growth of nationally branded long-term care
operators such as Manor Care and the emerging assisted living companies,
and increased press coverage of the needs of the aging baby boomer
population, have raised the general consumer's awareness of options
available to seniors in the long-term care industry.
. Changing family dynamics. Due to the growing number of dual income
families and the geographic dispersion of families, many children are
unable to care for their elderly parents in their own homes.
Historically, unpaid women, primarily daughters or daughters-in-law,
represented a large portion of the caregivers of the non-institutional
elderly. In addition, the greater affluence of these dual income
families enables them to better provide financial support to their
parents. Manor Care Realty believes that, as a result, adult children
are increasingly seeking high quality facilities which will provide
their parents with the care and support that they require.
Manor Care Realty, as one of the premier owners and developers in the long-
term care industry, is well positioned to capitalize on the growth of the
long-term care industry for several reasons:
. Increasing use of outside development companies by health care
operators. Health care operators are increasingly looking to experienced
health care developers, such as Manor Care Realty, to provide them with
design, construction management and zoning and regulatory assistance as
well as to reduce their investment costs and associated risks.
. Need for capital to finance the aggressive development plans of the
seniors housing industry. Health care operators are looking for new
sources of financing to fuel their growth. The equity markets and,
increasingly, health care real estate investment trust (REITs), have
provided a source of capital for many of these companies. Manor Care
Realty believes it can capitalize on the inability of traditional
sources of capital to meet the projected growth of the seniors housing
markets.
. Complex regulatory environment. The long-term care industry is governed
by a wide variety of regulations at the local and state levels. Manor
Care Realty believes that its experience in the regulatory arena and its
in-house health planning department provide it with a significant
advantage in managing the complex regulatory process at the local and
state levels. Thirty-eight states require certificates of need ("CONs")
to build skilled nursing facilities and at least eight states require
CONs for assisted living facilities. A number of states are considering
adding regulations for assisted living development. In addition, many
states have imposed moratoriums on skilled nursing beds which further
complicates the process of securing approval to develop new or renovate
existing skilled nursing facilities. Finally, the construction of new
skilled nursing and assisted living facilities typically requires local
zoning and land use approvals, permits and certificates of occupancy.
BUSINESS
Skilled Nursing Facilities
Manor Care Realty believes it will be the premier owner of skilled nursing
facilities in the United States. Through a cohesive framework of proprietary
care protocols, Manor Care Realty's Skilled Nursing Facilities provide (i)
long-term care for chronically ill and frail elderly individuals who need 24-
hour skilled nursing and physical, occupational and speech therapies; (ii)
high acuity, short-term, post-hospital care for medically complex patients and
persons in need of aggressive rehabilitation; and (iii) long-term care for
individuals with middle to late-stage Alzheimer's disease or related memory
impairment. In all cases, these services include appropriate nursing care,
room and board, special diets, occupational, speech, physical and recreational
therapy and other services designed to improve the well-being of the resident.
ManorCare Health Services will lease, operate and manage Manor Care Realty's
Skilled Nursing Facilities pursuant to Lease Agreements under which ManorCare
Health Services will pay monthly fees to Manor Care
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Realty. See "Relationship Between Manor Care Realty and Manor Care Health
Services After the Distribution--Lease Agreements Relating to Skilled Nursing
Facilities."
Manor Care Realty's Skilled Nursing Facilities target affluent to middle
income seniors in need of skilled nursing care. Manor Care Realty believes its
facilities enjoy a more attractive quality mix compared to other long-term
care operators. Manor Care's private pay residents accounted for a majority of
Manor Care's skilled nursing revenues in fiscal year 1997. Manor Care Realty
believes it will benefit from its strong portfolio by participating in the
operating profit generated by these facilities in accordance with the terms of
the Lease Agreements.
Manor Care Realty's Skilled Nursing Facilities differentiate themselves from
their competitors by offering, through ManorCare Health Services, unique
specialty products designed to meet the needs of specific customer segments. A
significant portion of the beds at Manor Care Realty's Skilled Nursing
Facilities are dedicated to specialty services, which are attractive because
they generate higher per patient day revenues and profits than standard long-
term care beds. For example, the Heritage and Williamsburg wings in 107 of
Manor Care Realty's Skilled Nursing Facilities provide residents with upgraded
decor, a private lounge and special programs and, in the case of the
Williamsburg wings, concierge services and a private dining area with a
gourmet menu. Manor Care Realty believes that the Heritage and Williamsburg
design concepts contribute to Manor Care's high percentage of private pay
residents compared to the rest of the industry. Within Manor Care Realty's
Skilled Nursing Facilities, ManorCare Health Services also will continue to
operate 143 Arcadia special-care units providing services to individuals in
the middle to late stages of Alzheimer's disease or afflicted with related
memory impairment. Finally, ManorCare Health Services will continue to operate
within the Skilled Nursing Facilities 21 dedicated MedBridge high acuity units
featuring high staff-to-patient ratios, sophisticated clinical capabilities
and state-of-the-art rehabilitation departments. Manor Care Realty believes
these high-end specialty products will facilitate marketing efforts to attract
longer stay (1-3 years) private pay residents.
Manor Care is currently constructing two skilled nursing facilities and has
three nursing sites under contract and in development. A typical skilled
nursing facility built by Manor Care has 120 beds, costs approximately $8.5
million to build (including the cost of the land) and takes approximately
twelve to thirteen months to construct.
Assisted Living Facilities
Assisted living facilities serve elderly persons who require assistance with
activities of daily living but who do not require the constant nursing
supervision that skilled nursing facilities provide. Manor Care Realty
currently has 25 assisted living facilities under construction and 64 sites
for new assisted living facilities under contract and in development. These
facilities will be managed by and if the requisite occupancy levels are
achieved within two years, purchased by ManorCare Health Services pursuant to
the terms of the Assisted Living Facility Management Agreement and the
Development Agreement. Also, pursuant to the Development Agreement, Manor Care
Realty plans to develop approximately 200 assisted living facilities for sale
to ManorCare Health Services over the next five years, including approximately
170 Arden Courts and 38 Springhouse senior residences. See "Relationship
Between Manor Care Realty and Manor Care Health Services After the
Distribution--Development Agreement Relating to Assisted Living Facilities."
Manor Care Realty believes that upon completion of this development plan
ManorCare Health Services will be the nation's largest operator of Alzheimer's
assisted living facilities. Manor Care Realty's assisted living units are
generally rented to occupants pursuant to 30-day or one-year leases, subject
to Manor Care's right to terminate the lease if the occupant becomes too frail
for the facility.
In a strategy similar to that employed in connection with the Skilled
Nursing Facilities, the assisted living facilities to be developed by Manor
Care Realty will target affluent to middle income seniors in need of up to a
full range of assisted living services to optimize their quality of life.
These services will be available 24 hours a day and generally include meal
service, housekeeping, personal care, nursing and health related services,
social and recreational services, transportation and special services (such as
banking and shopping). Personal services
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will include bathing, dressing, personal hygiene, grooming, ambulating and
dining assistance. Health-related services, which are tailored to individual
patient needs and applicable state regulatory requirements, may also include
assistance with medication management, skin care and injections, as well as
health care monitoring.
The Arden Courts assisted living facilities to be developed by Manor Care
Realty are a distinct product and service segment focused exclusively on
individuals suffering from the early to middle stages of Alzheimer's disease
or related memory impairment. These special purpose assisted living facilities
offer a proprietary, specially designed physical plant with security systems,
structured activities and related resident services and support systems. These
facilities are typically divided into four color-coded houses comprising a
total of 56 units with access to communal living rooms, kitchens, dining rooms
and protected gardens. All aspects of the facilities' operations are managed
by an Executive Director specially trained in the care of Alzheimer's
patients. Arden Courts assisted living facilities are designed to allow
residents the freedom to move about independently while keeping them safely
contained within a secured area. A typical Arden Courts facility has 56 units,
costs approximately $4.5 million to build (including the cost of the land) and
takes approximately ten months to construct.
The Springhouse senior residences to be developed by Manor Care Realty are
freestanding, residential-style facilities designed to meet the needs of the
general assisted living population. These facilities are functionally arranged
to provide a home-like atmosphere. The architectural and interior design
concepts incorporate the Manor Care operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a home-like
setting. Each facility is operated with certain protocols designed to maintain
the health of the residents and to provide a measure of security and support
for those individuals. Each facility includes common areas designed to promote
social interaction among residents, such as a dining area, a laundry room, a
library, a wellness center, barber and beauty shop, crafts room, spa and a
snack room or ice cream parlor. In addition, Springhouse residents have access
to medication management services, therapy and other ancillary services, as
well as dementia programs and dedicated dementia units in some locations. A
typical Springhouse senior residence has 105 beds, costs approximately $9.5
million to build and takes approximately twelve to thirteen months to
construct.
Real Estate Development and Acquisition Activities
Pursuant to the Development Agreement, Manor Care Realty plans to develop
approximately 200 assisted living facilities for sale to ManorCare Health
Services over the next five years. In this regard, Manor Care Realty will
continue to employ its integrated internal development process pursuant to
which Manor Care Realty's market feasibility, health planning, interior
design, architecture, development, and construction personnel will develop and
open these facilities. Manor Care Realty's development process is divided into
three discrete phases.
The first phase of the development process involves market feasibility and
site selection. Manor Care Realty's in-house market feasibility team will be
responsible for identifying and prioritizing the top metropolitan statistical
areas for development on a national basis, based on (i) the demographics of
each market, (ii) fit with ManorCare Health Services' existing cluster
markets, and (iii) the competitive environment in each market. Following
market selection, regionally focused development teams will be responsible for
identifying potential sites, creating site schematics, executing purchase
agreements, selecting external civil engineers and consultants, preparing an
initial budget, and obtaining land use approval. At the same time, Manor Care
Realty's health planning department will perform CON analyses and, if needed,
file for any required CONs and obtain CON approval for each approved site.
Manor Care Realty will conduct full market feasibility studies, including
demographic analyses, evaluations of existing and planned competitors, and
rate assessments. The market feasibility and site selection phase takes
approximately nine to twelve months.
The second phase of the process consists of project planning and design.
During this stage, Manor Care Realty's development team will determine the
project schedule and select external fee architects responsible for adopting
prototype designs to local building requirements. Manor Care Realty's
architectural and construction departments will conduct regular review of
progress by the fee architect to ensure that Manor Care Realty's
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standards are being met. In addition, Manor Care Realty's centralized
construction purchasing and interior design departments will create finish
schedules and preliminary lists of furniture, fixtures, and equipment (FF&E)
for the facility. The architecture and interior design teams maintain a
running log of design issues during this phase of the process which will be
used to refine Manor Care Realty's prototypes. The final steps of the planning
and design phase involve creating the final project budget, finalizing the
financial pro formas, and securing the relevant permits. The planning and
design phase takes approximately three to six months.
The last phase of Manor Care Realty's development process is the
construction and licensure of the facility. Regionally focused construction
teams will be responsible for selecting the general contractor, obtaining
final permits and conducting biweekly reviews of progress. These biweekly
meetings involve construction management, the general contractor, the fee
architect, and ManorCare Health Services' district operations team. The
construction teams are also responsible for coordinating with all state and
local jurisdictions and health departments to obtain certificates of occupancy
and licensure of facilities. The construction and licensure phase takes
approximately ten months for an Arden Courts facility and twelve to thirteen
months for a Springhouse or skilled nursing facility.
In addition to its development efforts, subject to the terms of the Non-
Competition Agreement, Manor Care Realty may selectively acquire assisted
living and skilled nursing operations. Manor Care Realty expects that
acquisition opportunities will be identified through Manor Care Realty's
senior management, industry contacts, leads from real estate brokers and
consultants, and a proactive acquisition review process by Manor Care Realty's
acquisitions group. In reviewing acquisition opportunities, Manor Care Realty
considers, among other factors, the competitive climate, the current
reputation of the facility, the quality of the management team and staff, the
need to reposition the facility in the marketplace and associated costs, and
the construction quality and need for renovations.
Mesquite Community Hospital
Manor Care Realty will own and operate Mesquite Community Hospital
("Mesquite Hospital"), a 172 licensed-bed hospital located in Mesquite, Texas,
a Dallas suburb. Mesquite Hospital, which opened in 1978, is a general
medical/surgical acute care hospital fully accredited by the Joint Commission
for the Accreditation of Health Care Organizations. Services offered by
Mesquite Hospital include obstetrics, emergency services, coronary/intensive
care, day surgery nursing, and geriatric psychiatry. In addition, Mesquite
Hospital's modern ancillary and diagnostic services include MRI, CT, nuclear
medicine, cardiac catheterization and ultrasound with doppler. The medical
staff, representing virtually every medical and surgical specialty, admits and
refers patients into Mesquite from their private office practices. Patient
services are reimbursed from traditional insurance programs, managed care (HMO
and PPO), Medicare and Medicaid. Renovation of 14,400 square feet of existing
hospital space was completed in October 1996. According to a December 1995
industry survey, Mesquite Hospital was among the top 100 hospitals in the
nation based on a performance analysis evaluating key measures related to
clinical practices, operations, and financial management.
COMPETITION
Manor Care Realty competes for land, property acquisitions and development
opportunities with health care providers, real estate developers, health care
real estate investment trusts, real estate partnerships, and other investors.
ManorCare Health Services, the operator of the skilled nursing facilities and
the assisted living facilities to be developed by Manor Care Realty, is
subject to competition from the operators of comparable facilities, including
skilled nursing, assisted living, and hospital providers. These competitors
include independent operators as well as regional and national companies that
manage multiple facilities. Manor Care Realty's competitors in the health care
real estate business are Alternative Living Services, American Health
Properties, Inc., American Retirement Corp., ARV Assisted Living, Assisted
Living Concepts, Inc., Atria Communities, Inc. Beverly Enterprises, Inc.,
Capstone Capital Corp., Carematrix Corp., Extendicare, Inc., Genesis Health
Ventures, Inc., G & L Realty Corp., Greenbriar Corp., Harborside Healthcare
Corp., Health Care Property Investors, Inc., Healthcare Realty Trust Inc.,
Health Care REIT, Inc., Health Care & Retirement Corp.,
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Health and Retirement Property Trust, Integrated Health Services, Integrated
Living Communities, Kapson Senior Quarters, Inc., Karrington Health, Inc., LTC
Properties, Inc., Mariner Health Group, Inc., Meditrust Corporation, National
Healthcare L.P. National Health Investors, Inc., Nationwide Health Properties,
Inc., Newcare Health Corp., Omega Healthcare Investors, Inc., Paragon Health
Network, Inc., Regent Assisted Living, Retirement Care Associates, Summit Care
Corp., Sun Healthcare Group, Inc., Sunrise Assisted Living, Inc., Unison
Healthcare Corp., Universal Health Realty Income Trust, and Vencor, Inc. Manor
Care Health Services' competitors in the skilled nursing business are Advocat,
Inc., Beverly Enterprises, Inc., Extendicare, Inc., Genesis Health Ventures,
Inc., Health Care and Retirement Corporation, Integrated Health Services,
Inc., Mariner Health Group, Inc., National HealthCare L.P., Paragon Health
Network, Inc., Sun Healthcare Group, Inc. and Vencor, Inc. Certain operators
have capital resources substantially in excess of ManorCare Health Services.
Operators compete on the basis of breadth and quality of services, reputation,
location and physical appearance of the facilities, family preferences,
strength of the operator's referral stream and pricing. Mesquite Hospital
encounters competition in the Mesquite, Texas area where it competes with
other hospitals for community and physician acceptance.
In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of the present and
potential competitors of ManorCare Health Services operate on a not-for-profit
basis or as charitable organizations, while others have, or may obtain,
greater financial resources than those of ManorCare Health Services.
Consequently, there can be no assurance that ManorCare Health Services will
not encounter increased competition that could limit its ability to attract
residents or expand its business. Moreover, if the development of new assisted
living facilities outpaces demand for those facilities in certain markets,
such markets may become saturated. Such an oversupply of facilities could
cause ManorCare Health Services to experience decreased occupancy, depressed
margins and lower operating results which may in turn have an adverse effect
on Manor Care Realty's results of operations.
GOVERNMENT REGULATION
The facilities which Manor Care Realty owns and develops and Mesquite
Hospital are subject to comprehensive and intricate federal, state and local
regulatory guidelines. The facilities themselves, as well as their respective
purposes and activities, are also subject to various local building codes and
other ordinances. In most cases compliance with the applicable statutes and
regulations will be the responsibility of ManorCare Health Services. Manor
Care Realty's success will depend in part upon the ability of ManorCare Health
Services to satisfy applicable regulations and requirements and to procure and
maintain required licenses in rapidly changing regulatory environments. The
failure of ManorCare Health Services or Mesquite Hospital to satisfy
applicable regulations or to procure or maintain a required license could have
a material adverse effect on Manor Care Realty. Moreover, certain regulatory
developments such as revisions in the building code requirements for assisted
living or skilled nursing facilities, mandatory increases in the scope and
quality of care to be offered to residents and revisions in licensing and
certification standards could also have a material adverse effect on Manor
Care Realty.
Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on
licensure of Manor Care Realty facilities, eligibility for participation in
federal and state programs, permissible activities, costs of doing business or
the levels of reimbursement from governmental, private and other sources. Any
one of these potential developments could have an immediate and very
significant effect on the revenues and profitability of the Skilled Nursing
Facilities or Mesquite Hospital. Apart from extensive existing health care
statutes and regulations, there are numerous initiatives on the federal and
state levels for comprehensive reforms. Manor Care Realty cannot predict the
ultimate timing, content or possible impact of future legislation and
regulations affecting the Skilled Nursing Facilities or Mesquite Hospital and
the health care industry in general. See "Risk Factors--Regulation."
Both ManorCare Health Services, as the operator of the Skilled Nursing
Facilities, and Mesquite Hospital are subject to Federal and state laws which
govern financial and other arrangements between health care providers. These
laws often prohibit certain direct and indirect payments or fee-splitting
arrangements between
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health care providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. These laws include the Federal "Stark Legislation"
which prohibits, with limited exceptions, the referral of patients for certain
services, including home health services, physical therapy and occupational
therapy, by a physician to an entity in which the physician has an ownership
interest and the Federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients or
the purchasing, leasing, ordering or arranging for any goods, facility
services or items for which payment can be made under Medicare and Medicaid.
The Federal government, private insurers and various state enforcement
agencies have increased their scrutiny of providers, business practices and
claims in an effort to identify and prosecute fraudulent and abusive
practices. The Federal government has issued recent fraud alerts concerning
nursing services, double billing, home health services and the provision of
medical supplies to nursing facilities; accordingly, these areas may come
under closer scrutiny by the government. Some states restrict certain business
relationships between physicians and other providers of health care services
and many states prohibit business corporations from providing, or holding
themselves out as a provider of, medical care. Possible sanctions for
violation of any of these restrictions or prohibitions include loss of
licensure or eligibility to participate in reimbursement programs, as well as
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
There can be no assurance that such laws will ultimately be interpreted in a
manner consistent with the practices of ManorCare Health Services, as the
operator of the Skilled Nursing Facilities, or Mesquite Hospital.
Certificate of Need
Many of the states in which Manor Care Realty's facilities are leased and
operated have adopted Certificate of Need ("CON") statutes applicable to the
assisted living and skilled nursing facilities. CONs are required to build
skilled nursing facilities in 38 states and in at least eight states to build
assisted living facilities. CON or similar laws generally require that
approval must be obtained from the designated state health planning agency for
certain acquisitions and capital expenditures, and determine that a need
exists prior to the expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. CON laws typically do not affect the operations
of facilities that already are operating. CON laws are in effect in the
following states where Manor Care operates and where Manor Care Realty and
ManorCare Health Services may continue to expand: Florida, Illinois, New
Jersey, Ohio, New York, Connecticut and Kentucky. In addition, many states
currently have a moratorium on the construction of new skilled nursing
facilities. Failure to obtain the necessary state approval may result in (i)
the inability to provide services, to operate a facility or to complete an
acquisition, addition or other change; (ii) the imposition of sanctions; (iii)
adverse action on the facility's license; and (iv) adverse reimbursement
action. CONs or other approvals may be required in connection with Manor Care
Realty's future developments and acquisitions. There can be no assurance that
Manor Care Realty or ManorCare Health Services will be able to obtain the CONs
or other approvals necessary for any or all such projects. There can be no
assurance that states with CON laws may not abolish such laws or that states
without such laws will not enact such CON laws. Manor Care has extensive
experience filing for CONs. During the period from 1987 to the present, Manor
Care completed 64 new skilled nursing facilities, most of which required CON
applications. During the past four fiscal years, Manor Care received CON
approval for 13 skilled nursing facilities and 18 assisted living facilities.
Federal and State Assistance Programs
Substantially all of Manor Care Realty's Skilled Nursing Facilities and
Mesquite Hospital are currently certified to receive benefits under Medicare
and Medicaid. Both initial and continuing qualification of a nursing center or
hospital to participate in such programs depends on many factors including
accommodations, equipment, services, patient care, safety, personnel, physical
environment and adequate policies, procedures and controls.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to
health care facilities. Manor Care Realty
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can give no assurance that payments to ManorCare Health Services under such
programs will in the future remain at a level comparable to the present level
or be sufficient to cover the operating and fixed costs allocable to such
patients.
There have been numerous initiatives on the Federal and state levels for
comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods beginning July 1, 1998.
For ManorCare Health Services, the Budget Act will be phased-in for cost
report years starting in November, 1998. Medicare is currently a retrospective
payment system in which each facility receives an interim payment during the
year, which is later adjusted to reflect actual allowable direct and indirect
costs of services based on the submission of a cost report at the end of each
year. The Budget Act will result in a shift to a prospective Medicare payment
system in which skilled nursing facilities will be reimbursed per diem for
specific covered services regardless of actual cost. Specifically, the Budget
Act provides that, over three reporting periods starting July 1, 1998, the
Medicare program will phase into this prospective payment system. During the
first reporting period, skilled nursing facilities will receive 75% of their
reimbursement based on actual costs and 25% based on a federally-scheduled per
diem rate. In the second reporting period, reimbursement will be 50% cost-
based and 50% rate-based, in the third, 25% cost-based and 75% rate-based.
Thereafter, skilled nursing facilities will be reimbursed by Medicare solely
based on a prospective payment system. Pursuant to the Balanced Budget Act of
1997, between November 1998 and June 1999, the Medicare payment system for
ManorCare Health Services will become prospective rather than retrospective.
The Budget Act also gives states greater flexibility in the administration of
their Medicaid programs in that the Budget Act repeals the requirement that
payment be reasonable and adequate to cover the costs of "efficiently and
economically operated" skilled nursing facilities. Manor Care Realty cannot
predict the impact that this change will have on ManorCare Health Services
and, indirectly, on Manor Care Realty. Manor Care Realty cannot predict
whether any other proposals will be adopted at the Federal or state level or,
if adopted and implemented, what effect, if any, such proposals will have on
ManorCare Health Services and, indirectly, Manor Care Realty. Manor Care
Realty believes, however, that government and private efforts to contain or
reduce health care costs will continue and that these trends are likely to
lead to reduced or slower growth in reimbursement for certain services
provided by ManorCare Health Services, which in turn will affect the revenue
derived by Manor Care Realty from ManorCare Health Services. A significant
change in coverage, reduction in payment rates by third-party payors or the
decline in availability of funding could have a material adverse effect on the
business and financial condition of ManorCare Health Services and, indirectly,
Manor Care Realty's results of operations and financial condition.
Home Health Care Moratorium. On September 15, 1997, President Clinton issued
a Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be proposed to combat
fraud. Given the short duration of the moratorium and the fact that the
moratorium only pertains to new home health providers, Manor Care does not
believe that there will be any material adverse affect on either In Home
Health or on ManorCare Health Services as a result thereof.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property or an
entity that arranges for the disposal or treatment of hazardous or toxic
substances at a disposal site may be held jointly and severally liable for the
cost of removal or remediation of certain hazardous or toxic substances, that
could be located on, in or under such property. Such laws and regulation often
impose liability whether or not the owner, operator or otherwise responsible
party knew of, or caused the presence of the hazardous of toxic substances.
The costs of any required remediation or removal of these substances could be
substantial and the liability of a responsible party as to any property is
generally not limited under such laws and regulation and could exceed the
property's value and the aggregate assets of the liable party. The presence of
these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property, or to
borrow using the property as collateral. In connection
55
<PAGE>
with the ownership and leasing to third-parties of its properties, Manor Care
Realty could be liable for these costs, as well as certain other costs,
including governmental fines and injuries to persons or properties. See "--
Legal Proceedings" and "Risk Factors--Environmental Matters."
LEGAL PROCEEDINGS
Environmental. One or more subsidiaries or affiliates of Manor Care have
been identified as potentially responsible parties ("PRPs") in a variety of
actions (the "Actions") relating to waste disposal sites which allegedly are
subject to remedial action under the Comprehensive Environmental Response
Compensation and Liability Act, as amended, 42 U.S.C. (S)(S)9601 et seq.
("CERCLA") and similar state laws. CERCLA imposes retroactive, strict joint
and several liability on PRPs for the costs of hazardous waste clean-up. The
Actions arise out of the alleged activities of Cenco Incorporated and its
subsidiary and affiliated companies ("Cenco"). Cenco was acquired in 1981 by a
wholly owned subsidiary of Manor Care. The Actions allege that Cenco
transported and/or generated hazardous substances that came to be located at
the sites in question. The Company believes that the waste disposal activities
at issue occurred prior to the Manor Care subsidiary's acquisition of Cenco.
Environmental proceedings such as the Actions may involve owners and/or
operators of the hazardous waste site, multiple waste generators and multiple
waste transportation disposal companies. Such proceedings typically involve
efforts by governmental entities and/or private parties to allocate or recover
site investigation and cleanup costs, which costs may be substantial.
Manor Care believes it has adequate insurance coverage for a substantial
portion of the claims asserted in the actions. Manor Care is engaged in
litigation with its insurers as to the extent of coverage available in
connection with the Actions. While it cannot be guaranteed, Manor Care Realty
believes it will ultimately be successful in the pending litigation with its
insurers.
On October 30, 1989, the New Jersey Department of Environmental Protection
sued Manor Care and other defendants in U.S. District Court, District of New
Jersey, seeking clean-up costs at the Kramer landfill, located in Mantua, New
Jersey, where subsidiaries of Cenco allegedly transported waste. About the
same time, the United States filed a lawsuit against approximately 25
defendants in the same court seeking recovery of its expenses arising in
connection with this site. Manor Care is also defendant in that suit. Based
upon a final allocation plan, and also in view of its insurance coverage
(assuming Manor Care prevails in its litigation with such insurers), Manor
Care Realty believes that the Kramer Action will not have a material adverse
effect on its financial condition or results of operations. This final
allocation plan is not binding. If the matter is not resolved by settlement, a
court would have to allocate responsibility and Manor Care Realty's allocation
could change. In addition, should Manor Care Realty fail to favorably resolve
the litigation with its insurers, some Actions individually and the Actions in
the Aggregate could have an adverse effect on its financial condition or
results of operations.
After the Distribution, Manor Care Realty will retain liability for the
Actions and pursuant to the Distribution Agreement will indemnify ManorCare
Health Services against any liabilities and losses arising out of the Actions.
Although Manor Care, together with its insurers, is vigorously contesting its
liability in the Actions, it is not possible at the present time to accurately
estimate the ultimate legal and financial liability of Manor Care Realty in
respect to the Actions. Manor Care Realty believes, however, that any such
liability will not be material. Furthermore, Manor Care cannot guarantee that
additional environmental claims of this nature, for which Manor Care may incur
liability, will not arise in the future. See "Description of the
Transactions--The Distribution."
The potential liability exposure for currently pending environmental claims
and litigation, without regard to insurance coverage, cannot be quantified
with precision because of the inherent uncertainties of litigation in the
Actions and the fact that the ultimate cost of the remedial actions for some
of the waste disposal sites where Manor Care is alleged to be a potentially
responsible party has not yet been quantified. Manor Care believes that the
potentially environmental liability exposure, after consideration of insurance
coverage, is approximately $3 million. Future liabilities for the pending
environmental claims and litigation, without regard to insurance, currently
are not expected to exceed approximately $46 million.
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<PAGE>
Other. Manor Care Realty will also retain liability for certain regulatory
and legal actions, investigations or claims for damages that have arisen in
the ordinary course of business. Although it is impossible to predict the
outcome of any legal proceeding and Manor Care Realty cannot estimate the
range of the ultimate liability, if any, relating to these proceedings, Manor
Care Realty believes that the outcome of such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
results of operations or financial condition of Manor Care Realty.
EMPLOYEES
After consummation of the Distribution, Manor Care Realty will have
approximately 160 full and part-time employees, 100 of whom will be employed
in development operations and the remainder in Manor Care Realty's
Headquarters. In addition, Mesquite Hospital will have approximately 600 full
and part-time employees.
PROPERTIES
The real estate portfolio of Manor Care Realty consists of 168 skilled
nursing facilities, two skilled nursing and 25 assisted living facilities
under construction, three skilled nursing and 64 assisted living facilities
under contract and in development, and one acute care hospital.
The skilled nursing facilities owned by Manor Care Realty and operated by
ManorCare Health Services range in bed capacity from 53 to 265 beds and have
an aggregate bed capacity of 23,724 beds. Most of the skilled nursing
facilities have been designed to permit private and semi-private patient room
accommodations. Most facilities have individually controlled heating and air-
conditioning units. Each skilled nursing facility contains a fully equipped
kitchen, day room areas, administrative offices and in most cases a physical
therapy room.
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<PAGE>
The table below summarizes certain information regarding Manor Care Realty's
existing facilities as of August 31, 1997 giving pro forma effect to the
Distribution:
SKILLED NURSING FACILITIES
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
ARIZONA
Tucson.................. 117
-----
Total................... 117
=====
CALIFORNIA
Citrus Heights.......... 147
Encinitas............... 106
Fountain Valley......... 147
Hemet................... 175
Palm Desert............. 178
Rancho Bernardo......... 94
Rossmoor................ 119
Sunnyvale............... 139
Walnut Creek............ 154
-----
Total................... 1,259
=====
COLORADO
Boulder................. 149
Denver.................. 152
-----
Total................... 301
=====
DELAWARE
Pike Creek.............. 151
Wilmington.............. 138
-----
Total................... 289
=====
FLORIDA
Boca Raton.............. 178
Boynton Beach........... 179
Carrollwood............. 117
Dunedin................. 119
Jacksonville............ 114
Naples.................. 116
Palm Harbor............. 179
Plantation.............. 118
Sarasota................ 177
Venice.................. 128
West Palm Beach......... 120
Winter Park............. 133
-----
Total................... 1,678
=====
GEORGIA
Decatur................. 131
Marietta................ 116
-----
Total................... 247
=====
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
<CAPTION>
ILLINOIS
<S> <C>
Arlington Heights....... 151
Champaign............... 98
Decatur................. 95
Elgin................... 80
Elk Grove............... 179
Hinsdale................ 190
Kankakee................ 104
Libertyville............ 149
Naperville.............. 112
Normal.................. 95
Oak Lawn................ 179
Oak Lawn Americana...... 142
Orchard Manor........... 53
Palos Heights........... 179
Palos Heights West...... 120
Peoria.................. 120
Rolling Meadows......... 154
South Holland........... 188
Urbana.................. 98
Westmont................ 115
Wilmette................ 76
-----
Total................... 2,677
=====
INDIANA
Anderson................ 225
Indianapolis North...... 185
Indianapolis South...... 119
Kokomo.................. 100
-----
Total................... 629
=====
IOWA
Cedar Rapids............ 102
Davenport............... 102
Dubuque................. 94
Waterloo................ 95
-----
Total................... 393
=====
KANSAS
Overland Park........... 173
Topeka.................. 120
Wichita................. 117
-----
Total................... 410
=====
</TABLE>
58
<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
MARYLAND
Bethesda................ 87
Chevy Chase............. 157
Largo................... 128
Potomac................. 136
Roland Park............. 74
Rossville............... 178
Ruxton.................. 221
Silver Spring........... 119
Towson.................. 126
Wheaton................. 98
-----
Total................... 1,324
=====
MISSOURI
Florissant.............. 97
Fremont................. 220
-----
Total................... 317
=====
MICHIGAN
Kingsford............... 105
Windemere............... 189
-----
Total................... 294
=====
NEVADA
Reno.................... 149
-----
Total................... 149
=====
NEW JERSEY
Cherry Hill............. 107
Mountainside............ 148
West Deptford........... 135
-----
Total................... 390
=====
NEW MEXICO
Camino Vista............ 133
Northeast Heights....... 138
Sandia.................. 177
-----
Total................... 448
=====
NORTH CAROLINA
Pinehurst............... 112
-----
Total................... 112
=====
NORTH DAKOTA
Fargo................... 107
Minot................... 105
-----
Total................... 212
=====
OHIO
Akron................... 99
Barberton............... 118
Belden Village.......... 144
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Cincinnati................ 149
Lake Shore................ 198
Mayfield Heights.......... 148
North Olmstead............ 177
Oregon.................... 108
Rocky River............... 208
Westerville............... 179
Willoughby................ 154
Woodside.................. 143
-----
Total..................... 1,825
=====
OKLAHOMA
Midwest City.............. 108
Norman.................... 102
Northwest Oklahoma City... 115
Southwest Oklahoma City... 110
Tulsa..................... 107
Warr Acres................ 100
Windsor Hills............. 102
-----
Total..................... 744
=====
PENNSYLVANIA
Allentown................. 165
Bethel Park............... 160
Bethlehem-I............... 224
Bethlehem-II.............. 225
Camp Hill................. 119
Carlisle.................. 151
Chambersburg.............. 212
Dallastown................ 202
Devon Manor............... 265
Easton.................... 225
Elizabethtown............. 97
Harrisburg................ 233
Huntingdon Valley......... 120
Jersey Shore.............. 121
King of Prussia........... 147
Kingston Court............ 125
Kingston East............. 177
Lansdale.................. 171
Laureldale................ 198
Lebanon................... 159
McMurray.................. 141
Monroeville............... 119
North Hill................ 199
Pittsburgh................ 149
Pottstown Nursing......... 158
Pottsville................ 178
Sinking Spring............ 214
Sunbury................... 124
West Reading.............. 176
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Whitehall............... 171
Williamsport North...... 152
Williamsport South...... 127
Yardley................. 140
Yeadon.................. 199
York North.............. 162
York South.............. 123
-----
Total................... 6,028
=====
SOUTH CAROLINA
Charleston.............. 117
Columbia................ 130
Lexington............... 118
-----
Total................... 365
-----
SOUTH DAKOTA
Aberdeen................ 98
-----
Total................... 98
=====
TEXAS
Dallas.................. 201
Fort Worth.............. 158
Forth Worth NW.......... 103
San Antonio-Babcock..... 210
San Antonio-North....... 89
San Antonio-Northwest... 145
San Antonio-Windcrest... 186
Sharpview............... 126
Temple.................. 102
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Temple Care............. 140
Webster................. 111
-----
Total................... 1,571
=====
UTAH
Ogden................... 133
-----
Total................... 133
=====
VIRGINIA
Arlington............... 191
Fair Oaks............... 118
Imperial................ 127
Stratford Hall.......... 233
-----
Total................... 669
=====
WASHINGTON
Gig Harbor.............. 119
Lynwood................. 112
Meadow Park............. 125
Spokane................. 124
-----
Total................... 480
=====
WISCONSIN
Appleton................ 101
Fond du Lac............. 107
Green Bay-East.......... 78
Green Bay-West.......... 105
Madison................. 174
-----
Total................... 565
=====
</TABLE>
TOTAL SKILLED NURSING FACILITIES: 168
TOTAL SKILLED NURSING BEDS: 23,724
All of the facilities listed in the above table are owned or leased by Manor
Care Realty and leased by ManorCare Health Services except for certain
facilities which Manor Care Realty either leases or has an ownership interest
pursuant to joint venture agreements. Manor Care Realty owns 35% of the Winter
Park, Florida facility and 94% of the Decatur, Georgia facility.
Manor Care's skilled nursing facilities, including skilled nursing
facilities that have been operated by Manor Care for less than two years, had
an 88.4% occupancy rate for the 12-month period ended May 31, 1997. Manor
Care's skilled nursing facilities that have been operated by Manor Care for at
least two years had an 89.8% occupancy rate for the 12-month period ended May
31, 1997.
Mesquite Hospital is licensed for 172 beds in all private rooms and is a
modern, fully equipped, acute care facility.
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<PAGE>
The table below summarizes certain information regarding Manor Care Realty's
facilities under contract and in development or under construction:
<TABLE>
<CAPTION>
SPRINGHOUSES SPRINGHOUSES ARDEN COURTS ARDEN COURTS
UNDER IN UNDER IN
STATE CONSTRUCTION DEVELOPMENT CONSTRUCTION DEVELOPMENT TOTALS
----- ------------ ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
Arizona........... 0 1 1 3 5
California........ 0 1 1 3 5
Colorado.......... 0 1 0 4 5
Connecticut....... 0 0 0 2 2
Delaware.......... 0 0 1 0 1
Florida........... 1 0 5 6 12
Georgia........... 1 0 2 1 4
Illinois.......... 0 2 1 1 4
Kansas............ 0 0 1 0 1
Maryland.......... 1 2 1 3 7
Michigan.......... 0 0 0 1 1
Nevada............ 0 0 1 0 1
New Jersey........ 3 1 2 3 9
New York.......... 0 0 0 3 3
North Carolina.... 0 0 1 1 2
Ohio.............. 0 1 0 5 6
Pennsylvania...... 0 3 0 6 9
Texas............. 0 2 2 3 7
Virginia.......... 0 1 0 1 2
Washington........ 0 1 0 2 3
--- --- --- --- ---
Total............. 6 16 19 48 89
=== === === === ===
</TABLE>
61
<PAGE>
DESCRIPTION OF THE TRANSACTIONS
THE DISTRIBUTION
Pursuant to the Distribution Agreement, on or prior to the Effective Date,
Manor Care will convey or cause to be conveyed to ManorCare Health Services
all of the right, title and interest of Manor Care and its subsidiaries in:
(i) all of the business and assets of the Assisted Living Business; (ii) the
shares of Common Stock of Vitalink owned by Manor Care; (iii) the shares of
Common and Preferred Stock of In Home Health owned by Manor Care; (iv) the
shares of common stock of The Tidewater Healthcare Shared Services Group, Inc.
("Tidewater"); (v) the partnership interests (the "Joint Venture Interests")
owned by Manor Care in the partnerships owning the Sycamore Glen, Centerville
and Fitzgerald Mercy skilled nursing facilities; and (vi) certain of the
contracts entered into in connection with the November 1, 1996 spin-off of
Choice Hotels International, Inc. (the "Choice Spinoff") (the "Contribution of
Assets").
Pursuant to the Distribution Agreement, ManorCare Health Services will
assume, and indemnify and hold Manor Care Realty harmless against certain
liabilities (the "Assumed Liabilities"), including: (i) liabilities arising
after the Effective Date relating to (x) the ownership, operation and
management of the assisted living facilities and the five skilled nursing
facilities to be owned by ManorCare Health Services and (y) the operation and
management of the Skilled Nursing Facilities; (ii) liabilities arising out of
the ownership of the stock of Vitalink, In Home Health, Tidewater and the
Joint Venture Interests, whether arising before or after the Effective Date;
(iii) liabilities arising out of information contained in or omitted from the
Registration Statement on Form 10 (the "Form 10") filed by ManorCare Health
Services with the Commission in connection with the Distribution; (iv)
liabilities set forth or referenced in the ManorCare Health Services financial
statements or the notes thereto contained in the Form 10; (v) liabilities
arising out of information contained in or omitted from the information
contained in the Registration Statement on Form S-4 filed by ManorCare Health
Services in connection with the Exchange Offer; (vi) liabilities under
indemnification agreements in effect as of the Effective Date between Manor
Care and certain employees and directors with respect to services rendered by
such employee or director to ManorCare Health Services or the Assisted Living
Business or in connection with Vitalink or In Home Health; (vii) third-party
claims relating to the operation and management of the assisted living
facilities prior to the Effective Date and the operation and management of the
Skilled Nursing Facilities prior to the Effective Date (in each case, only to
the extent such claims are not covered by insurance or self-insurance of Manor
Care in effect immediately prior to the Effective Date and are of the type set
forth on a schedule to the Distribution Agreement); (viii) environmental
liabilities arising out of or in connection with the Assisted Living
Facilities; (ix) environmental liabilities to the extent such liabilities
arose by reason of ManorCare Health Services' negligent operation or
management of an assisted living facility or Skilled Nursing facility; (x)
after ManorCare Health Services acquires an assisted living facility pursuant
to the terms of the Development Agreement, environmental liabilities arising
out of or in connection with such acquired assisted living facility; (xi)
liabilities arising out of or in connection with the handling of biomedical
waste at the Assisted Living Facilities or the Skilled Nursing Facilities;
(xii) all accounts payable relating exclusively to the Skilled Nursing
Facilities or the Assisted Living Business; (xiii) the $30 million aggregate
principal amount of indebtedness incurred under the Existing Revolving Credit
Facility in connection with the acquisition of additional equity securities of
Vitalink (the "Vitalink Borrowings"); and (xiv) certain obligations of Manor
Care arising out of the contracts entered into in connection with the Choice
Spin-off.
After giving pro forma effect to the Distribution and related transactions
as if they occurred on August 31, 1997, (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care Realty's
indebtedness, (ii) liabilities relating to benefits and workers' compensation
of approximately $49.8 million, (iii) current liabilities of the skilled
nursing facilities of approximately $55.5 million, and (iv) deferred tax
liabilities of approximately $38.4 million. In addition, ManorCare Health
Services will assume certain contingent liabilities of Manor Care pursuant to
the terms of the Distribution Agreement. However, the assumption of such
liabilities will not release Manor Care Realty therefrom if ManorCare Health
Services should fail, for any reason, to perform its obligations pursuant to
such assumed liabilities.
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<PAGE>
Pursuant to the Distribution Agreement, Manor Care Realty will retain, and
indemnify and hold ManorCare Health Services harmless against, certain
liabilities (the "Retained Liabilities"), including: (i) any liabilities of
Manor Care for money borrowed (other than the Vitalink Borrowings); (ii)
third-party claims arising out of the operation and management of the assisted
living facilities prior to the Effective Date and the operation and management
of the Skilled Nursing Facilities prior to the Effective Date (in each case,
only to the extent such claims are covered by insurance or self-insurance of
Manor Care in effect immediately prior to the Effective Date and the operation
and management of the Skilled Nursing Facilities prior to the Effective Date
and are of the type set forth on a schedule to the Distribution Agreement);
(iii) (x) certain pending environmental claims, including the Actions, as
specified in a schedule to the Distribution Agreement; (y) any and all
currently unknown but potential environmental and other claims arising out of
the activities of Cenco Incorporated, and its subsidiary and affiliated
companies, and any and all of Cenco Incorporated's predecessor corporations
and affiliates ("Cenco"), including new claims arising out of the sites
identified in a schedule to the Distribution Agreement, and (z) all other
claims arising out of Cenco's discontinued operations; (iv) all environmental
liabilities arising out of the Skilled Nursing Facilities, other than
liabilities arising by reason of ManorCare Health Services' negligent
operation or management of a Skilled Nursing Facility; (v) prior to the time
ManorCare Health Services acquires an assisted living facility pursuant to the
terms of the Development Agreement, environmental liabilities arising out of
or in connection with such assisted living facility other than any such
liabilities arising by reason of ManorCare Health Services' negligent
operation or management of any such assisted living facility; (vi) liabilities
arising out of information contained in or omitted from the Registration
Statement on Form S-3 filed by Manor Care Real Estate Corp.; and (vii) any Tax
liabilities (which will be governed by the Tax Sharing Agreement).
The potential liability exposure for currently pending environmental claims
and litigation, without regard to insurance coverage, cannot be quantified
with precision because of the inherent uncertainties of litigation in the
Actions and the fact that the ultimate cost of the remedial actions for some
of the waste disposal sites where Manor Care is alleged to be a potentially
responsible party has not yet been quantified. Manor Care believes that the
potential environmental liability exposure, after consideration of insurance
coverage, is approximately $3 million. Future liabilities for the pending
environmental claims and litigation, without regard to insurance, currently
are not expected to exceed approximately $46 million.
The Distribution Agreement provides that all cash and cash balances in
depository accounts as of the Distribution Date will be remitted to Manor Care
Realty. All petty cash accounts of Manor Care will be allocated on the
Distribution Date to ManorCare Health Services. The Distribution Agreement
also provides that all other current assets and liabilities (the "Noncash
Working Capital") will be conveyed (or in the case of certain government
receivables, deemed to have been conveyed) to ManorCare Health Services.
Promptly after the Distribution Date, ManorCare Health Services and Manor Care
Realty will calculate the amount of the Noncash Working Capital so conveyed
(or deemed to have been conveyed) and ManorCare Health Services will pay to
Manor Care Realty an amount equal to 50% of the Noncash Working Capital up to
$25 million (i.e., in no circumstances will such payment to Manor Care Realty
exceed $12.5 million).
In addition, pursuant to the Distribution Agreement, on or prior to the
Effective Date, Manor Care will make or cause to be made the Capital
Contribution to ManorCare Health Services. See " --The Realty Note."
Manor Care Realty and ManorCare Health Services have agreed in the
Distribution Agreement to share on an equal basis all costs and expenses
incurred in connection with the Distribution and the related transactions,
except that any fees paid in connection with any financings entered into in
connection with the Distribution will be paid by the party undertaking such
financings.
Manor Care Realty has agreed to indemnify and hold harmless ManorCare Health
Services and ManorCare Health Services has agreed to indemnify and hold
harmless Manor Care Realty, against any loss, liability or expense incurred or
suffered by the indemnified party arising out of or relating to the failure by
the indemnifying party, as the case may be, to perform or otherwise discharge
the Retained Liabilities, in the case of Manor Care Realty and the Assumed
Liabilities in the case of ManorCare Health Services. The Distribution
Agreement provides that the indemnifying party may assume the defense of a
claim or suit brought by a third party (unless
63
<PAGE>
the claim involves both ManorCare Health Services and Manor Care Realty as
defendants and the parties reasonably believe that there is a conflict of
interest in which case an independent counsel will be selected). In addition,
the Distribution Agreement provides that the indemnifying party may settle or
compromise the claim without the prior consent of the indemnified party;
provided that the indemnified party may not agree to a settlement unless as a
condition to such settlement the indemnified party receives a written release
from any and all liability relating to such third party claim and such
settlement does not include any relief other than monetary damages.
To the extent that the Distribution Agreement provides for indemnification
by ManorCare Health Services of Manor Care Realty or by Manor Care of
ManorCare Health Services and by Manor Care Realty of ManorCare Health
Services from liabilities arising under the Securities Act of 1933 and the
Securities Exchange Act of 1934, Manor Care has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy and is, therefore, unenforceable.
The Distribution is conditioned upon, among other things, (i) the receipt of
all necessary regulatory approvals and consents of third parities; (ii) the
execution of the agreements relating to the financing necessary to consummate
the Distribution and the related transactions and the receipt of the requisite
funds pursuant to such financing agreements; and (iii) the receipt by the
Board of Directors of Manor Care of the Solvency Opinion.
THE REALTY NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. In order to fund the cash
portion of the Capital Contribution, Manor Care Real Estate will utilize part
of the proceeds from the Offering and borrowings under the Credit Facilities.
As part of the Capital Contribution, Manor Care will contribute or cause to be
contributed to ManorCare Health Services the Realty Note to be issued by Manor
Care Real Estate and guaranteed by Manor Care Realty. The Realty Note will
have the same general terms (including interest rate and maturity, and parent
and subsidiary guarantees) as the Notes except that Manor Care Realty may
redeem the Realty Note after three years at a redemption price equal to 100%
of the principal amount thereof plus accrued and unpaid interest. In addition,
ManorCare Health Services has agreed not to transfer the Realty Note on or
prior to the sixth month anniversary of the date of issuance thereof. After
such date, ManorCare Health Services may transfer the Realty Note without
restriction subject to Manor Care Realty's right to redeem the Realty Note.
ManorCare Health Services will have certain demand registration rights with
respect to all or any portion of the Realty Note. Upon receipt of any such
demand, Manor Care Realty is required to use reasonable efforts to register
the portion of the Realty Note reflected in the demand of ManorCare Health
Services.
On or after the third anniversary of the issuance of the Realty Note,
ManorCare Health Services may request that Manor Care Realty redeem the Realty
Note. Manor Care Realty may not have adequate funds to effect the redemption
of the Realty Note and in such case may seek to obtain such funds through
additional debt or equity financing. There can be no assurance that Manor Care
Realty would be able to obtain such funds. Moreover, the anticipated terms of
the Credit Facilities will not permit Manor Care Realty to refinance the
Realty Notes with the proceeds of borrowings thereunder. In the event that
ManorCare Health Services requests that Manor Care Realty redeem the Realty
Note and Manor Care Realty does not redeem the Realty Note, the interest rate
on the Realty Note will increase by 200 basis points; provided that such
interest rate will not be so increased unless, as of the time such request for
redemption is made, the aggregate amount of rent paid by ManorCare Health
Services under the Lease Agreements with respect to all properties subject to
such Lease Agreements shall equal or exceed the aggregate Priority Sum for all
such properties on a cumulative basis from the Effective Date through the
third anniversary thereof (such aggregate amount of rent being herein referred
to as the "Threshold Rent"). Solely for purposes of calculating the Threshold
Rent, (i) the aggregate Priority Sum for the fiscal year ended May 31, 1999
shall be deemed to be the aggregate Priority Sum calculated pursuant to the
Lease Agreements plus $5 million and (ii) the aggregate Priority Sum for the
fiscal year ended May 31, 2000
64
<PAGE>
and thereafter shall be deemed to be the aggregate Priority Sum calculated
pursuant to the Lease Agreements plus $10 million. Any such increase in the
interest rate on the Realty Note may have a material adverse effect on Manor
Care Realty. Manor Care may determine to reduce the principal amount of the
Realty Note prior to issuance or to reduce the amount of the cash portion of
the Capital Contribution, to the extent Old Senior Notes remain outstanding
upon consummation of the Exchange Offer.
THE CREDIT FACILITIES
Manor Care, on behalf of Manor Care Real Estate, is negotiating a commitment
letter (the "Commitment Letter") with The Chase Manhattan Bank ("Chase") and
Chase Securities Inc. ("CSI") relating to an eight-year $150 million term loan
facility, subject to earlier maturity under certain circumstances, (the "Term
Facility") and a five-year $300 million revolving credit facility (the
"Revolving Facility" and, together with the Term Facility, the "Credit
Facilities"). Manor Care anticipates that the Credit Facilities will be
secured by a majority of the assets of Manor Care Realty and Manor Care Real
Estate, by certain of the assets of Manor Care Realty's other subsidiaries, by
a pledge of the capital stock of Manor Care Real Estate and Manor Care
Realty's other subsidiaries and by an assignment of certain agreements with
ManorCare Health Services, including the Lease Agreements and the Development
Agreement. In addition, Manor Care anticipates that the Credit Facilities will
be fully and unconditionally guaranteed by Manor Care Realty and substantially
all of Manor Care Realty's present and future subsidiaries. Manor Care
anticipates that the Credit Facilities will be available, subject to the terms
and conditions thereof, for general corporate purposes and working capital
purposes, including funding development and operating costs and acquisitions.
Borrowings under the Credit Facilities will be used together with part of the
proceeds from the sale of the Notes to fund the cash portion of the Capital
Contribution. The Credit Facilities will be subject to mandatory prepayment in
certain circumstances.
THE EXCHANGE OFFER AND SOLICITATION
Concurrently with the Offering made hereby, ManorCare Health Services plans
to offer $1,000 principal amount of its 7 1/2% Senior Notes due June 15, 2006
(the "New MCHS Senior Notes") in exchange for each $1,000 principal amount of
7 1/2% Senior Notes due June 15, 2006 of Manor Care properly tendered (the
"Old Senior Notes"). Concurrently with the Exchange Offer, Manor Care plans to
solicit (the "Solicitation") consents ("Consents") to certain amendments (the
"Proposed Amendments") to the indenture governing the Old Senior Notes (the
"Old Indenture"). The Proposed Amendments would, among other things, eliminate
the covenants in the Old Indenture that restrict (i) the creation, incurrence
or assumption of liens, (ii) sale leaseback transactions and (iii)
transactions with affiliates. If Consents are received from the holders of at
least a majority in principal amount of the Old Senior Notes (the "Requisite
Consents"), the Old Indenture will be amended in accordance with the Proposed
Amendments. As a result of the Exchange Offer, ManorCare Health Services, not
Manor Care Realty, will be the obligor on the New MCHS Senior Notes; and Manor
Care Realty, not ManorCare Health Services, will remain the obligor on the Old
Senior Notes. Consummation of the Exchange Offer is conditioned upon, among
other things, acceptance of the Exchange Offer by holders of at least a
majority in principal amount of the Old Senior Notes (the "Minimum Tender
Condition") and consummation of the Distribution. Manor Care may in its
reasonable discretion waive any such conditions and accept for exchange any
Old Senior Notes properly tendered. Manor Care may determine to reduce the
principal amount of the Realty Note prior to issuance to the extent that Old
Senior Notes remain outstanding upon consummation of the Exchange Offer.
Holders of Old Senior Notes who tender into the Exchange Offer will be
required, as a condition to valid tender, to have given their Consent to the
Proposed Amendments. The Proposed Amendments will become operative only upon
consummation of the Exchange Offer. If the Exchange Offer is consummated,
then, unless the Requisite Consents have not been obtained, the Proposed
Amendments will become effective and each non-exchanging holder of the New
MCHS Senior Notes will be bound by such amendment even though such holder did
not consent to the Proposed Amendments.
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RELATIONSHIP BETWEEN MANOR CARE REALTY AND
MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION
The following summarizes certain provisions of the various agreements to be
entered into by Manor Care Realty and ManorCare Health Services in connection
with the Distribution. The following summaries do not purport to be complete
and are qualified in their entirety by reference to the forms of agreement
referred to below, copies of which will be filed as exhibits to the
Registration Statement of which this Prospectus forms a part. In addition, the
terms of such agreements may be amended by the parties thereto in the future.
See "Risk Factors" for certain additional information relating to the
relationship between Manor Care Realty and ManorCare Health Services after the
Distribution.
LEASE AGREEMENTS RELATING TO SKILLED NURSING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into Lease
Agreements (each a "Lease Agreement," and collectively the "Lease
Agreements"), pursuant to which Manor Care Realty will lease to ManorCare
Health Services all the Skilled Nursing Facilities owned by Manor Care, and
Manor Care Realty will grant to ManorCare Health Services, the right to
operate and manage, pursuant to the Lease Agreements, all of Manor Care
Realty's current skilled nursing facilities and, by separate agreement, its
future skilled nursing facilities. Under each Lease Agreement, ManorCare
Health Services' use of the subject facility will be limited to operating a
skilled nursing facility together with such other ancillary uses as exist on
the Effective Date at such facility. Manor Care Realty and ManorCare Health
Services will also enter into Lease Agreements or similar arrangements
pursuant to which ManorCare Health Services will also lease and operate two
skilled nursing facilities in which Manor Care Realty is a substantial equity
investor by joint venture, common ownership or otherwise.
Under the Lease Agreements, ManorCare Health Services will operate and
manage the facilities and will collect all revenues from the facilities. Under
the Lease Agreement for each facility, ManorCare Health Services will be
obligated to pay Manor Care Realty annual rent ("Premises Rent") equal to the
greater of (i) 77% of Net Operating Profit and (ii) a value of the subject
facility agreed upon by ManorCare Health Services and Manor Care Realty (the
"Priority Basis") multiplied by 10%; provided that the Premises Rent for a
specific Lease Year may be reduced below these two amounts as a result of the
deferral mechanism described below. Manor Care Realty and ManorCare Health
Services have determined that Premises Rent for the fiscal year ended May 31,
1998 will be paid on an aggregate portfolio basis, not on a facility by
facility basis. The Premises Rent on a facility is payable in installments
(each "Monthly Premises Rent"), as follows: (i) on the first day of each
calendar month of each Lease Year, commencing with the first day of the month
following the month in which the commencement date of the Lease Agreement
occurs, ManorCare Health Services shall pay to Manor Care Realty an amount
equal to one-twelfth of the 10% of Priority Basis (the "Monthly Priority
Sum"); and (ii) on or before the fifteenth day of each calendar month of each
Lease Year, commencing with the fifteenth day of the month following the month
in which the commencement date of the Lease Agreement occurs, if 77% of the
Net Operating Profit for the Lease Year to date is greater than 10% of the
Priority Basis (the "Priority Sum") multiplied by a fraction the numerator of
which is the number of days that have passed in the applicable Lease Year and
the denominator of which is 365, ManorCare Health Services shall pay to Manor
Care Realty an amount equal to such excess; and (iii) on or before the
fifteenth day of each calendar month of each Lease Year, commencing with the
fifteenth day of the month following the month in which the commencement date
of the Lease Agreement occurs, if the Net Operating Profit for the Lease Year
to date is less than the Priority Sum allocable to the Lease Year to date,
Manor Care Realty shall repay to ManorCare Health Services an amount equal to
such deficiency. Such deficiency amounts paid by Manor Care Realty to
ManorCare Health Services are referred to as "Deferred Premises Rent." The
Priority Basis for each skilled nursing facility will be a predetermined
dollar value for each facility agreed upon by ManorCare Health Services and
Manor Care Realty and will not be subject to increase based upon increases in
the cost of living or inflation. In determining the Priority Basis for each
facility, the parties reviewed, among other things, historical and projected
cash flows, costs of recent capital improvements, the location of the facility
and relevant market conditions. The computation of Net Operating Profit
includes as a Project Expense an amount equal to 6% of Project Revenues
("Tenant's
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Base Fee"), which is in effect a base fee out of Project Revenues which
ManorCare Health Services is entitled to retain without reduction. Project
Revenues generally include all revenues and income derived by ManorCare Health
Services from the facilities. Project Expenses generally include all expenses
incurred by ManorCare Health Services to comply with its obligations under the
Lease Agreements including Tenant's Base Fee; provided however that Project
Expenses do not include Premises Rent.
Deferred Premises Rent may be deferred until such time as Net Operating
Profit is available to pay it; provided that as of the first day of each new
Lease Year all Deferred Premises Rent for the prior Lease Year which has not
become due and payable shall be deemed cancelled and extinguished and shall
not thereafter be due and payable. To the extent that Net Operating Profit
supports less than all Monthly Premises Rent and Deferred Premises Rent then
due, payments made with respect thereto shall be deemed to be made first to
Deferred Premises Rent (from longest to shortest outstanding) and then to
Monthly Premises Rent. The total amount of fiscal 1997 rent which could have
been deferred and ultimately canceled is approximately $10.3 million relating
to 23 facilities. Approximately $6.6 million of this amount relates to 12
recently acquired, renovated or developed facilities which are anticipated to
pay rent at least equal to Priority Sum within the next two fiscal years.
Each facility will be operated pursuant to an Operating Budget (as defined
in the Lease Agreements). The Operating Budget for the period ending May 31,
1998 will be attached to each of the Lease Agreements as an exhibit. The
Operating Budget for each facility for the period from June 1, 1998 through
May 31, 1999 will be agreed upon by Manor Care Realty and ManorCare Health
Services. Thereafter, each Operating Budget will not be subject to Manor Care
Realty's approval unless (i) the Net Operating Profit for the Lease Year (as
defined in the Lease Agreements) immediately prior to the Lease Year with
respect to which the Operating Budget in question is being prepared was less
than the greater of (a) the Priority Sum and (b) 90% of budgeted Net
Operating Profit for such Lease Year or (ii) budgeted Net Operating Profit
for the current Lease Year is less than the greater of (a) the Priority Sum
for the current Lease Year and (b) 90% of budgeted Net Operating Profit for
the prior Lease Year. ManorCare Health Services will have the right to use
2.75% of aggregate Project Revenues (aggregated across all facilities under
all Lease Agreements) for maintenance capital expenditures at the facilities.
Manor Care Realty shall reimburse ManorCare Health Services for all such
maintenance capital expenditures. In addition, each year, ManorCare Health
Services must prepare and submit to Manor Care Realty for approval a budget
setting forth ManorCare Health Services' estimate of the cost of performing
proposed revenue generating alterations, additions and improvements of the
facilities (i.e., major capital expenditures). Manor Care Realty may withhold
its approval in its absolute discretion. Manor Care Realty shall reimburse
ManorCare Health Services for all approved expenditures. If Manor Care Realty
withholds its approval and ManorCare Health Services believes that the
proposed revenue generating items are reasonably necessary to the maintenance
of the facility as a competitive, efficient and economical operation,
ManorCare Health Services may elect to terminate the subject Lease Agreement
effective as of the first anniversary of the date of ManorCare Health
Services' election. If Manor Care Realty disputes ManorCare Health Services'
belief, the dispute shall be resolved by arbitration. In the event the
arbitrator decides in favor of Manor Care Realty, ManorCare Health Services'
notice of termination will be deemed void ab initio.
The Lease Agreements provide that ManorCare Health Services, on behalf of
the underlying property, will have the right to enter into service agreements
with its affiliates, provided, among other conditions, that such services are
competitively priced. In addition, Manor Care Realty will have the right to
mortgage all or any part of its interest in each facility if such financing is
a financing secured by more than [ ] facilities. If such financing is secured
by less than [ ] facilities, Manor Care Realty will have the right to mortgage
its interest in each facility to the extent of 90% of the Priority Basis with
respect to each facility. The foregoing limitations will not apply to any
indebtedness to the extent secured by properties held directly by Manor Care
Real Estate Corp. in Pennsylvania mortgaged to secure the Credit Facilities on
the Effective Date. Any such mortgage will be superior to the Lease
Agreements; provided that the holder of any such mortgage will deliver to
ManorCare Health Services a non-disturbance agreement. Each Lease Agreement
will have an initial term of five years with up to thirty-four one year
renewals at the option of ManorCare Health Services; provided that in certain
states total lease terms will not exceed the maximum term permitted by statute
such that such Lease Agreement will not be deemed a change of ownership for
real estate transfer tax purposes.
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Manor Care Realty will have the right to terminate a Lease Agreement in the
event that (i) either (a) actual Net Operating Profit is less than 90% of
budgeted Net Operating Profit for two consecutive twelve month Lease Years or
(b) actual Net Operating Profit fails to exceed the Priority Sum for two
consecutive twelve month Lease Years, subject to ManorCare Health Services'
right to cure with respect to one year only by making a cash payment to Manor
Care Realty of such deficiency plus 5% of 90% budgeted Net Operating Profit or
5% of the Priority Sum, as applicable, exceeds actual Net Operating Profit,
(ii) the facility is decertified as a skilled nursing facility, is
disqualified from participation in Medicare or Medicaid or ManorCare Health
Services loses its license to operate the subject facility as a skilled
nursing facility or (iii) any one of certain additional defaults occurs, such
as monetary default, breach of covenant and bankruptcy defaults. All
termination rights will be subject to "right to cure" provisions, except that
ManorCare Health Services will have no right to cure if the subject facility
is disqualified from Medicare or Medicaid or decertified or if ManorCare
Health Services loses its license to operate a skilled nursing facility.
Finally, ManorCare Health Services will have the right to terminate a Lease
Agreement in the event a facility is damaged and either (i) the insurance
proceeds are insufficient to cover the restoration costs or (ii) the
restoration could not reasonably be completed within 12 months following the
damage. A Lease Agreement will automatically terminate upon the condemnation
of so much of a facility that, in ManorCare Health Services' reasonable
judgment, the conduct of its business would be substantially prevented or
impaired.
In the event that Manor Care Realty terminates a Lease Agreement based upon
actual Net Operating Profit being less than 90% of budgeted Net Operating
Profit for two consecutive Lease Years, Manor Care Realty will be obligated to
pay to ManorCare Health Services a termination fee, which fee will be based on
the performance of the subject facility, in accordance with the formula
therefor set forth in the Lease Agreements. Unless ManorCare Health Services
consents to the sale, Manor Care Realty will also be obligated to pay to
ManorCare Health Services a termination fee upon the sale of a facility. The
termination fee is formula-based and intended to approximate ManorCare Health
Services' future income from the operation of that facility.
ManorCare Health Services is prohibited from assigning a Lease Agreement or
subletting any facility without Manor Care Realty's approval, which it may
withhold in its sole discretion, except that Manor Care Realty's consent is
not required for assignments or sublettings (i) in connection with ManorCare
Health Services' sale of its business operations as a going concern or with
its merger or consolidation into or with another company or (ii) to an
affiliate succeeding to ManorCare Health Services' business operations.
The Lease Agreements provide that ManorCare Health Services is obligated to
comply with all applicable laws and must obtain and keep in full force and
effect all licenses and permits necessary to operate the facilities. Pursuant
to the Lease Agreements, with respect to ManorCare Health Services' use,
occupancy and operation of operation of the skilled nursing facilities, Manor
Care Realty will not be liable, and ManorCare Health Services will, whether or
not available insurance proceeds are sufficient therefor, indemnify, defend
and hold Manor Care Realty harmless from and against any and all loss, cost,
expense, liability and claims of liability for damage or injury to person or
property on or about the facilities, or otherwise, arising from ManorCare
Health Services' negligence or willful misconduct. Other than such
indemnification obligation, ManorCare Health Services will not have any
liability, personal or otherwise, in connection with any of its obligations
under the Lease Agreements except to the extent of (i) Project Revenues, (ii)
proceeds of insurance and awards for condemnation applicable to the skilled
nursing facilities and actually received by ManorCare Health Services and
(iii) ManorCare Health Services' interest, if any, in the improvements on the
skilled nursing facilities and leasehold estate created under the Lease
Agreements.
The payments from ManorCare Health Services to Manor Care Realty under the
Lease Agreements will not have any effect on the revenues of ManorCare Health
Services. The lease payments will be reflected as operating expenses of
ManorCare Health Services and revenues of Manor Care Realty.
DEVELOPMENT AGREEMENT RELATING TO ASSISTED LIVING FACILITIES
Manor Care Realty and ManorCare Health Services will enter into a Master
Development Agreement (the "Development Agreement") pursuant to which Manor
Care Realty will develop assisted living facilities for
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ManorCare Health Services. Neither Manor Care Realty nor ManorCare Health
Services is obligated to proceed with the development of a facility unless and
until ManorCare Health Services has approved the project budget. Each facility
will be built by Manor Care Realty based upon ManorCare Health Services' then
existing prototype designs. Under the Development Agreement, if stabilized
occupancy of 75% or more is achieved for a period of five days within two
years of commencing operations, ManorCare Health Services will be obligated to
purchase the facility. The purchase price for each facility will be equal to
(i) the actual project costs (but in no event in excess of an amount equal to
the amount of the project budget approved by ManorCare Health Services plus
5%) plus (ii) such actual project costs multiplied by the applicable premium
percentage plus (iii) Manor Care Realty's portion of shared cost savings, if
any, plus (iv) an agreed amount for inventory items. Manor Care Realty's
portion of shared cost savings is an amount equal to 50% of the excess of the
amount of the approved project budget over the amount of the actual project
costs. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two-year stabilization period. The premium percentage is the percentage
set forth below opposite the month during which notice of the purchase of the
facility is given by ManorCare Health Services to Manor Care Realty.
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the eighth
full calendar month thereafter........................................ 15.0%
Ninth calendar month................................................... 16.6%
Tenth calendar month................................................... 18.2%
Eleventh calendar month................................................ 19.7%
Twelfth calendar month................................................. 21.3%
Thirteenth calendar month.............................................. 22.5%
Fourteenth calendar month.............................................. 23.6%
Fifteenth calendar month............................................... 24.9%
Sixteenth calendar month............................................... 25.9%
Seventeenth calendar month............................................. 27.0%
Eighteenth calendar month.............................................. 28.0%
Nineteenth calendar month.............................................. 29.1%
Twentieth calendar month............................................... 30.0%
Twenty-first calendar month............................................ 31.3%
Twenty-second calendar month........................................... 32.2%
Twenty-third calendar month............................................ 33.2%
Twenty-fourth calendar month........................................... 34.3%
</TABLE>
The purchase price for each facility is formula-based and may or may not
approximate the fair market value of a particular facility. Given that
pursuant to the Development Agreement, Manor Care Realty's primary activity
will be developing assisted living facilities for ManorCare Health Services,
which facilities ManorCare Health Services will be obligated to buy if certain
conditions are met, Manor Care Realty believes that over time the aggregate
purchase prices for the facilities should approximate the aggregate purchase
prices that would be available from a similarly situated unaffiliated third
party.
The Development Agreement provides that prior to presentation to any other
party and prior to proceeding by itself for its own account, ManorCare Health
Services shall present to Manor Care Realty for evaluation any assisted living
facility development opportunity that ManorCare Health Services desires to
have pursued. Within thirty (30) days after Manor Care Realty has received
such reports and studies as Manor Care Realty deems necessary in order to
evaluate such opportunity, Manor Care Realty shall elect whether or not to
proceed with
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the opportunity. In the event that Manor Care Realty elects (or is deemed to
have elected) not to proceed with the opportunity, ManorCare Health Services
shall be free, subject to any applicable restrictions set forth in the Non-
Competition Agreement, to pursue such assisted living facility development
opportunity with others.
Pursuant to the Assisted Living Facility Management Agreement, during the
two-year stabilization period, ManorCare Health Services will manage the
facility for Manor Care Realty for a fixed monthly fee. See "--Assisted Living
Facility Management Agreement." If ManorCare Health Services does not acquire
a facility developed by Manor Care Realty during the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. ManorCare Health Services will, however, retain the rights to the Arden
Courts or Springhouse brand name in the event of a third-party sale. The
Development Agreement will have a term of seven years and may be terminated
for cause by either Manor Care Realty or ManorCare Health Services under
certain circumstances.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
Prior to the commencement of the development of an assisted living facility,
Manor Care Realty and ManorCare Health Services will execute and deliver an
Assisted Living Facility Management Agreement (the "Assisted Living Facility
Management Agreement") pursuant to which ManorCare Health Services will manage
the assisted living facility for the period from the first day of the calendar
month in which the subject facility is opened to the earlier of (a) the date
of the sale of the subject facility by Manor Care Realty to ManorCare Health
Services or (b) the second anniversary of the date on which the subject
facility opened for business. ManorCare Health Services will manage each
facility for Manor Care Realty for a fixed monthly fee. The monthly management
fee for each Arden Court facility will be $5,000 and the monthly management
fee for each Springhouse facility will be $8,500. The fixed monthly fee
payable to ManorCare Health Services represents an approximation of ManorCare
Health Services' general and administrative costs for managing the facilities.
All operating costs relating to the managed facilities will be borne by Manor
Care Realty as the owner of facilities.
If stabilized occupancy of 75% or more is not achieved within two years of
commencing operations, upon request by Manor Care Realty made no later than
thirty (30) days prior to the second anniversary of the commencement of
operations. ManorCare Health Services will continue to manage the facility for
a period ending no later than the third anniversary of the commencement of
operations. During any such extended term, Manor Care Realty will be obligated
to pay to ManorCare Health Services a management fee equal to 6% of gross
revenues on a monthly basis and Manor Care Realty will have the right to
terminate the Assisted Living Facility Management Agreement as of the last
calendar day of any month upon not less than thirty (30) days prior written
notice.
NON-COMPETITION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Non-
Competition Agreement (the "Non-Competition Agreement"), which will impose
certain non-competition restrictions on each of Manor Care Realty and
ManorCare Health Services. The Non-Competition Agreement will terminate on the
date the Development Agreement expires or is terminated; provided that if
Manor Care Realty is actively developing assisted living facilities pursuant
to the Development Agreement, the restrictions set forth below relating to
Manor Care Realty's ability to acquire assisted living facilities and
ManorCare Health Services' ability to develop or manage assisted living
facilities will continue until the earlier of (i) the second anniversary of
the expiration of the term of the Development Agreement or (ii) the date on
which ManorCare Health Services acquires the last of such facilities.
Agreements with Respect to the Skilled Nursing Business. The Non-Competition
Agreement provides that Manor Care Realty will be a health care real estate
company focused on the ownership, construction, development and acquisition of
health care properties. The Non-Competition Agreement provides that in the
event that ManorCare Health Services identifies a skilled nursing facility
development opportunity or a skilled nursing facility acquisition opportunity,
ManorCare Health Services will notify Manor Care Realty of such opportunity
and if Manor Care Realty does not respond within a specified time or rejects
the opportunity to acquire or develop such facility, ManorCare Health Services
will have the right to present such development or
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skilled nursing facility acquisition opportunity to a non-affiliated third-
party; provided that ManorCare Health Services will not, without the prior
consent of Manor Care Realty (which consent may be given or withheld in the
sole discretion of Manor Care Realty), present such development or skilled
nursing facility acquisition opportunity to such non-affiliated third party if
such development or acquisition would result in the acquisition or development
of a skilled nursing facility that is within a five mile radius of a Manor
Care Realty owned skilled nursing facility that is leased or managed by Manor
Care Health Services.
In the event that Manor Care Realty determines to proceed with the
development of a skilled nursing facility or a skilled nursing facility
acquisition, Manor Care Realty will notify ManorCare Health Services of such
determination indicating the material terms on which Manor Care Realty is
prepared to permit ManorCare Health Services to manage and lease such skilled
nursing facility (or facilities) and ManorCare Health Services will have a
specified time after the receipt of such notice to notify Manor Care Realty of
its interest in entering into a management and lease agreement with Manor Care
Realty with respect to such skilled nursing facility (or facilities). In the
event that ManorCare Health Services so notifies Manor Care Realty, ManorCare
Health Services and Manor Care Realty will negotiate in good faith for a
specified time period to enter into a management agreement and lease with
respect to such skilled nursing facility (or facilities), but if (i) ManorCare
Health Services does not respond to such notice within such specified time
period or rejects the opportunity to negotiate with Manor Care Realty with
respect to such skilled nursing facility (or facilities) or (ii) ManorCare
Health Services negotiates with Manor Care Realty but the parties are unable
to reach an agreement during such specified time period, Manor Care Realty
will have the right to enter into a management agreement and/or a lease
agreement relating to such skilled nursing facility (or facilities) with a
non-affiliated third party on terms no more favorable in the aggregate to such
third party than those offered to ManorCare Health Services or manage such
facility itself for a period not to exceed 18 months following commencement of
operations of a Manor Care Realty developed skilled nursing facility or
consummation of the skilled nursing facility acquisition, as the case may be.
In the event Manor Care Realty elects to manage such skilled nursing facility
(or facilities), Manor Care Realty will enter into a management agreement
and/or lease agreement with respect to such skilled nursing facility (or
facilities) with an non-affiliated third party following the expiration of
such 18 month period. The terms of such management agreement and/or a lease
agreement will be no more favorable in the aggregate to such third party than
those offered to ManorCare Health Services. In the event that ManorCare Health
Services desires to acquire a business which also includes one or more skilled
nursing facilities, the ownership or possession of which by ManorCare Health
Services would otherwise be prohibited by the Non-Competition Agreement,
ManorCare Health Services must offer Manor Care Realty the right to purchase
such skilled nursing facilities at a price to be agreed upon by the parties;
provided, however that if the parties are unable to agree on such purchase
price, the parties shall submit the issue to binding arbitration. In the event
Manor Care Realty elects not to purchase such skilled nursing facilities at
such purchase price or the parties have been unable to agree on the purchase
price and have submitted the dispute to arbitration, ManorCare Health Services
nonetheless may complete such acquisition but will use its commercially
reasonable efforts to divest itself of such skilled nursing facilities within
one year of the closing of such acquisition. In the event that ManorCare
Health Services determines to sell the skilled nursing facilities for a price
less than the purchase price offered to Manor Care Realty or determined by the
arbitrator, as the case may be, ManorCare Health Services will notify Manor
Care Realty and Manor Care Realty will have the irrevocable and exclusive
option, to buy on the terms set forth in such notice, such skilled nursing
facilities. If Manor Care Realty does not notify ManorCare Health Services
within a specified time period of its intention to purchase such facilities,
Manor Care Realty will be deemed to have declined to purchase such skilled
nursing facilities and ManorCare Health Services will be free to sell such
skilled nursing facilities at a price equal to or exceeding the price and on
the terms specified in such notice.
In addition, the Non-Competition Agreement provides that ManorCare Health
Services will not, without the prior consent of Manor Care Realty (which
consent will not be unreasonably withheld), engage in the lease, operation or
management of any skilled nursing facility owned by a third party that is
within a five-mile radius of a Manor Care Realty owned skilled nursing
facility that is leased or managed by ManorCare Health Services and, subject
to certain exceptions, ManorCare Health Services will not own a skilled
nursing facility.
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The Non-Competition Agreement also provides that Manor Care Realty will not
engage, either directly or indirectly, in the management of skilled nursing
facilities, except as set forth above and except as may be permitted with
respect to a particular skilled nursing facility by the Lease Agreement or
other agreement between Manor Care Realty and ManorCare Health Services
pursuant to which ManorCare Health Services manages such skilled nursing
facility.
Agreements with Respect to the Assisted Living Business. Except as provided
below and except pursuant to the terms of the Development Agreement, the Non-
Competition Agreement provides that Manor Care Realty will not acquire any
assisted living facility; provided, that Manor Care Realty will not be deemed
to have acquired a assisted living facility by reason of the acquisition of a
mixed use facility in which not more than the greater of 20% of the units in
the facility or 30 units are designated for assisted living.
In the event that Manor Care Realty identifies an assisted living facility
acquisition opportunity, Manor Care Realty will notify ManorCare Health
Services of such opportunity and ManorCare Health Services will have a
specified time to notify Manor Care Realty of its interest in pursuing such
opportunity. In the event that ManorCare Health Services does not respond
within such time period or rejects the opportunity to acquire such facility,
Manor Care Realty will have the right to make such assisted living facility
acquisition; provided, however, that if any such assisted living facility is
within a five mile radius of any Manor Care Realty developed assisted living
facility that is owned or managed by ManorCare Health Services, Manor Care
Realty will not be permitted to proceed with such acquisition without the
prior written consent of ManorCare Health Services (which consent will not to
be unreasonably withheld or delayed).
The Non-Competition Agreement provides that in the event that Manor Care
Realty desires to acquire a business which also includes one or more assisted
living facilities, the ownership or possession of by which by Manor Care
Realty would otherwise be prohibited by the Non-Competition Agreement, Manor
Care Realty must offer ManorCare Health Services the right to purchase such
assisted living facilities at a price to be agreed to by the parties; provided
that if the parties are unable to agree on such purchase price, the parties
will submit the dispute to binding arbitration. In the event ManorCare Health
Services elects not to purchase such assisted living facilities at such
purchase price or the parties have been unable to agree on the purchase price
and have submitted the dispute to arbitration, Manor Care Realty nonetheless
may complete such acquisition but will use its commercially reasonable efforts
to divest itself of such assisted living facilities within one year of the
closing such acquisition.
In the event that Manor Care Realty determines to sell the assisted living
facilities for a price less than the offered to ManorCare Health Services or
determined by the arbitrator, as the case may be, Manor Care Realty will
notify ManorCare Health Services and ManorCare Health Services will have the
irrevocable and exclusive option, to buy on the terms set forth in such
notice, such assisted living facilities. If ManorCare Health Services does not
notify Manor Care Realty within a specified time period, ManorCare Health
Services will be deemed to have declined to purchase such assisted living
facilities and Manor Care Realty shall be free to sell such assisted living
facilities at a price equal to or exceeding the price and on the terms
specified in such notice. In the event Manor Care Realty acquires an assisted
living facility (or facilities) in such a transaction, Manor Care Realty will
offer ManorCare Health Services the opportunity to manage and lease such
assisted living facility (or facilities) and ManorCare Health Services and
Manor Care Realty will negotiate in good faith to enter into a management
agreement with respect to such assisted living facility (or facilities). In
the event that ManorCare Health Services does not respond to such offer within
a specified time period or rejects the opportunity to negotiate with Manor
Care Realty with respect to such assisted living facility (or facilities) or
ManorCare Health Services negotiates with Manor Care Realty but the parties
are unable to reach an agreement after such time period, Manor Care Realty
will have the right to enter into a management agreement relating to such
assisted living facility (or facilities) with an non-affiliated third party on
terms no more favorable in the aggregate to such third party than those
offered to ManorCare Health Services or manage such facility itself for a
period not to exceed 18 months following consummation of the acquisition of
such assisted living facility (or facilities). In the event Manor Care Realty
elects to manage such assisted living facility (or facilities), Manor Care
Realty will
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enter into a management agreement with a non-affiliated third party following
the expiration of such 18 month period. The terms of such management agreement
shall be no more favorable in the aggregate to such third party than those
offered to ManorCare Health Services.
The Non-Competition Agreement also provides that except as provided therein,
Manor Care Realty will not engage, either directly or indirectly, in the
management of assisted living facilities.
The Non-Competition Agreement also provides that ManorCare Health Services
will not be permitted to enter into a management agreement with a non-
affiliated third party in connection with an assisted living facility that is
located within a five-mile radius of an assisted living facility (i) developed
by Manor Care Realty pursuant to the terms of the Development Agreement and
still owned by Manor Care Realty or (ii) under development by Manor Care
Realty pursuant to the Development Agreement or (iii) still covered by the
terms of the Development Agreement, unless Manor Care Realty specifically
consents thereto (which consent will not be unreasonably withheld). The Non-
Competition Agreement also provides that ManorCare Health Services will not
develop assisted living facilities except as may be permitted pursuant to the
terms of the Development Agreement.
Agreements with Respect to the Other Businesses. The Non-Competition
Agreement provides that Manor Care Realty will not, either directly or
indirectly, (i) own, manage, operate, finance or participate in the ownership,
management, operation or financing of any entity engaged in the institutional
pharmacy business, the home health care business or otherwise in the continuum
of care (other than the hospital management business) (the "Manor Care Realty
Restricted Business") or (ii) engage in any other manner or make any
investment in any entity engaged in the Manor Care Realty Restricted Business;
provided, however, that Manor Care Realty will be entitled to acquire a
business that includes a Manor Care Realty Restricted Business so long as
Manor Care Realty provides ManorCare Health Services with same notices and
rights concerning the Manor Care Realty Restricted Business as contemplated by
the Non-Competition Agreement with respect to the acquisition by Manor Care
Realty of a business that includes certain assisted living facilities. The
Non-Competition Agreement provides that the provisions of the agreement
relating to the institutional pharmacy business will terminate when ManorCare
Health Services no longer owns, directly or indirectly, 20% or more of the
fully diluted equity of Vitalink Pharmacy Services, Inc. (including any
successor thereto by merger, consolidation, stock purchase or sale of all or
substantially all of the assets) and the provisions of the agreement relating
to the home health business will terminate when ManorCare Health Services no
longer owns, directly or indirectly, 20% or more of the fully diluted equity
of In Home Health, Inc. (including any successor thereto by merger,
consolidation, stock purchase or sale of all or substantially all of the
assets).
The Non-Competition Agreement also provides that ManorCare Health Services
will not, either directly or indirectly, (i) own, manage, operate, finance or
participate in the ownership, management, operation or financing of any entity
engaged in the hospital management business (the "ManorCare Health Services
Restricted Business") or (ii) engage in any other manner or make any
investment in any entity engaged in the hospital management business;
provided, however that such restrictions will not apply to skilled nursing
facilities or assisted living facilities or units thereof that are located
within or are adjacent to hospitals; provided, further, however, that
ManorCare Health Services will be entitled to acquire a business that includes
a ManorCare Health Services Restricted Business so long as ManorCare Health
Services provides Manor Care Realty with the same notices and rights
concerning the ManorCare Health Services Restricted Business as contemplated
by the Non-Competition Agreement with respect to the acquisition by ManorCare
Health Services of a business that includes certain skilled nursing
facilities. The Non-Competition Agreement provides that the provisions of the
agreement relating to the hospital management business will terminate when
Manor Care Realty no longer owns, directly or indirectly, 20% or more of the
fully diluted equity of Community Hospital of Mesquite, Inc. (including any
successor thereto by merger, consolidation, stock purchase or sale of all or
substantially all of the assets). In addition, the Non-Competition Agreement
provides that, if ManorCare Health Services enters into a new line of business
involving the ownership of real estate, ManorCare Health Services must offer
for sale such real estate to Manor Care Realty with the same notices and
rights concerning such real estate as contemplated by the Non-Competition
Agreement with respect to the acquisition by ManorCare Health Services of a
business that includes certain skilled nursing facilities.
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EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement (the "Employee
Benefits Allocation Agreement"), pursuant to which the employee benefits with
respect to employees who remain employed by Manor Care Realty or its
subsidiaries immediately after the Distribution ("Manor Care Realty
Employees") and the employee benefits of employees who are employed by
ManorCare Health Services immediately after the Distribution ("ManorCare
Health Services Employees") will be allocated.
The Employee Benefits Allocation Agreement provides that all of the vested
and non-vested Incentive Stock Options ("ISOs") of employees of Manor Care who
will be employed by ManorCare Health Services will be converted into ISOs of
ManorCare Health Services. The ISOs of employees who remain employed by Manor
Care Realty will be converted into ISOs of Manor Care Realty. In addition,
both employees who will be employed by ManorCare Health Services and employees
who remain employed by Manor Care Realty will have the right to elect to
convert their vested Manor Care Non-Qualified Stock Options ("NQSOs") into any
percentage combination of Manor Care Realty NQSOs and ManorCare Health
Services NQSOs. The Employee Benefits Allocation Agreement also provides that
one-half of the non-vested NQSOs of any employee who will be employed by
ManorCare Health Services will be converted into NQSOs of ManorCare Health
Services, and one-half of the non-vested NQSOs of any employee who remains
employed by Manor Care Realty will be converted into NQSOs of Manor Care
Realty. The remaining non-vested NQSOs will be converted into any percentage
combination of ManorCare Health Services NQSOs and Manor Care Realty NQSOs at
the election of the employee. Notwithstanding the foregoing, the NQSOs of one
executive officer will be converted on a pro rata basis to ManorCare Health
Services NQSOs and Manor Care Realty NQSOs based on their relative stock
values. Another executive officer will have the option to convert NQSOs to
ManorCare Health Services NQSOs and Manor Care Realty NQSOs such that such
officer's overall option holdings are converted on a pro rata basis to
ManorCare Health Services options and Manor Care Realty options based on their
relative stock values.
The Employee Benefits Allocation Agreement also provides that employees of
Choice Hotels International, Inc. ("Choice Hotels") and Sunburst Hospitality
Corporation ("Sunburst") can elect to convert their Manor Care NQSOs into any
percentage combination of ManorCare Health Services NQSOs and Manor Care
Realty NQSOs.
The Employee Benefits Allocation Agreement also addresses the treatment of
Manor Care NQSOs owned by non-employee directors of Manor Care. The NQSOs of
non-employee directors who become directors of both Manor Care Realty and
ManorCare Health Services will be converted on a pro rata basis to ManorCare
Health Services NQSOs and Manor Care Realty NQSOs based on their relative
stock values. The Employee Benefits Allocation Agreement also provides that
all NQSOs of non-employee directors who remain with Manor Care Realty or who
become directors of ManorCare Health Services will be converted to NQSOs of
Manor Care Realty or ManorCare Health Services, respectively.
The Employee Benefits Allocation Agreement will provide that the adjustment
in stock options will be based upon a predetermined formula related to (i)
stock prices on the first day the shares in the companies are independently
traded and (ii) the election of the optionees. In all cases, however, the
exercise price and the number of the options will be adjusted to maintain the
same financial value to the option holder before and after the Distribution.
The ratio of the exercise price per option to the market value per share will
not be reduced, and the vesting provisions and option period of the original
grant will remain the same.
EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Employee
Benefits Administration Agreement (the "Employee Benefits Administration
Agreement"), pursuant to which ManorCare Health Services will administer the
employee benefits plans and programs of Manor Care Realty following the
Distribution.
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ManorCare Health Services shall provide such services for a fee which shall
include any or a combination of the following: (i) activity-based charges;
(ii) fixed-fee based charges; (iii) usage-based charges; and (iv) time and
materials charges, as specified in the Corporate Services Agreement. The
Employee Benefits Administration Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Employee Benefits
Administration Agreement.
OFFICE LEASE AGREEMENT
Manor Care, Inc. leases the building complex in Gaithersburg, Maryland (the
"Complex") from Gaithersburg Realty Trust at which the principal executive
offices of ManorCare Health Services and Manor Care Realty are located.
ManorCare Health Services, as Tenant, and Manor Care Realty, as Landlord, will
enter into a sublease agreement with respect to the Complex (the "Office Lease
Agreement"). The Complex consists of an office building (the "Office
Building") containing approximately 377,126 gross square feet of space, a
warehouse and distribution building (the "Warehouse Building") containing
approximately 200,000 gross square feet of space, and approximately 98.7974
acres of land.
Manor Care Realty will lease to ManorCare Health Services approximately
202,458 rentable square feet in the Office Building, for a lease term expiring
on August 30, 2002 , with an option to renew for an additional ten years at
fair market rental determined by appraisal. As Basic Rent for each Lease Year,
ManorCare Health Services will pay Tenant's Pro Rata Share of all Operating
Expenses for such Lease Year. "Tenant's Pro Rata Share" means the ratio of (i)
the number of rentable square feet in the Office Building occupied by
ManorCare Health Services as of the commencement of such Lease Year, to (ii)
the total number of rentable square feet in the Office Building occupied by
Manor Care Realty and ManorCare Health Services as of the commencement of such
Lease Year. "Operating Expenses" means all expenses incurred by Manor Care
Realty (net of rental income paid by third parties and net of the after-tax
value of depreciation taken by Manor Care Realty on the buildings in the
Complex) in connection with the operation and maintenance of the Complex
(including vacant space and common areas), including real estate taxes,
insurance, utilities, structural and non-structural repairs, capital
expenditures, property management, and debt service. Manor Care Realty will be
responsible for "Landlord's Pro Rata Share" of Operating Expenses for each
Lease Year, meaning the ratio of (i) the number of rentable square feet in the
Office Building occupied by Manor Care Realty as of the commencement of such
Lease Year, to (ii) the total number of rentable square feet in the Office
Building occupied by Manor Care Realty and ManorCare Health Services as of the
commencement of such Lease Year. It is expected that Manor Care Realty will
occupy approximately 58,714 rentable square feet in the Office Building as of
the commencement of the Lease. Accordingly, based on a total of 261,172
rentable square feet in the Office Building occupied by Manor Care Realty and
ManorCare Health Services, ManorCare Health Services' Pro Rata Share would be
78% and Manor Care Realty's Pro Rata Share would be 22%.
ManorCare Health Services' right to exercise its renewal option is
conditioned upon Manor Care Realty's continuing control over the Complex
through an extension of the existing lease with Gaithersburg Realty Trust or
otherwise. Any income derived from the Complex will be shared by ManorCare
Health Services and Manor Care Realty in proportion to their Pro Rata Shares.
The Office Lease Agreement will also cover approximately 5,000 square feet
to be leased to ManorCare Health Services in the Warehouse Building. Space
leased to ManorCare Health Services in the Warehouse Building will not be
included in the calculation of Tenant's Pro Rata Share. ManorCare Health
Services will pay a market rate for warehouse space and such rental payments
will be treated as third party rental income for purposes of calculating
Operating Expenses.
DISTRIBUTION AGREEMENT
Manor Care and ManorCare Health Services will enter into a Distribution
Agreement (the "Distribution Agreement") which will provide for, among other
things, the principal corporate transactions required to effect the
Distribution, including the Assumption of Liabilities, the Contribution of
Assets and the Capital Contribution. The Distribution Agreement also provides
for the allocation between ManorCare Health Services and Manor Care of certain
other liabilities and the execution and delivery of the agreements to be
entered into between Manor Care Realty and ManorCare Health Services in
connection with the Distribution. See "Description of the Transactions--The
Distribution."
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TAX SHARING AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Sharing Agreement (the "Tax Sharing Agreement") which will provide for, among
other things, the allocation of federal, state and local income tax
liabilities between Manor Care Realty and its subsidiaries, on the one hand,
and ManorCare Health Services and its subsidiaries, on the other hand. In
general, under the Tax Sharing Agreement, Manor Care Realty will be
responsible for paying all income taxes shown to be due on any Manor Care
Realty consolidated federal income tax return (including the consolidated
federal income tax return for the fiscal year ended May 31, 1998), and any
other tax return filed with respect to Manor Care Realty or any of its
subsidiaries for any taxable period. ManorCare Health Services will be
responsible for paying all income taxes shown to be due on any tax return
filed with respect to ManorCare Health Services or any of its subsidiaries for
any taxable period beginning on or after the Effective Date.
ManorCare Health Services will indemnify Manor Care Realty from and against
any additional income tax liability of Manor Care or any of its subsidiaries,
resulting from any tax audit or any judicial or administrative proceeding or
otherwise for any taxable period (including any taxable period ending on or
before the Effective Date), relating to the businesses that will be conducted
by ManorCare Health Services following the Distribution. Conversely, Manor
Care Realty will indemnify ManorCare Health Services from and against any
additional income tax liability of ManorCare Health Services or any of its
subsidiaries, resulting from any tax audit or any judicial or administrative
proceeding or otherwise for any taxable period (including any taxable period
ending on or before the Effective Date), relating to the businesses that will
be conducted by Manor Care Realty following the Distribution. In addition,
Manor Care Realty, on the one hand, and ManorCare Health Services, on the
other hand, will each be entitled to any income tax refund received from any
taxing authority to the extent that such refund relates to the businesses
conducted by that party following the Distribution.
The Tax Sharing Agreement also provides that if the Distribution (including
certain related transactions) fails to qualify as a tax-free transaction under
Section 355 of the Code as a result of either party taking or failing to take
certain specified actions, then that party will be liable for and will
indemnify the other party from and against all taxes and other damages
resulting from such failure to qualify. If the failure to qualify as a tax-
free transaction results from both parties taking or failing to take certain
specified actions, then the first party taking or failing to take any of such
actions shall be liable for and will indemnify the other party from and
against all taxes and other damages resulting from such failure to qualify.
TAX ADMINISTRATION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Administration Agreement (the "Tax Administration Agreement"). The Tax
Administration Agreement sets forth the terms and conditions pursuant to which
ManorCare Health Services will provide certain tax-related administrative
services to Manor Care Realty following the Distribution. Such services will
include audit and compliance work related to income, real estate, personal
property and sales and use taxes. The Tax Administration Agreement will remain
in effect for one year from the Effective Date, after which it will renew
automatically for one-year periods unless terminated pursuant to the terms of
the Tax Administration Agreement.
CORPORATE SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Corporate
Services Agreement (the "Corporate Services Agreement") pursuant to which
following the Distribution, ManorCare Health Services will provide certain
corporate services, to Manor Care Realty including administrative, payroll and
accounting systems. ManorCare Health Services shall provide such services for
a fee which shall include any or a combination of the following: (i) activity-
based charges; (ii) fixed-fee based charges; (iii) usage-based charges; and
(iv) time and materials charges, as specified in the Corporate Services
Agreement. The Corporate Services Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Corporate Services
Agreement.
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TRADEMARK AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Trademark
Agreement (the "Trademark Agreement") pursuant to which Manor Care Realty will
assign to ManorCare Health Services approximately 40 U.S. trademarks and
service marks registered and pending (and all federal, state and foreign
registrations and all other rights and privileges related thereto). These
registrations and applications represent all of the trademarks necessary for
the operations of the business of ManorCare Health Services. Pursuant to the
Trademark Agreement, ManorCare Health Services will assume all obligations
related to such trademarks and trademark applications.
LICENSE AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a License
Agreement (the "License Agreement") pursuant to which ManorCare Health
Services will license to Manor Care Realty the right to use approximately 20
U.S. trademarks and service marks; and certain other marks, trade names,
copyrights, designs and trade dress in connection with the operation of Manor
Care Realty's business. The license granted under the License Agreement
relating to Manor Care Realty's skilled nursing facilities will terminate
within 45 days of the termination of all the Lease Agreements. The license
granted under the License Agreement relating to Manor Care Realty's assisted
living facilities will terminate within a reasonable time after the
termination of the Development Agreement and all the Assisted Living Facility
Management Agreements.
DESIGN SERVICES AGREEMENT
Manor Care and ManorCare Health Services will enter into a Design Services
Agreement (the "Design Services Agreement") pursuant to which Manor Care
Realty will provide certain interior design and architectural services in
connection with capitalized renovation projects. The fee for these services
will be $48,000 per month until May 31, 1998 after which the fee will be paid
annually and will be based on the percentage of Manor Care Realty's design
department budget required to provide services to ManorCare Health Services.
Fees under the Design Services Agreement will be credited against the 2.75% of
aggregate annual Project Revenues from all the skilled nursing facilities
leased under Lease Agreements applied toward reasonable repairs, replacements
and renewals to be made in the ordinary course of operations as set forth in
the Lease Agreements. The Design Services Agreement will remain in effect
until May 31, 1999, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Design Services
Agreement.
CASH MANAGEMENT AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
after the Distribution ManorCare Health Services will perform cash management
services for Manor Care Realty, including but not limited to bank relationship
management, bank account administration, daily cash flow position management
and settlement, bank account analysis review, electronic fund transfers, and
deposits of cash and checks. For these services, Manor Care Realty will pay
ManorCare Health Services a quarterly fee determined by multiplying ManorCare
Health Services' cash management department expenses by a percentage estimate
of time spent providing services to Manor Care Realty as well as reimbursement
for direct expenses incurred. The Cash Management Agreement will remain in
effect for one year from the Effective Date, after which it will renew
automatically for one-year periods unless terminated pursuant to the terms of
the Cash Management Agreement.
RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Risk
Management Consulting Services Agreement (the "Risk Management Consulting
Services Agreement"), pursuant to which ManorCare Health Services will provide
to Manor Care Realty risk management consulting services, including but not
limited to insurance renewals, insurance, indemnity and bond contract review,
surety bond procurement, regulatory compliance services, environmental
management, and risk management services. Manor Care Realty will pay
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ManorCare Health Services a fixed annual fee for such services as well as
reimbursement for insurance and self-insurance plans. The Risk Management
Consulting Services Agreement will remain in effect for one year from the
Effective Date, after which it will renew automatically for one-year periods
unless terminated pursuant to the terms of the Risk Management Consulting
Services Agreement.
REALTY NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. As part of the Capital
Contribution, Manor Care will contribute or cause to be contributed to
ManorCare Health Services the Realty Note. See "Description of the
Transactions--The Realty Note."
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MANAGEMENT OF MANOR CARE REALTY AFTER THE DISTRIBUTION
DIRECTORS AND EXECUTIVE OFFICERS OF MANOR CARE REALTY
The name, age, proposed title upon consummation of the Distribution and
business background of certain of the persons who are expected to become on
the Effective Date the directors and executive officers of Manor Care Realty
are set forth below. At or prior to the Effective Date, certain additional
individuals may be appointed as directors or executive officers. The business
address of each of the prospective executive officers is 11555 Darnestown
Road, Gaithersburg, Maryland, 20878, unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Stewart Bainum, Jr. 51 Chairman of the Board and Director
Joseph R. Buckley 49 Chief Executive Officer and Director
Senior Vice President and Chief Financial
Leigh C. Comas 32 Officer
Senior Vice President, Construction and
Larry R. Godla 40 Development
Senior Vice President, General Counsel and
Edward A. Kubis 38 Secretary
Margarita A. Schoendorfer 48 Vice President and Controller
Donald M. Feltman 42 Vice President, Development
Kennett L. Simmons 55 Director
Ann Torre Grant 38 Director
William L. Jews 45 Director
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and Chairman of the Board of the principal
operating subsidiary of Manor Care, which prior to the Distribution owned and
operated Manor Care's assisted living and skilled nursing facilities ("Old
ManorCare Health Services") since March 1987; Chief Executive Officer of Manor
Care since March 1987 and President since June 1989; Chairman of the Board of
Vitalink since February 1997; Vice Chairman of the Board of Vitalink from
February 1995 to February 1997; Vice Chairman of the Board of Manor Care and
subsidiaries from June 1982 to March 1987; Director of Manor Care since August
1981, of Vitalink since September 1991, of Old ManorCare Health Services since
1976 and of Choice and its predecessors since 1977; Chief Executive Officer of
Old ManorCare Health Services since June 1989 and President from May 1990 to
May 1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987
to June 1990.
Joseph R. Buckley. Executive Vice President of Manor Care and Old ManorCare
Health Services since March 1996; Director of Vitalink since July 1996;
President, Assisted Living Division of Old ManorCare Health Services from
February 1995 to March 1996; Senior Vice President-Information Resources and
Development of Manor Care from June 1990 to February 1995; Vice President-
Information Resources and Development of Manor Care from July 1989 to June
1990; Vice President-Real Estate from September 1983 to July 1989; Director of
Vitalink since July 1996; Chairman of the Board of In Home Health since June
1997 and Director since October 1995.
Leigh C. Comas. Vice President, Finance and Treasurer of Manor Care and Old
ManorCare Health Services since September 1996; Vice President, Finance and
Assistant Treasurer of Manor Care from September 1995 to September 1996;
Assistant Treasurer of Manor Care and Old ManorCare Health Services from
September 1993 to September 1995.
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Larry R. Godla. Vice President of Development and Construction, Manor Care
Inc. since March 1996; Vice President of Construction of Manor Care, Inc. from
March 1993 to March 1996; Director of Construction of Manor Care, Inc. from
January 1990 to March 1993; Vice President of Construction at Spaulding and
Slye Company from January 1984 to January 1990; Project Manager at Omni
Construction from August 1981 to December 1983.
Edward A. Kubis. Senior Vice President and General Counsel of Choice
Management and Realty Services a division of Choice, since June 1997; Senior
Vice President, General Counsel and Secretary of Choice from November 1996 to
June 1997; Assistant General Counsel and Assistant Secretary, Manor Care from
December 1993 to November 1996; Senior Attorney, Real Estate, from December
1990 to December 1993; Staff Attorney, Real Estate from June 1987 to December
1990.
Margarita A. Schoendorfer. Vice President and Controller of Manor Care since
November 1990.
Donald M. Feltman. Vice President of Development at Manor Care, Inc. since
March 1993; Director of Development at Marriott Senior Living Services from
July 1988 to March 1993; Director of Development and various other development
positions at Manor Care, Inc. from March 1977 to July 1988.
Kennett L. Simmons. Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to E.M. Warburg,
Pincus & Co. from 1991 to 1994; Chairman and Chief Executive Officer of United
Healthcare Corporation from October 1987 to February 1991; Director of United
Healthcare and Virginia Health Care Foundation.
Ann Torre Grant. Executive Vice President, Chief Financial Officer and
Treasurer of NHP Incorporated since February 1995; Vice President and
Treasurer of USAir, Inc. and USAir Group, Inc. from 1991 to January 1995;
Director of Franklin Mutual Series Funds and SLM Holding Corp.
William L. Jews. President and Chief Executive Officer, Blue Cross and Blue
Shield of Maryland since April 1993; President and Chief Executive Officer,
Dimensions Health Corporation from March 1990 through March 1993; Director of
Crown Central Petroleum Corp., Municipal Mortgage and Equity, L.L.C.,
NationsBank, N.A. and The Ryland Group, Inc.
EMPLOYMENT AGREEMENTS
Manor Care Realty expects to enter into an employment agreement effective
upon the Effective Date, with Joseph R. Buckley (the "Employment Agreement"),
providing for Mr. Buckley's employment as Chief Executive Officer of Manor
Care Realty. The Employment Agreement will have a term of five years. The
Employment Agreement provides for a base salary of $350,000 per annum for
services to Manor Care Realty and a maximum bonus of 60% of Mr. Buckley's base
compensation based upon performance of Manor Care Realty.
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DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture (the "Indenture") to be dated as
of , 1998 among the Company, the Guarantors and , as trustee
(the "Trustee"). The following summary of certain provisions of the Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), and to all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
of the Indenture by reference to the Trust Indenture Act, as in effect on the
date of the Indenture. The definitions of certain capitalized terms used in
the following summary are set forth below under "Certain Definitions."
References in this "Description of the Notes" section to "the Company" mean
only ManorCare Health Services, Inc. (to be renamed Manor Care Real Estate
Corp. upon consummation of the Distribution) and not any of its Subsidiaries
and references to "the Parent Guarantor" mean only Manor Care, Inc. (to be
renamed Manor Care Realty, Inc. upon consummation of the Distribution) and not
any of its Subsidiaries.
GENERAL
The Notes will be unsecured general obligations of the Company. The Notes
will be issued only in registered form, without coupons, in denominations of
$1,000 and integral multiples of $1,000. Pursuant to the Indenture, the
Trustee, initially, will serve as registrar and paying agent. No service
charge will be made for any registration of transfer or exchange of the Notes,
except for any tax or other governmental charge that may be imposed in
connection therewith.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The Notes will be limited to $350 million aggregate principal amount and
will mature on , 2008. Cash interest on the Notes will accrue at a rate of
% per annum and will be payable semi-annually in arrears on each and
, commencing on , 1998, to the holders of record of Notes at the
close of business on and , respectively, immediately preceding such
interest payment date. Interest will accrue from the most recent interest
payment date to which interest has been paid or, if no interest has been paid,
from , 1998. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2003, at the redemption prices (expressed
as a percentage of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
beginning on of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................... %
2004........................................................... %
2005........................................................... %
2006 and thereafter............................................ 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to , 2001,
the Company may redeem in the aggregate up to 35% of the originally issued
aggregate principal amount of the Notes with the net cash proceeds of one or
more Public Equity Offerings by the Parent Guarantor or the Company at a
redemption price in cash equal to % of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, that at
least 65% of the originally issued aggregate principal
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amount of the Notes must remain outstanding immediately after giving effect to
each such redemption (excluding any Notes held by the Parent Guarantor, the
Company or any of its Affiliates). Notice of any such redemption must be given
within 60 days after the date of the closing of the relevant Public Equity
Offering of the Parent Guarantor or the Company.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not then listed on a national securities exchange, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided, however, that no Notes of a principal amount of $1,000
or less shall be redeemed in part; provided, further, however, that if a
partial redemption is made with the net cash proceeds of a Public Equity
Offering by the Company, selection of the Notes or portions thereof for
redemption shall be made by the Trustee only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to the procedures of The
Depository Trust Company), unless such method is otherwise prohibited.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. On and
after the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption as long as the Company has deposited with the
paying agent for the Notes funds in satisfaction of the applicable redemption
price pursuant to the Indenture.
GUARANTEES
The Company's obligations under the Notes will be fully and unconditionally
and jointly and severally guaranteed (the "Guarantees") by the Parent
Guarantor and by each of the Restricted Subsidiaries other than inactive
Restricted Subsidiaries with no material assets (together, the "Guarantors").
As of the Issue Date, all of the Subsidiaries of the Parent Guarantor and the
Company shall be Restricted Subsidiaries. Each of the Guarantors will also be
guaranteeing all obligations of the Company under the Credit Facilities, and
each Guarantor will grant a security interest in certain of its assets to
secure its obligations under the Credit Facilities. The obligations of each
Guarantor are limited to the maximum amount as will, after giving effect to
all other contingent and fixed liabilities of such Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Guarantor in respect of the obligations of such other Guarantor under its
Guarantee or pursuant to its contribution obligations under the Indenture,
result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a
Guarantee shall be entitled to a contribution from each other Guarantor in a
pro rata amount based on the net assets of each Guarantor determined in
accordance with GAAP.
The Indenture will provide that the Company shall cause each Restricted
Subsidiary issuing a Guarantee after the Issue Date pursuant to the
"Limitation on Guarantees by Restricted Subsidiaries" covenant to (i) execute
and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall
become a party to the Indenture and thereby unconditionally guarantee all of
the Company's Obligations under the Notes and the Indenture on the terms set
forth therein and (ii) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by
such Restricted Subsidiary and constitutes a valid, binding and enforceable
obligation of such Restricted Subsidiary (which opinion may be subject to
customary assumptions and qualifications). Thereafter, such Restricted
Subsidiary shall (unless released in accordance with the terms of this
Indenture) be a Guarantor for all purposes of the Indenture.
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Each Guarantee will be a continuing guarantee and will (a) remain in full
force and effect until payment in full of all of the obligations covered
thereby, (b) be binding upon each Guarantor and (c) inure to the benefit of and
be enforceable by the Trustee, the Holders and their successors, transferees
and assigns.
The Indenture will provide that if (1) all or substantially all of the assets
of any Subsidiary Guarantor or all of the Equity Interests of any Subsidiary
Guarantor are sold (including by issuance or otherwise) by the Company or by
the Parent Guarantor (2) the unsecured senior Indebtedness of the Parent
Guarantor, without benefit of any credit enhancement, shall have been rated the
Minimum Rating, or (3) a Subsidiary Guarantor shall no longer be required to
guarantee the obligations of the Company under, or otherwise provide credit
support with respect to, the Credit Facilities, then such Subsidiary Guarantor
or all Subsidiary Guarantors, as the case may be, shall be released and
discharged of all obligations in respect of the Indenture and the Notes. The
earlier of the date on which the circumstances set forth in clause (2) of the
immediately preceding sentence occurs and the date on which the circumstances
set forth in clause (3) of the immediately preceding sentence occurs, with
respect to all of the Subsidiary Guarantors, is herein referred to as the
"Subsidiary Guarantee Termination Date." Following the Subsidiary Guarantee
Termination Date, no Restricted Subsidiary shall be required to issue a
Guarantee. Upon the occurrence of the events described in the foregoing clauses
(1) or (2), the release of the relevant Guarantees shall be permanent. See also
"Risk Factors--Restrictions Imposed by Terms of Manor Care Realty's
Indebtedness."
Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary
pursuant to and in accordance with the "Designation of Unrestricted
Subsidiaries" covenant shall upon such Designation be released and discharged
of its Guarantee obligations in respect of the Indenture and the Notes and any
Unrestricted Subsidiary whose Designation is revoked prior to the Subsidiary
Guarantee Termination Date pursuant to the "Designation of Unrestricted
Subsidiaries" covenant will be required to become a Guarantor in accordance
with the procedure described in the third preceding paragraph.
OFFER TO PURCHASE UPON A CHANGE OF CONTROL TRIGGERING EVENT
Following the occurrence of a Change of Control Triggering Event (the date of
such occurrence being the "Change of Control Date"), the Company shall notify
the Holders of the Notes of such occurrence in the manner prescribed by the
Indenture and shall, within 30 days after the Change of Control Date, make an
Offer to Purchase all Notes then outstanding at a purchase price in cash equal
to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon (the "Change of Control Offer Price"), if any, to the Purchase
Date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), provided, however,
that notwithstanding the occurrence of a Change of Control, the Company shall
not be required to purchase Notes pursuant to this covenant in the event it has
exercised its rights to redeem all of the Notes as described under "-- Optional
Redemption."
If the Company is required to make an Offer to Purchase, the Company will
comply with all applicable tender offer laws and regulations, including, to the
extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any
other applicable Federal or state securities laws and regulations and any
applicable requirements of any securities exchange on which the Notes are
listed, and any violation of the provisions of the Indenture relating to such
Offer to Purchase occurring as a result of such compliance shall not be deemed
an Event of Default or an event that, with the passing of time or giving of
notice, or both, would constitute an Event of Default.
Notwithstanding the foregoing, the Company shall not be required to make an
Offer to Purchase upon a Change of Control Triggering Event, as provided above,
if, in connection with any Change of Control, it or any third party has made an
offer to purchase (an "Alternate Offer") any and all Notes validly tendered at
a cash price equal to or higher than the Change of Control Offer Price and has
purchased all Notes properly tendered in accordance with the terms of such
Alternate Offer.
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The Company may not have adequate funds to effect a purchase of the Notes
upon a Change of Control Triggering Event and, in such case, may seek to
obtain such funds through additional debt or equity financing. There can be no
assurance that the Company would be able to obtain such funds. The Credit
Facilities contain similar provisions requiring repayment in full upon a
change of control and, further, will prohibit the Company from making required
purchases with respect to the Notes prior to repayment in full of all amounts
outstanding under the Credit Facilities. Consequently, any such purchase of
Notes could constitute an event of default under the Credit Facilities. The
Company's ability to repurchase the Notes upon a Change of Control Triggering
Event may also be limited by the terms of other then existing contractual
obligations of the Company and its subsidiaries. If the Company fails to
purchase all of the Notes tendered for purchase upon the occurrence of a
Change of Control Triggering Event, such failure will constitute an Event of
Default under the Indenture.
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction,
has no clearly established meaning under relevant law and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of a person
and therefore it may be unclear whether a Change of Control has occurred and
whether the Notes are subject to an offer to purchase.
The Change of Control provision may deter certain takeover attempts which
trigger the obligation to purchase because such provision could require a
potential new controlling person to obtain additional financing to purchase
tendered Notes or to use cash on hand at the Company for such purpose.
Notwithstanding the Change of Control provision, the Company could enter into
certain highly leveraged transactions, including a reorganization,
restructuring, merger or other similar transaction, that could increase the
amount of debt outstanding and adversely affect the holders, because such
transactions may not involve a shift in voting power or beneficial ownership
or, even if they do, may not involve a shift of the magnitude required under
the definition of Change of Control to trigger such provisions or may not
result in a downgrade in ratings of the Notes as required under the definition
of Change of Control Triggering Event.
Except as described above with respect to a Change of Control Triggering
Event, the Indenture does not contain provisions that permit the Holders of
the Notes to require the Company to repurchase or redeem the Notes in the
event of a highly leveraged transaction.
CERTAIN COVENANTS
Limitation on Indebtedness. The Parent Guarantor shall not, and shall not
cause or permit the Company or any Restricted Subsidiary to, directly or
indirectly, Incur any Indebtedness (including Acquired Indebtedness), except
for Permitted Indebtedness; provided, however, that the Parent Guarantor, the
Company or any Restricted Subsidiary may Incur Indebtedness if, at the time of
and immediately after giving pro forma effect to such Incurrence of
Indebtedness and the application of the proceeds therefrom, the Consolidated
Coverage Ratio of the Parent Guarantor would be greater than 2.0 to 1.0.
The limitations contained in the preceding paragraph will not apply to the
Incurrence of any of the following (collectively, "Permitted Indebtedness"),
each of which shall be given independent effect:
(a) Indebtedness under the Notes and the Guarantees;
(b) Indebtedness of the Parent Guarantor, the Company and any Subsidiary
Guarantor Incurred under the Credit Facilities in an aggregate principal
amount at any time outstanding not to exceed $450 million; provided that
such Indebtedness may exceed $450 million but only to the extent that, and
for so long as, the total aggregate amount at any one time outstanding does
not exceed 50% of the consolidated property and equipment of the Parent
Guarantor, as reflected on the Parent Guarantor's and its Restricted
Subsidiaries most recent monthly consolidated balance sheet prepared in
accordance with GAAP;
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(c) Indebtedness under the Realty Note [and the Old Senior Notes] in an
aggregate principal amount at any one time outstanding not to exceed $250
million;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by the
Parent Guarantor or the Company or any Restricted Subsidiary, (y)
Indebtedness of the Company owed to and held by the Parent Guarantor or any
Restricted Subsidiary and (z) Indebtedness of the Parent Guarantor owed to
and held by the Company or any Restricted Subsidiary that is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under the Indenture and the Notes; provided, however,
that an Incurrence of Indebtedness that is not permitted by this clause (d)
shall be deemed to have occurred upon any sale or other disposition of any
Indebtedness of the Parent Guarantor or the Company or any Subsidiary of
the Company referred to in this clause (d) to a Person (other than the
Parent Guarantor or the Company or a Restricted Subsidiary);
(e) Indebtedness incurred prior to and existing on the Issue Date;
provided, that, effective on the Distribution Date, any Indebtedness of the
Parent Guarantor under the Existing Revolving Credit Facility and the
Promissory Note shall not be Permitted Indebtedness;
(f) Interest Rate Protection Obligations and Currency Agreements;
provided, that in the case of Currency Agreements which relate to
Indebtedness, such Currency Agreements do not increase the principal amount
of Indebtedness of the Parent Guarantor, the Company and the Restricted
Subsidiaries, as the case may be, outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(g) Purchase Money Indebtedness and Capitalized Lease Obligations of the
Parent Guarantor, the Company or any Subsidiary Guarantor which do not
exceed 10% of the total consolidated tangible assets of the Parent
Guarantor and the Restricted Subsidiaries as reflected on the Parent
Guarantor's most recent consolidated balance sheet prepared in accordance
with GAAP, in the aggregate, at any one time outstanding;
(h) Indebtedness to the extent representing a refinancing of outstanding
Indebtedness Incurred in compliance with the Consolidated Coverage Ratio of
the first paragraph of this covenant or clauses (a), (c), (e) or (i) of
this paragraph of this covenant; provided, however, that any such
refinancing (i) shall not exceed the sum of the principal amount (or
accreted amount (determined in accordance with GAAP), if less) of the
Indebtedness being refinanced, plus the amount of accrued interest thereon,
plus the amount of any reasonably determined prepayment premium necessary
to accomplish such refinancing and such reasonable fees and expenses
incurred in connection therewith, (ii) shall have a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of the Indebtedness being refinanced; and (iii) with respect to
Indebtedness that is subordinated to the Notes, shall be refinanced with
Indebtedness that is made subordinate in right of payment to the Notes; and
(i) In addition to the items referred to in clauses (a) through (g)
above, Indebtedness of the Parent Guarantor, the Company or any Restricted
Subsidiary in an aggregate principal amount at any one time outstanding not
to exceed $50 million.
For purposes of determining compliance with, and any particular amount of
Indebtedness under, the "Limitation on Indebtedness" covenant, guarantees,
Liens or obligations with respect to letters of credit supporting Indebtedness
shall be disregarded (x) if otherwise included in the determination of such
particular amount, or (y) if incurred by the obligor on such Indebtedness, to
the extent that any such guarantee, Lien or letter of credit secures the
principal amount of such Indebtedness. For purposes of determining compliance
with the "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in this definition of Permitted Indebtedness, the Parent Guarantor,
in its sole discretion, shall classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of such
clauses.
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Limitation on Restricted Payments. The Parent Guarantor shall not, directly
or indirectly,
(i) declare or pay any dividend or any other distribution on any Equity
Interests of the Parent Guarantor or make any payment or distribution to
the direct or indirect holders (in their capacities as such) of Equity
Interests of the Parent Guarantor (other than dividends or distributions
payable to any Person solely in Qualified Equity Interests of the Parent
Guarantor or in options, warrants or other rights to purchase Qualified
Equity Interests of the Parent Guarantor);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Parent Guarantor, the Company or any Restricted Subsidiary
(other than any such Equity Interests owned by the Parent Guarantor, the
Company or any Restricted Subsidiary);
(iii) make any Investment in any Person (other than Permitted
Investments); or
(iv) designate any Restricted Subsidiary to be an Unrestricted Subsidiary
(any such payment or any other action (other than any exception thereto)
described in (i), (ii) or (iii) each, a "Restricted Payment"), unless
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
(b) solely with respect to the making of any Restricted Payment that is
not an Investment, immediately after giving effect to such Restricted
Payment, the Parent Guarantor would be able to Incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the "Limitation on
Indebtedness" covenant; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to, without duplication, the
sum of (1) 50% of cumulative Consolidated Net Income determined for the
period (taken as one period) commencing on the Distribution Date and ending
on the last day of the most recent fiscal quarter immediately preceding the
date of such Restricted Payment for which consolidated financial
information of the Parent Guarantor is available (or if such cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss), plus (2)
the aggregate net cash proceeds received by the Parent Guarantor either (x)
as capital contributions to the Parent Guarantor after the Distribution
Date or (y) from the issue and sale (other than to a Restricted Subsidiary)
of its Qualified Equity Interests after the Distribution Date (excluding
(A) the net proceeds from any issuance and sale of Qualified Equity
Interests financed, directly or indirectly, using funds borrowed from the
Company or any Restricted Subsidiary until and to the extent such borrowing
is repaid, and (B) the net cash proceeds of any issuance and sale of
Qualified Equity Interests to the extent used to make an Investment
pursuant to clause (f) of the definition of "Permitted Investments" or to
purchase, redeem, retire or otherwise acquire Equity Interests of the
Parent Guarantor pursuant to clause (ii) of the third paragraph of this
covenant), plus (3) the principal amount (or accreted amount (determined in
accordance with GAAP), if less) of any Indebtedness or Disqualified Equity
Interest of the Parent Guarantor, the Company or any Restricted Subsidiary
Incurred or issued after the Distribution Date which has been converted
into or exchanged or exercised for Qualified Equity Interests of the Parent
Guarantor (minus the amount of any cash or property distributed by the
Parent Guarantor, the Company or any Restricted Subsidiary upon such
conversion or exchange), plus (4) in the case of any Investment
constituting a Restricted Payment made after the Distribution Date, an
amount equal to 100% of the net cash proceeds from the sale or other
disposition thereof (or dividends, distributions or interest payments
received in cash thereon) plus (5) so long as the Designation thereof was
treated as a Restricted Payment made after the Distribution Date, with
respect to any Unrestricted Subsidiary that has been redesignated as a
Restricted Subsidiary after the Distribution Date in accordance with the
"Designation of Unrestricted Subsidiaries" covenant, the direct or indirect
proportionate interest of the Parent Guarantor in an amount equal to the
excess of (x) the total assets of such Subsidiary, valued on an aggregate
basis at Fair Market Value, over (y) the total liabilities of such
Subsidiary, determined in accordance with GAAP.
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In addition, the foregoing provisions will not prevent (i) the payment of
any dividend or distribution on, or redemption of, Equity Interests within 60
days after the date of declaration of such dividend or distribution or the
giving of formal notice of such redemption, if at the date of such declaration
or giving of such formal notice such payment or redemption would comply with
the provisions of the Indenture; (ii) the purchase, redemption, retirement or
other acquisition of any Equity Interests of the Parent Guarantor in exchange
for, or out of the net cash proceeds of the substantially concurrent issue and
sale (other than to a Restricted Subsidiary) of, Qualified Equity Interests of
the Parent Guarantor or the Company; (iii) the purchase, redemption or other
acquisition for value of shares of capital stock of the Parent Guarantor
(other than Disqualified Capital Stock) or options on such shares held by
officers or employees or former officers or employees (or their estates or
beneficiaries under their estates) upon the death, disability, retirement or
termination of employment of such current or former officers or employees
pursuant to the terms of an employee benefit plan or any other agreement
pursuant to which such shares of capital stock or options were issued or
pursuant to a severance, buy-sell or right of first refusal agreement with
such current or former officer or employee; provided, however, that the
aggregate cash consideration paid, or distributions made, pursuant to this
clause (iii) do not in any one fiscal year exceed $2 million; (iv) Investments
constituting Restricted Payments made as a result of the receipt of non-cash
consideration from any Asset Sale made pursuant to and in compliance with the
"Disposition of Proceeds of Asset Sales" covenant; (v) repurchases of Equity
Interests of the Parent Guarantor deemed to occur upon exercise of stock
options if such Equity Interests represent a portion of the exercise price of
such stock options; (vi) the consummation of the Distribution; and (vii)
additional Restricted Payments not in excess of $15 million in the aggregate;
provided, however, that in the case of clause (vii), no Default or Event of
Default shall have occurred and be continuing or would arise therefrom.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (iii) and (vii) of the
immediately preceding paragraph shall be included as Restricted Payments. The
amount of any non-cash Restricted Payment shall be deemed to be equal to the
Fair Market Value thereof at the date of the making of such Restricted
Payment.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Parent Guarantor shall not, and shall not cause or permit
the Company or any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or become effective any consensual encumbrance or restriction
on the ability of the Company or any Restricted Subsidiary to (a) pay
dividends or make any other distributions to the Parent Guarantor on its
Equity Interests or with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to the Parent
Guarantor, the Company or any Restricted Subsidiary, (b) make loans or
advances to the Parent Guarantor, the Company or any Restricted Subsidiary or
(c) transfer any of its properties or assets to the Parent Guarantor, the
Company or any Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of (i) the Credit Facilities as in
effect on the Distribution Date and any amendments, restatements, renewals,
replacements or refinancings thereof; provided that any such amendment,
restatement, renewal, replacement or refinancing is not materially more
restrictive in the aggregate with respect to such encumbrances or restrictions
than those contained in the Credit Facilities as in effect on the Distribution
Date; (ii) any other agreement of the Parent Guarantor, the Company or the
Restricted Subsidiaries outstanding on the Issue Date as in effect on the
Issue Date, and any amendments, restatements, renewals, replacements or
refinancings thereof; provided, however, that any such amendment, restatement,
renewal, replacement or refinancing is not materially more restrictive in the
aggregate with respect to such encumbrances or restrictions than those
contained in the agreement being amended, restated, reviewed, replaced or
refinanced; (iii) applicable law; (iv) any agreement or instrument of an
Acquired Person, or any instrument governing Indebtedness or Equity Interests
of an Acquired Person, acquired by the Parent Guarantor, the Company or any
Restricted Subsidiary as in effect at the time of such acquisition (except to
the extent such agreement or instrument was entered into or issued or such
Indebtedness was Incurred by such Acquired Person in connection with, as a
result of or in contemplation of such acquisition); provided, however, that
such encumbrances and restrictions are not applicable to the Parent Guarantor,
the Company or any Restricted Subsidiary, or the properties or assets of the
Parent Guarantor, the Company or any Restricted Subsidiary, other than the
Acquired Person; (v) customary non-assignment provisions in leases entered
into in the ordinary course of business and
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consistent with past practices; (vi) Purchase Money Indebtedness for property
acquired in the ordinary course of business that only imposes encumbrances and
restrictions on the property so acquired; (vii) any agreement for the sale or
disposition of the Equity Interests or assets of any Subsidiary of the Parent
Guarantor; provided, however, that such encumbrances and restrictions
described in this clause (vii) are only applicable to such Subsidiary or
assets, as applicable, and any such sale or disposition is made in compliance
with the "Disposition of Proceeds of Asset Sales" covenant, to the extent
applicable thereto; (viii) refinancing Indebtedness permitted under clause (h)
of the second paragraph of the "Limitation on Indebtedness" covenant;
provided, however, that such encumbrances and restrictions contained in the
agreements governing such Indebtedness are not materially more restrictive in
the aggregate than those contained in the agreements governing the
Indebtedness being refinanced immediately prior to such refinancing; (ix) any
encumbrance or restriction arising out of any sale of accounts receivable in
the ordinary course (including in connection with a financing transaction) to
Persons that are not Affiliates of the Parent Guarantor; (x) the Indenture;
(xi) any requirement of any regulatory authority having jurisdiction over the
Parent Guarantor, the Company or any Restricted Subsidiary or any of their
businesses; and (xii) customary provisions restricting dispositions of real
property interests set forth in any reciprocal easement agreements to the
Parent Guarantor, the Company or any Restricted Subsidiary.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall (1) prevent the
Parent Guarantor, the Company or any Restricted Subsidiary from creating,
incurring, assuming or suffering to exist any Liens otherwise permitted in the
"Limitation on Liens" covenant or (2) prohibit restrictions on the sale or
other disposition of property or assets of the Parent Guarantor, the Company
or any Restricted Subsidiary to the extent that such property or assets secure
Indebtedness not Incurred or secured in violation of the Indenture.
Limitation on Liens. The Parent Guarantor shall not, and shall not cause or
permit the Company or any Restricted Subsidiary to, directly or indirectly,
Incur any Liens of any kind against or upon any of their respective properties
or assets now owned or hereafter acquired, or any proceeds therefrom or any
income or profits therefrom, to secure any Indebtedness or trade payables
unless contemporaneously therewith effective provision is made, in the case of
the Company, to secure the Notes and all other amounts due under the Indenture
and, in the case of a Guarantor, to secure the Guarantee of the Notes and all
other amounts due under the Indenture, equally and ratably with such
Indebtedness (or, in the event that such Indebtedness is subordinated in right
of payment to the Notes or Guarantees, prior to such Indebtedness) with a Lien
on the same properties and assets securing such Indebtedness for so long as
such Indebtedness is secured by such Lien, except for Permitted Liens.
Disposition of Proceeds of Asset Sales. The Parent Guarantor shall not, and
shall not cause or permit the Company on any Restricted Subsidiary to,
directly or indirectly, make any Asset Sale, unless (i) the Parent Guarantor,
the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets sold or otherwise disposed of and (ii) at least 75% of
such consideration consists of cash or Cash Equivalents. The amount of (x) any
Indebtedness (other than any Subordinated Indebtedness) of the Parent
Guarantor, the Company or any Restricted Subsidiary that is actually assumed
by the transferee in such Asset Sale and from which the Parent Guarantor, the
Company and a Restricted Subsidiary are fully and unconditionally released and
(y) any securities, notes or other obligations that are received by the Parent
Guarantor, the Company or any Restricted Subsidiary from such transferee that
are promptly, but in no event more than 60 days after such Asset Sale,
converted into cash or Cash Equivalents shall be deemed to be cash (to the
extent of the net cash or Cash Equivalents received upon conversion) for
purposes of determining the percentage of cash consideration received by the
Parent Guarantor, the Company or a Restricted Subsidiary.
The 75% limitation referred to above shall not apply (A) to any Asset Sale
in which the cash portion of the consideration received therefor is equal to
or greater than what the after-tax net cash proceeds would have been had such
transaction complied with the aforementioned 75% limitation, which
determination shall be set forth in an officer's certificate delivered to the
Trustee or (B) to any Asset Sale consisting of the disposition of the all of
the Equity Interests of a Restricted Subsidiary whose sole asset is a
healthcare facility in exchange for all of the Equity Interests of any Person
that is a healthcare business or a real estate business.
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The Parent Guarantor, the Company or such Restricted Subsidiary, as the case
may be, may (i) apply the Net Cash Proceeds of any Asset Sale within 365 days
of receipt thereof to repay Indebtedness under the Credit Facilities and
permanently reduce any related commitment, or (ii) make an Investment in
properties and capital assets that will be used in the business of the Company
and its Subsidiaries as existing on the Issue Date or in businesses reasonably
related thereto (as determined in good faith by the Company's Board of
Directors, which determination shall be conclusive) ("Replacement Assets");
provided, however, that such Investment occurs on or prior to the 365th day
following the receipt of such Net Cash Proceeds. Pending application of such
Net Cash Proceeds pursuant to this paragraph, the Parent Guarantor, the
Company or a Restricted Subsidiary, as the case may be, may invest such Net
Cash Proceeds in Cash Equivalents or may apply such Net Cash Proceeds to
temporarily reduce amounts outstanding under the Revolving Credit Facility.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied as described in clause (i) or (ii) of the immediately preceding
paragraph within the time periods set forth therein (the "Net Proceeds
Utilization Date") (such Net Cash Proceeds, the "Unutilized Net Cash
Proceeds"), the Company shall, within 20 days after the end of the fiscal
quarter in which such Net Proceeds Utilization Date occurs, make an Offer to
Purchase all outstanding Notes and Other Debt (as defined below) up to a
maximum aggregate principal amount (expressed as a multiple of $1,000) equal
to such Unutilized Net Cash Proceeds, at a purchase price in cash equal to
100% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the Purchase Date. The principal amount of Notes offered
to be purchased shall not be less than the Note Offer Amount (as defined
below). The Offer to Purchase may be deferred until there are aggregate
Unutilized Net Cash Proceeds equal to or in excess of $15 million, at which
time the entire amount of such Unutilized Net Cash Proceeds, and not just the
amount in excess of $15 million, shall be applied as required pursuant to this
paragraph. Any offer to purchase with respect to Other Debt shall be made and
consummated concurrently with any Offer to Purchase Notes.
"Other Debt" shall mean other Indebtedness of the Company that ranks pari
passu with the Notes, including the Realty Note, and requires an offer to
purchase to be made to repurchase such Other Debt upon consummation of an
Asset Sale.
"Note Offer Amount" with respect to any Offer to Purchase, means (i) if an
offer to purchase Other Debt is not being made, the amount of the Unutilized
Net Cash Proceeds, and (ii) if an offer to purchase Other Debt is being made,
an amount equal to the product of (x) the Unutilized Net Cash Proceeds and (y)
a fraction the numerator of which is the aggregate amount of Notes tendered
pursuant to the Offer to Purchase and the denominator of which is the
aggregate amount of Notes and Other Debt tendered pursuant to such offers to
purchase.
With respect to any Offer to Purchase effected pursuant to this covenant,
among the Notes, to the extent the aggregate principal amount of Notes and
Other Debt tendered pursuant to such Offer to Purchase exceeds the Unutilized
Net Cash Proceeds to be applied to the repurchase thereof, such Notes and
Other Debt shall be purchased pro rata based on the aggregate principal amount
of such Notes and Other Debt tendered by each Holder. To the extent the
Unutilized Net Cash Proceeds exceed the aggregate amount of Notes tendered by
the Holders of the Notes pursuant to such Offer to Purchase, the Company may
retain and utilize any portion of the Unutilized Net Cash Proceeds not
required to be applied to repurchase Notes tendered pursuant to such Offer for
any purpose consistent with the other terms of the Indenture.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1
under, the Exchange Act, and any violation of the provisions of the Indenture
relating to such Offer to Purchase occurring as a result of such compliance
shall not be deemed an Event of Default or an event that with the passing of
time or giving of notice, or both, would constitute an Event of Default.
Each Holder shall be entitled to tender all or any portion of the Notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an
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integral multiple of $1,000 principal amount and subject to any proration
among tendering Holders as described above.
Merger, Sale of Assets, etc. The Indenture will provide that neither the
Parent Guarantor nor the Company shall consolidate with or merge with or into
any other entity and neither the Parent Guarantor nor the Company shall, and
neither shall cause or permit any Restricted Subsidiary to, sell, convey,
assign, transfer, lease or otherwise dispose of all or substantially all of
the Parent Guarantor's and its Subsidiaries' properties and assets (determined
on a consolidated basis for the Parent Guarantor and its Subsidiaries) to any
entity in a single transaction or series of related transactions, unless: (i)
either (a)(1) if the transaction or transactions is a merger or consolidation
involving the Parent Guarantor or the Company, the Parent Guarantor or the
Company shall be the surviving Person of such merger or consolidation or (2)
if the transaction or transactions is a merger or consolidation involving a
Restricted Subsidiary, such Restricted Subsidiary shall be the surviving
Person of such merger or consolidation and such surviving Person shall be a
Restricted Subsidiary, or (b)(1) the Person formed by such consolidation or
into which the Parent Guarantor, the Company or such Restricted Subsidiary is
merged or to which the properties and assets of the Parent Guarantor, the
Company or such Restricted Subsidiary, as the case may be, are transferred
(any such surviving Person or transferee Person being the "Surviving Entity")
shall be a corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and (2)(a) in
the case of a transaction involving the Company, the Surviving Entity shall
expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company under the Notes and the Indenture, and in each case, the Indenture
shall remain in full force and effect, or (B) in the case of a transaction
involving a Guarantor that pursuant to the terms of the Indenture is then
obligated to Guarantee the Notes, the Surviving Entity shall expressly assume
by a supplemental indenture executed and delivered to the Trustee, in from
satisfactory to the Trustee, all the obligations of the Parent Guarantor or
such Restricted Subsidiary, as the case may be, under its Guarantee and
related supplemental indenture, and in each case, such Guarantee and
supplemental indenture shall remain in full force and effect; (ii) immediately
thereafter, no Default or Event of Default shall have occurred and be
continuing; and (iii) immediately after giving effect to any such transaction,
the Surviving Person could Incur, on a pro forma basis after giving effect to
such transaction as if it had occurred at the beginning of the four quarter
period immediately preceding such transaction for which consolidated financial
statements of the Parent Guarantor are available, at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the "Limitation on
Indebtedness" covenant.
Notwithstanding the foregoing clauses (ii) and (iii) of the immediately
preceding paragraph, (A) any Restricted Subsidiary may consolidate with, merge
into or transfer all or part of its properties and assets to the Parent
Guarantor or the Company, (B) the Company may consolidate with or merge with
or into or sell, convey, assign, transfer, lease or otherwise dispose of all
or substantially all of the Company's assets to the Parent Guarantor or any
Wholly Owned Restricted Subsidiary, (C) the Parent Guarantor may consolidate
with or merge with or into or sell, convey, assign, transfer, lease or
otherwise dispose of all or substantially all of the Parent Guarantor's assets
to the Company or any Wholly Owned Restricted Subsidiary, and (D) the Parent
Guarantor, the Company or any Restricted Subsidiary may merge with an
Affiliate that is a shell corporation with no assets or liabilities organized
solely for the purpose of effecting the reincorporation of the Parent
Guarantor, the Company or any such Restricted Subsidiary in another
jurisdiction.
In the event of any transaction described in and complying with the
conditions listed in the second preceding paragraph in which the Parent
Guarantor or the Company is not the Surviving Entity, the Parent Guarantor or
the Company, as the case may be, shall be discharged from its obligations
under the Indenture and the Notes.
For purposes of the foregoing, (1) the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Subsidiaries of the
Parent Guarantor the Equity Interest of which constitutes all or substantially
all the properties and assets of the Parent Guarantor shall be deemed to be
the transfer of all or substantially all the properties and assets of the
Parent Guarantor and (2) the Distribution shall not be deemed a sale,
conveyance, transfer or offer disposition of all or substantially all of the
Parent Guarantor's or its Subsidiaries' properties and assets.
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Transactions with Affiliates. The Parent Guarantor shall not, and shall not
cause or permit the Company or any Restricted Subsidiary to, directly or
indirectly, conduct any business or enter into any transaction (or series of
related transactions) with or for the benefit of any of their respective
Affiliates (each an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is either (x) on terms which are no less favorable to the Parent
Guarantor, the Company or such Restricted Subsidiary, as the case may be, than
would be available with an unaffiliated third party or (y) is fair to the
Parent Guarantor and not materially adverse to the Holders, and (ii) if such
Affiliate Transaction (or series of related Affiliate Transactions) involves
aggregate payments or other consideration having a Fair Market Value in excess
of $10 million, such Affiliate Transaction is in writing and a majority of the
Independent Directors shall have approved such Affiliate Transaction and
determined that such Affiliate Transaction complies with the provisions set
forth in clause (i). In addition, any Affiliate Transaction involving
aggregate payments or other consideration having a Fair Market Value in excess
of $25 million will also require a written opinion from an Independent
Financial Advisor (filed with the Trustee) stating that the terms of such
Affiliate Transaction are fair, from a financial point of view, to the Parent
Guarantor, the Company or the Restricted Subsidiaries involved in such
Affiliate Transaction, as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to
(i) transactions with or among the Parent Guarantor, the Company and any
Restricted Subsidiary (other than non-Wholly Owned Restricted Subsidiaries
in which an Affiliate of the Parent Guarantor has an equity interest) or
between or among Restricted Subsidiaries (other than non-Wholly Owned
Restricted Subsidiaries in which an Affiliate of the Parent Guarantor has
an equity interest);
(ii) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees or agents of the Parent
Guarantor, the Company or any Restricted Subsidiary as determined in good
faith by the Parent Guarantor's Board of Directors;
(iii) transactions between the Parent Guarantor and any of Choice Hotels
International, Inc., Sunburst Hospitality Corp. and their respective
Subsidiaries pursuant to agreements in existence on the Issue Date,
including any amendments thereto entered into after the Issue Date,
provided that the terms of any such amendment (A) are not less favorable to
the Parent Guarantor, than the terms of the relevant agreement in effect
prior to any such amendment or (B) are fair to the Parent Guarantor and are
not materially adverse to the Holders;
(iv) Restricted Payments made in compliance with the "Limitation on
Restricted Payments" covenant;
(v) any transaction pursuant to a Distribution Agreement, including any
amendments thereto entered into after the Distribution Date, provided that
the terms of any such amendment (A) are not less favorable to the Parent
Guarantor, than the terms of the relevant agreement in effect prior to any
such amendment or (B) are fair to the Parent Guarantor and are not
materially adverse to the Holders; and
(vi) Permitted Investments.
Limitation on Guarantees by Restricted Subsidiaries. The Indenture will
provide that the Company will not create or acquire, nor cause or permit any
of the Restricted Subsidiaries, directly or indirectly, to create or acquire,
any Subsidiary other than (A) an Unrestricted Subsidiary in accordance with
the other terms of the Indenture, or (B) a Restricted Subsidiary that,
simultaneously with such creation or acquisition, executes and delivers a
supplemental indenture to the Indenture pursuant to which it will become a
Guarantor under the Indenture in accordance with "Guarantees" above; provided,
however, that a Restricted Subsidiary that is not required to become an
obligor under the Credit Facilities shall not be required to comply with this
covenant and that from and after the Subsidiary Guarantee Termination Date a
Restricted Subsidiary shall not be required to comply with this covenant.
Provision of Financial Information. Whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
SEC pursuant to such Section 13(a) or 15(d) or any successor
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provision thereto if the Company were so subject, such documents to be filed
with the SEC on or prior to the respective dates (the "Required Filing Dates")
by which the Company would have been required so to file such documents if the
Company were so subject. The Company shall also in any event (a) within 15
days of each Required Filing Date (whether or not permitted or required to be
filed with the SEC) file with the Trustee and The Depository Trust Company
copies of the annual reports, quarterly reports and other documents which the
Company is, or would have been, required to file with the SEC pursuant to the
preceding sentence, and (b) if, notwithstanding the preceding sentence, filing
such documents by the Company with the SEC is not permitted by SEC practice or
applicable law or regulations, promptly upon written request, supply copies of
such documents to any Holder.
Designation of Unrestricted Subsidiaries. The Company may designate after
the Issue Date any Subsidiary of the Parent Guarantor or the Company as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(ii) immediately after giving effect to such Designation, the Parent
Guarantor could Incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the "Limitation on Indebtedness" covenant;
and
(iii) the Parent Guarantor would be permitted to make an Investment
(other than a Permitted Investment) at the time of Designation (assuming
the effectiveness of such Designation) pursuant to the first paragraph of
the "Limitation on Restricted Payments" covenant in an amount (the
"Designation Amount") equal to the Fair Market Value of the Parent
Guarantor's proportionate interest in the net worth of such Subsidiary on
such date calculated in accordance with GAAP.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the
"Limitation on Restricted Payments" covenant for all purposes of the Indenture
in the Designation Amount. Neither the Parent Guarantor, the Company nor any
Restricted Subsidiary shall at any time (x) provide credit support for or
guarantee any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness); provided,
that the Company may pledge Equity Interests or Indebtedness of any
Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no
claim whatsoever against the Company other than to obtain such pledged
property, (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the
occurrence of a default with respect to any Indebtedness of any Unrestricted
Subsidiary, except for any non-recourse guarantee given solely to support the
pledge by the Company of the capital stock of any Unrestricted Subsidiary, and
except to the extent permitted by the "Limitation on Restricted Payments"
covenant. For purposes of the foregoing, the Designation of a Subsidiary of
the Company as an Unrestricted Subsidiary shall be deemed to include the
Designation of all of the Subsidiaries of such Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, be permitted to be Incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
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Limitation on Applicability of Certain Covenants. Notwithstanding the
foregoing (A) the covenants described under "Limitation on Indebtedness,"
"Limitation on Restricted Payments," "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries," "Disposition of Proceeds of
Asset Sales," and "Limitation on Guarantees by Restricted Subsidiaries" shall
not apply from and after such time as the unsecured senior Indebtedness of the
Parent Guarantor shall have been rated the Minimum Rating, and (B) the
covenants described under "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries," "Transactions with
Affiliates," and "Disposition of Proceeds of Asset Sales" shall not apply to
the Distribution, the Distribution Agreements and any related transaction
described in or contemplated by the Prospectus.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Event of
Default" under the Indenture: (a) failure to pay principal of (or premium, if
any, on) any Note when due; (b) failure to pay any interest on any Note when
due, continued for 30 days or more; (c) failure to consummate any Redemption
or Offer to Purchase required by the Indenture or failure to pay on the
Purchase Date the Purchase Price for any Note validly tendered pursuant to any
Offer to Purchase; (d) failure to perform or comply with any of the provisions
described under the "Merger, Sale of Assets, etc." covenant; (e) failure to
perform any other covenant, warranty or agreement of the Company under the
Indenture or in the Notes or of the Guarantors under the Indenture or in the
Guarantees, continued for 60 days or more after written notice to the Company
by the Trustee or Holders of at least 25% in aggregate principal amount of the
outstanding Notes; (f) default or defaults under the terms of one or more
instruments evidencing or securing Indebtedness of the Parent Guarantor, the
Company or any Significant Restricted Subsidiary having an outstanding
principal amount of $25 million or more, individually or in the aggregate,
which default has resulted in the acceleration of such Indebtedness, or
failure by the Parent Guarantor, the Company or any Significant Restricted
Subsidiary to pay principal when due at the stated maturity of any such
Indebtedness; (g) the Guarantee of the Parent Guarantor or of any Significant
Restricted Subsidiary ceases to be in full force and effect or any such
Guarantor denies that it has any further liability under its Guarantee, or
gives notice to such effect other than, with respect to any Significant
Restricted Subsidiary that is a Subsidiary Guarantor, as permitted under the
Indenture; (h) the rendering of a final judgment or judgments (not subject to
appeal) against the Parent Guarantor, the Company or any Significant
Restricted Subsidiary in an amount of $25 million or more which remains
undischarged or unstayed for a period of 60 days after the date on which the
right to appeal has expired; or (i) certain events of bankruptcy, insolvency
or reorganization affecting the Parent Guarantor, the Company or any
Significant Restricted Subsidiary.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders of
Notes, unless such Holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the Holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred on such Trustee.
If an Event of Default with respect to the Notes (other than an Event of
Default described in clause (i) of the preceding paragraph with respect to the
Parent Guarantor or the Company) occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the outstanding
Notes, by notice in writing to the Company may declare the unpaid principal of
(and premium, if any) and accrued interest to the date of acceleration on all
the outstanding Notes to be due and payable immediately and, upon any such
declaration, such principal amount (and premium, if any) and accrued interest,
notwithstanding anything contained in the Indenture or the Notes to the
contrary, will become immediately due and payable. If an Event of Default with
respect to the Parent Guarantor or the Company specified in clause (i) of the
preceding paragraph occurs under the Indenture, the Notes will ipso facto
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder of the Notes.
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Any such declaration with respect to the Notes may be annulled by the
Holders of a majority in aggregate principal amount of the outstanding Notes
upon the conditions provided in the Indenture. For information as to waiver of
defaults, see "Modification and Waiver" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes
outstanding, give the Holders of the Notes thereof notice of all uncured
Defaults or Events of Default thereunder known to it; provided, however, that,
except in the case of a Default or an Event of Default in payment with respect
to the Notes or a Default or Event of Default in complying with the "Merger,
Sale of Assets, etc." covenant, the Trustee shall be protected in withholding
such notice if and so long as a committee of its trust officers in good faith
determines that the withholding of such notice is in the interest of the
Holders of the Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing
Event of Default thereunder and unless the Holders of at least 25% of the
aggregate principal amount of the outstanding Notes shall have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding, and the Trustee shall have not have received from the Holders of a
majority in aggregate principal amount of such outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of such a Note for enforcement of payment of the
principal of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
The Parent Guarantor will be required to furnish to the Trustee annually a
statement as to the performance by the Parent Guarantor and the Company of
certain of their obligations under the Indenture and as to any default in such
performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR, MANAGER
AND STOCKHOLDERS
No director, officer, employee, incorporator, manager or stockholder of the
Parent Guarantor or the Company or any of its Affiliates, as such, shall have
any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have obligations of
the Company and the Guarantors discharged with respect to the outstanding
Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire indebtedness represented by
the outstanding Notes, except for (i) the rights of Holders to receive
payments in respect of the principal of, premium, if any, and interest on the
Notes when such payments are due, (ii) the Company's obligations with respect
to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and
the Guarantors released with respect to certain covenants that are described
in the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or an Event of Default
with respect to the Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, reorganization
and insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must deposit with the Trustee, under the terms of an irrevocable trust
agreement for the benefit of the Holders cash in U.S. dollars,
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United States Government Obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the Notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture,
there has been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the incurrence of Indebtedness the proceeds
of which are applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; and (vi) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for or relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
Notwithstanding the foregoing, the opinion of counsel required by clause (ii)
above need not be delivered if all Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable on the maturity date within one year or (z) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
GOVERNING LAW
The Indenture, the Notes and the Guarantees will be governed by the laws of
the State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for the Notes); provided,
however, that no such modification or amendment to the Indenture may, without
the consent of the Holder of each Note affected thereby, (a) change the
maturity of the principal of or any installment of interest on any such Note
or alter the special redemption, optional redemption or repurchase provisions
of any such Note or the Indenture in a manner adverse to the Holders of the
Notes; (b) reduce the principal amount of (or the premium of) any such Note;
(c) reduce the rate of or extend the time for payment of interest on any such
Note; (d) change the place or currency of payment of principal of (or premium)
or interest on any such Note; (e) modify any provisions of the Indenture
relating to the waiver of past defaults (other than to add sections of the
Indenture or the Notes subject thereto) or the right of the Holders of Notes
to institute suit for the enforcement of any payment on or with respect to any
such Note or any Guarantee or the modification and amendment provisions of the
Indenture and the Notes (other than to add sections of the Indenture or the
Notes which may not be amended, supplemented or waived without the consent of
each Holder therein affected); (f) reduce the percentage of the principal
amount of outstanding Notes necessary for amendment to or waiver of compliance
with any provision of the Indenture or the Notes or for waiver of any Default
in respect thereof; (g) waive a default in the payment of principal of,
interest on, or
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redemption payment with respect to, the Notes (except a rescission of
acceleration of the Notes by the Holders thereof as provided in the Indenture
and a waiver of the payment default that resulted from such acceleration); (h)
modify the ranking or priority of any Note or the Guarantee in respect thereof
of any Guarantor in any manner adverse to the Holders of the Notes; (i) modify
the provisions of any covenant (or the related definitions) in the Indenture
requiring the Company to make an Offer to Purchase in a manner materially
adverse to the Holders of Notes affected thereby otherwise than in accordance
with the Indenture; or (j) release the Parent Guarantor or any Significant
Restricted Subsidiary from any of its obligations under its Guarantee or the
Indenture otherwise than in accordance with the Indenture.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture or the Notes (i) to cure any ambiguity, omission, defect or
inconsistency, (ii) to provide for uncertificated Notes in addition to or in
place of certificated Notes, (iii) to provide for the assumption of the
Company's obligations to holders of the Notes in the event of any Disposition
involving the Company in which the Company is not the Surviving Person or to
add Subsidiary Guarantees or to secure the Notes, (iv) to make any change that
would provide any additional rights or benefits to the holders of the Notes or
that does not adversely affect the rights of any such holder, or (v) to comply
with the requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain
rights of the Trustee, as provided in the Indenture, the Holders of a majority
in aggregate principal amount of the Notes, on behalf of all Holders, may
waive any past default under the Indenture (including any such waiver obtained
in connection with a tender offer or exchange offer for the Notes), except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Notes tendered pursuant to an Offer to Purchase,
or a default in respect of a provision that under the Indenture cannot be
modified or amended without the consent of the Holder of each Note that is
affected.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indenture. During the
existence of a Default, the Trustee will exercise such rights and powers
vested in it under the Indenture and use the same degree of care and skill in
its exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company or any other obligor upon the Notes, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claim as security or otherwise. The
Trustee is permitted to engage in other Transactions with the Company or an
Affiliate of the Company; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time
such Person becomes a Restricted Subsidiary of the Company or is merged or
consolidated with or into the Parent Guarantor, the Company or any Restricted
Subsidiary, in each case other than Indebtedness of the Acquired Person
actually repaid concurrent with any such transaction.
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"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Restricted Subsidiary of such
specified Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Parent Guarantor, the Company
or any Restricted Subsidiary to any other Person, or any acquisition or
purchase of Equity Interests of any other Person by the Parent Guarantor, the
Company or any Restricted Subsidiary, in either case pursuant to which such
Person shall become a Subsidiary of the Parent Guarantor or the Company or
shall be consolidated with or merged into the Parent Guarantor, the Company or
any Restricted Subsidiary or (ii) any acquisition by the Parent Guarantor, the
Company or any Restricted Subsidiary of the assets of any Person which
constitute substantially all of an operating unit or line of business of such
Person or which is otherwise outside of the ordinary course of business.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including,
without limitation, any merger, consolidation or Sale and Leaseback
Transaction) to any Person other than the Parent Guarantor, the Company or a
Restricted Subsidiary, in one transaction or a series of related transactions,
of (i) any Equity Interest of the Company or any Restricted Subsidiary (other
than directors' qualifying shares, to the extent mandated by applicable law)
or (ii) any assets of the Parent Guarantor, the Company or any Restricted
Subsidiary which constitute substantially all of an operating unit or line of
business of the Parent Guarantor, the Company or any Restricted Subsidiary.
For the purposes of this definition, the term "Asset Sale" shall not include
(a) any transaction consummated in compliance with the "Merger, Sale of
Assets, etc." covenant and the creation of any Lien not prohibited by the
"Limitation on Liens" covenant; (b) sales of property or equipment that has
become worn out, obsolete or damaged or otherwise unsuitable for use in
connection with the business of the Parent Guarantor, the Company or any
Restricted Subsidiary, as the case may be; (c) any transaction consummated in
compliance with the "Limitation on Restricted Payments" covenant; (d) the
surrender or waiver of contract rights or the settlement, release or surrender
of contract, tort or other claims; (e) the grant of any non-exclusive license
with respect to patents, trademarks or other similar intellectual property;
(f) Sale and Lease-Back Transactions consummated within 180 days following the
acquisition of the relevant assets; (g) Liens permitted by the "Limitation on
Liens" covenant and (h) the Distribution. In addition, solely for purposes of
the "Disposition of Proceeds of Asset Sales" covenant, any sale, conveyance,
transfer, lease or other disposition of any property or asset, whether in one
transaction or a series of related transactions, involving assets with a Fair
Market Value not in excess of 2.5% of the total consolidated tangible assets
of the Parent Guarantor in any fiscal year shall be deemed not to be an Asset
Sale.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the present value of the notes
(discounted according to GAAP at the cost of indebtedness implied in the
lease) of the total obligations of the lessee for rental payments during the
remaining term of the lease included in such Sale and Lease-Back Transaction
(including any period for which such lease has been extended).
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Capital Contribution" means the contribution on the Distribution Date by
the Parent Guarantor or a Subsidiary of the Parent Guarantor to MCHS of (i) up
to $250 million in cash and (ii) the Realty Note, in connection with the
Distribution.
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on the balance sheet in
accordance with GAAP.
"Cash Equivalents" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency
or instrumentality thereof having maturities of not more than one year from
the date of acquisition; (c) certificates of deposit and eurodollar time
deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (b) and (c) above entered into with any financial institution meeting
the qualifications specified in clause (c) above; (e) commercial paper rated
P-1, A-1 or the equivalent thereof by Moody's or S&P, respectively, and in
each case maturing within one year after the date of acquisition; and (f)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality or agency thereof maturing within one year from the date of
acquisition thereof and at the time of acquisition having one of the two
highest ratings obtainable from either Moody's or S&P.
"Change of Control" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Parent Guarantor):
(i) any Person (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including any group acting for the purpose of acquiring, holding
or disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act), other than one or more Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time, upon the happening
of an event or otherwise), directly or indirectly, of more than 50% of the
total voting power of the then outstanding Voting Equity Interests of the
Parent Guarantor; (ii) the Parent Guarantor consolidates with, or merges with
or into, another Person (other than a Wholly Owned Restricted Subsidiary) or
the Parent Guarantor or any of its Subsidiaries sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of the
assets of the Parent Guarantor and its Subsidiaries (determined on a
consolidated basis) to any Person (other than the Parent Guarantor or any
Wholly Owned Restricted Subsidiary), other than any such transaction where
immediately after such transaction, no Person, other than one or more
Permitted Holders, is or becomes (as a result of the issuance of securities,
by merger or otherwise) the "beneficial owner", directly or indirectly, of
more than 50% of the total voting power of the then outstanding Voting Equity
Interests of the surviving or transferee Person; or (iii) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Parent Guarantor (together with any
new directors whose election by such Board of Directors or whose nomination
for election by the shareholders of the Parent Guarantor was approved by (i) a
vote of a majority of the directors of the Parent Guarantor then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved or (ii) by one
or more Permitted Holders) cease for any reason to constitute a majority of
the Board of Directors of the Parent Guarantor then in office.
"Change of Control Date" has the meaning set forth under "Offer to Purchase
upon Change of Control" above.
"Change of Control Triggering Event" means the occurrence of (i) a Change of
Control and (ii) a Ratings Decline.
"Company" means ManorCare Health Services, Inc., a Delaware corporation
which shall change its name to ManorCare Real Estate Corp. upon consummation
of the Distribution.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal quarters ending prior to the
date of such determination (the "Four Quarter Period") to (ii) Consolidated
Interest Expense for
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such Four Quarter Period; provided, however, that (1) if the Parent Guarantor,
the Company or any Restricted Subsidiary (x) has incurred any Indebtedness
since the beginning of such Four Quarter Period that remains outstanding on
such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness,
Consolidated EBITDA and Consolidated Interest Expense for such Four Quarter
Period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of
such Four Quarter Period or (y) has repaid, repurchased, defeased or otherwise
discharged any Indebtedness since the beginning of such Four Quarter Period
that is no longer outstanding on such date of determination, of if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio involves a discharge of Indebtedness (in each case, other than
Indebtedness incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid), Consolidated EBITDA and
Consolidated Interest Expense for such Four Quarter Period shall be calculated
after giving effect on a pro from basis to such discharge of such
Indebtedness, including with the proceeds of such new Indebtedness, as if such
discharge had occurred on the first day of such Four Quarter Period, (2) if
since the beginning of such Four Quarter Period the Parent Guarantor, the
Company or any Restricted Subsidiary shall have made any Asset Sale or other
sale or disposition of assets outside the ordinary course, the Consolidated
EBITDA for such Four Quarter Period shall be reduced by an amount equal to the
Consolidated EBITDA (if positive) directly attributable to the assets that are
the subject of such Asset Sale or such other sale or disposition of assets for
such Four Quarter Period or increased by an amount equal to the Consolidated
EBITDA (if negative) directly attributable thereto for such Four Quarter
Period and Consolidated Interest Expense for such Four Quarter Period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Parent Guarantor, the Company or any
Restricted Subsidiary repaid, repurchased or otherwise discharged with respect
to the Parent Guarantor and its continuing Subsidiaries in connection with
such Asset Sale or other sale or disposition of assets outside the ordinary
course for such Four Quarter Period (or, if the Equity Interests of any
Restricted Subsidiary are sold, the Consolidated Interest Expense for such
Four Quarter Period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Parent Guarantor and its continuing
Subsidiaries are no longer liable for such Indebtedness after such sale), (3)
if since the beginning of such Four Quarter Period the Parent Guarantor, the
Company or any Restricted Subsidiary (by merger or otherwise) shall have made
an Investment in any Restricted Subsidiary (or any Person that becomes a
Restricted Subsidiary) or an acquisition of assets, including any acquisition
of assets occurring in connection with a transaction causing a calculation to
be made hereunder, which constitutes all or substantially all of an operating
unit of a business, Consolidated EBITDA and Consolidated Interest Expense for
such Four Quarter Period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such Investment
or acquisition occurred on the first day of such Four Quarter Period and (4)
if since the beginning of such Four Quarter Period any Person (that
subsequently became a Subsidiary or was merged with or into the Parent
Guarantor, the Company or any Restricted Subsidiary since the beginning of
such Four Quarter Period) shall have made any Asset Sale or other sale or
disposition of assets outside the ordinary course or any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (2) or (3) above if made by the Parent Guarantor, the Company or a
Restricted Subsidiary during such Four Quarter Period, Consolidated EBITDA and
Consolidated Interest Expense for such Four Quarter Period shall be calculated
after giving pro forma effect thereto as if such Asset Sale or such other sale
or disposition of assets, Investment or acquisition of assets occurred on,
with respect to any Investment or acquisition, the first day of such Four
Quarter Period and, with respect to any Asset Sale or other sale or
disposition of assets outside the ordinary course, the day prior to the first
day of such Four Quarter Period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income
or earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro
forma calculations shall be determined in accordance with Regulation S-X under
the Securities Act as in effect on the date of such calculation. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any agreement under which Interest
Rate Protection Obligations are outstanding applicable to such Indebtedness if
such agreement under which such Interest Rate Protection Obligations are
outstanding has a remaining term as at the date of determination in excess of
12 months); provided, however, that the Consolidated Interest Expense of the
Parent Guarantor
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attributable to interest on any Indebtedness Incurred under a revolving credit
facility computed on a pro forma basis shall be computed based upon the
average daily balance of such Indebtedness during the Four Quarter Period.
"Consolidated EBITDA" means, for any period, the Consolidated Net Income for
such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) Consolidated Income Tax Expense for such period;
(ii) Consolidated Interest Expense for such period; and (iii) Consolidated
Non-cash Charges for such period.
"Consolidated Income Tax Expense" means, with respect to the Parent
Guarantor for any period, the provision for Federal, state, local and foreign
income taxes payable by the Parent Guarantor and its Restricted Subsidiaries
for such period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Parent Guarantor
for any period, without duplication, the sum of (i) the interest expense
(excluding amortization or write-off of debt issuance costs in connection with
the Distribution and related financings) of the Parent Guarantor and its
Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (e) all capitalized interest and all accrued interest, (f) non-cash
interest expense and (g) interest on Indebtedness of another Person that is
guaranteed by the Parent Guarantor or any of its Subsidiaries actually paid by
the Parent Guarantor or any of its Subsidiaries, (ii) the interest component
of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Parent Guarantor and its Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP and (iii) the
amount of all dividends or distributions paid on Disqualified Capital Stock
(other than dividends paid in shares of Capital Stock of the Parent Guarantor)
during such period as determined on a consolidated basis in accordance with
GAAP.
"Consolidated Net Income" means, for any period, the consolidated net income
(loss) of the Parent Guarantor and its Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income: (i) any net
income (loss) of any Person if such person is not a Subsidiary of the Parent
Guarantor, except, in the case of income, to the extent of cash actually
distributed to the Parent Guarantor, (ii) any net income (loss) of any Person
acquired by the Parent Guarantor, the Company or a Restricted Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income (but not loss) of any Restricted Subsidiary
if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except to the
extent that any dividend or distribution was made or could have been made by
the Restricted Subsidiary during such period in compliance with such
restrictions; (iv) any gain or loss realized upon the sale or other
disposition of any asset of the Parent Guarantor, the Company or the
Restricted Subsidiaries (including pursuant to any Sale and Lease-Back
Transaction) outside of the ordinary course of business; (v) any extraordinary
gain or loss; (vi) the cumulative effect of a change in accounting principles
after the Issue Date; (vii) any restoration to income of any contingency
reserve of an extraordinary, non-recurring or unusual nature, except to the
extent that provision for such reserve was made out of Consolidated Net Income
accrued at any time following the Issue Date; (viii) expenses, write-offs and
non-cash charges incurred in connection with the Distribution and related
financings; and (ix) for purposes of the "Limitation on Restricted Payments"
covenant, any net income of the Parent Guarantor and its Subsidiaries if such
net income resulted in a reduction in the amount of an Investment as a result
of the payment to the Parent Guarantor or a Restricted Subsidiary of dividends
or distributions in connection with such Investment.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period the sum of (A) depreciation, (B) amortization and (C) other non-cash
expenses of such Person and its Subsidiaries reducing Consolidated Net Income
of such Person and its Subsidiaries for such period, determined on a
consolidated basis
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in accordance with GAAP (excluding, for purposes of clause (C) only, such
charges which require an accrual of or a reserve for cash charges for any
future period).
"Credit Facilities" means the credit agreement, dated as of the Distribution
Date, by and between the Company, the guarantors named therein, the lenders
named therein, and The Chase Manhattan Bank as agent, as amended, including
any deferrals, renewals, extensions, replacements, refinancings or refundings
thereof, or amendments, modifications or supplements thereto and any agreement
providing therefor, whether by or with the same or any other lender, creditor,
group of lenders or group of creditors, and including related notes, guarantee
and security agreements and other instruments and agreements executed in
connection therewith.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement entered into to protect
the Parent Guarantor, the Company or any Restricted Subsidiary against
fluctuations in currency values.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such
Person is the Surviving Person) or the sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of such Person's
assets.
"Disqualified Equity Interest" means any Equity Interest which, by its terms
(or by the terms of any security into which it is convertible or for which it
is exchangeable at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof,
in whole or in part, or exchangeable into Indebtedness on or prior to the
earlier of the maturity date of the Notes or the date on which no Notes remain
outstanding. An Equity Interest shall not be automatically deemed a
Disqualified Equity Interest solely as a result of provisions that require an
offer to purchase upon the occurrence of a change of control or an asset sale,
so long as such provisions are not under any circumstances triggered prior to
any similar provisions in the Indenture and the Notes.
"Distribution" means the distribution by Parent Guarantorto its common stock
holders of 100% of the outstanding common stock of MCHS.
"Distribution Agreements" means each of the Lease Agreements, the
Development Agreement, the Non-Competition Agreement, the Assisted Living
Facility Management Agreements, the Employee Benefits and Other Employment
Matters Allocation Agreement, the Employee Benefits Administration Agreement,
the Office Lease Agreement, the Distribution Agreement, the Tax Sharing
Agreement, the Tax Administration Agreement, the Corporate Services Agreement,
the Trademark Agreement, the Cash Management Agreement and the Risk Management
Consulting Services Agreement, each between the Parent Guarantor and MCHS (or
subsidiaries thereof) and substantially to the effect described in the
Offering Memorandum, as such agreements may be amended or supplemented from
time to time in a manner not materially adverse to the Holders.
"Distribution Date" means the date of consummation of the Distribution.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited,
in such Person, including any Preferred Equity Interests.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
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"Exchange Offer" means the offer by MCHS to exchange its 7 1/2% Senior Notes
due 2006 for the Old Senior Notes.
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase" below.
"Existing Revolving Credit Facility" means the credit agreement dated
September 6, 1996, among the Parent Guarantor, certain subsidiaries of the
Parent Guarantor, the banks named therein, The Chase Manhattan Bank and
NationsBank, N.A.
"Fair Market Value" means, with respect to any asset, the price (after taking
into account any liabilities relating to such assets) which could be negotiated
in an arm's-length transaction between a willing seller and a willing and able
buyer, neither of which is under any compulsion to complete the transaction;
provided, however, that the Fair Market Value of any such asset or assets shall
be determined conclusively by the Board of Directors of the Parent Guarantor
acting in good faith, and shall be evidenced by resolutions of the Board of
Directors of the Company delivered to the Trustee.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Coverage Ratio" above.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Guarantee" means the guarantee of the Notes by each Guarantor under the
Indenture.
"Guarantors" means the Parent Guarantor and the Subsidiary Guarantors.
"Holders" means the registered holders of the Notes.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing); provided, however, that (i) a change in
GAAP that results in an obligation of such Person that exists at such time
becoming Indebtedness shall not be deemed an incurrence of such Indebtedness
and (ii) neither the accrual of interest nor the accretion of original issue
discount shall be considered an incurrence of Indebtedness. Indebtedness of any
Acquired Person or any of its Subsidiaries existing at the time such Acquired
Person becomes a Restricted Subsidiary of the Company (or is merged into or
consolidated with the Parent Guarantor, the Company or any Restricted
Subsidiary), whether or not such Indebtedness was Incurred in connection with,
as a result of, or in contemplation of, such Acquired Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Parent
Guarantor, the Company or any Restricted Subsidiary), shall be deemed Incurred
at the time any such Acquired Person becomes a Restricted Subsidiary or merges
into or consolidates with the Parent Guarantor, the Company or any Restricted
Subsidiary.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (a) the principal amount (or accreted amount
determined in accordance with GAAP, if less) of indebtedness of such Person for
money borrowed; (b) the
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principal amount (or accreted amount determined in accordance with GAAP, if
less) of indebtedness of such Person evidenced by bonds, debentures, notes or
other similar instruments, including obligations Incurred in connection with
the acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person; (d)
every obligation of such Person issued or assumed as the deferred purchase
price of property or services (but excluding trade accounts payable incurred
in the ordinary course of business and payable in accordance with industry
practices, or other accrued liabilities arising in the ordinary course of
business); (e) every Capital Lease Obligation of such Person; (f) every net
obligation under Interest Rate Protection Obligations or similar agreements or
Currency Agreements of such Person; (g) Attributable Indebtedness; and (h)
every obligation of the type referred to in clauses (a) through (g) of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable for, directly or indirectly, as obligor, guarantor or
otherwise provided that the principal amount attributable to any such
guarantee shall be limited to the extent of such Person's guarantee with
respect to such obligation. Indebtedness (i) shall not be calculated taking
into account any cash and cash equivalents held by such Person; (ii) shall not
include obligations of any Person (x) arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business, provided that such obligations are extinguished within five Business
Days of their incurrence, (y) resulting from the endorsement of negotiable
instruments for collection in the ordinary course of business and consistent
with past business practices and (z) under stand-by letters of credit to the
extent collateralized by cash or Cash Equivalents; (iii) which provides that
an amount less than the principal amount thereof shall be due upon any
declaration of acceleration thereof shall be deemed to be incurred or
outstanding in an amount equal to the accreted value thereof at the date of
determination; (iv) shall include the liquidation preference and any mandatory
redemption payment obligations in respect of any Disqualified Equity Interests
of the Parent Guarantor or any Subsidiary of the Parent Guarantor; and (v)
shall not include obligations under performance bonds, performance or
accommodation guarantees, surety bonds and appeal bonds, letters of credit,
bankers' acceptances or similar obligations, incurred in the ordinary course
of business.
"Independent Director" means, with respect to any Affiliate Transaction, a
member of the Board of Directors of the Parent Guarantor who has no material
direct or indirect financial interest in or with respect to such Affiliate
Transaction.
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal, investment banking firm or consultant (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified
to perform the task for which it is to be engaged.
"Interest" means, with respect to the Notes, any cash interest on the Notes.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements, and
(ii) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect loan,
advance, guarantee or other extension of credit or capital contribution to (by
means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. For
purposes of the "Limitation on Restricted Payments" covenant above, the amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment; reduced by the payment of dividends or distributions in
connection with such Investment or any other amounts received in respect of
such Investment. In determining the amount of any Investment involving a
transfer of any property or asset other than cash, such property shall be
valued at its fair market value at the time
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of such transfer, as determined in good faith by the Board of Directors (or
comparable body) of the Person making such transfer.
"Issue Date" means the original issue date of the Notes.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Maturity Date" means the date, which is set forth on the face of the Notes,
on which the Notes will mature.
"MCHS" means New ManorCare Health Services, Inc., a newly-organized Delaware
corporation which shall change its name to ManorCare Health Services, Inc.
upon consummation of the Distribution.
"Minimum Rating" means, with respect to the senior unsecured Indebtedness of
any Person, a rating of (i) at least BBB- (or the equivalent successor rating)
by S&P and (ii) at least Baa3 (or the equivalent successor rating) by Moody's.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or Cash
Equivalents received by the Parent Guarantor, the Company or any Restricted
Subsidiary in respect of any Asset Sale, including all cash or Cash
Equivalents received upon any sale, liquidation or other exchange of proceeds
of Asset Sales received in a form other than cash or Cash Equivalents, net of
(a) the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof; (b)
taxes paid or accrued as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements); (c) all
payments made on, and all installment payments required to be made to retire,
any Indebtedness which is secured by any assets subject to such Asset Sale, in
accordance with the terms of any Lien upon such assets, or which must, by its
terms, or in order to obtain a necessary consent to such Asset Sale, or by
applicable law, be repaid out of the proceeds from such Asset Sale; (d)
amounts deemed, in good faith, appropriate by the Board of Directors of the
Parent Guarantor to be provided as a reserve, in accordance with GAAP, against
any liabilities associated with such assets which are the subject of such
Asset Sale; including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale (provided that the amount of any such reserves shall be deemed to
constitute Net Cash Proceeds at the time such reserves shall have been
reversed or are not otherwise required to be retained as a reserve); and (e)
with respect to Asset Sales by the Company or Restricted Subsidiaries, the
portion of such cash payments attributable to Persons holding a minority
interest in the Company or such Restricted Subsidiary.
"Net Proceeds Utilization Date" has the meaning set forth in the second
paragraph under "Certain Covenants -- Disposition of Proceeds of Asset Sales"
above.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on behalf
of the Company by first-class mail, postage prepaid, to each holder at his
address appearing in the register for the Notes on the date of the Offer
offering to purchase up to the principal amount of Notes specified in such
Offer at the purchase price specified in such Offer (as determined pursuant to
the Indenture). Unless otherwise required by applicable law, the Offer shall
specify an expiration date (the "Expiration Date") of the Offer to Purchase,
which shall be not less than 20 Business Days nor more than 60 days after the
date of such Offer, and a settlement date (the "Purchase Date") for purchase
of Notes to occur no later than five Business Days after the Expiration Date.
The Company shall notify the Trustee at least 10 days (or such shorter period
as is acceptable to the Trustee) prior to the mailing of the Offer of the
Company's obligation to make an Offer to Purchase, and the Offer shall be
mailed
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by the Company or, at the Company's request, by the Trustee in the name and at
the expense of the Company. The Offer shall contain all the information
required by applicable law to be included therein, including all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state: (1) the Section of the
Indenture pursuant to which the Offer to Purchase is being made; (2) the
Expiration Date and the Purchase Date; (3) the Note Offer Amount (including,
if less than 100% of the outstanding Notes, the manner by which such amount
has been determined pursuant to the Section of the Indenture requiring the
Offer to Purchase); (4) the purchase price to be paid by the Company for each
$1,000 aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price"); (5) that the Holder may
tender all or any portion of the Notes registered in the name of such Holder
and that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount; (6) the place or places where Notes are
to be surrendered for tender pursuant to the Offer to Purchase; (7) that
interest on any Note not tendered or tendered but not purchased by the Company
pursuant to the Offer to Purchase will continue to accrue; (8) that on the
Purchase Date the Purchase Price will become due and payable upon each Note
being accepted for payment pursuant to the Offer to Purchase and that interest
thereon shall cease to accrue on and after the Purchase Date; (9) that each
Holder electing to tender all or any portion of a Note pursuant to the Offer
to Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration Date
(such Note being, if the Company or the Trustee so requires, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing); (10) that Holders will be entitled to withdraw
all or any portion of Notes tendered if the Company (or its Paying Agent)
receives, not later than the close of business on the fifth Business Day next
preceding the Expiration Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the Note
the Holder tendered, the certificate number of the Note the Holder tendered
and a statement that such Holder is withdrawing all or a portion of his
tender; (11) that (a) if Notes in an aggregate principal amount less than or
equal to the Note Offer Amount are duly tendered and not withdrawn pursuant to
the Offer to Purchase, the Company shall purchase all such Notes and (b) if
Notes in an aggregate principal amount in excess of the Note Offer Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Notes having an aggregate principal amount equal to the Note
Offer Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 principal amount or
integral multiples thereof shall be purchased); (12) that in the case of any
Holder whose Note is purchased only in part, the Company shall execute and the
Trustee shall authenticate and deliver to the Holder of such Note without
service charge, a new Note or Notes, of any authorized denomination as
requested by such Holder, in an aggregate principal amount equal to and in
exchange for the unpurchased portion of the Note so tendered; and (13) the
circumstances and relevant facts and financial information regarding such
Change of Control.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"Old Senior Notes" means the 7 1/2% Senior Notes due 2006 of the Parent
Guarantor.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Parent Guarantor" means Manor Care, Inc., a Delaware corporation which
shall change its name to Manor Care Realty, Inc. upon consummation of the
Distribution.
"Permitted Holder" means (i) Stewart Bainum, Jr. and members of his
immediate family, (ii) Stewart Bainum, Sr. and members of his immediate
family, (iii) any entity controlled by Stewart Bainum, Jr. and/or Stewart
Bainum, Sr., including, without limitation, Bainum Associates Limited
Partnership, MC Investments Limited Partnership, Mid Pines Associates Limited
Partnership, Realty Investment Company, Inc. and any Affiliates thereof or
successors thereto, and (iv) any trust of which one or more of the Persons
specified in clauses (i) and (ii) are the beneficiaries.
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"Permitted Indebtedness" has the meaning set forth in the second paragraph
of "Certain Covenants -- Limitation on Indebtedness" above.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
negotiable instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits; (c) Interest Rate
Protection Obligations; (d) Investments received in connection with the
bankruptcy or reorganization of suppliers and customers or in settlement of
delinquent obligations of, or other disputes with, customers and suppliers, in
each case arising in the ordinary course of business; (e) Investments in the
Parent Guarantor or the Company, a Restricted Subsidiary or any Person that,
as a result of or in connection with such Investment, becomes a Restricted
Subsidiary; (f) Investments paid for in Qualified Equity Interests of the
Parent Guarantor or out of the substantially concurrent sale of Qualified
Equity Interests of the Parent Guarantor, provided, that the proceeds of any
such substantially concurrent sale of Qualified Equity Interests shall not be
included in clause (c)(2)(y) of the second paragraph of the "Limitation on
Restricted Payments" covenant to the extent used to fund such Investment; (g)
Investments in accounts receivables and prepaid expenses in the ordinary
course of business; (h) Investments existing on the Issue Date; (i)
Investments pursuant to the Capital Contribution; (j) loans or advances to
officers or employees of the Parent Guarantor or the Company and the
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes of the Parent Guarantor or the Company or the Restricted
Subsidiaries (including travel and moving expenses) not in excess of $ million
in the aggregate at any one time outstanding; (k) Investments acquired as a
result of the acquisition of a Person that held such Investments; provided,
that such Investments were not made in connection with, as a result of or in
contemplation of such acquisition; (l) Investments received as consideration
for Asset Sales consummated in compliance with the Indenture; and (m)
Investments in one or more healthcare businesses or real estate businesses not
to exceed $35 million in the aggregate.
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Parent Guarantor, the
Company or any Restricted Subsidiary; provided, however, that such Liens were
in existence prior to the contemplation of such merger or consolidation and do
not secure any property or assets of the Parent Guarantor, the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation (other than improvements or accessions
thereto or proceeds or dividends or distributions therefrom); (b) Liens
imposed by law such as carriers', warehousemen's and mechanics' Liens and
other similar Liens arising in the ordinary course of business which secure
payment of obligations not more than 30 days past due or which are being
contested in good faith and by appropriate proceedings; (c) Liens existing on
the Issue Date and Liens in favor of the lenders under the Credit Facilities;
(d) Liens securing the Notes or the Guarantees; (e) Liens in favor of the
Parent Guarantor, the Company or any Restricted Subsidiary; (f) Liens for
taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; provided, however,
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (g) easements, reservation
of rights of way, restrictions and other similar easements, licenses,
restrictions on the use of properties, or minor imperfections of title that in
the aggregate are not material in amount and do not in any case materially
detract from the properties subject thereto or interfere with the ordinary
conduct of the business of the Parent Guarantor, the Company and the
Restricted Subsidiaries; (h) Liens resulting from the deposit of cash or notes
in connection with contracts, tenders or expropriation proceedings, or to
secure workers' compensation, surety or appeal bonds, costs of litigation when
required by law and public and statutory obligations or obligations under
franchise arrangements entered into in the ordinary course of business; (i)
Liens securing Indebtedness consisting of Capitalized Lease Obligations,
Purchase Money Indebtedness, mortgage financings, industrial revenue bonds or
other monetary obligations, in each case incurred solely for the purpose of
financing all or any part of the purchase price or cost of construction or
installation of property or assets used in the business of the Parent
Guarantor, the Company or the Restricted Subsidiaries, or repairs, additions
or improvements to such property or assets, provided, however, that (I) such
Liens secure Indebtedness in an amount not in excess of the original purchase
price or the original cost of any such assets or repair, addition or
improvement thereto (plus an amount equal to the reasonable fees and expenses
in connection with the incurrence of such Indebtedness), (II) such Liens do
not extend to any other assets of the
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Parent Guarantor, the Company or its Subsidiaries (and, in the case of repair,
addition or improvements to any such assets, such Lien extends only to the
assets (and improvements thereto or thereon) repaired, added to or improved),
(III) the Incurrence of such Indebtedness is permitted by the "Limitation on
Indebtedness" covenant and (IV) such Liens attach within 180 days of such
purchase, construction, installation, repair, addition or improvement; and (j)
Liens to secure any refinancings, renewals, extensions, modifications or
replacements (collectively, "refinancing") (or successive refinancings), in
whole or in part, of any Indebtedness secured by Liens referred to in the
clauses above so long as such Lien does not extend to any other property
(other than additions and improvements thereto).
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
Equity Interests of any other class in such Person.
"principal" of a debt security means the principal of the security plus,
when appropriate, the premium, if any, on the security.
"Promissory Note" means [to come].
"Public Equity Offering" means an offering of Qualified Equity Interests
pursuant to a registration statement filed with the SEC under the Securities
Act of 1933 (other than a registration statement on Form S-8 or any successor
form).
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Money Indebtedness" means Indebtedness of the Parent Guarantor,
the Company or any Restricted Subsidiary Incurred for the purpose of financing
in the ordinary course of business all or any part of the purchase price or
the cost of construction or improvement of any property or assets; provided,
however, that (A) the aggregate principal amount of such Indebtedness does not
exceed such purchase price or cost or (B) such Indebtedness shall be with
recourse solely to the assets or property so purchased or acquired, any
additions and accessions thereto and any proceeds therefrom, including any
refinancing, refunding, extension, renewal or replacement of such Indebtedness
that does not increase the aggregate principal amount (or accreted amount, if
less) thereof as of the date of refinancing, refunding, extension, renewal or
replacement plus an amount necessary to pay any fees and expenses, including
premiums, related to such refinancing, refunding, extension, renewal or
replacement.
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Ratings Decline" means any reduction (e.g., from "B" to "B-" or from "B1"
to "B2") in the rating accorded the Notes by either S&P or Moody's.
"Realty Note" means the % Senior Notes due 2008 of the Company to be
issued to MCHS in connection with the Distribution and the indenture or other
agreement pursuant to which such Realty Note is issued, as such Realty Note
and agreement may be amended or supplemented from time to time in any manner
not materially adverse to the Holders of the Notes.
"Redemption Date" has the meaning set forth in the third paragraph of
"Optional Redemption" above.
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"Replacement Assets" has the meaning set forth in the first paragraph under
the "Disposition of Proceeds of Asset Sales" covenant.
"Restricted Subsidiary" means any Subsidiary of the Parent Guarantor or the
Company existing on the Issue Date and any Subsidiary of the Parent Guarantor
or the Company created or acquired after the Issue Date, in each case that has
not been designated by the Board of Directors of the Parent Guarantor, by a
resolution of the Board of Directors of the Parent Guarantor delivered to the
Trustee, as an Unrestricted Subsidiary pursuant to the "Designation of
Unrestricted Subsidiaries" covenant. Any such designation may be revoked by a
resolution of the Board of Directors of the Parent Guarantor delivered to the
Trustee, subject to the provisions of such covenant.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Parent Guarantor, the Company or any
Restricted Subsidiary of any real or tangible personal property, which
property has been or is to be sold or transferred by the Parent Guarantor, the
Company or such Restricted Subsidiary to such Person in contemplation of such
leasing.
"S&P" means Standard & Poor's Ratings Service and its successors.
"SEC" means the Securities and Exchange Commission.
"Significant Restricted Subsidiary" means, at any date of determination, (a)
any Subsidiary of the Parent Guarantor that, together with its Subsidiaries
that are Restricted Subsidiaries (i) for the most recent fiscal year of the
Parent Guarantor accounted for more than 10.0% of the consolidated revenues of
the Parent Guarantor and its Subsidiaries or (ii) as of the end of such fiscal
year, owned more than 10.0% of the consolidated assets of the Parent Guarantor
and its Subsidiaries, all as set forth on the consolidated financial
statements of the Parent Guarantor and its Subsidiaries for such year prepared
in conformity with GAAP, and (b) any Subsidiary of the Parent Guarantor which,
when aggregated with all other Subsidiaries of the Parent Guarantor that are
not otherwise Significant Restricted Subsidiaries and as to which any event
described in clause (i) of "Events of Default" above has occurred, would
constitute a Significant Restricted Subsidiary under clause (a) of this
definition.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (a) any corporation of which
the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of
which at least a majority of Voting Equity Interests are at the time, directly
or indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or
the Person to which such Disposition is made.
"United States Government Obligations" means direct non-callable obligations
of the United States of America for the payment of which the full faith and
credit of the United States is pledged.
"Unrestricted Subsidiary" means any Subsidiary of the Parent Guarantor
designated as such pursuant to the "Designation of Unrestricted Subsidiaries"
covenant. Any such designation may be revoked by a resolution of the Board of
Directors of the Company delivered to the Trustee, subject to the provisions
of such covenant.
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"Unutilized Net Cash Proceeds" has the meaning set forth in the third
paragraph under the "Disposition of Proceeds of Asset Sales" covenant.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by the Parent Guarantor.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE REALTY NOTE
On or prior to the Effective Date, Manor Care will make or cause to be made
a capital contribution to ManorCare Health Services of (i) approximately $250
million in cash and (ii) the Realty Note of Manor Care Real Estate in an
aggregate amount of up to $250 million. See "Description of the Transactions--
The Realty Note."
THE CREDIT FACILITIES
Manor Care, on behalf of Manor Care Real Estate, is negotiating a Commitment
Letter with Chase and CSI pursuant to which Chase is expected to agree to act
as administrative agent for a syndicate of financial institutions for the
Credit Facilities and CSI is expected to agree to act as arranger for the
Credit Facilities. The following summary of the anticipated provisions of the
Commitment Letter does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Commitment Letter.
Manor Care expects that the Commitment Letter will provide for an eight-year
$150 million term loan facility, subject to earlier maturity under certain
circumstances, (the "Term Facility") and a five-year $300 million revolving
credit facility (the "Revolving Facility" and, together with the Term
Facility, the "Credit Facilities"). A portion of the Revolving Facility may be
used for the issuance of letters of credit. Unless leases representing a
percentage to be agreed upon of the revenues represented by the Lease
Agreements have been terminated (a "Lease Termination"), borrowings under the
Term Facility will amortize quarterly for eight years after the closing as
follows:
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION
YEAR AMOUNT
- ---- ------------
<S> <C>
1998............................................................... $1,000,000
1999............................................................... $1,000,000
2000............................................................... $1,000,000
2001............................................................... $1,000,000
2002............................................................... $1,000,000
2003............................................................... $1,000,000
2004............................................................... $72,000,000
2005............................................................... $72,000,000
</TABLE>
Manor Care Real Estate will be required to notify Chase of an anticipated
Lease Termination at least twelve months in advance of such occurrence; the
date of the Lease Termination shall be the new Term Facility maturity date and
the amortization schedule set forth above will automatically be adjusted so
that outstanding loans under the Term Facility will amortize in equal
quarterly installments over the last four amortization dates prior to the new
maturity date.
Manor Care expects that loans under the Revolving Facility will bear
interest, at Manor Care Real Estate's option, at adjusted LIBOR or Chase's
adjusted base rate ("ABR"), in each case, plus a variable margin which will be
adjusted depending on Manor Care Real Estate's ratio of total debt to EBITDA.
The LIBOR margin and ABR margin applicable to loans under the Term Facility
will be % and %, respectively. The Company will pay a quarterly commitment
fee based on the ratio of Manor Care Real Estate's debt to EBITDA.
Manor Care expects that proceeds of loans under the Credit Facilities
together with proceeds from the sale of the Notes will be used to repay
amounts outstanding under Manor Care's Existing Revolving Credit Facility, to
provide funds for the cash portion of the Capital Contribution and for general
corporate purposes, including but not limited to, working capital, capital
expenditures, certain acquisitions, real estate development costs and to pay
related transaction expenses. Proceeds of the loans under the Credit
Facilities will not be used to repurchase or refinance the Realty Note.
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Manor Care expects that the Credit Facilities will be subject to mandatory
prepayment with 50% of the net proceeds of certain equity issuances by Manor
Care Realty; 100% of the net proceeds of certain debt issuances and asset sales
by Manor Care Realty and its subsidiaries; and 75% of Manor Care Real Estate's
excess cash flow.
It is anticipated that the obligations of Manor Care Real Estate under the
Credit Facilities will be unconditionally guaranteed by Manor Care Realty and
each of Manor Care Realty's significant subsidiaries. In addition, it is
anticipated that the obligations of Manor Care Real Estate under the Credit
Facilities will be secured by (i) a first priority pledge of the capital stock
held by Manor Care Realty or its subsidiaries in Manor Care Real Estate or in
significant subsidiaries of Manor Care Realty; (ii) an assignment of Manor Care
Realty's rights under certain agreements with ManorCare Health Services,
including the Lease Agreements and the Development Agreement; and (iii)
security interests in the majority of the assets of Manor Care Realty and Manor
Care Real Estate and by a pledge of the capital stock of Manor Care Real Estate
and Manor Care Realty's other subsidiaries. The terms of the Credit Facilities
will require the release of a Subsidiary Guarantor's Guarantee under the
Indenture in the event such Subsidiary Guarantor is not an obligor under the
Credit Facilities.
It is anticipated that the Credit Facilities will contain covenants customary
for transactions of this type, including, without limitation, restrictions on
indebtedness, line of business, sale of receivables, mergers and
consolidations, asset sales, liens and sale-leaseback transactions,
investments, loans, transactions with affiliates, changes in fiscal year and
accounting practices, termination or amendment of material agreements;
amendment, prepayment or redemption of other indebtedness, and dividends and
stock repurchases and a prohibition on the grant of negative pledges. It is
anticipated that the Credit Facilities will also contain financial covenants
including ratio of consolidated EBITDA to consolidated interest expense, ratio
of total debt to consolidated EBITDA and limitations on capital expenditures.
It is anticipated that events of default under the Credit Facilities will
include, without limitation, and subject to certain cure periods and
exceptions: (i) nonpayment of principal, interest, fees and other amounts
payable when due; (ii) violation of covenants; (iii) material incorrectness of
representations and warranties; (iv) change of control of Manor Care Realty;
(v) cross defaults or cross acceleration with respect to any material
indebtedness; (vi) the occurrence of certain material adverse events with
respect to ERISA plans; (vii) the imposition of material judgment against Manor
Care Realty or the commencement of a voluntary or involuntary bankruptcy of
Manor Care Realty or its subsidiaries; and (viii) material default by Manor
Care Realty under material agreements with ManorCare Health Services. In the
event that the commitment letter is executed, Chase and CSI will commit to
purchase a portion of such facility and will use their commercially reasonable
efforts to arrange the balance of such facility with other lenders.
111
<PAGE>
CERTAIN RELATIONSHIPS
On November 1, 1996, Manor Care completed the spin-off of its lodging
segment. Manor Care's shareholders of record on October 10, 1996 received one
share of Choice Hotels International, Inc. ("Choice") common stock for each
outstanding share of Manor Care common stock. Accordingly, lodging results are
reported as discontinued operations for all periods presented. As of August
31, 1997, advances to Choice totalled $115.7 million. Such advances are due in
full on November 1, 1999 and accrue interest at an annual rate of 9%. Choice
repaid in full all outstanding advances on October 15, 1997. For purposes of
providing an orderly transition after the spin-off, Manor Care 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 Manor Care (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. See "Notes to
Consolidated Financial Statements--Discontinued Lodging Operations." Pursuant
to the Distribution Agreement, ManorCare Health Services has agreed to assume
certain obligations of Manor Care under these agreements.
Following the Distribution, Manor Care Realty will have a continuing
relationship with ManorCare Health Services as a result of the agreements
being entered into in connection with the Distribution, including the Lease
Agreements, the Development Agreement, the Non-Competition Agreement, the
Assisted Living Facility Management Agreement, the Distribution Agreement, the
Tax Sharing Agreement, the Tax Administration Agreement, the Employee Benefits
and Other Employment Matters Allocation Agreement, the Employee Benefits
Administration Agreement, the Office Lease Agreement, the Corporate Services
Agreement, the Trademark Agreement, the License Agreement, the Cash Management
Agreement, the Design Services Agreement, and the Risk Management Consulting
Services Agreement. See "Relationship Between Manor Care Realty and ManorCare
Health Services After the Distribution."
112
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement") dated , 1998, among Manor Care Real
Estate, the Parent Guarantor and the Underwriters, Manor Care Real Estate has
agreed to sell to the Underwriters, and the Underwriters have severally agreed
to purchase from Manor Care Real Estate, the following respective amounts of
the Notes:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF NOTES
----------- ---------------
<S> <C>
Chase Securities Inc. ....................................... $
SBC Warburg Dillon Read Inc. ................................
------------
Total...................................................... $350,000,000
============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Notes offered
hereby if they purchase any of the Notes. Manor Care Realty has been advised
by the Underwriters that the Underwriters propose to offer the Notes to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers initially at such price less a
discount not in excess of % of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a concession to certain
other dealers not in excess of % of the principal amount of the Notes. After
the initial offering of the Notes to the public, the Underwriters may change
the public offering price, the discount and the concession.
The Notes comprise new issues of securities with no established trading
market. Manor Care Realty has been advised by each of the Underwriters that
such Underwriter intends to make a market in the Notes as permitted by
applicable laws and regulations. However, neither of the Underwriters are
under any obligation to make such a market and any such market-making may be
discontinued by such Underwriter at any time. No assurances can be given that
the Underwriters will make a market in the Notes, or as to the liquidity of,
or the trading market for the Notes. Manor Care Real Estate does not intend to
apply for listing of the Notes on any securities exchange or automated dealer
quotation system.
Chase Securities Inc. ("CSI") is an affiliate of The Chase Manhattan Bank
("Chase"), which is the agent bank and a lender under the Existing Revolving
Credit Facility. Chase will receive its proportionate share of any repayment
of amounts outstanding under the Existing Revolving Credit Facility from the
proceeds of the Offering. CSI and SBC Warburg Dillon Read are acting as dealer
managers of the Exchange Offer. SBC Warburg Dillon Read Inc. has acted as
Manor Care's financial advisor in connection with the Distribution, for which
Manor Care has agreed to compensate SBC Warburg Dillon Read Inc. $3,000,000 in
advisory fees. Chase and CSI are expected to act as administrative agent and
arranger, respectively, and Swiss Bank Corporation, an affiliate of SBC
Warburg Dillon Read, is expected to act as documentation agent under the
Credit Facilities. In addition, CSI is expected to act as arranger in
connection with the new credit facilities of ManorCare Health Services. CSI
and its affiliates and SBC Warburg Dillon Read Inc. continue to, and may, in
the future, provide financial advisory, investment banking and commercial
banking services for Manor Care Realty and ManorCare Health Services and their
respective affiliates.
In connection with the Offering, CSI, on behalf of the Underwriters, may
engage in overallotment, stabilizing transactions and syndicate covering
transactions in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended. Overallotment involves sales in excess of the offering
size, which creates a short position for the Underwriters. Stabilizing
transactions involve bids to purchase the Notes in the open market for
purposes of pegging, fixing or maintaining the price of the Notes. Syndicate
covering transactions involve purchases of the Notes in the open market after
the distribution has been completed in order to cover short positions. Such
stabilizing transactions and syndicate covering transactions may cause the
price of the Notes to be higher than it would otherwise be in the absence of
such transactions. Such activities, if commenced, may be discontinued at any
time.
113
<PAGE>
Manor Care Real Estate and the Parent Guarantor have agreed to indemnify the
Underwriters, jointly and severally, against certain civil liabilities,
including liabilities under the Securities Act, and to contribute to payments
which the Underwriters might be required to make in respect thereof.
LEGAL MATTERS
Certain legal matters as to the validity of the Notes offered hereby will be
passed upon for Manor Care Realty by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York and James H. Rempe, General Counsel for Manor Care. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York. Cahill Gordon & Reindel has
provided and continues to provide legal services for Manor Care and its
affiliates.
EXPERTS
The consolidated financial statements and schedules of Manor Care, Inc. as
of May 31, 1997 and 1996 and for each of the three years in the period ended
May 31, 1997 have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their reports with respect thereto, and are
included and incorporated by reference herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
114
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants of Manor Care, Inc. ............. F-2
Consolidated Statements of Income of Manor Care, Inc.
for the fiscal years ended May 31, 1997, 1996 and 1995 and the three
months ended August 31, 1997 and 1996 (unaudited) ....................... F-3
Consolidated Balance Sheets of Manor Care, Inc. as of May 31, 1997 and
1996 and August 31, 1997 (unaudited)..................................... F-4
Consolidated Statements of Shareholders' Equity of Manor Care, Inc.
at May 31, 1997, 1996, 1995 and 1994 and at August 31, 1997 (unaudited).. F-5
Consolidated Statements of Cash Flows of Manor Care, Inc.
for the fiscal years ended May 31, 1997, 1996 and 1995 and the three
months ended August 31, 1997 and 1996 (unaudited) ....................... F-6
Notes to the Consolidated Financial Statements of Manor Care, Inc......... F-7
Schedule II-- Valuation and Qualifying Accounts........................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Manor Care, Inc.:
We have audited the accompanying consolidated balance sheets of Manor Care,
Inc. (a Delaware corporation) and subsidiaries as of May 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended May 31, 1997. These
consolidated financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Manor Care, Inc. and
subsidiaries as of May 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule attached as Schedule II--
Valuation and Qualifying Accounts is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Washington, D.C. June 27, 1997 (except for the transaction as discussed in the
footnote entitled "Discontinued Assisted Living, Pharmacy and Home Health
Operations" which is dated September 14, 1997)
F-2
<PAGE>
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
------------------------------ --------------------
1997 1996 1995 1997 1996
---------- -------- -------- --------- ---------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $1,056,095 $985,150 $893,471 $ 274,054 $ 250,226
EXPENSES
Operating expenses.... 789,074 735,671 670,987 208,247 191,539
Depreciation and amor-
tization............. 60,243 56,503 48,284 15,985 14,586
General corporate and
other................ 60,177 63,127 60,240 11,265 14,163
Provisions for asset
impairment and -- 25,100 -- -- --
restructuring........ ---------- -------- -------- --------- ---------
Total expenses.......... 909,494 880,401 779,511 235,497 220,288
---------- -------- -------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE OTHER
INCOME AND (EXPENSES) 146,601 104,749 113,960 38,557 29,938
AND INCOME TAXES....... ---------- -------- -------- --------- ---------
OTHER INCOME AND (EX-
PENSES)
Interest income from
advances to discon-
tinued lodging seg-
ment................. 21,221 19,673 15,492 2,604 5,079
Interest income and
other................ 6,400 3,452 6,372 2,592 1,653
Interest expense...... (24,514) (18,951) (18,872) (6,829) (5,302)
---------- -------- -------- --------- ---------
Total other income and 3,107 4,174 2,992 (1,633) 1,430
(expenses), net...... ---------- -------- -------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS
BEFORE INCOME TAXES.... 149,708 108,923 116,952 36,924 31,368
INCOME TAXES............ 60,783 44,563 46,101 14,100 12,327
---------- -------- -------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS............. 88,925 64,360 70,851 22,824 19,041
DISCONTINUED ASSISTED
LIVING, PHARMACY AND
HOME HEALTH OPERATIONS
Income from discontinued
assisted living,
pharmacy and home
health operations (net
of income taxes of
$23,917, $1,437,
$6,055, $750 and
$1,273)................ 36,188 1,111 6,824 (2,964) 1,225
DISCONTINUED LODGING OP-
ERATIONS
Income from discontinued
lodging operations (net
of income taxes of
$8,734, $14,966,
$13,144, $0 and $2,934,
respectively).......... 11,829 20,436 16,811 -- 3,419
---------- -------- -------- --------- ---------
NET INCOME.............. $ 136,942 $ 85,907 $ 94,486 $ 19,860 $ 23,685
========== ======== ======== ========= =========
WEIGHTED AVERAGE SHARES
OF COMMON STOCK........ 63,257 62,628 62,480 63,708 63,002
========== ======== ======== ========= =========
INCOME PER SHARE OF COM-
MON STOCK
Income from continuing
operations............. $1.40 $1.03 $1.13 $0.36 $0.30
Income from discontinued
assisted living, phar-
macy and home health
operations............. 0.57 0.01 0.11 (0.05) 0.02
Income from discontinued 0.19 0.33 0.27 -- 0.06
lodging operations..... ---------- -------- -------- --------- ---------
Net income per share of
common stock........... $ 2.16 $ 1.37 $ 1.51 $ 0.31 $ 0.38
========== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF AUGUST 31,
---------------------- ----------------
1997 1996 1997
---------- ---------- ----------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............ $ 18,396 $ 38,943 $ 30,063
Receivables (net of allowances for
doubtful accounts of $24,670,
$21,170 and $28,495)................ 126,043 73,558 147,908
Inventories.......................... 11,273 10,523 11,323
Income taxes......................... 32,083 39,237 30,300
Due from discontinued assisted liv-
ing, pharmacy and home health seg-
ments............................... 2,625 2,481 2,625
Other................................ 3,249 1,439 32,456
Advances to discontinued lodging seg-
ment................................ -- -- 115,723
---------- ---------- ----------
Total current assets.............. 193,669 166,181 370,398
---------- ---------- ----------
PROPERTY AND EQUIPMENT, AT COST, NET
OF ACCUMULATED DEPRECIATION.......... 805,793 737,038 830,457
---------- ---------- ----------
GOODWILL, NET OF ACCUMULATED
AMORTIZATION......................... 9,479 5,298 9,427
---------- ---------- ----------
DUE FROM DISCONTINUED ASSISTED LIVING,
PHARMACY AND HOME HEALTH SEGMENTS.... 75,560 49,946 75,560
---------- ---------- ----------
ADVANCES TO DISCONTINUED LODGING
SEGMENT.............................. 115,723 225,723 --
---------- ---------- ----------
NET INVESTMENT IN DISCONTINUED LODGING
SEGMENT.............................. -- 159,537 --
---------- ---------- ----------
NET INVESTMENT IN DISCONTINUED
ASSISTED LIVING, PHARMACY AND HOME
HEALTH SEGMENTS...................... 277,066 193,807 277,235
---------- ---------- ----------
OTHER ASSETS.......................... 70,288 55,663 75,215
---------- ---------- ----------
$1,547,578 $1,593,193 $1,638,292
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt.... $ 11,649 $ 22,171 $ 11,626
Accounts payable..................... 53,462 73,712 57,040
Accrued expenses..................... 94,840 95,766 91,491
Income taxes payable................. -- 7,889 9,428
---------- ---------- ----------
Total current liabilities......... 159,951 199,538 169,585
---------- ---------- ----------
MORTGAGES AND OTHER LONG-TERM DEBT.... 491,190 490,575 551,507
---------- ---------- ----------
DEFERRED INCOME TAXES ($151,138,
$135,975 AND $152,917) AND OTHER..... 206,006 195,311 206,523
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.10 par, 160.0 million
shares authorized, 66.8 million,
65.8 million shares, and 67.0 mil-
lion issued and outstanding......... 6,682 6,581 6,701
Contributed capital.................. 194,640 174,364 198,188
Retained earnings.................... 538,630 571,925 557,101
Cumulative translation adjustment.... -- (1,362) --
Treasury stock, 3.2 million, 3.0 mil-
lion and 3.2 million shares, at
cost................................ (49,521) (43,739) (51,313)
---------- ---------- ----------
Total shareholders' equity........ 690,431 707,769 710,677
---------- ---------- ----------
$1,547,578 $1,593,193 $1,638,292
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CONTRIBUTED RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
---------- ------ ----------- -------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT COMMON SHARES)
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994...... 65,436,734 $6,545 $167,316 $402,520 $ (31)
Net income................ -- -- -- 94,486 --
Exercise of stock options. 77,000 8 833 -- --
Cash dividends............ -- -- -- (5,489) --
Other..................... -- -- 550 3 740
---------- ------ -------- -------- ------
Balance, May 31, 1995...... 65,513,734 6,553 168,699 491,520 709
Net income................ -- -- -- 85,907 --
Exercise of stock options. 269,156 28 3,279 -- --
Cash dividends............ -- -- -- (5,502) --
Other..................... -- -- 2,386 -- (2,071)
---------- ------ -------- -------- ------
Balance, May 31, 1996...... 65,782,890 6,581 174,364 571,925 (1,362)
Net income................ -- -- -- 136,942 --
Exercise of stock options. 1,011,951 101 12,153 -- --
Cash dividends............ -- -- -- (6,108) --
Dividend of discontinued
lodging segment.......... -- -- -- (164,225) 1,362
Tax benefit of stock op-
tion transactions........ -- -- 6,818 -- --
Other..................... -- -- 1,305 96 --
---------- ------ -------- -------- ------
Balance, May 31, 1997...... 66,794,841 6,682 194,640 538,630 --
Net income................ -- -- -- 19,860 --
Exercise of stock options. 186,764 19 3,672 -- --
Cash dividends............ -- -- -- (1,399) --
Other..................... -- -- (124) 10 --
---------- ------ -------- -------- ------
Balance, August 31, 1997
(unaudited)............... 66,981,605 $6,701 $198,188 $557,101 $ --
========== ====== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
MANOR CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MAY 31 AUGUST 31
---------------------------- ----------------------
1997 1996 1995 1997 1996
-------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............... $136,942 $ 85,907 $ 94,486 $19,860 $ 23,685
Reconciliation of net
income to net cash pro-
vided by operating ac-
tivities:
Income from discontin-
ued assisted living,
pharmacy and home
health operations..... (36,188) (1,111) (6,824) 2,964 (1,225)
Income from discontin-
ued lodging opera-
tions................. (11,829) (20,436) (16,811) -- (3,419)
Depreciation and amor-
tization.............. 60,243 56,503 48,284 15,985 14,586
Provisions for asset
impairment and re-
structuring........... -- 25,100 -- -- --
Amortization of debt
discount.............. 513 455 499 71 103
Provisions for bad
debt.................. 15,442 13,776 10,723 5,891 3,490
Increase (decrease) in
deferred taxes........ 23,538 (5,970) 858 4,355 (2,686)
Gain on sale of
healthcare facilities. (7,322) -- -- -- --
Minority interest...... 120 137 82 11 26
Changes in assets and liabilities (excluding sold facilities & acquisitions):
Change in receivables.... (69,662) (27,017) (18,283) (27,756) (8,495)
Change in inventories
and other current as-
sets.................... (2,371) 2,749 (8,118) (29,257) (30,050)
Change in current lia-
bilities................ (21,506) 43,805 13,490 229 (7,931)
Change in income taxes
payable................. (5,444) 11,202 (12,598) 9,428 17,667
Change in other liabili-
ties.................... (6,726) 6,164 (1,729) (2,067) (9,681)
-------- -------- -------- ------- --------
NET CASH PROVIDED BY CON-
TINUING OPERATIONS....... 75,750 191,264 104,059 (286) (3,930)
NET CASH PROVIDED
(UTILIZED) BY
DISCONTINUED ASSISTED
LIVING, PHARMACY AND HOME
HEALTH OPERATIONS........ 13,505 (15,305) 17,111 (20,160) 11,420
NET CASH PROVIDED BY
DISCONTINUED LODGING 40,599 52,682 48,604 -- 13,929
OPERATIONS............... -------- -------- -------- ------- --------
NET CASH PROVIDED BY OPER- 129,854 228,641 169,774 (20,446) 21,419
ATING ACTIVITIES......... -------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in property
and equipment........... (128,238) (90,164) (58,721) (45,463) (28,920)
Investment in systems
development............. (15,257) (14,167) (8,159) -- --
Acquisition of
healthcare facilities... (17,793) (32,369) (26,560) -- --
Sale of healthcare busi-
ness.................... -- -- 13,334 -- --
Sale of healthcare fa-
cilities................ 17,283 -- -- -- --
Receipts from (advances
to) discontinued lodg-
ing segment............. 113,267 (27,201) (51,461) -- --
Advances to discontinued
assisted living seg-
ment.................... (75,267) (102,803) (42,072) (3,133) (9,146)
Other items, net......... 7,105 (8,614) (963) (173) (7,285)
-------- -------- -------- ------- --------
NET CASH UTILIZED BY
INVESTING ACTIVITIES OF
CONTINUING OPERATIONS.... (98,900) (275,318) (174,602) (48,769) (45,351)
NET CASH (UTILIZED)
PROVIDED BY INVESTING
ACTIVITIES OF
DISCONTINUED
ASSISTED LIVING, PHARMACY
AND HOME HEALTH
OPERATIONS............... (136,093) 18,454 (18,883) 6,938 (10,937)
NET CASH UTILIZED BY
INVESTING ACTIVITIES OF
DISCONTINUED LODGING (29,424) (169,641) (92,422) -- (16,577)
OPERATIONS............... -------- -------- -------- ------- --------
NET CASH UTILIZED BY IN- (264,417) (426,505) (285,907) (41,831) (72,865)
VESTING ACTIVITIES....... -------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term
debt.................... 179,400 149,000 207,254 60,800 149,400
Principal payments of
long-term debt.......... (179,090) (22,135) (122,496) (578) (116,275)
Proceeds from exercise
of stock options........ 12,254 3,307 841 3,691 9,964
Treasury stock acquired.. (5,782) (1,131) (73) (1,792) --
Retirement of deben-
tures................... (9,900) -- -- -- (9,900)
Dividends paid........... (6,108) (5,502) (5,489) (1,399) (1,381)
-------- -------- -------- ------- --------
NET CASH (UTILIZED)
PROVIDED BY FINANCING
ACTIVITIES OF CONTINUING
OPERATIONS............... (9,226) 123,539 80,037 60,722 31,808
NET CASH PROVIDED (UTI-
LIZED) BY FINANCING AC-
TIVITIES OF
DISCONTINUED ASSISTED
LIVING, PHARMACY AND HOME
HEALTH OPERATIONS........ 122,588 (3,149) 1,772 13,222 (483)
NET CASH PROVIDED BY
FINANCING ACTIVITIES OF
DISCONTINUED 654 43,687 50,008 -- 260
LODGING OPERATIONS....... -------- -------- -------- ------- --------
NET CASH PROVIDED BY FI- 114,016 164,077 131,817 73,944 31,585
NANCING ACTIVITIES....... -------- -------- -------- ------- --------
NET CHANGE IN CASH AND (20,547) (33,787) 15,684 11,667 (19,861)
CASH EQUIVALENTS......... -------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS 38,943 72,730 57,046 18,396 38,943
AT BEGINNING OF YEAR..... -------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR........... $ 18,396 $ 38,943 $ 72,730 $30,063 $19,082
======== ======== ======== ======= ========
NONCASH ACTIVITIES:
Liabilities assumed in
connection with acqui-
sition of property...... $ -- $ 13,000 $ -- $ -- $ --
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Manor Care,
Inc. and its subsidiaries (the "Company"). As a result of the Company's
announcement of its intent to spin-off its assisted living, pharmacy and home
health businesses, the financial statements reflect these segments as a
discontinued operation. As a result of the Company's spin-off of its lodging
operations, the accompanying financial statements reflect the lodging segment
as a discontinued operation. All significant intercompany transactions have
been eliminated, except for advances to the discontinued segments and the
related interest income and interest expense.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet as of August 31, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the
three months ended August 31, 1997 and 1996, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
August 31, 1997 and for all periods presented have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The results of operations and cash flows for the three
month periods ended August 31, 1997 and 1996 are not necessarily indicative of
the operating results or cash flows for the full year.
CASH
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, were as follows.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS OF
DOLLARS)
--------------------
<S> <C> <C>
Land................................................ $ 76,130 $ 74,969
Building and improvements........................... 815,851 759,273
Capitalized leases.................................. 12,747 12,747
Furniture, fixtures and equipment................... 175,896 161,067
Facilities in progress.............................. 48,154 39,282
--------- ---------
1,128,778 1,047,338
Less: accumulated depreciation and amortization..... (322,985) (310,300)
--------- ---------
$ 805,793 $ 737,038
========= =========
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows.
<TABLE>
<CAPTION>
<S> <C>
Building and improvements..................................... 10-40 years
Furniture, fixtures and equipment............................. 3-20 years
</TABLE>
F-7
<PAGE>
Accumulated depreciation includes $6.4 million and $6.0 million at May 31,
1997 and 1996, respectively, relating to capitalized leases. Capitalized
leases are amortized on a straight-line basis over the lesser of the lease
term or the remaining useful life of the leased property.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs, and minor
replacements are charged to expense.
Construction overhead and costs incurred to ready a project for its intended
use are capitalized for major development projects and are amortized over the
lives of the related assets.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1997, $3.3 million; 1996,
$2.6 million; 1995, $1.2 million.
ACCOUNTING FOR SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the estimated useful
lives of the related systems not to exceed five years.
ACCOUNTING FOR INVESTMENTS IN JOINT VENTURES
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliates as they occur. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee. These investments will be transferred in connection with the
Distribution.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
certain acquisitions over the recorded fair value of the net assets. Goodwill
is amortized over 40 years. Amortization expense amounted to $0.2 million,
$0.1 million and $0.1 million in each of the years ended May 31, 1997, 1996
and 1995, respectively.
SELF-INSURANCE PROGRAMS
The Company self-insures for certain levels of general and professional
liability, automobile liability, and workers' compensation coverage. The
estimated costs of these programs are accrued at present values at a discount
rate of 7% based on actuarial projections for known and incurred but not
reported claims.
PRO FORMA INFORMATION (UNAUDITED)
After giving effect to the Distribution and related transactions (see
"Discontinued Assisted Living, Pharmacy and Home Health Operations"), pro
forma revenues, net income and net equity for the three months ended August
31, 1997 would have been $41.4 million, $4.8 million, and $14.2 million,
respectively.
Pro forma income per share for three months ended August 31, 1997, after
giving effect to the transaction described in the pro forma consolidated
financial statements, would have been $.08. Pro forma income per common share
is computed by dividing pro forma net income by the weighted average number of
outstanding common shares, aggregating 63.7 million shares as of August 31,
1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company has disclosed herein pro
forma net income and pro forma earnings per share in the footnotes using the
fair value based method beginning in fiscal year 1997 with comparable
disclosures for fiscal year 1996.
F-8
<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.
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Payroll......................................... $ 50,323 $ 47,108
Taxes other than income......................... 12,892 11,568
Insurance....................................... 9,832 14,079
Interest........................................ 6,928 1,246
Other........................................... 14,865 21,765
------------ ------------
$ 94,840 $95,766
============ ============
</TABLE>
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1997 were as follows.
<TABLE>
<CAPTION>
FISCAL (IN THOUSANDS
YEAR OF DOLLARS)
------ -------------
<S> <C>
1998........................................................ $ 11,649
1999........................................................ 6,042
2000........................................................ 6,523
2001........................................................ 5,965
2002........................................................ 6,024
2003 to 2024................................................ 466,636
--------
$502,839
========
</TABLE>
F-9
<PAGE>
Long-term debt, consisting of mortgages, capital leases, Senior Notes, and
Senior Subordinated Notes, was net of discount of $1.2 million and $1.0
million at May 31, 1997 and 1996, respectively. Amortization of discount was
$0.5 million in 1997, 1996, and 1995, including write-offs associated with
debt redemptions. At May 31, 1997, the Company had mortgages and capital
leases of $80.2 million, of which $45.6 million is related to mortgages on
assisted living facilities. Mortgages on assisted living facilities are held
by the Company and will be transferred to ManorCare Health Services on the
Distribution Date.
Interest paid was $34.1 million in 1997, $29.8 million in 1996 and $22.4
million in 1995. During fiscal year 1997, interest rates on subordinated debt
ranged from 4.8% to 9.5%. Interest rates on mortgages and other long-term debt
ranged from 2.6% to 12.0%. The weighted average interest rate in fiscal year
1997 was 7.5%.
In June 1996, the Company issued $150.0 million of 7 1/2% Senior Notes due
2006. These notes are redeemable at the option of the Company at any time at a
price equal to the greater of (a) the principal amount or (b) the sum of the
present values of the remaining scheduled payments of principal and interest,
discounted with an applicable treasury rate plus 15 basis points, plus accrued
interest to the date of redemption. The proceeds of this offering were used to
repay borrowings under the Company's $250.0 million competitive advance and
multi-currency revolving credit facility (the "Facility").
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased
$9.9 million of the 9 1/2% Senior Subordinated Notes for $10.5 million.
In September 1996, the Company amended the Facility provided by a group of
sixteen banks. The Facility provides that up to $75.0 million is available for
borrowings in foreign currencies. Borrowings under the Facility are, at the
option of the Company, at one of several rates including LIBOR plus 20 basis
points. In addition, the Company has the option to request that participating
banks bid on loan participation at lower rates than those contractually
provided by the Facility. The Facility presently requires the Company to pay
fees of 1/10 of 1% on the entire loan commitment. The Facility will terminate
on September 6, 2001. At May 31, 1997, outstanding revolver borrowings
amounted to $85.0 million.
Various debt agreements impose, among other restrictions, restrictions
regarding financial ratios and payment of dividends. Pursuant to such
restrictions, owned property with a net book value of $91.6 million was
pledged or mortgaged and approximately $167.4 million of retained earnings was
not available for cash dividends.
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. The terms of the Vitalink Credit
Facility contain, among other provisions, requirements for maintaining defined
levels of net worth, annual capital expenditures, and interest coverage and
consolidated leverage ratios. Vitalink was in compliance with the terms of the
Vitalink Credit Facility for the fiscal year ended May 31, 1997. In
conjunction with Vitalink's merger with TeamCare, Vitalink assumed $1.8
million of GranCare's 9 3/8% Senior Subordinated Notes due September 15, 2005.
The notes require semi-annual interest payments. A $0.6 million premium has
been recorded on the Senior Subordinated Notes to reflect the fair market
value as of the merger date of February 12, 1997. The debt related to the
Vitalink Credit Facility is classified as long-term debt on the balance sheet
of ManorCare Health Services.
F-10
<PAGE>
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2035. Future minimum
lease payments are as follows.
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
1998.......................................... $ 5,123 $ 701
1999.......................................... 4,870 702
2000.......................................... 4,677 615
2001.......................................... 4,360 292
2002.......................................... 4,179 292
Thereafter.................................... 36,364 1,904
------------- ------------
Total minimum lease payments.................. $ 59,573 4,506
============= ============
Less: amount representing interest............ 1,435
------------
Present value of lease payments............... 3,071
------------
Less: current portion......................... 414
------------
Lease obligations included in long-term debt.. $ 2,657
============
</TABLE>
Rental expense under noncancelable operating leases was $3.9 million in
1997, $4.5 million in 1996 and $3.6 million in 1995.
INTEREST RATE HEDGING
The Company 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 converted the Company's interest rate exposure on a
floating rate operating lease to a fixed interest rate of 5.60% and mature
simultaneously with the relevant operating lease in 2002. The weighted average
interest rate under the lease was 6.21% for the year ended May 31, 1997. While
the Company is exposed to credit loss in the event of nonperformance by other
parties to outstanding interest rate swap agreements, the Company does not
anticipate any such credit losses.
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2%
Senior Notes, the Company also entered into a series of interest rate swap and
treasury lock agreements having a total notional principal amount of $150.0
million. Agreements with a total notional principal amount of $100.0 million
were terminated concurrent with the pricing of the notes offering on May 30,
1996 with a $2.7 million cash gain. The remaining agreement, with a total
notional principal amount of $50.0 million, was terminated on October 23, 1996
with a $1.4 million cash gain. The gains on the termination of the agreements
have been deferred and are being amortized against interest expense over the
life of the 7 1/2% Senior Notes, effectively reducing the interest rate on the
Notes to 7.1%.
F-11
<PAGE>
INCOME TAXES
The Company files a consolidated return which includes the assisted living
operations. The income tax provision of the Company is calculated based on a
separate company basis.
Income tax provisions were as follows for the year ended May 31.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Current tax expense
Federal........................................ $31,171 $41,663 $37,129
State.......................................... 6,074 8,870 8,114
Deferred tax expense
Federal........................................ 19,112 (4,811) 703
State.......................................... 4,426 (1,159) 155
------- ------- -------
<CAPTION>
$60,783 $44,563 $46,101
======= ======= =======
<S> <C> <C> <C>
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at May 31.
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Depreciation and amortization.......... $ (92,620) $(78,946) $ (77,802)
Purchased tax benefits................. (44,110) (45,527) (46,212)
Other.................................. (21,490) (18,678) (17,881)
--------- -------- ---------
Gross deferred tax liabilities......... (158,220) (143,151) (141,895)
--------- -------- ---------
Tax deposit............................ 5,754 5,754 12,000
Reimbursement reserve.................. 4,389 16,882 4,996
Reserve for doubtful accounts.......... 12,320 9,175 7,561
Deferred compensation.................. 12,919 9,526 9,409
Other.................................. 3,636 5,076 7,552
--------- -------- ---------
Gross deferred tax assets.............. 39,018 46,413 41,518
--------- -------- ---------
Net deferred tax....................... $(119,202) $(96,738) $(100,377)
========= ======== =========
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows.
<CAPTION>
1997 1996 1995
--------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Federal income tax rate................ 35% 35% 35%
========= ======== =========
Federal taxes at statutory rate........ $ 52,398 $ 38,123 $ 40,933
State income taxes, net of Federal tax
benefit............................... 6,825 5,012 5,375
Minority interest...................... 931 (44) 805
Tax credits............................ (143) (19) (895)
Other.................................. 772 1,491 (117)
--------- -------- ---------
Income tax expense..................... $ 60,783 $ 44,563 $ 46,101
========= ======== =========
</TABLE>
Income taxes paid on a consolidated basis for the years ended May 31, 1997,
1996, 1995 were $47.5 million, $53.1 million, and $68.7 million, respectively.
F-12
<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>
1997 1996
------------- ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income:
As reported.............................. $ 136,942 $ 85,907
Pro forma................................ $ 128,141 $ 81,697
------------- ------------
Earnings per share:
As reported.............................. $ 2.16 $ 1.37
Pro forma................................ $ 2.03 $ 1.30
============= ============
</TABLE>
F-13
<PAGE>
The effects of applying SFAS 123 in this pro forma disclosure may not be
representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to fiscal year 1996 and additional
awards are anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed a risk-free interest rate equal to
approximately 6.36% and 6.37% for fiscal years 1997 and 1996, respectively,
expected volatility of 12.8%, dividend yields based on historical dividends of
$.088 per share annually and expected option lives of eight years. The average
fair values of the options granted during 1997 and 1996, as measured on the
dates of the grants, are estimated to be $15.12 and $11.96, respectively.
ACQUISITIONS AND DIVESTITURES
On February 12, 1997, Vitalink Pharmacy Services, Inc. ("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 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 In Home Health, Inc. ("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.
During fiscal year 1995, the Company purchased three nursing centers for
approximately $26.6 million. In March 1995, the Company sold its investment in
a physicians' practice management business for $13.3 million. The physicians'
practice management investment was made in fiscal year 1994 in the amount of
$10.0 million.
Unless otherwise noted, acquisitions are accounted for as purchases.
Acquisition costs in excess of fair market value of the assets acquired are
allocated to goodwill.
PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net
realizable value, an impairment loss is recorded in the period the impairment
is determined.
F-14
<PAGE>
The Company recorded provisions of $25.1 million in fiscal year 1996 related
to the impairment of certain long-lived assets and costs associated with the
Company's restructuring. The most significant components of the provisions
were non-cash impairment charges of $20.0 million relating to writedowns of
property, equipment and capitalized systems development costs and $5.1 million
related to the spinoff of the lodging segment in fiscal year 1996.
In fiscal year 1996, the Company determined that it incurred costs in excess
of the original amount expected to complete a systems development project for
billing and receivables which began in fiscal year 1995. Intensive testing
during a six month pilot identified over 100 major system problems. At this
time, it was determined that the newly developed system was not functional and
that a major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs. The carrying amount was
determined to be in excess of the fair value and accordingly, the related
assets were written down by $13 million to the net realizable value.
DISCONTINUED ASSISTED LIVING, PHARMACY AND HOME HEALTH OPERATIONS
On September 15, 1997, the Company announced its intention to proceed with a
separation of its assisted living, pharmacy and home health businesses
(collectively, the "Business") from its skilled nursing, real estate and
healthcare facility development business via a spin-off of the Business (the
"Distribution"). The spin-off of the Business will be effected by a
distribution to the Company's shareholders of all the common stock of
ManorCare Health Services, Inc. ("ManorCare Health Services"), a wholly owned
subsidiary of the Company, which as of the date of the spin-off, will own and
operate all the Company's assisted living, pharmacy and home health operations
as well as manage the skilled nursing assets owned by the Company. The Board
of Directors voted in September 1997 to approve in principle the transaction
subject to receipt of other approvals and consents and satisfactory
implementation of the arrangements for the Distribution. The Company
anticipates that the transaction will be completed by the end of the 1997
calendar year. The Distribution is conditional upon certain matters, including
declaration of the special dividend by the Company's Board of Directors.
The revenues, income from operations before income taxes and net income from
discontinued assisted living, pharmacy and home health operations for the
years ended May 31, 1997, 1996, and 1995 were as follows.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues............................................ $471,152 $263,047 $125,987
Income from discontinued assisted living, pharmacy
and home health operations before taxes............ $ 60,105 $ 2,548 $ 12,879
Net income from discontinued assisted living,
pharmacy and home health operations................ $ 36,188 $ 1,111 $ 6,824
</TABLE>
Included in discontinued assisted living, pharmacy and home health
operations is interest expense charged by the Company relating to cash
advances provided to the assisted living segment for the acquisition and
construction of assisted living assets. For the years ended May 31, 1997,
1996, and 1995, interest so allocated amounted to $11.2 million, $8.4 million
and $3.8 million, respectively. The cash advances related to assisted living
acquisitions and construction are included in net investment in discontinued
assisted living, pharmacy and home health segments. Such advances amounted to
$277.1 million and $193.8 million at May 31, 1997 and 1996, respectively. The
advances will be forgiven at the date of the proposed spin-off.
General corporate expenses of $8.4 million, $9.2 million and $3.0 million,
respectively, were charged to discontinued assisted living, pharmacy and home
health operations for the years ended May 31, 1997, 1996, and 1995. Allocation
of general corporate charges was principally determined based on time
allocations.
F-15
<PAGE>
For purposes of providing an orderly transition after the Distribution,
ManorCare Health Services and the Company will enter into various agreements,
including, among others, Lease Agreements, Development Agreement, Assisted
Living Facility Management Agreement, Tax Sharing Agreement, Tax
Administration Agreement, Corporate Services Agreement, Employee Benefits and
Other Employment Matters Allocation Agreement, and Employee Benefits
Administration Agreement. Effective at the Distribution Date, these agreements
will provide, among other things, that ManorCare Health Services (i) will
perform certain corporate and support services, such as accounting, risk
management and computer system support, (ii) will establish or participate in
pension, profit sharing and incentive plans similar to those in place at Manor
Care, (iii) will receive certain miscellaneous administrative services and
(iv) will lease skilled nursing facilities and corporate offices from the
Company. At the date of the Distribution the Company will change its name to
Manor Care Realty. The operating subsidiaries of the Company will own but not
operate the skilled nursing facilities after the Distribution. The operations
of the skilled nursing facilities will continue to have a material impact on
Manor Care Realty after the Distribution because of the Lease Agreement.
Following the Distribution, Manor Care Realty's principal sources of revenues
will be payments pursuant to the leasing of the skilled nursing facilities to
ManorCare Health Services, the operations of the developed assisted living
facilities prior to sale, the proceeds of the sale of assisted living
facilities, and revenues of Mesquite Hospital.
DISCONTINUED LODGING OPERATIONS
On November 1, 1996, the Company completed the spin-off of its lodging
segment. The Company's shareholders of record on October 10, 1996 received one
share of Choice Hotels International, Inc. common stock for each outstanding
share of Manor Care common stock. Accordingly, lodging results are reported as
discontinued operations for all periods presented.
The revenues, income from discontinued lodging operations before income
taxes, and net income from discontinued lodging operations for the years ended
May 31, 1997, 1996, and 1995 were as follows.
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues............................................. $89,849 $374,873 $302,535
Income from discontinued operations before income
taxes............................................... $20,563 $ 35,402 $ 29,955
Net income from discontinued operations.............. $11,829 $ 20,436 $ 16,811
</TABLE>
Net income from discontinued operations for the year ended May 31, 1996
includes the results of operations of the lodging segment through March 7,
1996, the measurement date. During the period from the measurement date
through May 31, 1996, the lodging segment incurred a net loss of $12.0
million. The net loss was primarily the result of provisions for asset
impairment and costs and expenses directly associated with the spin-off
totaling $33.3 million. The non-cash provision for asset impairment in the
discontinued lodging segment reflects primarily the writedown of European
hotel assets based on expected future cash flows. This non-cash provision was
recorded in accordance with SFAS 121. No loss on the disposal of the
discontinued lodging operations was recognized as the discontinued lodging
segment generated income between the measurement date and the date of the
spin-off.
Included in discontinued lodging operations is interest expense charged by
the continuing operations to the discontinued lodging segment relating to cash
advances provided to the discontinued lodging segment for the acquisition and
renovation of lodging assets. For the years ended May 31, 1997, 1996, and
1995, interest so allocated amounted to $3.4 million, $19.7 million, and $15.5
million, respectively. The indebtedness related to lodging acquisitions and
renovations is reflected as advances to discontinued lodging segment in the
consolidated balance sheets. Such advances amounted to $115.7 million and
$225.7 million at May 31, 1997 and 1996, respectively. The indebtedness is to
be repaid over a three year period from the date of the spin-off. Interest is
charged at an annual rate of 9% on the indebtedness. The Company received a
prepayment of $110.0 million on the advances to the discontinued lodging
segment in 1997. This payment was subject to a prepayment penalty of $1.9
million, which is included in interest income from advances to the
discontinued lodging segment.
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.
F-16
<PAGE>
For purposes of providing an orderly transition after the spin-off, the
Company has entered into various agreements with the discontinued lodging
segment, including, among others, a Tax Sharing Agreement, Corporate Services
Agreement, Employee Benefits Allocation Agreement and Support Services
Agreement. These agreements provide, among other things, that the Company (i)
will provide certain corporate and support services, such as accounting, tax,
and computer systems support and (ii) will provide certain risk management
services and other miscellaneous administrative services. These agreements will
extend for a period of 30 months from the spin-off date or until such time as
the discontinued lodging segment has arranged to provide such services in-house
or through another unrelated provider of such services.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company,
the ultimate outcome of such litigation will not have a material adverse effect
on the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. For fiscal
years 1997, 1996, and 1995 these revenues amounted to $464.1 million, $440.6
million, and $391.1 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant.
In fiscal year 1997, the Health Care Financing Administration issued a
modification to regulations governing the treatment of interest expense and
investment income offsets for Medicare reimbursement purposes. As a result of
this modification the Company recognized revenues of approximately $20 million
in fiscal year 1997, which had been reserved in prior years.
As of May 31, 1997, the Company had contractual commitments of $58.2 million
relating to its internal construction program.
Vitalink has 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.
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
Liability Act, as amended, 42 U.S.C. (S)(S)9601 et seq. ("CERCLA") and similar
state laws. CERCLA imposes retroactive, strict joint and several liability on
PRPs for the costs of hazardous waste clean-up. The Actions arise out of the
alleged activities of Cenco, Incorporated and its subsidiary and affiliated
companies ("Cenco"). Cenco was acquired in 1981 by a wholly owned subsidiary of
Manor Care. The Actions allege that Cenco transported and/or generated
hazardous substances that came to be located at the sites in question. The
Company believes that the waste disposal activities at issue occurred prior to
the Manor Care subsidiary's acquisition of Cenco. Environmental proceedings
such as Actions may involve owners and/or operators of the hazardous waste
site, multiple waste generators and multiple waste transportation disposal
companies. Such proceedings typically involve efforts by governmental entities
and/or private parties to allocate or recover site investigation and clean-up
costs, which costs may be substantial. The potential liability exposure for
currently pending environmental claims and litigation, without regard to
insurance coverage, cannot be quantified with precision because of the inherent
uncertainties of litigation in the Actions and the fact that the ultimate cost
of the remedial actions for some of the waste disposal sites where Manor Care
is alleged to be a potentially responsible party has not yet been quantified.
Manor Care believes that the potential environmental liability exposure, after
consideration of insurance coverage, is approximately $3 million. Future
liabilities for the pending environmental claims and litigation, without regard
to insurance, currently are not expected to exceed approximately $46 million.
F-17
<PAGE>
The Company has recorded reserves to cover estimated contingent future
environmental liabilities with respect to such actions. The recorded
liabilities for estimated future environmental claims and litigation at May 31,
1997 and 1996 were $3 million. The liability has been accrued for future costs
for all Actions where the Company's obligation is probable and where such costs
can be reasonably estimated. The liability includes future costs
for remediation and restoration of sites as well as any significant monitoring
costs, and is net of anticipated insurance recoveries, as the Company believes
that it will ultimately be successful in the pending litigation with its
insurers. The liability represents only the Company's estimated share of any
possible costs incurred in the cleanup of the waste disposal sites since
potentially responsible parties other than the Company are parties to the
Actions.
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%.
The Company also has various incentive compensation plans for certain
personnel. Incentive compensation expense was $3.1 million in 1997, $3.0
million in 1996, and $3.1 million in 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term debt instruments were determined by discounting
future cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the balance sheet.
The balance sheet carrying amounts of cash, cash equivalents, and receivables
approximate fair value due to the short-term nature of these items. Management
believes that the fair value of the advances to the discontinued segments
approximates the carrying value.
Total fair market value for the outstanding interest rate swap agreements at
May 31, 1997 and 1996 was $1.4 million and $1.8 million, respectively. Fair
values were determined based on quoted rates.
F-18
<PAGE>
SUMMARY FINANCIAL INFORMATION OF MANOR CARE REAL ESTATE CORP.
The information below presents the condensed consolidated information for
Manor Care Real Estate Corp. and the other co-registrants. All of the co-
registrants are direct or indirect wholly owned subsidiaries of Manor Care
Real Estate Corp.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
----------------------------------
1995 1996 1997
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of Income Data:
Revenues................................... $ 892,133 $ 980,561 $ 1,053,021
Expenses:
Operating................................. 669,015 730,801 786,897
Depreciation and amortization............. 42,227 48,155 50,222
General corporate and other............... 59,864 91,151 96,184
Provisions for asset impairment and
restructuring............................ -- 21,806 --
--------- ---------- -----------
Total expenses........................... 771,106 891,913 933,303
Income from operations..................... 121,027 88,648 119,718
Interest income and other................. 474 3,122 4,220
Interest expense.......................... (32,403) (39,615) (60,475)
Other income (expenses), net ............. (82) (137) (120)
--------- ---------- -----------
Income before income taxes................. 89,016 52,018 63,343
Income taxes............................... 34,995 21,563 28,183
Income from discontinued assisted living,
pharmacy and home health operations....... 6,824 1,111 36,188
--------- ---------- -----------
Net income................................. $ 60,845 $ 31,566 $ 71,348
========= ========== ===========
Balance Sheet Data:
Current assets............................. $ 92,568 $ 122,428 $ 170,552
Long-term assets........................... 753,646 982,240 1,174,552
Total assets............................... 846,214 1,104,668 1,345,104
Current liabilities........................ 92,778 133,222 120,758
Long-term debt............................. 484,348 720,760 942,058
Other long-term liabilities................ 138,068 138,100 147,814
Total equity............................... 131,020 112,586 134,474
</TABLE>
F-19
<PAGE>
SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME FROM CONTINUING
OPERATIONS BEFORE OTHER
INCOME AND (EXPENSES)
AND NET PER
QUARTERS ENDED REVENUES INCOME TAXES INCOME SHARE
-------------- ---------- ----------------------- -------- -----
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1997
August................. $ 250,226 $ 29,939 $ 23,685 $ .38
November............... 259,336 37,572 32,444 .51
February............... 269,188 39,326 61,392 .97
May.................... 277,345 39,764 19,421 .30
---------- -------- -------- -----
$1,056,095 $146,601 $136,942 $2.16
========== ======== ======== =====
FISCAL 1996
August................. $ 236,911 $ 26,985 $ 28,426 $.45
November............... 243,451 32,717 28,788 .46
February............... 250,954 32,572 22,302 .36
May.................... 253,834 12,475 6,391 .10
---------- -------- -------- -----
$ 985,150 $104,749 $ 85,907 $1.37
========== ======== ======== =====
</TABLE>
QUARTERLY MARKET PRICE RANGE OF
COMMON STOCK AND DIVIDENDS PAID
(UNAUDITED)
<TABLE>
<CAPTION>
CASH DIVIDENDS
PAID
MARKET PRICE PER SHARE PER SHARE
QUARTERS ENDED HIGH LOW AMOUNT DATE
-------------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C>
FISCAL 1997
August....................... $ 39.63* $ 31.50* $0.022 8/27/96
November..................... $ 42.25* $ 23.75 $0.022 11/27/96
February..................... $ 28.00 $ 24.13 $0.022 2/27/97
May.......................... $ 28.38 $ 21.88 $0.022 5/27/97
FISCAL 1996
August....................... $ 34.25* $ 27.78* $0.022 8/25/95
November..................... $ 35.58* $ 30.50* $0.022 11/27/95
February..................... $ 40.25* $ 32.75* $0.022 2/27/96
May.......................... $ 43.50* $ 36.50* $0.022 5/24/96
</TABLE>
- --------
*Market prices prior to November 1, 1996, are reflective of the stock value
prior to the spin-off of the discontinued lodging business.
F-20
<PAGE>
SCHEDULE II
MANOR CARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING PROFIT WRITE- AT END
DESCRIPTION OF PERIOD AND LOSS OFFS OF PERIOD
----------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Year ended May 31, 1997
Allowance for doubtful
accounts..................... $21,170 $15,442 ($11,942) $24,670
Year ended May 31, 1996
Allowance for doubtful
accounts..................... $17,418 $13,776 ($10,024) $21,170
Year ended May 31, 1995
Allowance for doubtful
accounts..................... $14,300 $10,723 ($ 7,605) $17,418
</TABLE>
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDIC-
TION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDIC-
TION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Documents by Reference................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 30
Pro Forma Capitalization.................................................. 32
Selected Historical Financial Data of Manor Care.......................... 33
Manor Care Realty Pro Forma Financial Data................................ 35
Management's Review of Operating Results..................................
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 41
Business of Manor Care Realty After the Distribution...................... 46
Description of the Transactions........................................... 62
Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution......................................................... 66
Management of Manor Care Realty After the Distribution.................... 79
Description of the Notes.................................................. 81
Description of Certain Indebtedness....................................... 110
Certain Relationships..................................................... 112
Underwriting.............................................................. 113
Legal Matters............................................................. 114
Experts................................................................... 114
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$350,000,000
MANOR CARE REAL ESTATE CORP.
FULLY AND UNCONDITIONALLY GUARANTEED BY
MANOR CARE REALTY, INC.
AND EACH OF THE OTHER GUARANTORS NAMED HEREIN
% SENIOR NOTES DUE 2008
---------------
PROSPECTUS
---------------
CHASE SECURITIES INC.
SBC WARBURG DILLON READ INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the SEC registration fee. The Company will bear all of such expenses.
<TABLE>
<S> <C>
SEC registration fee............................................ $106,061
NASD fee........................................................ 30,500
Rating Agency Fees.............................................. *
Blue sky fees and expenses...................................... *
Printing and engraving expenses................................. *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Trustee fees.................................................... *
Miscellaneous................................................... *
--------
Total......................................................... $ *
========
</TABLE>
- --------
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("Delaware Law")
provides generally and in pertinent part that a Delaware corporation may
indemnify its directors and officers against expenses, judgments, fines, and
settlements actually and reasonably incurred by them in connection with any
civil suit or action, expectations by or in the right of the corporation, or
any administrative or investigative proceeding if, in connection with the
matters in issue, they acted in good faith, in a manner they reasonably
believed to be in, or not opposed to, the best interest of the corporation,
and without negligence or misconduct in the performance of their duties to the
corporation. Section 145 further permits a Delaware corporation to grant its
directors and officers additional rights of indemnification through bylaw
provisions and otherwise.
Section 102(b)(7) of the Delaware law provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its violation
of law, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation at law, (iii) under Section 174
of the Delaware Law (relating to liability for unauthorized acquisitions or
redemptions of, or dividends on, capital stock) or (iv) for any transaction
from which the director derived an improper personal benefit. Article Eleventh
of the Registrant's Amended Certificate of Incorporation contains such a
provision.
Article VII of the Amended Bylaws of the Registrant provide that the
Registrant shall indemnify its directors and officers to the fullest extent
permitted by Delaware Law. The Registrant has entered into indemnification
agreements with each of its directors and executive officers. Such
indemnification agreements are intended to provide a contractual right to
indemnification, to the maximum extent permitted by law, for expenses
(including attorneys' fees), judgments, penalties, fines and amounts paid in
settlement actually and reasonable incurred by the person to be indemnified in
connection with any proceeding (including, to the extent permitted by
applicable law, any derivative action) to which they are, or are threatened to
be made, a party by reason of their status in such positions. Such
indemnification agreements do not change the basic legal standards for
indemnification set forth under Delaware Law or the Amended Certificate of
Incorporation of the Company. Such agreements are intended to be in
furtherance, and not in limitation of, the general right to indemnification
provided in the Registrant's Amended Certificate of Incorporation. The
Registrant's Amended Bylaws also authorize the Registrant to purchase and
maintain insurance on behalf of an officer or director, past or present,
II-1
<PAGE>
against any liability asserted against him in any such capacity whether or not
the Registrant would have the power to indemnify him against such liability
under the provisions of the Amended Certificate of Incorporation of the
Registrant or section 145 of the Delaware Law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The form of Underwriting Agreement, to be filed as Exhibit 1.1 to this
Registration Statement, obligates the underwriters to indemnify the
Registrant, their officers who sign the Registration Statement and directors,
and persons who control the Registrant under certain circumstances.
The foregoing summaries are necessarily subject to the complete text of the
statutes, the Registrant's Amended Certificate of Incorporation and the
Registrant's Amended Bylaws and the agreements referred to above and are
qualified in their entirety by reference thereto.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1 --Form of Underwriting Agreement.*
2.1 --Form of Distribution Agreement, dated as of , 1998, between
Registrant and ManorCare Health Services.*
3.1 --Amended Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1997.
3.2 --Amended Bylaws of the Registrant, incorporated by reference to
Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997.
4.1 --Indenture, dated as of June 4, 1996, between the Registrant and
Wilmington Trust Company, Trustee, related to the Registrant's 7
1/2% Senior Notes due 2006, incorporated by reference to Exhibit
4.1 to Registrant's Form 8-K dated June 4, 1996.
4.2 --Supplemental Indentures, dated as of June 4, 1996, between the
Registrant and Wilmington Trust Company, Trustee, relating to the
Registrant's 7 1/2% Senior Notes due 2006, incorporated by
reference to Exhibit 4.2 to Registrant's Form 8-K dated June 4,
1996.
4.3 --Form of Indenture among Manor Care Real Estate, the Guarantors
and , as Trustee.*
4.4 --Form of % Senior Note due 2008 (included in Exhibit 4.3).*
5.1 --Opinion of Skadden, Arps, Slate, Meagher and Flom, LLP
(including the consent of such counsel) regarding the legality of
securities being offered.*
10.1 --Form of Tax Sharing Agreement, dated as of , 1998, between
Registrant and ManorCare Health Services.*
10.2 --Form of Tax Administration, dated as of , 1998, between
Registrant and the ManorCare Health Services.*
10.3 --Form of Corporate Services Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.4 --Credit Agreement, dated as of , 1998, among the Registrant,
Manor Care Real Estate, The Chase Manhattan Bank and Chase
Securities Inc.*
10.5 --Commitment Letter, dated , 1998, among Manor Care Real
Estate, The Chase Manhattan Bank and Chase Securities Inc.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.6 --Form of Assisted Living Facility Management Agreement, dated as
of , 1998, between Registrant and ManorCare Health Services.*
10.7 --Form of Master Development Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.8 --Form of Master Lease Agreement, dated as of , 1998, between
Registrant and ManorCare Health Services.*
10.9 --Form of Non-Competition Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.10 --Form of Employee Benefits and Other Employment Matters
Allocation, dated as of , 1997, between Registrant and
ManorCare Health Services.*
10.11 --Form of Employee Benefits Administration Agreement, dated as of
, 1998, between Registrant and ManorCare Health Services.*
10.12 --Form of Office Lease Agreement, dated as of , 1998, between
Registrant and ManorCare Health Services.*
10.13 --Form of Trademark Agreement, dated as of , 1998, between
Registrant and ManorCare Health Services.*
10.14 --Form of Cash Management Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.15 --Form of Risk Management Consulting Service Agreement, dated as
of , 1998, between Registrant and ManorCare Health Services.*
10.16 --Form of Employment Agreement, dated as of , 1998, between
Stewart Bainum, Jr. and Registrant.*
10.17 --Form of License Agreement, dated as of , 1998, between
ManorCare Health Services and the Registrant.*
10.18 --Form of Vehicle Lease Agreement, dated as of , 1998, between
ManorCare Health Services and the Registrant.*
10.19 --Form of Design Services Agreement, dated as of , 1998,
between ManorCare Health Services and the Registrant.*
12.1 --Statement re Computation of Ratio of Earnings to Fixed Charges.
23.1 --Consent of Independent Public Accountants
23.2 --Consent of Skadden, Arps, Slate, Meagher and Flom, LLP (included
as part of opinion filed pursuant to Exhibit 5 hereof).*
24.1 --Powers of Attorney (See Signature Page).
25.1 --Statement of Eligibility and Qualification of Trustee on Form T-
1 of , as Trustee.*
27.1 --Financial Data Schedule.
99.1 --Schedule II -- Valuation and Qualifying Accounts.
</TABLE>
- --------
* To be filed as amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual
II-3
<PAGE>
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, the DGCL, the Amended
Certificate of Incorporation and the Bylaws, or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in such Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Securities Act and will be governed
by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Gaithersburg, State of
Maryland, on the 15th day of December, 1997.
Manor Care, Inc.
/s/ James H. Rempe
By__________________________________:
NAME: JAMES H. REMPE
TITLE: SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities on December 15, 1997:
SIGNATURES TITLE
Chairman of the
* Board, President,
- ------------------------------------- Chief Executive
STEWART BAINUM, JR. Officer and
Director (Principal
Executive Officer)
Vice Chairman and
* Director
- -------------------------------------
STEWART BAINUM
* Vice President,
- ------------------------------------- Finance and
LEIGH C. COMAS Treasurer
(Principal
Financial Officer)
Vice President and
* Controller
- ------------------------------------- (Principal
MARGARITA A. SCHOENDORFER Accounting Officer)
Director
*
- -------------------------------------
REGINA E. HERZLINGER
Director
*
- -------------------------------------
WILLIAM H. LONGFIELD
II-5
<PAGE>
Director
*
- -------------------------------------
FREDERIC V. MALEK
Director
*
- -------------------------------------
JERRY E. ROBERTSON, PH.D.
Director
*
- -------------------------------------
KENNETT L. SIMMONS
/s/ James H. Rempe
*By ____________________________
AS ATTORNEY-IN-FACT
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the Co-
Registrants certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement on Form S-3 or amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Gaithersburg, State of Maryland, on the 15th day of December, 1997.
For the Registrants set forth on the
table of additional Co-Registrants
/s/ James H. Rempe
By: ________________________________
NAME: JAMES H. REMPE
TITLE: (1)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons
in the capacities on December 15, 1997.
SIGNATURES TITLE
(2)
*
- -------------------------------------
STEWART BAINUM, JR.
(3)
*
- -------------------------------------
DONALD C. TOMASSO
(4)
*
- -------------------------------------
LEIGH C. COMAS
(5)
*
- -------------------------------------
MARGARITA A. SCHOENDORFER
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<PAGE>
SIGNATURES TITLE
(6)
*
- -------------------------------------
K. PETER KEMEZYS
(7)
*
- -------------------------------------
DARRELL A. CARLISLE
(8)
*
- -------------------------------------
JOSEPH R. BUCKLEY
(9)
*
- -------------------------------------
JAMES A. MACCUTCHEON
/s/ James H. Rempe
*By ____________________________
AS ATTORNEY IN FACT
- --------
(1) As Senior Vice President and Secretary of MNR Finance Corp.; as Director
and President of American Hospital Building Corp., Colewood Realty Corp.,
Distco, Inc., Executive Advertising, Inc., Healthcare Construction Corp.,
Industrial Wastes, Inc., Leader Nursing and Rehabilitation Center of
Gloucester, Inc., MRS, Inc. and Portfolio One, Inc.; as Senior Vice
President, General Counsel and Secretary of Manor Care Properties, Inc.;
and as Director, Senior Vice President, General Counsel and Secretary of
the remaining Co-registrants.
(2) As Director of American Hospital Building Corp., Colewood Realty Corp.,
Executive Advertising, Inc. and Healthcare Construction Corp.; as Director
and President of Archive Acquisition, Inc., Archive Retrieval Systems,
Inc.; as chairman of the board and chief executive officer of Manor Care
Properties, Inc.; and as Chief Executive Officer of the remaining Co-
Registrants, other than Distco, Inc., Industrial Wastes, Inc., Leader
Nursing Rehabilitation Center of Gloucester, Inc., MNR Finance Corp., MRS.
Inc., and Porfolio One, Inc.
(3) As Executive Vice President of Archive Acquisition, Inc., Archive
Retrieval Systems, Inc.; as Director and President of ManorCare Health
Services, Inc.; as Director of American Hospital Building Corp., Colewood
Realty Corp., Executive Advertising, Inc. and Healthcare Construction
Corp.; and as President of the remaining Co-Registrants, other than
Distco, Inc., Industrial Wastes, Inc., Leader Nursing Rehabilitation
Center of Gloucester, Inc., MNR Finance Corp., MRS, Inc., and Porfolio
One, Inc.
(4) As Vice President, Finance & Development of Healthcare Construction Corp.;
as Director and Treasurer of MNR Finance Corp. and Manor Care Properties
Inc.; as Treasurer of Colewood Realty Corp., Distco, Inc., Industrial
Wastes, Inc., MRS, Inc., and Porfolio One, Inc.; and as Vice President,
Finance and Treasurer of the remaining Co-Registrants other than Leader
Nursing Rehabilitation Center of Gloucester, Inc.
(5) As Corporate Controller of MRS, Inc.; and as Vice President, Controller of
the remaining Co-Registrants, other than American Hospital Building Corp.,
Colewood Realty Corp., Distco, Inc., Executive Advertising, Inc.,
Healthcare Construction Corp., Industrial Wastes, Inc., Leader Nursing
Rehabilitation Center of Gloucester, Inc., MNR Finance Corp., and Porfolio
One, Inc.
(6) As Director and Secretary of Leader Nursing and Rehabilitation Center of
Gloucester, Inc. and MRS, Inc.; as Vice President, Associate General
Counsel and Assistant Secretary of Archive Acquisition, Inc., Archive
Retrieval Systems, Inc., Industrial Wastes, Inc., and ManorCare Health
Services, Inc.; as Secretary of American Hospital Building Corp., Colewood
Realty Corp., Distco, Inc., Executive Advertising, Inc., Healthcare
Construction Corp. and Porfolio One, Inc.; and as Director, Vice
President, Associate General Counsel and Assistant Secretary of the
remaining Co-registrants, other than MNR Finance Corp.
II-8
<PAGE>
(7) As Director and Assistant Secretary of MNR Finance Corp.; and as Vice
President, Finance of the remaining Co-Registrants, other than Archive
Acquisition, Inc., Archive Retrieval Systems, Inc., American Hospital
Building Corp., Colewood Realty Corp., Distco, Inc., Executive
Advertising, Inc., Healthcare Construction Corp., Industrial Wastes, Inc.,
Leader Nursing Rehabilitation Center of Gloucester, Inc., MNR Finance
Corp., MRS, Inc., and Porfolio One, Inc.
(8) As Executive Vice President of Archive Acquisition, Inc., Archive
Retrieval Systems, Inc., American Hospital Building Corp., Executive
Advertising, Inc., Healthcare Construction Corp., ManorCare Health
Services, Inc., and MRS, Inc.; as director of Manor Care Properties, Inc.;
and as Director and Executive Vice President of all the Co-Registrants
other than Colewood Realty Corp., Distco, Inc., Industrial Wastes, Inc.,
Leader Nursing Rehabilitation Center of Gloucester, Inc., MNR Finance
Corp. and Porfolio One, Inc.
(9) As Director and President of MNR Finance Corp.; and as Director and
Treasurer of Leader Nursing and Rehabilitation Center of Gloucester, Inc.
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NO.
----------- ---------------------- ----
<C> <S> <C>
1.1 --Form of Underwriting Agreement.*
2.1 --Form of Distribution Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
3.1 --Amended Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to Registrant's
Annual Report on Form 10-K for the fiscal year ended May
31, 1997.
3.2 --Amended Bylaws of the Registrant, incorporated by
reference to Exhibit 3.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997.
4.1 --Indenture, dated as of June 4, 1996, between the
Registrant and Wilmington Trust Company, Trustee, related
to the Registrant's 7 1/2% Senior Notes due 2006,
incorporated by reference to Exhibit 4.1 to Registrant's
Form 8-K dated June 4, 1996.
4.2 --Supplemental Indentures, dated as of June 4, 1996,
between the Registrant and Wilmington Trust Company,
Trustee, relating to the Registrant's 7 1/2% Senior Notes
due 2006, incorporated by reference to Exhibit 4.2 to
Registrant's Form 8-K dated June 4, 1996.
4.3 --Form of Indenture among Manor Care Real Estate, the
Guarantors and , as Trustee.*
4.4 --Form of % Senior Note due 2008 (included in Exhibit
4.3).*
5.1 --Opinion of Skadden, Arps, Slate, Meagher and Flom, LLP
(including the consent of such counsel) regarding the
legality of securities being offered.*
10.1 --Form of Tax Sharing Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.2 --Form of Tax Administration, dated as of , 1998,
between Registrant and the ManorCare Health Services.*
10.3 --Form of Corporate Services Agreement, dated as of ,
1998, between Registrant and ManorCare Health Services.*
10.4 --Credit Agreement, dated as of , 1998, among the
Registrant, Manor Care Real Estate, The Chase Manhattan
Bank and Chase Securities Inc.*
10.5 --Commitment Letter, dated , 1998, among Manor Care
Real Estate, The Chase Manhattan Bank and Chase Securities
Inc.*
10.6 --Form of Assisted Living Facility Management Agreement,
dated as of , 1998, between Registrant and ManorCare
Health Services.*
10.7 --Form of Master Development Agreement, dated as of ,
1998, between Registrant and ManorCare Health Services.*
10.8 --Form of Master Lease Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.9 --Form of Non-Competition Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.10 --Form of Employee Benefits and Other Employment Matters
Allocation, dated as of , 1997, between Registrant and
ManorCare Health Services.*
10.11 --Form of Employee Benefits Administration Agreement, dated
as of , 1998, between Registrant and ManorCare Health
Services.*
10.12 --Form of Office Lease Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.13 --Form of Trademark Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
10.14 --Form of Cash Management Agreement, dated as of , 1998,
between Registrant and ManorCare Health Services.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NO.
----------- ---------------------- ----
<C> <S> <C>
10.15 --Form of Risk Management Consulting Service Agreement,
dated as of , 1998, between Registrant and ManorCare
Health Services.*
10.16 --Form of Employment Agreement, dated as of , 1998,
between Stewart Bainum, Jr. and Registrant.*
10.17 --Form of License Agreement, dated as of , 1998, between
ManorCare Health Services and the Registrant.*
10.18 --Form of Vehicle Lease Agreement, dated as of , 1998,
between ManorCare Health Services and the Registrant.*
10.19 --Form of Design Services Agreement, dated as of , 1998,
between ManorCare Health Services and the Registrant.*
12.1 --Statement re Computation of Ratio of Earnings to Fixed
Charges.
23.1 --Consent of Independent Public Accountants
23.2 --Consent of Skadden, Arps, Slate, Meagher and Flom, LLP
(included as part of opinion filed pursuant to Exhibit 5
hereof).*
24.1 --Powers of Attorney (See Signature Page).
25.1 --Statement of Eligibility and Qualification of Trustee on
Form T-1 of , as Trustee.*
27.1 --Financial Data Schedule.**
99.1 --Schedule II -- Valuation and Qualifying Accounts.
</TABLE>
- --------
* To be filed as amendment.
** Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated June 27, 1997 (except for the transaction as discussed in the
footnote entitled "Discontinued Assisted Living, Pharmacy and Home Health
Operations" which is dated September 14, 1997) included in Manor Care, Inc.'s
Form 8-K dated September 15, 1997, and included in or made a part of this
registration statement, and to all references to our Firm included in this
registration statement.
Washington, D.C.,
December 15, 1997
