<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1998
REGISTRATION NO. 333-37599
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NEW MANORCARE HEALTH SERVICES, INC.
(EXACT NAME OF FORM S-1 REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2053999
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
--------------
AMENDMENT NO. 3
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)
MANORCARE HEALTH SERVICES, INC.
(WHICH WILL CHANGE ITS NAME TO MANOR CARE REAL ESTATE CORP. AFTERTHE
DISTRIBUTION REFERRED TO HEREIN)
(EXACT NAME OF FORM S-3 REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1200376
(STATE OR OTHER JURISDICTION OF 52-0886946
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
--------------
SEE TABLE OF ADDITIONAL CO-REGISTRANTS INCLUDED HEREWITH
--------------
11555 DARNESTOWN ROAD GAITHERSBURG, MARYLAND 20878 (301) 979-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
--------------
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 MARK C. SMITH MICHAEL A. BECKER CAHILL GORDON &
SKADDEN, ARPS, SLATE, MEAGHER & FLOM REINDEL 80 PINE STREET NEW YORK, NEW
LLP 919 THIRD AVENUE NEW YORK, NEW YORK 10005 (212) 701-3000
YORK 10022 (212) 735-3000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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
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
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 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
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 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
Manor Care of Rossville,
Inc. ................... Maryland 52-1077857
Manor Care of Willoughby,
Inc. ................... Ohio 52-0970449
Manor Care of York
(North), Inc. .......... Pennsylvania 52-1314645
Manor Care of York
(South), Inc. .......... Pennsylvania 52-1314644
</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>
Nightingale Nursing Home,
Inc. (The).............. Pennsylvania 23-1719762
MNR Finance Corp. ....... Delaware 51-0348281
MRS, Inc. ............... Delaware 52-1164725
PLM, Inc. ............... Delaware 37-1031568
Pneumatic Concrete, Inc.
........................ Tennessee 62-0716951
Portfolio One, Inc. ..... New Jersey 22-1604502
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
</TABLE>
<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 MARCH 16, 1998
PROSPECTUS
$350,000,000
MANOR CARE REAL ESTATE CORP.
(WHICH IS NAMED MANORCARE HEALTH SERVICES, INC. PRIOR TO THE DISTRIBUTION
REFERRED TO HEREIN)
% SENIOR NOTES DUE 2008
FULLY AND UNCONDITIONALLY GUARANTEED BY
MANOR CARE REALTY, INC.
(WHICH IS NAMED MANOR CARE, INC. PRIOR TO THE DISTRIBUTION REFERRED TO HEREIN)
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 (which will change its name
to ManorCare Health Services, Inc. after the Distribution). ManorCare Health
Services is a co-registrant in this Prospectus for securities law purposes
because it will receive a portion of the proceeds of the Offering. Manor Care
Real Estate and the Guarantors are the sole obligors on the Notes and holders
of the Notes may rely only upon Manor Care Real Estate and the Guarantors for
repayment of the Notes. ManorCare Health Services and its subsidiaries will not
be guarantors of the Notes and holders of the Notes will not have any claim
with respect to payment on the Notes against ManorCare Health Services or its
subsidiaries.
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 the 168 skilled nursing facilities owned
by Manor Care Realty, (iii) own a 50% joint venture interest in 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 "Real Estate 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 proceeds of the Offering, together with borrowings under
the Credit Facilities, will be used to effect the Distribution, including
financing the cash portion of the Capital Contribution, refinancing certain
debt of Manor Care and paying related fees and expenses. 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 automatic release in certain circumstances even after a Default or
Event of Default occurs under the Indenture. 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 Real Estate 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 Real Estate Note. However, obligations under the Credit Facilities will
be secured by substantially all of the assets directly owned by Manor Care
Realty and Manor Care Real Estate, by mortgages on certain real property owned
by 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 November 30, 1997, Manor Care
Realty's aggregate outstanding indebtedness would have been approximately $776
million, including approximately $176 million of secured borrowings, and unused
commitments under the Credit Facilities would have been $300 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 20 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)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................ % % %
- --------------------------------------------------------------------------------
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 and ManorCare Health Services have filed with the Commission a
Registration Statement on Form S-3 and Form S-1 (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, as amended by Quarterly Report on Form 10-Q/A dated , 1998.
(3) Quarterly Report on Form 10-Q for the three month period ended
November 30, 1997, as amended by Quarterly Report on Form 10-Q/A dated
, 1998.
(4) Current Report on Form 8-K dated September 15, 1997, as amended by
Current Report on Form 8-K/A dated , 1998.
(5) Current Report on Form 8-K dated March 12, 1998.
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, unless otherwise specified "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 Manor Care Realty's 168 skilled nursing facilities,
(iii) own a 50% joint venture interest in three additional skilled nursing
facilities (the "Joint Venture Interests"), 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 Real Estate and the Guarantors are
the sole obligors on the Notes offered hereby. Holders of the Notes will not
have any claim with respect to payment on the Notes against ManorCare Health
Services or its subsidiaries.
MANOR CARE REALTY
Manor Care Realty will own 168 skilled nursing facilities in 28 states (the
"Skilled Nursing Facilities") and will be a health care real estate company
focused on the ownership, construction, development and acquisition of health
care properties, including skilled nursing and assisted living facilities.
Manor Care Realty will 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
3
<PAGE>
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. 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 23,732 beds.
. 26 assisted living facilities under construction in 12 states.
. 87 sites for assisted living facilities under contract and in
development, including 73 Arden Court sites and 14 Springhouse sites.
. Two skilled nursing facilities under construction with 268 beds and five
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 74 development projects,
including ten skilled nursing facilities, 17 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
4
<PAGE>
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
(the "NYSE").
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 will strive to be 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 have a high
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
benefit from the anticipated growth in the demand for assisted living
care. Pursuant to the Development Agreement, Manor Care
5
<PAGE>
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 12-37%
premium to total approved development costs of Manor Care Realty, based
on the number of months elapsed since the opening of the facility. 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.
MANORCARE HEALTH SERVICES
ManorCare Health Services was incorporated in the State of Delaware on
August 29, 1997 and is currently a wholly owned subsidiary of Manor Care.
ManorCare Health Services was formed for the purpose of consummating the
Distribution and currently conducts no business other than that related to
consummating the Distribution. ManorCare Health Services is included as a co-
registrant in this Prospectus for securities law purposes because it will
receive a portion of the proceeds of the Offering. Manor Care Real Estate and
the Guarantors are the sole obligors on the Notes and holders of the Notes may
rely only upon Manor Care Real Estate and the Guarantors for repayment of the
Notes. ManorCare Health Services and its subsidiaries will not be guarantors
of the Notes and holders of the Notes will not have any claim with respect to
payment on the Notes against ManorCare Health Services or its subsidiaries.
Following the Distribution, 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, the Assisted Living Business currently
conducted by Manor Care, (ii) operate the 168 Skilled Nursing Facilities owned
by Manor Care Realty, (iii) own the Joint Venture Interests, (iv) own
approximately 51% of Vitalink, a public company that operates institutional
pharmacies, and (v) own approximately 64% of the voting stock of In Home
6
<PAGE>
Health, a public company that provides health care services to clients in their
homes. See "Business of ManorCare Health Services After the Distribution,"
"Description of The Transactions" and "Relationship Between Manor Care Realty
and ManorCare Health Services After the Distribution." Historical financial
information relating to Manor Care is presented because ManorCare Health
Services is a co-registrant for securities laws purposes. The historical
financial statements of Manor Care are included solely because (i) after the
Distribution, ManorCare Health Services will present Manor Care's historical
results for periods prior to the Distribution and (ii) the historical financial
statements of Manor Care represent the financial statements of the entities
that are not guaranteeing the Notes. ManorCare Health Services' 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 principal transactions related to the Distribution are:
. The Contribution of Assets and the Assumption of Liabilities. Manor Care
will effect the Contribution of Assets (as defined below) and Manor Care
will assign to ManorCare Health Services and ManorCare Health Services
will assume certain liabilities.
. The Financing Transactions
. Manor Care Real Estate will enter into the Credit Facilities (as
defined below). The closing of the Credit Facilities will be
conditioned on the simultaneous consummation of the Distribution.
ManorCare Health Services will close on its five-year $100 million
revolving credit facility which closing will be conditioned on the
simultaneous consummation of the Distribution. See "--The Credit
Facilities."
. Manor Care Real Estate is offering (the "Offering") $350 million
aggregate principal of % Senior Notes due 2008 (the "Notes").
. The Exchange Offer. ManorCare Health Services will consummate the
Exchange Offer. The Distribution is conditioned on the consummation of
the Exchange Offer. See "--The Exchange Offer."
. The Capital Contribution. Manor Care Realty will use the proceeds of the
Offering together with borrowings under the Credit Facilities to make
the cash portion of the capital contribution and will cause Manor Care
Real Estate to issue the intercompany note (the "Real Estate Note") to
New ManorCare Health Services.
. Related Party Agreements. Concurrently with the Distribution, Manor Care
Realty and New ManorCare Health Services will execute the related party
agreements. See "--Related Party Agreements."
. The Distribution. Manor Care Realty will distribute to its stockholders
the stock of New ManorCare Health Services. The Distribution is
conditioned on the consummation of the Exchange Offer, the closing of
the Offering and the consummation of the Credit Facilities.
It is anticipated that all of the above transactions will close
simultaneously.
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
7
<PAGE>
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 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 "Real Estate Note"). The Real Estate Note will be issued by
Manor Care Real Estate and will have the same general terms (including interest
rate and maturity and parent and subsidiary guarantees) as the Notes, except
that Manor Care Real Estate may redeem the Real Estate Note after three years
at a redemption price equal to 100% of the principal amount thereof plus
accrued and unpaid interest. For a description of the terms of the Real Estate
Note, see "Description of the Transactions--The Real Estate Note." Manor Care
may determine to reduce the principal amount of the Real Estate Note prior to
issuance or to reduce the amount of the cash portion of the Capital
Contribution to the extent that Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
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; (iii) the consummation of the
Exchange Offer, which will occur concurrently with the Distribution; (iv) the
consummation of the Credit Facilities and the consummation of the Offering; and
(v) 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 substantially all of the assets directly owned by
Manor Care Realty and Manor Care Real Estate, by mortgages on certain real
property owned by 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, including the
Lease Agreements and the Development Agreements.
8
<PAGE>
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. In addition, the Credit
Facilities will be fully and unconditionally guaranteed by Manor Care Realty
and substantially all of its 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. In the event that the Commitment Letter is executed, Chase will
commit to purchase a portion of such facilities and CSI will use its best
efforts to arrange the balance of such facilities with other lenders. The
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 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 Sublease Agreement, the
Corporate Services Agreement, the Trademark Agreement, the License Agreement,
the Design Services Agreement, the Cash Management Agreement, and the Risk
Management Consulting Services Agreement. See "Relationship between Manor Care
Realty and ManorCare Health Services after the Distribution."
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
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 12% to 37% 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
9
<PAGE>
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.
10
<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 APPEARS HERE]
BEFORE THE DISTRIBUTION
-----------------------
MANOR CARE HEALTH SERVICES, INC.
(to be renamed Manor Care Real Estate Corp. after the Distribution)
Other Operating New Manor Care Vitalink Pharmacy In Home
Subsidiaries Health Services, Inc. Services, Inc. Health, Inc.
AFTER THE DISTRIBUTION
----------------------
Manor Care Realty, Inc. ManorCare Health Services, Inc.
(formerly Manor Care, Inc.)*** (formerly New ManorCare Health
Services, Inc.)****
Manor Care Real Operating Vitalink Pharmacy In Home Health,
(formerly ManorCare Subsidiaries Services, Inc. Inc.
Health Services Inc.)
Operating Subsidiaries
- -----------------------------------
* Manor Care (and ManorCare Health Services after the Distribution) is
exploring strategic alternatives, including strategic mergers, joint
ventures or other business combinations, with respect to its 51%
ownership interest in Vitalink.
** Represents 64% of the total outstanding voting power, consisting of
common stock and convertible preferred stock voting as common stock.
*** Health care real estate company focused on the ownership, construction,
development and acquisition of health care properties, including assisted
living and skilled nursing facilities.
**** Health care operating company which, together with its operating
subsidiaries, owns and operates all Manor Care's assisted living
facilities, operates all of Manor Care Realty's skilled nursing
facilities, and owns joint venture interests in and manages three
additional skilled nursing facilities.
11
<PAGE>
The following table illustrates the estimated sources and uses of funds,
assuming the Distribution was consummated on November 30, 1997 and that all
holders of the outstanding Old Senior Notes accept the Exchange Offer:
<TABLE>
<CAPTION>
AMOUNT
(DOLLARS
IN MILLIONS)
------------
<S> <C>
Sources:
Reimbursement from ManorCare Health Services to repay Ex-
isting Revolving Credit Facility(1)....................... $ 30.0
Working capital reimbursement from ManorCare Health Servic-
es........................................................ 12.5
Revolving Credit Facility(2)............................... 0.0
Term Loan.................................................. 150.0
Gross proceeds of the Offering............................. 350.0
Real Estate Note(3)........................................ 250.0
------
Total Sources............................................ $792.5
======
Uses:
Contribution of Cash to ManorCare Health Services(3)....... $250.0
Repayment of amounts outstanding under Existing Revolving
Credit Facility .......................................... 215.0
Repayment of amounts outstanding under Promissory Note..... 21.9
Repayment of certain mortgage bond indebtedness(4)......... 0.5
Cash and cash equivalents.................................. 34.1
Contribution of Real Estate Note to ManorCare Health Serv-
ices(3)................................................... 250.0
Fees and expenses.......................................... 21.0
------
Total Uses............................................... $792.5
======
</TABLE>
- --------
(1) ManorCare Health Services has agreed to reimburse Manor Care Realty an
aggregate of $30.0 million for borrowings under the Existing Credit
Facility relating to Manor Care's May 1997 tender offer for additional
shares of Vitalink.
(2) For a description of the availability of borrowings under the Revolving
Credit Facility, see "Description of Certain Indebtedness--The Credit
Facilities."
(3) Manor Care may reduce the principal amount of the Real Estate Note prior to
issuance or reduce the amount of the cash portion of the Capital
Contribution to the extent Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
(4) The mortgages were repaid on December 1, 1997.
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.
Manor Care Realty will receive all of the direct proceeds from the Offering.
Manor Care Realty will use the proceeds from the Offering together with
borrowings under the Credit Facilities to effect the Distribution, including
financing the cash portion of the capital Contribution, refinancing certain
debt of Manor Care and paying related fees and expenses. In addition, as part
of the Capital Contribution, Manor Care will cause Manor Care Real Estate to
issue the Real Estate Note to ManorCare Health Services. See "Use of Proceeds."
ManorCare Health Services is included as a co-registrant in this Prospectus
for securities law purposes because it will receive a portion of the proceeds
of the Offering. Manor Care Real Estate and the Guarantors are the sole
obligors on the Notes and holders of the Notes may rely only upon Manor Care
Real Estate and the Guarantors for repayment of the Notes. ManorCare Health
Services and its subsidiaries will not be guarantors of the Notes and holders
of the Notes will not have any claim with respect to payment on the Notes
against ManorCare Health Services or its subsidiaries.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
Due to the fact that the majority of the current Manor Care operations will
be transferred to ManorCare Health Services in connection with the
Distribution, the Distribution will be reported for accounting purposes as a
"reverse spin-off." Accordingly, Manor Care will continue to present
consolidated results (with no discontinued operations treatment) up to the date
of the Distribution. After the Distribution, ManorCare Health Services will
present Manor Care's historical consolidated results for periods prior to the
Distribution and Manor Care Realty will present the historical results of
Mesquite Hospital, Manor Care Realty's accounting predecessor, for periods
prior to the Distribution.
Historical financial information relating to Manor Care is presented because
ManorCare Health Services is a co-registrant for securities laws purposes. The
historical financial statements of Manor Care are included solely because (i)
after the Distribution, ManorCare Health Services will present Manor Care's
historical results for periods prior to the Distribution and (ii) the
historical financial statements of Manor Care include the financial statements
of the entities that are not guaranteeing the Notes--i.e., ManorCare Health
Services, all of the currently existing subsidiaries of ManorCare Health
Services, Manor Care of Centreville, Inc., Manor Care of Darien, Inc., Manor
Care of Delaware County, Inc., Manor Care of Miamisburg, Inc., and those
subsidiaries of Manor Care that will be subsidiaries of ManorCare Health
Services following the Distribution: Distco, Inc., Manor Care Foundation, Inc.,
Medical Aid Training Schools, Inc., Mid-Atlantic Post Acute Network, Inc., Peak
Rehabilitation, Inc., TotalCare Clinical Laboratories, Inc. (collectively, the
"Non-Guarantors") (other than Mesquite Hospital whose results are included in
the historical financial statements of Manor Care and who is a Guarantor).
Investors in the Notes should not look to the historical financial statements
of Manor Care for repayment of the Notes or the Guarantees.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF MANOR CARE REALTY
The following table sets forth a summary of selected historical and pro forma
financial data for Manor Care Realty. The historical financial data relates to
the businesses of Manor Care Realty as they were operated as part of Manor Care
and may not necessarily be indicative of the results of operations or financial
position that would have been obtained if Manor Care Realty had been a
separate, independent company during the periods shown nor necessarily
indicative of Manor Care Realty's future performance as an independent company.
See "Risk Factors--Operating History and Future Prospects." The historical
statements of income data for the fiscal years ended May 31, 1995, 1996 and
1997 and the historical balance sheet data for the fiscal years ended May 31,
1996 and 1997 are derived from the audited financial statements of Community
Hospital of Mesquite, Inc. ("Mesquite Hospital"), Manor Care Realty's
accounting predecessor. The historical statements of income data for the six
month periods ended November 30, 1996 and 1997 and the historical balance sheet
data for the period ended November 30, 1997 are derived from the unaudited
financial statements of Mesquite Hospital, Manor Care Realty's accounting
predecessor. The historical financial data set forth below should be read in
conjunction with Mesquite Hospital's Financial Statements and the notes thereto
found elsewhere in this Prospectus. 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 November 30, 1997 for purposes of the pro forma balance
sheet, and on June 1, 1996 for purposes of the pro forma statements 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 of Manor Care Realty" and the
accompanying footnotes for a discussion of the principal adjustments made in
the preparation of the pro forma financial information.
13
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
-------------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
------- ----------- ----------- --------- ----------- ----------- -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $40,505 $ 42,044 $ 44,889 $222,040 $ 21,827 $ 22,221 $130,225
Expenses:
Operating.............. 34,876 35,674 37,871 64,149 18,314 19,035 37,176
Depreciation and
amortization.......... 1,275 1,344 1,955 60,608 865 1,150 33,218
Provision for
restructuring charge.. -- -- -- 6,450 -- -- 6,450
------- ----------- ----------- -------- ---------- ----------- ------------
Total expenses....... 36,151 37,018 39,826 131,207 19,179 20,185 76,844
------- ----------- ----------- -------- ---------- ----------- ------------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 4,354 5,026 5,063 90,833 2,648 2,036 53,381
Interest expense....... -- -- -- (60,552) -- (74) (23,507)
Interest income and
other................. -- -- -- 6,301 -- (63) 3,607
------- ----------- ----------- -------- ---------- ----------- ------------
Income from continuing
operations before
income taxes........... 4,354 5,026 5,063 36,582 2,648 1,899 33,481
Income taxes............ 1,647 1,907 1,919 14,566 1,032 745 13,236
------- ----------- ----------- -------- ---------- ----------- ------------
Net income.............. $ 2,707 $ 3,119 $ 3,144 $ 22,016 $ 1,616 $ 1,154 $ 20,245
======= =========== =========== ======== ========== =========== ============
<CAPTION>
AS OF MAY 31, AS OF NOVEMBER 30,
------------------------ --------------------------
PRO FORMA
1996 1997 1997 1997
----------- ----------- ----------- -------------
(AMOUNTS IN THOUSANDS) (AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 1,930 $ 1,970 $ 4,318 $ 59,847
Total assets............ 26,512 29,368 27,942 1,187,352
Long-term debt.......... -- -- -- 776,415
Total shareholder's
equity................. 20,305 23,449 24,603 25,863
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED MAY 31, NOVEMBER 30,
--------------------------------- -----------------------
1995 1996 1997 1996 1997
------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS) (AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided (utilized)
by operating
activities............. $ 1,508 $ 7,879 $ 5,294 $ 2,085 $(403)
Cash utilized by
investing activities... (1,421) (7,678) (5,418) (1,962) (228)
Cash provided by
financing activities... -- -- -- -- 650
</TABLE>
14
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF MANOR CARE AND PRO FORMA FINANCIAL DATA OF
MANORCARE HEALTH SERVICES
The following table sets forth a summary of selected historical financial
data of Manor Care and pro forma financial data for ManorCare Health Services.
The historical financial data of Manor Care are also the historical financial
data of the Non-Guarantors (other than Mesquite Hospital which will be a
Subsidiary Guarantor and whose results are included therein). The historical
financial data are not necessarily indicative of the results of operations or
financial position that would have been obtained if ManorCare Health Services
had been a separate, independent company during the periods shown nor
necessarily indicative of ManorCare Health Services' future performance as an
independent company. See "Risk Factors Relating to ManorCare Health Services---
Operating History and Future Prospects." The historical statements of income
data for the fiscal years ended May 31, 1995, 1996 and 1997 and the historical
balance sheet data as of May 31, 1996 and 1997 are derived from the audited
financial statements of Manor Care. The historical statements of income data
for the six month periods ended November 30, 1996 and 1997 and the historical
balance sheet data as of November 30, 1997 are derived from the unaudited
consolidated financial statements of Manor Care. The historical financial data
set forth below should be read in conjunction with Manor Care's Consolidated
Financial Statements and the notes thereto found elsewhere in this Prospectus.
The consolidated balance sheet as of November 30, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the six
months ended November 30, 1997 and 1996, have been prepared by Manor Care,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows at November 30, 1997 and for all
periods presented have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with Manor
Care's audited consolidated financial statements and notes thereto found
elsewhere in this Prospectus. The results of operations and cash flows for the
six month periods ended November 30, 1997 and 1996 are not necessarily
indicative of the operating results or cash flows for the full year.
The summary pro forma financial data for the fiscal year ended May 31, 1997
and the six month period ended November 30, 1997 make adjustments to the
historical balance sheet and the historical statements of income, as if the
Distribution had occurred on November 30, 1997 for purposes of the pro forma
balance sheet, and on June 1, 1996 for purposes of the pro forma statements of
income. See "Pro Forma Financial Data of ManorCare Health Services" and the
accompanying footnotes for a discussion of the principal adjustments made in
the preparation of the pro forma financial information. The pro forma financial
statements of ManorCare Health Services may not reflect the future results of
operations or financial position of ManorCare Health Services or what the
results of operations would have been if ManorCare Health Services had been a
separate, independent company during such period. The pro forma adjustments
reflect the impact of the Distribution, Lease Agreements, Assisted Living
Facility Management Agreements, net additional costs associated with general
corporate functions, TeamCare (as defined herein) operations from June 1, 1996
to January 31, 1997 (the portion of the fiscal year prior to the TeamCare
merger (as defined herein)), and the related income tax effects of these
adjustments. See "Pro Forma Financial Data of ManorCare Health Services."
15
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
---------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
---------- ---------- ---------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues................ $1,019,458 $1,248,197 $1,527,247 $1,681,966 $ 688,064 $ 885,623 $ 860,286
Expenses:
Operating expenses..... 769,998 963,081 1,202,836 1,494,809 541,482 723,244 785,632
Depreciation and
amortization.......... 54,374 68,086 80,378 27,797 36,877 47,818 14,600
General corporate and
other................. 63,197 72,322 68,563 70,592 31,873 28,208 32,134
Provision for asset
impairment and
restructuring......... -- 26,300 -- 6,950 -- -- 6,950
---------- ---------- ---------- ---------- --------- --------- ---------
Total expenses......... 887,569 1,129,789 1,351,777 1,600,148 610,232 799,270 839,316
---------- ---------- ---------- ---------- --------- --------- ---------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 131,889 118,408 175,470 81,818 77,832 86,353 20,970
Other income and
(expenses):
Interest income from
advances to
discontinued lodging
segment............... 15,492 19,673 21,221 -- 10,157 4,994 --
Gain on issuance of
Vitalink stock........ -- -- 50,271 50,271 -- -- --
Interest expense....... (22,769) (30,338) (41,831) (25,113) (19,168) (22,073) (10,941)
Interest income and
other................. 5,219 3,728 4,682 15,590 4,879 11,984 18,897
---------- ---------- ---------- ---------- --------- --------- ---------
Income from continuing
operations before
income taxes........... 129,831 111,471 209,813 122,566 73,700 81,258 28,926
Income taxes............ 52,156 46,000 84,700 52,856 29,400 35,692 15,001
---------- ---------- ---------- ---------- --------- --------- ---------
Income from continuing
operations............. $ 77,675 $ 65,471 $ 125,113 $ 69,710 $ 44,300 $ 45,566 $ 13,925
========== ========== ========== ========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF NOVEMBER 30,
--------------------- ---------------------
PRO FORMA
1996 1997 1997 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $1,681,840 $1,979,704 $1,995,264 $1,420,861
Long-term debt...................... 490,575 596,473 559,063 295,707
Shareholders' equity................ 707,769 690,431 729,023 692,098
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
------------------------------------------ ---------------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1996 1997 1997
--------- --------- --------- --------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided by
continuing operating
activities............. $ 120,760 $ 199,307 $ 80,151 N/A $ 28,925 $ 51,367 N/A
Cash (used in) provided
by continuing investing
activities............. (191,713) (259,118) (209,235) N/A (90,060) 12,726 N/A
Cash provided by (used
in) continuing
financing activities... 80,037 122,644 87,604 N/A 38,337 (43,943) N/A
Investment in property
and equipment and
systems development.... 91,900 136,332 183,469 N/A 83,713 110,720 N/A
</TABLE>
16
<PAGE>
THE OFFERING
Issuer............ Manor Care Real Estate Corp.
Securities $350,000,000 aggregate principal amount of % Senior Notes
Offered.......... due 2008.
Maturity.......... , 2008.
Interest Payment and , commencing , 1998.
Dates............
Sinking Fund...... None.
Optional Except as described below, Manor Care Real Estate may not
Redemption....... 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 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."
17
<PAGE>
The Subsidiary Guarantors are: Archive Retrieval Systems,
Inc.; Archive Acquisition, Inc.; American Hospital Building
Corporation; Americana Healthcare Corporation of Georgia;
Americana Healthcare Corporation of Naples; Baily Nursing
Home, Inc.; Chesapeake Manor, Inc.; Colewood Realty Corp.;
Community Hospital of Mesquite, Inc.; DeKalb Healthcare
Corporation; Devon Manor Corporation; Executive
Advertising, Inc.; Four Seasons Nursing Centers, Inc.;
Healthcare Construction Corp.; Industrial Wastes, Inc.;
Jacksonville Healthcare Corporation; Leader Nursing and
Rehabilitation Center of Bethel Park, Inc.; Leader Nursing
and Rehabilitation Center of Gloucester, Inc.; Leader
Nursing and Rehabilitation Center of Scott Township, Inc.;
Leader Nursing and Rehabilitation Center of Virginia, Inc.;
Manor Care of Akron, Inc.; Manor Care of Arizona, Inc.;
Manor Care of Arlington, Inc.; Manor Care of Boca Raton,
Inc.; Manor Care of Canton, Inc.; Manor Care of Charleston,
Inc.; Manor Care of Cincinnati, Inc.; Manor Care of
Columbia, Inc.; ManorCare Health Services of Northampton
County, Inc.; Manor Care of Hinsdale, Inc.; Manor Care of
Kansas, Inc.; Manor Care of Kingston Court, Inc.; Manor
Care of Largo, Inc.; Manor Care of Lexington, Inc.; Manor
Care of Meadow Park, Inc.; Manor Care of Mesquite, Inc.;
Manor Care of North Olmstead, Inc.; Manor Care of
Pinehurst, Inc.; Manor Care of Plantation, Inc.; Manor Care
Properties, Inc.; Manor Care of Rolling Meadows, Inc.;
Manor Care of Rossville, Inc.; Manor Care of Willoughby,
Inc.; Manor Care of York (North) Inc.; Manor Care of York
(South), Inc.; Nightingale Nursing Home, Inc. (The); MNR
Finance Corp.; MRS, Inc.; PLM, Inc.; Pneumatic Concrete,
Inc.; Portfolio One, Inc.; Rehab Source, Inc.; Roland Park
Nursing Center, Inc.; Silver Spring-Wheaton Nursing Home,
Inc.; Stratford Manor, Inc.; and Stutex Corp. The Non-
Guarantors are: ManorCare Health Services, all of the
currently existing subsidiaries of ManorCare Health
Services, and those subsidiaries of Manor Care that will be
subsidiaries of ManorCare Health Services following the
Distribution: Distco, Inc., Manor Care of Centreville,
Inc., Manor Care of Darien, Inc., Manor Care of Delaware
County, Inc., Manor Care of Miamisburg, Inc., Medical Aid
Training Schools, Inc., Mid-Atlantic Post Acute Network,
Inc., Peak Rehabilitation, Inc. and TotalCare Clinical
Laboratories, Inc.
ManorCare Health Services is included as a co-registrant in
this Prospectus for securities law purposes because it will
receive a portion of the proceeds of the Offering. Manor
Care Real Estate and the Guarantors are the sole obligors
on the Notes and holders of the Notes may rely only upon
Manor Care Real Estate and the Guarantors for repayment of
the Notes. ManorCare Health Services and its subsidiaries
will not be guarantors of the Notes and holders of the
Notes will not have any claim with respect to payment on
the Notes against ManorCare Health Services or its
subsidiaries.
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 Real Estate 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
18
<PAGE>
Senior Notes accept the Exchange Offer), as of November 30,
1997, Manor Care Realty's aggregate outstanding
indebtedness would have been approximately $776 million,
including approximately $176 million of secured borrowings
(including indebtedness under the Credit Facilities and
mortgage bond indebtedness), and unused commitments under
the Credit Facilities would have been $300 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.
19
<PAGE>
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.
RISK FACTORS RELATING TO MANOR CARE REALTY
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
20
<PAGE>
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.
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
November 30, 1997, Manor Care Realty's aggregate outstanding indebtedness
would have been $776 million and Manor Care Realty's stockholders' equity
would have been $25.9 million. The indebtedness consists of the following: (i)
$350 million aggregate principal amount of Notes offered hereby, (ii) the Real
Estate Note, in an aggregate principal amount of up to $250 million, (iii)
$150 million drawn under the term loan portion of the Credit Facilities, which
bear interest at either LIBOR or Chase's base rate plus a variable margin (the
term loan portion of the Credit Facilities amortizes in years six through
eight), and (iv) $26 million of facility-specific mortgage bond indebtedness
with maturities and interest rates ranging from one to twenty-six years, and
4% to 12%, respectively. The $350 million aggregate principal amount of
indebtedness offered hereby and the $250 million Real Estate Note will mature
in 2008. The $150 million drawn under the Term Facility will be subject to
amortization payments (payable quarterly) as follows: $1 million in each of
1998, 1999, 2000, 2001, 2002 and 2003 and $72 million in each of 2004 and
2005. 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 principally through the Revolving
Credit Facility. The Credit Facilities will be subject to mandatory prepayment
in certain circumstances. See "Description of Certain Indebtedness."
The degree to which Manor Care Realty is leveraged could have important
consequences, including the following: (i) Manor Care Realty's ability to
obtain additional financing in the future 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 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."
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 substantially all of the assets of Manor Care
Realty and Manor Care Real Estate, by certain assets of Manor Care Realty's
other subsidiaries 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,
21
<PAGE>
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.
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 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
and it is expected that this will be funded principally through the Revolving
Credit Facility. 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.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
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
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Dividend Requirements" and so long as the Guarantees have not been released
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 automatic release of a Subsidiary Guarantor's Guarantee
under the Indenture in the event such Subsidiary Guarantor is not an obligor
under the Credit Facilities and the lenders under such Credit Facilities may
require such releases of a Subsidiary Guarantor's Guarantee even after a
Default or Event of Default occurs under the Notes. Accordingly, there can be
no assurance that the Guarantees of the Subsidiary Guarantors will be in
effect following a Default or Event of Default under the Indenture or a
default under the Credit Facilities. In such event such Subsidiary Guarantors
will have no obligation with respect to the repayment of principal and the
interest on the Notes. Moreover, because Manor Care Realty anticipates that
the stock of such Subsidiary Guarantors will be pledged to secure indebtedness
outstanding under the Credit Facilities, should the lenders under the Credit
Facilities require releases of the Subsidiary Guarantors' Guarantees, the net
asset values of such Subsidiary Guarantors may be claimed by the lenders under
the Credit Facilities as pledgees of the stock of the Subsidiary Guarantors
and may become available to repay the Notes only after the indebtedness of
Manor Care Real Estate under the Credit Facilities is fully satisfied. 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."
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
substantially all of the assets directly owned by Manor Care Realty and Manor
Care Real Estate and by certain assets of Manor Care Realty's other
subsidiaries, 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 or a subsidiary of 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 November 30, 1997, Manor Care Realty
would have had approximately $176 million of secured borrowings (including
$150 million of indebtedness under the Credit Facilities and $26 million of
mortgage bond indebtedness), and unused commitments under the Credit
Facilities of $300 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 and its subsidiaries 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 automatic release of a Subsidiary Guarantor's Guarantee
under the Indenture in the event such Subsidiary Guarantor is not an obligor
under the Credit Facilities
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and the lenders under such Credit Facilities may require such releases of a
Subsidiary Guarantor's Guarantee even after a Default or Event of Default
occurs under the Notes. Accordingly, there can be no assurance that the
Guarantees of the Subsidiary Guarantors will be in effect following a Default
or Event of Default under the Indenture or a default under the Credit
Facilities. In such event such Subsidiary Guarantors will have no obligation
with respect to the repayment of principal and the interest on the Notes.
Moreover, because Manor Care Realty anticipates that the stock of such
Subsidiary Guarantors will be pledged to secure indebtedness outstanding under
the Credit Facilities, should the lenders under the Credit Facilities require
releases of the Subsidiary Guarantors' Guarantees, the net asset values of
such Subsidiary Guarantors may be claimed by the lenders under the Credit
Facilities as pledgees of the stock of the Subsidiary Guarantors and may
become available to repay the Notes only after the indebtedness of Manor Care
Real Estate under the Credit Facilities is fully satisfied. There can be no
assurance that Manor Care Realty will be able to comply with the covenants
contained in the Indenture and the Credit Facilities 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," "--Holding Company Structure;
Structural Subordination," "--Asset Encumbrances," "Description of the Notes"
and "Description of Certain Indebtedness."
THE REAL ESTATE NOTE
The Real Estate Note provides that after the three year anniversary of the
issuance thereof, ManorCare Health Services may request that Manor Care Real
Estate redeem the Real Estate 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 Real Estate may not have adequate funds to effect such
redemption and in such case may seek to obtain funds therefor through
additional debt or equity financing. The anticipated terms of the Credit
Facility will not permit Manor Care Real Estate to refinance the Real Estate
Note with the proceeds of borrowings thereunder and will limit Manor Care Real
Estate's right to refinance the Real Estate Note; the Indenture will permit
Manor Care Real Estate to refinance the Real Estate Note. In the event that
ManorCare Health Services requests that Manor Care Real Estate redeem the Real
Estate Note and Manor Care Real Estate does not redeem the Real Estate Note,
the interest rate on the Real Estate Note will increase by 200 basis points;
provided that such interest rate will not be so increased unless, as of the
time such request for redemption is made, the aggregate amount of rent paid by
ManorCare Health Services under the Lease Agreements with respect to all
properties subject to such Lease Agreements shall equal or exceed the
aggregate Priority Sum for all such properties on a cumulative basis from the
Effective Date through the third anniversary thereof (such aggregate amount of
rent being herein referred to as the "Threshold Rent"). Solely for purposes of
calculating the 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
Real Estate Note may have a material adverse affect on Manor Care Realty.
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 Manor Care's 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
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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 November 30, 1997, (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care's
indebtedness, (ii) liabilities of Manor Care relating to benefits and workers'
compensation of approximately $56.0 million, (iii) current liabilities of the
skilled nursing facilities of approximately $46.6 million, and (iv) deferred
tax liabilities of Manor Care of approximately $40.7 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 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
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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 Real Estate 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."
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
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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 16 Arden Courts facilities, including five mature facilities (facilities
that have been operated by Manor Care for a minimum of two years) and eleven
start-up facilities, had an average occupancy of 79% as of March 1, 1998.
Thirteen of the Arden Courts attained occupancy of 75% or greater as of March
1, 1998. For the 13 facilities that have reached 75% occupancy, the 75%
occupancy level was achieved on average in 11 months. The average occupancy of
these facilities on March 1, 1998 was 90%. With the five most recent openings,
Manor Care has intensified pre-marketing efforts in an attempt to shorten the
time period required to reach full occupancy.
The 20 Springhouse senior residences, including 18 mature facilities and two
start-up facilities, had an average occupancy of 83% as of March 1, 1998.
Seventeen 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 67% as of March 1, 1998.
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 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
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for the contributions it made and the risks it assumed. Manor Care did not
seek proposals from unaffiliated third parties. Such a solicitation would not
have been practical in view of the proposed relationship and make-up of the
two companies to be parties to the Lease Agreements. However, after the terms
of the Lease Agreements were finalized, Manor Care's Board of Directors
reviewed them in light of the objectives listed above taking into account that
alternative third party proposals were not solicited. Similarly, the financial
terms of the Development Agreement and the Assisted Living Facility Management
Agreements were structured to achieve the following objectives: (i) Manor Care
Realty should receive a fair return on its capital invested in developing new
assisted living facilities; (ii) ManorCare Health Services should be required
to purchase a facility immediately upon its achievement of a profitable
occupancy level; and (iii) each party should receive returns based on the
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 the Board of Directors'
review, the Board concurred with management's judgment that the transactions
contemplated by the Distribution Agreement, including the Distribution, the
Capital Contribution, the execution, delivery and performance of the Lease
Agreements, the Development Agreement and the Assisted Living Facility
Management Agreement and the transactions contemplated thereby, when
considered as a whole, are no less favorable to either Manor Care Realty or
ManorCare Health Services 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 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
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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 operation 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.
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
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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.
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.
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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 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 Real Estate Note, (v)
ManorCare Health Services and Manor Care Realty will enter into the Non-
Competition Agreement that will limit the competition between the companies,
(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 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.
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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 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
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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, some of ManorCare Health Services'
competitors are significantly larger and have, or may obtain, greater
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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
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Distribution and the Distribution is held to be taxable, both Manor Care
Realty and stockholders of Manor Care could recognize income or gain and thus
become liable for the payment of a material amount of income tax. See
"Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution--Tax Sharing Agreement."
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. A "Change of Control Triggering Event" means the occurrence of a
Change of Control together with a reduction in the rating accorded the Notes
by either S&P or Moody's. A Change of Control will occur upon the acquisition,
directly or indirectly, including by merger or consolidation, by any person
(other than certain permitted holders) of beneficial ownership of more than
50% of the total voting power of equity interests of Manor Care Realty or upon
the occurrence of certain changes in the constitution of the board of
directors of Manor Care Realty over a two year period. See "Description of the
Notes--Certain Definitions--Change of Control." 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
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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.
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RISK FACTORS RELATING TO MANORCARE HEALTH SERVICES
FORWARD-LOOKING 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," "intends," "expect" and similar
expressions are intended to identify forward-looking statements. Although
ManorCare Health Services believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such statements are subject to
certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated, projected or expected. Among the key factors that may have a direct
bearing on ManorCare Health Services' operating results is ManorCare Health
Services' ability to implement its plan to acquire from Manor Care Realty
approximately 170 Arden Courts and 38 Springhouse senior residences over the
next five years. In addition, actual future results and trends may differ
materially depending on a variety of factors discussed in this "Risk Factors"
section and elsewhere in this Prospectus including, among others (i) Manor
Care Realty's success in implementing its business strategy, including its
success in arranging financing where required, (ii) the nature and extent of
future competition and (iii) the extent of future reform and regulation.
OPERATING HISTORY AND FUTURE PROSPECTS
ManorCare Health Services was formed for the purpose of effecting the
Distribution. ManorCare Health Services does not have an operating history as
an independent public company, but will own and conduct the operations of the
Assisted Living Business previously owned and conducted by Manor Care, operate
and manage the Skilled Nursing Facilities previously operated and managed by
Manor Care and will own the stock of Vitalink and In Home Health previously
owned by Manor Care. On a historical basis, for the three fiscal years ended
May 31, 1997, ManorCare Health Services' businesses were profitable. There can
be no assurance, however, that ManorCare Health Services' operations will be
profitable in 1998 or future years. See "ManorCare Health Services Selected
Historical Financial Data" and "Combined Financial Statements of Manor Care."
ManorCare Health Services' future success will depend on a number of
factors, including (i) the level of demand for its assisted living facilities
and the Skilled Nursing Facilities, (ii) the success of ManorCare Health
Services' planned expansion of its Assisted Living Business, (iii) ManorCare
Health Services' ability to manage and operate the Skilled Nursing Facilities,
(iv) the substantial competition encountered by ManorCare Health Services, see
"--Competition" and "Business of ManorCare Health Services after the
Distribution--Competition," (v) the presence of existing governmental
regulation and the potential for health care reform which might be adverse to
ManorCare Health Services, see "--Regulation," and "Business of ManorCare
Health Services after the Distribution--Government Regulation," (vi) ManorCare
Health Services' transition to an independent, public company and the costs
associated therewith and (vii) the future success of Vitalink and In Home
Health.
The success of ManorCare Health Services' acquisition and expansion strategy
depends, in significant part, upon the anticipated development of assisted
living facilities by Manor Care Realty and in turn upon Manor Care Realty's
ability to obtain necessary financing, locate desirable sites, acquire
property, obtain local regulatory approvals and construct the facilities on
schedule and on budget. At or prior to the Distribution, Manor Care will
utilize part of the proceeds from the sale of the Manor Care Real Estate Notes
and borrowings under the Credit Facilities to make or cause to be made the
cash portion of the Capital Contribution. ManorCare Health Services'
acquisition and expansion strategy also depends, in significant part, upon
receipt of the Capital Contribution and upon ManorCare Health Services'
entering into the MCHS Credit Facility.
DEPENDENCE BY MANORCARE HEALTH SERVICES ON RELATED PARTY AGREEMENTS
In connection with the Distribution, ManorCare Health Services will enter
into agreements with Manor Care, including the Development Agreement, the
Lease Agreements and the Assisted Living Facility
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Management Agreements. Pursuant to the Development Agreement, Manor Care
Realty will develop assisted living facilities for sale to ManorCare Health
Services. If at any time during the two-year period measured from the time a
particular facility opens occupancy reaches 75% for a period of five days,
ManorCare Health Services will be obligated to purchase the facility. Such
purchases shall be at fixed prices based upon a stated premium to approved
construction costs as determined under the Development Agreement. If ManorCare
Health Services does not acquire a facility within the two-year stabilization
period, Manor Care Realty will have the right to sell the facility to a third
party. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two-year stabilization period. Pursuant to the Assisted Living Facility
Management Agreement, ManorCare Health Services will manage assisted living
facilities for Manor Care Realty for a fixed monthly fee during the two-year
stabilization period under the Development Agreement. See "Relationship
Between Manor Care Realty and ManorCare Health Services After the
Distribution--Development Agreement." Accordingly, the risks related to
construction and the initial operation of the assisted living facilities
developed by Manor Care Realty will be borne by Manor Care Realty.
The financial terms of the Lease Agreements were structured by Manor Care's
management under the general direction of Manor Care's Board of Directors to
create a risk/reward sharing arrangement at each of the Skilled Nursing
Facilities pursuant to which each of the companies would be fairly and
reasonably compensated for the contributions it made and the risks it assumed.
Manor Care did not seek proposals from unaffiliated third parties. Such a
solicitation would not have been practical in view of the proposed
relationship and make-up of the two companies to be parties to the Lease
Agreements. However, after the terms of the Lease Agreements were finalized,
Manor Care's Board of Directors reviewed them in light of the objectives
listed above taking into account that alternative third party proposals were
not solicited. Similarly, the financial terms of the Development Agreement and
the Assisted Living Facility Management Agreements were structured to achieve
the following objectives: (i) Manor Care Realty should receive a fair return
on its capital invested in developing new assisted living facilities; (ii)
ManorCare Health Services should be required to purchase a facility
immediately upon its achievement of a profitable occupancy level; and (iii)
each party should receive returns based on the 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. Based on the Board of
Directors' review, the Board concurred with management's judgment that the
transactions contemplated by the Distribution Agreement, including the
Distribution, the Capital Contribution, the execution, delivery and
performance of the Lease Agreements, the Development Agreement and the
Assisted Living Facility Management Agreement and the transactions
contemplated thereby, when considered as a whole, are no less favorable to
either Manor Care Realty or ManorCare Health Services than would be available
from an unaffiliated third party.
DEPENDENCE ON MANOR CARE REALTY
ManorCare Health Services' core strategy contemplates the acquisition from
Manor Care Realty of 170 new Arden Courts facilities and 38 new Springhouse
facilities over the next five years. Under the Development Agreement, Manor
Care Realty will locate, develop and build these facilities for sale to
ManorCare Health Services and, pending their purchase by ManorCare Health
Services, will own them for an occupancy stabilization period of up to two
years. The success of ManorCare Health Services' strategy will thus depend in
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very significant part upon Manor Care Realty's capacity to locate desirable
sites, acquire property, obtain local regulatory approvals and construct the
facilities on schedule and on budget. The estimated cost to complete these
facilities is approximately $1.4 billion. Manor Care Realty's ability to
achieve its development goals will depend upon a variety of factors, many of
which are beyond Manor Care Realty's control, including Manor Care Realty's
ability to obtain necessary financing. As a result of the Distribution, Manor
Care Realty will be highly leveraged, with indebtedness that is substantial in
relation to its stockholders' equity. On a pro forma basis after giving effect
to the offering of the Manor Care Real Estate Notes and the use of proceeds
thereof, the Distribution and related borrowings and assuming that all holders
of the outstanding Old Senior Notes accept the Exchange Offer, on November 30,
1997, Manor Care Realty's aggregate outstanding indebtedness would have been
$776 million. This high degree of leverage may make it more difficult 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
ManorCare Health Services. In addition, Manor Care Realty's high degree of
leverage could adversely affect Manor Care Realty's ability to pay principal
and interest on or to redeem the Real Estate Note and may adversely affect the
ability of ManorCare Health Services to sell the Real Estate Note. The terms
of the Real Estate Note will not limit in any way ManorCare Health Services'
use of the proceeds thereof. ManorCare Health Services intends to use the
proceeds of the Real Estate Note for general corporate purposes, which may
include debt service, working capital or acquisition financing. The failure of
Manor Care Realty to pay principal and interest on the Real Estate Note in a
timely manner or the inability of ManorCare Health Services to sell the Real
Estate Note to a third party for its principal amount could have a material
adverse effect on ManorCare Health Services. See "Relationship Between Manor
Care Realty and ManorCare Health Services After the Distribution."
CONFLICTS WITH MANOR CARE REALTY
Subsequent to the Distribution, the interests of ManorCare Health Services
and Manor Care Realty may potentially conflict due to the ongoing
relationships between the companies. Such sources of conflict include the fact
that after the Distribution, (i) ManorCare Health Services will lease and
operate Manor Care Realty's skilled nursing facilities pursuant to the Lease
Agreements, (ii) Manor Care Realty will develop assisted living facilities for
ManorCare Health Services and ManorCare Health Services will manage each of
those facilities until certain sustained occupancy targets are achieved, at
which point ManorCare Health Services will be obligated to purchase the
facility pursuant to the Development Agreement, (iii) pending the possible
purchase of an assisted living facility by ManorCare Health Services pursuant
to the terms of the Development Agreement, ManorCare Health Services will
manage the facility for a fixed monthly fee to be agreed upon with Manor Care
Realty, (iv) Manor Care Realty will be indebted to ManorCare Health Services
as a result of the Real Estate Note, (v) ManorCare Health Services and Manor
Care Realty will enter into the Non-Competition Agreement that will limit the
competition between the companies and (vi) ManorCare Health Services may
manage assisted living facilities not developed by Manor Care Realty. See
"Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution." With respect to these matters, the potential exists for
disagreements as to the quality of the services provided by the parties and as
to contract compliance. However, Manor Care believes that each of Manor Care
Realty and ManorCare Health Services will benefit from a strategic
relationship with the other entity created by the Lease Agreements, the
Development Agreement, the Assisted Living Facility Management Agreement and
the other related party agreements. As a result of this relationship, each
company's revenues are dependent in part on the other company and thus Manor
Care believes that Manor Care Realty and ManorCare Health Services will have a
mutual interest in resolving any contract compliance disagreements. ManorCare
Health Services believes that there will be sufficient mutuality of interest
between the two companies to result in a mutually productive relationship.
However, despite the anticipated mutuality of interest, each of Manor Care
Realty and ManorCare Health Services will have unique shareholder groups whose
interests may differ from one another.
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In addition, ManorCare Health Services and Manor Care Realty will have two
common directors, Mr. Stewart Bainum, Jr. and Mr. Kennett L. Simmons. Messrs.
Bainum, Jr. and Simmons, as well as certain other officers and directors of
ManorCare Health Services and Manor Care Realty will also own shares (and/or
options or other rights to acquire shares) in both companies following the
Distribution. Appropriate policies and procedures will be followed by the
board of directors of each company to limit the involvement of the overlapping
directors (and if appropriate, relevant officers of such companies) in
conflict situations, including requiring them to abstain from voting as
directors of either ManorCare Health Services or Manor Care Realty. Such
procedures will include requiring Messrs. Bainum, Jr. and Simmons (or such
other executive officers or directors having a significant ownership interest
in both companies) to abstain from voting as directors of either company, with
respect to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest situation exists
will be determined on a case-by-case basis depending on such factors as the
dollar value of the matter, the degree of personal interest of Messrs. Bainum,
Jr. and Simmons (or such other executive officers and directors having a
significant ownership interest in both companies) in the matter, the
respective interests of the shareholders of ManorCare Health Services or Manor
Care Realty and the likelihood that resolution of the matter will have
significant strategic, operational or financial implications for the business
of the respective companies.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
It is a condition to the consummation of the Distribution that the Board of
Directors of Manor Care shall have received a satisfactory opinion regarding
the solvency of Manor Care and ManorCare Health Services and the
permissibility of the Contribution of Assets, the Assumption of Liabilities,
the Capital Contribution and the Distribution under the requirements of
Section 170 of the DGCL. The solvency opinion will address certain factual
matters relevant to an assessment of the legality of the Distribution under
Delaware law, but will not constitute a legal opinion and will not be
delivered by a firm qualified to practice law in Delaware. Manor Care's Board
of Directors does not intend to consummate the Distribution unless it is
satisfied regarding the solvency of Manor Care and ManorCare Health Services
and the permissibility of the Contribution of Assets, the Capital Contribution
and the Distribution under Section 170 of the DGCL. There is no certainty,
however, that a court would reach the same conclusion.
If a court (for example, in a lawsuit by an unpaid creditor or
representatives of creditors such as a transfer in bankruptcy) were to find
that, at the time Manor Care effected the Distribution, Manor Care or
ManorCare Health Services, as the case may be, (i) (a) was insolvent, (b) was
rendered insolvent by reason of the Distribution, (c) was engaged in a
business or transaction for which its remaining assets, as the case may be,
constituted unreasonably small capital, or (d) intended to incur, or believed
it would incur, debts beyond its ability to pay as such debts matured and
received less than fair consideration or reasonably equivalent value or (ii)
made the Distribution with actual intent to hinder, delay or defraud existing
or future creditors of Manor Care, such court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and require that
the stockholders return the distribution (in whole or in part) to Manor Care,
or require Manor Care or ManorCare Health Services, as the case may be, to
fund certain liabilities of the other company for the benefit of creditors.
The measure of insolvency for purposes of the foregoing will vary depending
upon the jurisdiction whose law is being applied. Generally, however, Manor
Care or ManorCare Health Services, as the case may be, would be considered
insolvent if the fair value of their respective assets were less than the
amount of their respective liabilities or if they incurred debt beyond their
ability to repay such debt as it matures. In addition, under Section 170 of
the DGCL (which is applicable to Manor Care in the Distribution) a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
Manor Care's Board of Directors and management believe that, in accordance
with the solvency opinion rendered in connection with the Distribution, both
prior to and immediately following the consummation of the Distribution, (i)
Manor Care, Manor Care Realty and ManorCare Health Services each (a) will be
solvent (in accordance with the foregoing definitions), (b) will be able to
repay its debts as they mature, and (c) will have sufficient capital to carry
on its businesses and (ii) the Distribution will be made entirely out of Manor
Care's
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surplus, as required under Section 170 of the DGCL. Manor Care's Board of
Directors and management further believe that neither Manor Care nor ManorCare
Health Services is entering into the Distribution with any actual intent to
hinder, delay or defraud existing or future creditors of Manor Care Realty or
ManorCare Health Services.
COMPETITION
ManorCare Health Services operates in a highly competitive environment and
competes with a variety of other companies in providing assisted living
services, skilled nursing services, institutional pharmacy services and home
health care services, as well as numerous other companies providing similar
service and care alternatives, such as congregate care facilities and
retirement communities. In particular, given the relatively low barriers to
entry and continuing health care cost containment pressures in the assisted
living industry, ManorCare Health Services expects that the assisted living
industry will become increasingly competitive in the future. Some of ManorCare
Health Services' present and potential competitors have, or may have access
to, greater financial resources than those of ManorCare Health Services and
may be more established in their respective communities than ManorCare Health
Services. Consequently, increased competition in the future could limit
ManorCare Health Services' ability to attract and retain residents, to
maintain or increase resident service fees or to expand its business. As a
result, any increased competition could have a material adverse effect on
ManorCare Health Services. See "Business of ManorCare Health Services after
the Distribution--Competition."
REGULATION
General. Health care is an area of extensive and frequent regulatory change.
The Federal government and all states in which ManorCare Health Services
operates regulate various aspects of ManorCare Health Services' business.
Skilled nursing facilities and assisted living facilities and other health
care businesses, including institutional pharmacies and home health agencies,
are subject to annual licensure and other regulatory requirements. In
particular, the operation of nursing facilities and the provision of health
care services are subject to Federal, state and local laws relating to the
delivery and adequacy of medical care, distribution of pharmaceuticals,
equipment, personnel, operating policies, fire prevention, rate-setting and
compliance with building codes and environmental laws. Skilled nursing
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with various standards, their
continued licensing under state law, certification under the Medicare and
Medicaid programs and continued participation in the Veterans Administration
program (to the extent they participate) and the ability to participate in
other third party programs. ManorCare Health Services is also subject to
inspection regarding record keeping and inventory control. Failure of the
skilled nursing facilities to be in substantial compliance with licensure and
certification laws, rules and regulations could result in loss of
certification as a Medicare and Medicaid provider and/or a loss of licensure.
ManorCare Health Services' assisted living facilities are subject to varying
degrees of regulation and licensing by local and state health and social
service agencies and other regulatory authorities specific to their location.
While regulations and licensing requirements often vary significantly from
state to state, they typically address, among other things: personnel
education, training and records; facility services, including administration
of medication, assistance with supervision of medication management and
limited nursing services; physical plant specifications; furnishing of
resident units; food and housekeeping services; emergency evacuation plans;
and resident rights and responsibilities. Failure of the assisted living
facilities to be in compliance with licensing requirements could result in
loss of licensure. In most states, assisted living facilities also are subject
to state or local building codes, fire codes and food service licensure or
certification requirements. In addition, since the assisted living industry is
relatively new, the manner and extent to which it is regulated at the Federal
and state levels are evolving. Changes in the laws or new interpretations of
existing laws as applied to the skilled nursing facilities, the assisted
living facilities or other components of the Company's health care businesses
may have a significant impact on ManorCare Health Services' methods and costs
of doing business.
Licensing. ManorCare Health Services' success will depend in part upon its
ability to satisfy applicable regulations and requirements and to procure and
maintain required licenses in rapidly changing regulatory environments. Any
failure to satisfy applicable regulations or to procure or maintain a required
license could
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have a material adverse effect on ManorCare Health Services. In addition,
certain regulatory developments, such as revisions in the building code
requirements for assisted living or skilled nursing facilities, mandatory
increases in the scope and quality of care to be offered to residents and
revisions in licensing and certification standards, could have a material
adverse effect on ManorCare Health Services. Furthermore, there have been
numerous initiatives on the Federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain of these health care initiatives, such as reductions in funding of the
Medicare and Medicaid programs, potential changes in reimbursement regulations
by the Health Care Financing Administration ("HCFA"), enhanced pressure to
contain health care costs by Medicare, Medicaid and other payors and
permitting greater state flexibility in the administration of Medicaid, could
adversely affect the Skilled Nursing Facilities operated by ManorCare Heath
Services.
Medicare Payment System. On August 5, 1997, Congress enacted the Budget Act
which changes the manner in which Medicare seeks to achieve a balanced Federal
budget by, among other things, reducing Federal spending on the Medicare and
Medicaid programs. The law contains numerous changes in Medicare payments to
skilled nursing facilities, home health agencies, and hospices. The law
reimburses skilled nursing facilities for cost reporting periods beginning
July 1, 1998. Medicare is currently a retrospective payment system in which
each facility receives an interim payment during the year, which is later
adjusted to reflect actual allowable direct and indirect costs of services
based on the submission of a cost report at the end of each year. The Budget
Act will result in a shift to a prospective Medicare payment system in which
skilled nursing facilities will be reimbursed at a per diem rate for specific
covered services regardless of actual cost. Specifically, the Budget Act
provides that, over three reporting periods starting July 1, 1998, the
Medicare program will phase into this prospective payment system. During the
first reporting period, skilled nursing facilities will receive 75% of their
reimbursement based on actual costs and 25% based on a federally scheduled per
diem rate. In the second reporting period, reimbursement will be 50% cost-
based and 50% rate-based, in the third, 25% cost-based and 75% rate-based.
Thereafter, skilled nursing facilities will be reimbursed by Medicare solely
based on a prospective payment system. For ManorCare Health Services the
phase-in to prospective rates will begin in November, 1998. A similar
prospective payment system is required to be established for home health
services, beginning October 1, 1999. Prior to implementation, the Budget Act
establishes certain interim payment measures, for cost reporting periods
beginning after October 1, 1997, including reduced home health limits,
reducing per visit cost limits, and agency-specific per beneficiary annual
limits on an agency's costs. The law also reduces payments to many providers
and suppliers, including hospices. The Budget Act also gives states greater
flexibility in the administration of their Medicaid programs in that the
Budget Act repeals the requirement that payment be reasonable and adequate to
cover the costs of "efficiently and economically operated" skilled nursing
facilities. There can be no assurance that additional Federal, state or local
laws or regulations will not be imposed or expanded which would have a
material adverse effect on ManorCare Heath Services.
Anti-Remuneration Laws. ManorCare Heath Services is also subject to Federal
and state laws which govern financial and other arrangements between health
care providers. These laws prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. These laws include the
Federal "Stark Legislation" which prohibits, with limited exceptions, the
referral of patients for certain designated health services, including home
health services, physical therapy and occupational therapy, by a physician to
an entity in which the physician has a financial ownership interest. The
January 1998 notice of proposed rulemaking to issue regulations implementing
the Stark Legislation makes clear that the restrictions apply to referrals for
designated health services provided in skilled nursing facilities. In
addition, ManorCare Health Services is subject to the Federal "anti-kickback
law" which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of patients, or
the purchasing, leasing, ordering, arranging for any goods, facility services
or items for which payment can be made under Medicare, Medicaid or other
Federal health care programs. The Federal government, private insurers and
various state enforcement agencies have increased their scrutiny of providers,
business practices and claims in an effort to identify and prosecute
fraudulent and abusive practices. In addition, the Federal government has
issued recent fraud alerts concerning nursing services, double billing, home
health services and the provision
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of medical supplies to skilled nursing facilities; accordingly, these areas
may come under closer scrutiny by the government. In addition, in July 1995,
Federal officials announced a major anti-fraud initiative called Operation
Restore Trust. This program targets fraud involving skilled nursing
facilities, home health agencies, suppliers of medical equipment and hospices
and is currently operating in 17 states. Furthermore, some states restrict
certain business relationships between physicians and other providers of
health care services. Many states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs and
civil and criminal penalties. These laws vary from state to state and have
seldom been interpreted by the courts or regulatory agencies. There can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of, and business transactions by, ManorCare Heath Services.
Failure to comply with such laws can result in civil money penalties,
exclusion from the Medicare, Medicaid and other Federal health care programs,
and criminal convictions.
Certificate of Need Laws. Many states have adopted Certificate of Need or
similar laws which generally require that the appropriate state agency approve
certain acquisitions and determine that a need exists for certain bed
additions, new services and capital expenditures or other changes prior to
beds and/or new services being added or capital expenditures being undertaken.
To the extent that Certificates of Need or other similar approvals are
required for the expansion of ManorCare Health Services operations, either
through facility acquisitions or expansion or provision of new services or
other changes, such expansion could be adversely affected by the failure or
inability to obtain the necessary approvals, changes in the standards
applicable to such approvals and possible delays and expenses associated with
obtaining such approvals. Manor Care has extensive filing for CONs. During the
period from 1987 to the present, Manor Care commenced operations of at 64 new
skilled nursing facilities, most of which required CON applications. During
the past four fiscal years, Manor Care received CON approval for 13 skilled
nursing facilities and 18 assisted living facilities. There can be no
assurance, however, that ManorCare Health Services will be able to obtain CON
approval for all future projects requiring such approval. See "Business of
ManorCare Health Services After the Distribution--Government Regulation."
Medicaid Waiver Program. Certain states provide for Medicaid reimbursement
for assisted living services pursuant to Medicaid Waiver Programs permitted by
the Federal government. In the event ManorCare Heath Services elects to
provide services in states with a Medicaid Waiver Program, ManorCare Heath
Services may then elect to become certified as a Medicaid provider in such
states. As a provider of services under the Medicaid Waiver Program, ManorCare
Heath Services will be subject to all of the requirements of such program,
including the fraud and abuse laws, violations of which may result in civil
and criminal penalties and exclusion from further participation in the
Medicaid Waiver Program and other Federal health care programs. ManorCare
Heath Services intends to comply with all applicable laws, including the fraud
and abuse laws; however, there can be no assurance that administrative or
judicial interpretation of existing laws or regulations will not in the future
have a material adverse impact on ManorCare Heath Services' business, results
of operations or financial condition. See "Business of ManorCare Health
Services After the Distribution--Government Regulation."
Related Party Rule. The Medicare related party rule applies to companies
that are associated or affiliated with or have control of, or are controlled
by, a Medicare provider. Many state Medicaid programs have adopted the same
rule in determining costs that will be included in the payment rates. The
Medicare program may consider Vitalink and In Home Health to be related
parties with ManorCare Health Services. Consequently, unless a provider
qualifies for the exception to the related party rule, the Medicare program
will only reimburse the provider for the cost incurred by the related party in
providing products or services, rather than the related party's charge. An
organization can qualify for an exception from the related party rule by
meeting the following criteria: 1) the entities are bona-fide separate
organizations; 2) a substantial part of the supplying organization's business
activity is conducted with non-related organizations and there is an open,
competitive market for such services or products; 3) the services or products
are commonly obtained by a provider from other organizations and are not a
basic element of patient care ordinarily furnished directly to patients by the
provider; and 4) the charge to the provider is in line with the charge for
such services and products in the open market and no more
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than the charge made under comparable circumstances to others. The Medicare
related party rule could materially affect the relationship among ManorCare
Health Services, Manor Care Realty, Vitalink and In Home Health.
Home Health Care. On September 15, 1997, President Clinton imposed a
Medicare moratorium on new home health agencies, so that new regulations could
be issued to combat fraud. On January 13, 1998, the Clinton Administration
lifted the moratorium, based on the issuance of new regulations for home
health agencies. These regulations require, as mandated by the Budget Act,
that all home health agencies obtain surety bonds to participate in the
Medicare and Medicaid programs and disclose related business interests.
ManorCare Health Services does not believe that there will be any material
adverse affect on either In Home Health or on ManorCare Health Services as a
result of these new requirements.
STAFFING AND LABOR COSTS
ManorCare Heath Services competes with various health care providers,
including other assisted living and skilled nursing providers, with respect to
attracting and retaining qualified or skilled personnel. ManorCare Health
Services also depends on the available labor pool of low-wage employees. A
shortage of nurses or other trained personnel or general inflationary
pressures may require ManorCare Health Services to enhance its wage and
benefits package in order to compete. There can be no assurance that ManorCare
Health Services' labor costs will not increase or, if they do, that such costs
can be matched by corresponding increases in revenues. Any significant failure
by ManorCare Health Services to attract and retain qualified employees, to
control its labor costs or to match increases in its labor expenses with
corresponding increases in revenues could have a material adverse effect on
ManorCare Health Services' business, operating results and financial
condition. See "Business of ManorCare Health Services after the Distribution--
Employees."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
ManorCare Health Services currently, and for the foreseeable future, expects
to rely primarily on the ability of the residents of its assisted living
facilities to pay ManorCare Health Services' fees from their own or familial
financial resources. Generally only seniors with income or assets meeting or
exceeding the comparable median in the region where ManorCare Health Services'
assisted living facilities are located are expected to be able to afford
ManorCare Health Services' fees. Inflation or other circumstances that
adversely affect the ability of seniors to pay for ManorCare Health Services'
services could have an adverse effect on ManorCare Health Services. If
ManorCare Health Services encounters difficulty in attracting seniors with
adequate resources to pay for its services, its business, operating results
and financial condition likely would be adversely affected.
PAYMENT BY THIRD-PARTY PAYORS
A portion of ManorCare Health Services' revenues from the services it
provides for the Skilled Nursing Facilities will be dependent upon
reimbursement from third-party payors, including Medicare, state Medicaid
programs and private insurers. For the fiscal year ended May 31, 1997, the
Skilled Nursing Facilities to be operated by ManorCare Health Services derived
approximately 55% of their patient service revenue from private pay sources,
19% from Medicare and 26% from various state Medicaid agencies in each case as
they were operated by Manor Care. As of May 31, 1997, all of the patients at
Manor Care's assisted living facilities were private pay. Both governmental
and private third-party payors have employed cost containment measures
designed to limit payments made to health care providers such as ManorCare
Health Services. Those measures include the adoption of initial and continuing
recipient eligibility criteria which may limit payment for services, the
adoption of coverage and duration criteria which limit the services which will
be reimbursed and establishment of payment ceilings which set the maximum
reimbursement that a provider may receive for services. Furthermore,
government payment programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially increase or decrease the rate of
program payments to ManorCare Health Services for its services. There can be
no assurance that payments under governmental and private third-party payor
programs will remain at levels comparable to present levels or will, in the
future, be sufficient to cover the costs required to serve to patients
eligible for reimbursement
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pursuant to such programs. In addition, there can be no assurance that the
Skilled Nursing Facilities, or the provision of services and supplies by
ManorCare Health Services, now or in the future will initially meet or
continue to meet the requirements for participation in such programs.
ManorCare Health Services could be adversely affected by the continuing
efforts of governmental and private third-party payors to contain the amount
of reimbursement for health care services. For example, the Budget Act will,
over the next several years, alter the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods from a retrospective to
a prospective payment system. See "--Regulation." In addition, certain states
have proposed or enacted a case mix prospective payment system pursuant to
which the payment to a facility for a patient is based upon the patient's
condition and need for services. ManorCare Health Services cannot at this time
predict whether any pending/new proposals will be adopted or, if adopted and
implemented, what effect, if any, such proposals will have on ManorCare Health
Services. In addition, private payors, including managed care payors,
increasingly are demanding discounted fee structures or the assumption by
health care providers of all or a portion of the financial risk through
prepaid capitation arrangements. Efforts to impose reduced allowances, greater
discounts and more stringent cost controls by government and other payors are
expected to continue and could, depending on the scope, have a material
adverse effect on ManorCare Health Services.
RISKS RELATED TO IN HOME HEALTH
The majority of In Home Health's revenue is derived from services provided
to Medicare beneficiaries. Currently, Medicare reimburses participating
Medicare-certified home health agencies for the reasonable costs incurred to
provide covered visits to eligible beneficiaries, subject to certain cost
limits. Due to certain limitations on the nature and amount of the costs that
are reimbursable, In Home Health incurs a loss on the Medicare business.
During 1997, several cost reimbursement issues that were in dispute for
several years were resolved through decisions by the PRRB and the U.S District
Court. As a result of these decisions and other communications from HCFA, it
became clear that some costs incurred by In Home Health would not be
reimbursed by Medicare. Although In Home Health has restructured its
operations and eliminated a portion of these nonreimbursable costs, In Home
Health will continue to incur some costs that are not reimbursed by Medicare,
as it believes they constitute a necessary function to the conduct of its
business.
The Balanced Budget Act of 1997 required HCFA to implement a prospective
payment system for home health agencies by October 1, 1999, with up to a four-
year phase-in period. Prospective rates determined by HHS would reflect a 15%
reduction to the cost limits and per patient limits as of September 30, 1999.
In the event the implementation deadline is not met, the reduction will be
applied to the reimbursement system then in place. The impact of such a
change, if implemented, on In Home Health's results of operations cannot be
predicted with any certainty at this time and would depend, to a large extent,
on the reimbursement rates for home nursing established on an interim basis
and under the prospective payment system. There can be no assurances that such
reimbursement rates, if enacted, would cover the costs incurred by In Home
Health to provide home nursing services. Until the prospective payment takes
effect on October 1, 1999, the Budget Act sets up an interim payment system
(the "IPS") that provides for lowering of reimbursement limits for home health
visits. Cost limit increases for fiscal 1995 and 1996, have been eliminated.
In addition, for cost reporting periods beginning on October 1, 1997, home
health agencies cost limits will be determined at the lesser of (i) their
actual costs (ii) cost limits based on 105% of median costs of free-standing
home health agencies or (iii) an agency-specific per-patient cost cap, based
on 98% of 1994 costs adjusted for inflation. In Home Health is unable to
determine the effect of the IPS until HCFA finalizes related regulatory
guidance on the implementation of the IPS. The new cost limits will apply to
In Home Health for the cost reporting period beginning October 1, 1997. A
reduction in these cost limits could have a significant effect on In Home
Health's results of operations; however, the effect of such reductions cannot
be predicted with any level of certainty.
ENVIRONMENTAL MATTERS
Certain federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. Failure to comply with such laws or the
regulations promulgated thereunder could subject an entity covered by these
laws to fines, criminal penalties and other enforcement actions. ManorCare
Health Services has developed policies with respect to the handling and
disposal of medical, infectious and hazardous waste to assure
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SIGNIFICANT BAINUM FAMILY INTEREST
Upon completion of the Distribution, Messrs. Stewart Bainum and Stewart
Bainum, Jr. are expected to own beneficially approximately 15.22% and 22.86%,
respectively, of the Common Stock of ManorCare Health Services, in each case
including shares with respect to which voting power is shared with each other
and other individuals or entities. Collectively, members of the Bainum family
are expected to own beneficially approximately 29.95% of the Common Stock. In
addition, Mr. Bainum, Jr. will be Chairman of the Board of ManorCare Health
Services. As a result, the Bainum family may be in a position to influence
significantly the affairs of ManorCare Health Services, including the election
of directors.
THE YEAR 2000 ISSUE
ManorCare Health Services has assessed and continues to assess the potential
impact of the situation commonly referred to as the "Year 2000 Issue." The
Year 2000 Issue, which affects most corporations, concerns the inability of
information systems, primarily computer software programs, to properly
recognize and process date sensitive information relating to the year 2000 and
beyond. ManorCare Health Services is in the process of determining the costs
and expenditures associated with the Year 2000 Issue and has several
information system improvement initiatives underway to ensure that ManorCare
Health Services' computer systems will be Year 2000 compliant. ManorCare
Health Services is expected to incur expenditures of approximately $6 to $8
million over the next few years to address this issue. The failure by third
party payors, such as private 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 ManorCare
Health Services.
46
<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. In addition, as part of the Capital
Contribution, Manor Care will cause Manor Care Real Estate to issue the Real
Estate Note to ManorCare Health Services.
The following table illustrates the estimated sources and uses of funds,
assuming the Distribution was consummated on November 30, 1997 and that all
holders of the outstanding Old Senior Notes accept the Exchange Offer:
<TABLE>
<CAPTION>
AMOUNT
(DOLLARS
IN MILLIONS)
------------
<S> <C>
Sources:
Reimbursement from ManorCare Health Services to repay Ex-
isting Revolving Credit Facility(1)....................... $ 30.0
Working capital reimbursement from ManorCare Health Servic-
es........................................................ 12.5
Revolving Credit Facility(2)............................... 0.0
Term Loan.................................................. 150.0
Gross proceeds of the Offering............................. 350.0
Real Estate Note(3)........................................ 250.0
------
Total Sources............................................ $792.5
======
Uses:
Contribution of Cash to ManorCare Health Services(3)....... $250.0
Repayment of amounts outstanding under Existing Revolving
Credit Facility .......................................... 215.0
Repayment of amounts outstanding under Promissory Note..... 21.9
Repayment of certain mortgage bond indebtedness(4)......... 0.5
Cash and cash equivalents.................................. 34.1
Contribution of Real Estate Note to ManorCare Health Serv-
ices(3)................................................... 250.0
Fees and expenses.......................................... 20.5
------
Total Uses............................................... $792.5
======
</TABLE>
- --------
(1) ManorCare Health Services has agreed to reimburse Manor Care Realty an
aggregate of $30.0 million for borrowings under the Existing Credit
Facility relating to Manor Care's May 1997 tender offer for additional
shares of Vitalink.
(2) For a description of the availability of borrowings under the Revolving
Credit Facility, see "Description of Certain Indebtedness--The Credit
Facilities."
(3) Manor Care may reduce the principal amount of the Real Estate Note prior
to issuance or reduce the amount of the cash portion of the Capital
Contribution to the extent Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
(4) The mortgages were repaid on December 1, 1997.
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 November 30, 1997, the
outstanding balance under the Existing Revolving Credit Facility allocated to
Manor Care Realty was $215 million. The Existing Revolving Credit Facility
bears interest at a fluctuating LIBOR-based rate. At November 30, 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
47
<PAGE>
Care of up to $25.0 million and matures on June 30, 1998. At November 30,
1997, the outstanding balance under the Promissory Note was $21.9 million. The
Promissory Note bears interest at a fluctuating Federal funds-based rate. At
November 30, 1997, the weighted average interest rate of Manor Care's
outstanding borrowings under the Promissory Note was 6.06%. 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.
48
<PAGE>
MANOR CARE REALTY PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of Manor Care Realty at
November 30, 1997 and as adjusted to give pro forma effect to the Distribution
and related borrowings, including the Credit Facilities and the Real Estate
Note, the consummation of the Exchange Offer and the consummation of the
Offering and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
-----------------
ACTUAL PRO FORMA
------- ---------
(DOLLARS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-Term Debt:
The Notes................................................... $ -- $350,000
Term Loan................................................... -- 150,000
Mortgage and Capital Leases................................. -- 26,415
Real Estate Note(1)......................................... -- 250,000
------- --------
Total Long-Term Debt...................................... -- 776,415
Shareholders' Equity:
Total shareholders' equity................................ 24,603 25,863
------- --------
Total Capitalization.......................................... $24,603 $802,278
======= ========
</TABLE>
- --------
(1) Manor Care may determine to reduce the principal amount of the Real Estate
Note prior to issuance or to reduce the amount of the cash portion of the
Capital Contribution to the extent that Old Senior Notes remain
outstanding upon consummation of the Exchange Offer. See "Description of
the Transactions--The Exchange Offer."
49
<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 six month period
ended November 30, 1997 give effect to the Distribution and related
transactions, including the Credit Facilities, the Real Estate Note, the Lease
Agreements, the Development Agreement, 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. The unaudited pro
forma consolidated condensed statements of income for the fiscal year ended
May 31, 1997 and the six month period ended November 30, 1997 have been
prepared by adjusting the historical consolidated statements of income to
reflect the Distribution and related transactions as if they had been effected
on June 1, 1996. Manor Care has concluded that the terms of the Lease
Agreements will not affect the operations of the skilled nursing facilities
and therefore, that the pro forma effect of such agreements can be established
with reasonable accuracy.
The unaudited pro forma consolidated condensed balance sheet of Manor Care
Realty at November 30, 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 November
30, 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.
50
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MAY 31, 1997
------------------------------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------------------
LEASE MANAGEMENT PRO
HISTORICAL DISTRIBUTION AGREEMENTS AGREEMENT FORMA
---------- ------------ ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $44,889 $ 1,603 (a) $177,004(d) $222,040
(12,087)(i)
4,990 (c)
5,641 (c)
EXPENSES:
Operating expenses.... 37,871 2,081 (a) 20,266(d) $ 402 (f) 64,149 (m)
77 (a)
338 (b)
5,447 (b)
4,858 (c)
(7,191)(i)
Depreciation and
amortization......... 1,955 365 (a) 58,105(d) 60,608
183 (c)
Provision for
restructuring charge. 0 6,450 (j) 6,450
------- -------- -------- ----- --------
Total expenses........ 39,826 12,608 78,371 402 131,207
------- -------- -------- ----- --------
INCOME BEFORE OTHER
INCOME AND EXPENSES AND
INCOME TAXES........... 5,063 (12,461) 98,633 (402) 90,833
OTHER INCOME AND
EXPENSES:
Interest income and
other................ 0 6,291 (k) 6,301
10 (e)
Interest expense...... 0 (60,552)(g) (60,552)
------- -------- -------- ----- --------
INCOME BEFORE INCOME
TAXES.................. 5,063 (66,712) 98,633 (402) 36,582
Provision (benefit) for
income taxes........... 1,919 (27,008)(l) 39,817(l) (162)(l) 14,566
------- -------- -------- ----- --------
NET INCOME (LOSS)....... $ 3,144 $(39,704) $ 58,816 $(240) $ 22,016
======= ======== ======== ===== ========
WEIGHTED AVERAGE SHARE
OF COMMON STOCK........ 63,257 63,257
------- --------
INCOME PER SHARE OF
COMMON STOCK:
Net income per share.. $ 0.05 $ 0.35
======= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed statement of income.
51
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997
-------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
----------------------------------------------------
LEASE MANAGEMENT DEVELOPMENT PRO
HISTORICAL DISTRIBUTION AGREEMENTS AGREEMENT AGREEMENT FORMA
---------- ------------ ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $22,221 $ 1,845 (a) $93,648(d) $3,168(h) $130,225
6,163 (c)
3,180 (c)
EXPENSES:
Operating expenses..... 19,035 1,756 (a) 10,560(d) $ 111 (f) 37,176 (m)
151 (a)
169 (b)
2,618 (e)
2,776 (b)
Depreciation and amor-
tization.............. 1,150 446 (a) 31,528(d) 33,218
94 (e)
Provision for restruc- 0 6,450 (j) 6,450
turing charge......... ------- -------- ------- ----- ------ --------
Total expenses......... 20,185 14,460 42,088 111 -- 76,844
------- -------- ------- ----- ------ --------
INCOME BEFORE OTHER
INCOME AND (EXPENSES)
AND INCOME TAXES....... 2,036 (3,272) 51,560 (111) 3,168 53,381
OTHER INCOME AND
(EXPENSES):
Interest income and
other................ (63) 3,665 (k) 3,607
5 (e)
Interest expense...... (74) (23,361)(g) (23,507)
(72)(e)
------- -------- ------- ----- ------ --------
INCOME BEFORE INCOME
TAXES.................. 1,899 (23,035) 51,560 (111) 3,168 33,481
Provision for income 745 (9,110)(l) 20,392(l) (44)(l) 1,253 13,236
taxes................ ------- -------- ------- ----- ------ --------
NET INCOME (LOSS)....... $ 1,154 $(13,925) $31,168 $ (67) $1,915 $ 20,245
======= ======== ======= ===== ====== ========
WEIGHTED AVERAGE SHARES
OF COMMON STOCK........ 63,748 63,748
------- --------
INCOME PER SHARE OF
COMMON STOCK:
Net income per share of
common stock.......... $ 0.02 $ 0.32
======= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed statement of income.
52
<PAGE>
MANOR CARE REALTY
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
NOVEMBER 30, 1997 ADJUSTMENTS PRO FORMA
----------------- ----------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 183 $ 500,000 (g) $ 61,522
(250,000)(a)
12,500 (d)
26,726 (c)
(206,941)(g)
(20,950)(f)
4 (b)
Other current assets............... 6,296 165,942 (c) 200,572
28,189 (e)
145 (b)
------- ---------- ----------
Total current assets............... 6,479 255,615 262,094
Property and equipment, net........ 19,829 814,988 (c) 849,331
14,514 (b)
Other assets....................... 1,634 59,401 (c) 75,927
14,500 (f)
392 (b)
------- ---------- ----------
Total assets....................... $27,942 $1,159,410 $1,187,352
======= ========== ==========
Total current liabilities.......... $ 2,161 $ 77,455 (c) $ 202,247
108,712 (c)
207 (b)
13,712 (e)
Long-term debt..................... 0 233,356 (c) 526,415
293,059 (g)
Real Estate Note................... 0 250,000 (a) 250,000
Other long-term liabilities........ 1,178 34,781 (c) 182,827
146,390 (e)
478 (b)
------- ---------- ----------
Total liabilities.................. 3,339 1,158,150 1,161,489
Total shareholders' equity......... 24,603 (500,000)(a) 25,863
(131,913)(e)
612,752 (c)
12,500 (d)
(6,450)(f)
14,371 (b)
------- ---------- ----------
Total liabilities and shareholders'
equity............................ $27,942 $1,159,410 $1,187,352
======= ========== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed balance sheet.
53
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(a) Reflects the 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 incremental annual costs of $0.3 million for the fiscal year
ended May 31, 1997 and $0.2 million for the six months ended November 30,
1997 and the transfer of expenses of $5.4 million for the fiscal year
ended May 31, 1997 and $2.8 million for the six months ended November 30,
1997 to Manor Care Realty. Incremental costs relate primarily to personnel
and related overhead associated with finance, cash management, human
resources and legal functions. These personnel will replace existing
employees in these functions who are transferring to Manor Care Realty,
but whose positions are still required by ManorCare Health Services.
Transferred expenses include costs associated with personnel in finance,
accounting, legal, construction and development functions who will be
transferred from ManorCare Health Services, as well as additional
directors' fees, etc. Costs are transferred based on the historical costs
incurred for these functions by Manor Care, Inc.
(c) Transferred credits of $5.0 million for the fiscal year ended May 31, 1997
and $6.2 million for the six months ended November 30, 1997 relate to
rental income and gains on the sales of skilled nursing facilities and of
a corporate office building.
(d) Reflects lease payments to Manor Care Realty for skilled nursing
facilities under the terms of the Lease Agreements as well as depreciation
and real estate taxes associated with those properties. During the first
fiscal year under which such agreements are in effect, lease payments are
calculated as the greater of 77% of the aggregate defined net operating
profits or 10% of the aggregate priority basis, plus applicable real
estate taxes and insurance of the respective facilities. For the year
ended May 31, 1997, 77% of aggregate defined net operating profits
exceeded 10% of the aggregate priority basis, resulting in pro forma rent
expense of $177 million. In subsequent periods the terms of the Lease
Agreements require calculation of rent at the greater of 77% of the
defined net operating profit or 10% of the priority basis on an individual
property basis with rent deferred on properties for which cashflow is not
adequate to pay 10% of priority basis. Had the rent expense for the year
ended May 31, 1997 been calculated under such terms, total rent expense
would have been $180 million, which is net of a reduction of rent expense
of $10.3 million relating to 23 facilities which would not have generated
adequate cashflow to pay 10% of priority basis. The $10.3 million would
have been deferred and ultimately canceled. Approximately $6.6 million of
the $10.3 million relates to recently acquired, renovated or developed
facilities which are anticipated to generate sufficient cashflow to make
priority rent payments within the next two fiscal years.
The pro forma rent expense for the six months ended November 30, 1997, of
$93.6 million was calculated on a property by property basis as the greater
of 77% of defined net operating profit or 10% of priority basis.
(e) Reflects the operations of a skilled nursing facility which will be under
management contract.
(f) Reflects management fees associated with the Developed Properties under
the terms of the Assisted Living Facility Management Agreements. See Note
(a).
(g) Reflects additional interest expense associated with the indebtedness
under the Credit Facilities at an estimated interest rate of 7.75% ($11.6
million for the fiscal year ended May 31, 1997 and $5.8 million for the
six months ended November 30, 1997), the issuance of $350 million
aggregate principal amount of Manor Care Real Estate Notes offered hereby
at an estimated rate of 8.5% ($29.8 million and $14.9 million,
respectively), the issuance of the $250 million Real Estate Note at an
estimated rate of 8.5% ($21.3 million and $10.6 million, respectively),
and interest expense related to mortgages on skilled nursing facilities
and other, net of capitalized interest $(2.1) million and $(7.8) million,
respectively.
54
<PAGE>
(h) Reflects the gains on the sales of assisted living facilities (the "Sold
Properties") to ManorCare Health Services. The Sold Properties represent
facilities which opened subsequent to June 1, 1996 and achieved 75%
occupancy prior to November 30, 1997.
(i) Reflects the revenues and expenses of sold facilities which would have
been owned by Manor Care Realty.
(j) Reflects transaction fees of $6.5 million for the fiscal year ended May
31, 1997. Included are fees incurred for legal and accounting services of
$4.6 million as well as printing, mailing, travel and other miscellaneous
expenses of $1.9 million related to the transaction and the related public
filings.
(k) Reflects interest and other income of $6.3 million and $3.7 million for
the six months ended November 30, 1997, related mainly to rental income of
$1.8 million for the fiscal year ended May 31, 1997 and $0.8 million for
the six months ended November 30, 1997, gains on sales of miscellaneous
assets of $1.1 million for the fiscal year ended May 31, 1997 and $0.1
million for the six months ended November 30, 1997, interest income of
$1.7 million for the fiscal year ended May 31, 1997 and $0.5 million for
the six months ended November 30, 1997 and miscellaneous income of $1.7
million for the fiscal year ended May 31, 1997 and $2.3 million for the
six months ended November 30, 1997. This income relates to assets which
will be owned by Manor Care Realty.
(l) Reflects tax effect of adjustments made pursuant to notes (a) through (k).
(m) Operating expenses consist of Mesquite Hospital operating expenses,
property taxes on the facilities, management fees associated with the
management by Manor Care Health Services of the Developed Properties under
the terms of the Assisted Living Facility Management Agreements and
general corporate expenses.
55
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(a) Reflects cash of $250.0 million and the Real Estate Note contributed to
ManorCare Health Services at the Effective Date.
(b) Reflects the assets and liabilities attributable to the Developed
Properties. Properties that opened subsequent to June 1, 1996 and achieved
a 75% occupancy prior to November 30, 1997 fall under the Development
Agreement for purposes of the pro forma income statement. These properties
had a total cost of $17.7 million. The pro forma purchase price for these
properties is $20.5 million, which represents an average premium over
total cost of 15.8%. The pro forma gain on the sale of those properties
from Manor Care Realty to ManorCare Health Services is $3.2 million for
the six months ended November 30, 1997. The fair value of these properties
(calculated using a discounted cash flow model which assumes a 10.25%
discount rate over 10 years) exceeds the total purchase price of the
properties as calculated under the terms of the Development Agreement.
(c) Reflects the transfer of the skilled nursing facilities, mortgages and
certain other assets and liabilities associated with the skilled nursing
facilities, as well as $3.2 million related to Manor Care Realty's
appreciation rights in the Gaithersburg headquarters building.
(d) Reflects payment of $12.5 million from ManorCare Health Services for
working capital of skilled nursing facilities, which remains at ManorCare
Health Services.
(e) Reflects the allocation of deferred tax liabilities to Manor Care Realty
pursuant to the Tax Allocation Agreement. Deferred tax assets and
liabilities are allocated between Manor Care Realty and ManorCare Health
Services based upon the allocation of the underlying assets and
liabilities.
(f) Reflects capitalized deferred financing fees of $14.5 million and payment
of transaction fees of $6.5 million. Those include fees incurred for legal
and accounting services of $4.6 million as well as printing, mailing,
travel and other miscellaneous expenses of $1.9 million related to the
transaction and the related public filings.
(g) Reflects the additional $150 million of Term Loan indebtedness and $350
million of Manor Care Real Estate Notes offered hereby as well as the
repayment of the amounts outstanding under the Existing Credit Facility
($185.0 million) and the Promissory Note ($21.9 million).
56
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MANOR CARE REALTY
Due to the fact that the majority of the current Manor Care operations will
be transferred to ManorCare Health Services in connection with the
Distribution, the Distribution will be reported for accounting purposes as a
"reverse spin-off." Accordingly, Manor Care, Inc. will continue to present
consolidated results (with no discontinued operations treatment) up to the
date of the Distribution. After the Distribution, ManorCare Health Services
will present Manor Care's historical consolidated results for periods prior to
the Distribution and Manor Care Realty will present the historical results of
Mesquite Hospital, Manor Care Realty's accounting predecessor, for periods
prior to the Distribution.
The statements of income data for the fiscal years ended May 31, 1997, 1996
and 1995 and the balance sheet data as of fiscal years ended May 31, 1997 and
1996 are derived from the audited financial statements of Mesquite Hospital,
Manor Care Realty's accounting predecessor. The balance sheet data at May 31,
1995, 1994 and 1993 and statements of income data for the fiscal years ended
May 31, 1994 and 1993 are derived from unaudited financial statements of
Mesquite Hospital, Manor Care Realty's accounting predecessor, that, in the
opinion of Mesquite Hospital, Manor Care Realty's accounting predecessor,
reflect all adjustments consisting of normal recurring adjustments necessary
to present fairly the information set forth below. The statements of income
data for the six month periods ended November 30, 1997 and 1996 and the
balance sheet data as of November 30, 1997 are derived from the unaudited
financial statements of Manor Care. The following selected historical
financial data of Mesquite Hospital, Manor Care Realty's accounting
predecessor, should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this Registration
Statement. The historical financial statements of Mesquite Hospital, Manor
Care Realty's accounting predecessor, may not necessarily reflect the results
of operations or financial position that would have been obtained had Manor
Care Realty been a separate, independent company. See "Management's Discussion
and Analysis of Manor Care Realty's Financial Condition and Results of
Operation." Earnings per share data are presented elsewhere in this
Registration and on a pro forma basis only. See "Manor Care Realty Pro Forma
Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, FISCAL YEARS ENDED MAY 31,
-------------------- ------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $ 22,221 $ 21,827 $44,889 $42,044 $40,505 $36,167 $31,832
Expenses:
Operating expenses.... 16,567 15,749 32,467 30,839 30,132 26,413 22,901
Depreciation and
amortization......... 1,150 865 1,955 1,344 1,275 1,207 1,218
General corporate and
other................ 2,468 2,565 5,404 4,835 4,744 4,490 4,574
--------- --------- ------- ------- ------- ------- -------
Total expenses...... 20,185 19,179 39,826 37,018 36,151 32,110 28,693
--------- --------- ------- ------- ------- ------- -------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 2,036 2,648 5,063 5,026 4,354 4,057 3,139
Other income and
(expenses):
Interest expense...... 74 -- -- -- -- 6 153
Limited partners'
interest............. 63 -- -- -- -- -- --
--------- --------- ------- ------- ------- ------- -------
Income from operations
before income taxes.... 1,899 2,648 5,063 5,026 4,354 4,051 2,986
Income taxes............ 745 1,032 1,919 1,907 1,647 1,539 1,135
--------- --------- ------- ------- ------- ------- -------
Income from continuing
operations............. $ 1,154 $ 1,616 $ 3,144 $ 3,119 $ 2,707 $ 2,512 $ 1,851
========= ========= ======= ======= ======= ======= =======
<CAPTION>
AS OF NOVEMBER 30, AS OF MAY 31,
-------------------- ------------------------------------------
1997 1997 1996 1995 1994 1993
-------------------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $27,942 $29,368 $26,512 $19,797 $18,183 $17,495
Shareholders' equity.... 24,603 23,449 20,305 17,186 14,479 11,967
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, FISCAL YEARS ENDED MAY 31,
-------------------- ------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash (utilized) provided
by operating
activities............. $ (403) $ 2,085 $ 5,294 $ 7,879 $ 1,508 N/A N/A
Cash utilized by
investing activities... (228) (1,962) (5,418) (7,678) (1,421) N/A N/A
Cash provided by
financing activities... 650 -- -- -- -- N/A N/A
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF MANOR CARE REALTY'S
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Due to the fact that the majority of the current Manor Care operations will
be transferred to ManorCare Health Services in connection with the
Distribution, the Distribution will be reported for accounting purposes as a
"reverse spin-off." Accordingly, Manor Care, Inc. will continue to present
consolidated results (with no discontinued operations treatment) up to the
date of the Distribution. After the Distribution, ManorCare Health Services
will present Manor Care's historical consolidated results for periods prior to
the Distribution and Manor Care Realty will present the historical results of
Mesquite Hospital, Manor Care Realty's accounting predecessor, for periods
prior to the Distribution.
SIX MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1996
During the six months ended November 30, 1997, net revenues of Mesquite
Hospital were $22,221,000, an increase of $394,000, or 1.8%, compared to the
same period ended November 30, 1996. Acute medical/surgical patient days were
8,214, a decrease of 524, or 6.0%; while skilled nursing days were 1,180, a
decrease of 320, or 21.3%; and geropsych days were 1,318, a decrease of 297,
or 18.4%, compared to the same period ended November 30, 1996. Other key
indicators included admissions of 2,435, a decrease of 123, or 4.8%; 658
deliveries, a decrease of 105, or 13.8%; 1,918 surgeries, an increase of 115,
or 6.4%; emergency visits of 14,645, an increase of 629, or 4.5%; and other
outpatient visits of 9,480, a decrease of 52, or 0.5% compared to the same
period ended November 30, 1996. The increase in net revenues is primarily
attributable to a decrease in Medicare/Medicaid contractual allowances. The
reduction in the contractual allowance was due to a decline in the Medicare
length of stay from 5.28 days as of November 30, 1996 to 4.68 days as of
November 30, 1997 and an increase of $512,000 in Medicaid disproportionate
share payments.
Mesquite Hospital's earnings before interest, taxes, depreciation and
amortization ("EBITDA") was $3,186,000, a decrease of $327,000, or 9.3%,
compared to the six-month period ended November 30, 1996. Mesquite Hospital's
operating expenses were $20,185,000, an increase of $1,006,000, or 5.3%, over
the six-month period ended November 30, 1996. Salaries and benefits were
$8,241,000, a decrease of $169,000, or 2.0%, compared to the period ended
November 30, 1996. Outside contract services were $1,428,000, a decrease of
$177,000, or 11.0%, compared to the period ended November 30, 1996. Supply
costs were $2,605,000, a decrease of $112,000, or 4.1%, compared to the period
ended November 30, 1996. Professional services and other expenses were
$2,211,000, a decrease of $100,000, or 4.3%, versus the period ended November
30, 1996. Bad debt expense was $4,293,000, an increase of $1,276,000, or
42.3%, compared to the period ended November 30, 1996. Bad debt expense as a
percentage of revenues was 19.3% for the period ended November 30, 1997 as
compared to 13.8% for the period ended November 30, 1996. The increase as a
percentage of revenues is due to an increase in self pay revenue over the
prior year.
YEAR ENDED MAY 31, 1997 COMPARED TO YEAR ENDED MAY 31, 1996
During fiscal year 1997, net revenues of Mesquite Hospital were $44,889,000,
an increase of $2,845,000, or 6.8%, compared to fiscal 1996 net revenues.
Contributing to the increase in net revenues was a decline in
Medicare/Medicaid contractuals of $578,000. The decline in the contractuals
was primarily the result of an increase in Medicaid disproportionate share of
payments of $1,133,000. Acute medical/surgical patient days were 18,574, an
increase of 518, or 2.9%. Skilled nursing days were 3,002, an increase of 118,
or 4.1%; and geropsych days were 2,844, an increase of 591, or 26.2%, compared
to fiscal 1996. Other key indicators included 1,427 deliveries, a decrease of
142, or 9.1%; 3,578 surgeries, a decrease of 346, or 8.8%; emergency visits of
28,649, an increase of 905, or 3.3%, and outpatient visits of 18,446, a
decrease of 883, or 4.6%.
Mesquite Hospital's EBITDA was $7,018,000, an increase of $648,000, or 9.2%,
compared to fiscal 1996. Operating expenses were $39,826,000 an increase of
$2,808,000, or 7.6%, compared to fiscal 1996. Salaries and benefits were
$16,832,000, an increase of $809,000, or 5.0%, as compared to fiscal 1996.
Outside contract services were $3,189,000 a decrease of $395,000, or 11.0%, as
compared to fiscal 1996. Of that amount, $181,000 relates to converting
cardiopulmonary and physical therapy services from contract to in house.
Supply
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costs were $5,613,000 an increase of $534,000, or 10.5%, as compared to fiscal
1996. Professional services and other expenses were $4,896,000, an increase of
$458,000, or 10.3%, as compared to fiscal 1996. Bad debt expense was
$6,833,000, an increase of $680,000, or 11.1%, over fiscal 1996. Bad debt
expense as a percentage of revenue was 15.2% as compared to 14.6% in fiscal
1996.
On June 17, 1996, Mesquite Hospital opened a 30,000 square foot, two story
addition which was adjoined to the west end of the existing structure. The
first story of the addition contains a new admitting area where all Mesquite
Hospital patients, other than emergency services patients, are admitted. Also
on the first floor is a new emergency services department, which contains
sixteen beds, including two trauma rooms, two cardiac rooms, two gynecology
rooms, an orthopedic room, an eight bed fast track area, two nursing stations,
and a waiting area. A four bay covered ambulance area is located at the rear
of the addition. The second story houses an ambulatory surgical center which
is currently in operation Monday-Friday, excluding holidays, from 7:00 a.m. to
completion of the procedures each day. This unit contains four operating
suites, with three currently in operation, an eight bed post anesthesia
recovery unit, a four bed patient holding area, limited central sterile supply
services, and other support areas for employees and physicians. In addition to
the new construction, this project also included modernization and expansion
of the imaging department and a new physical therapy department contained
within the space formerly occupied by the emergency services department and
the old physical therapy department. In December of 1996, the hospital
installed new MRI equipment for $1,300,000. The hospital had been using a
mobile MRI provided by outside service. In April of 1997, the hospital
replaced its CT Scanner with a state of the art scanner at a cost of $500,000.
YEAR ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
During fiscal year 1996, net revenues were $42,044,000, an increase of
$1,539,000, or 3.8%, over fiscal 1995 net revenues. Acute medical/surgical
patient days were 18,056, a decrease of 1,446, or 7.4%. This was primarily the
result of decreasing the average length of stay from 3.6 days to 3.4 days.
Skilled nursing days were 2,884, an increase of 471, or 19.5%; and geropsych
days were 2,253, an increase of 824, or 57.7%, compared to fiscal 1995. Other
key indicators included 1,569 deliveries, a decrease of 245, or 13.5%; 3,924
surgeries, a decrease of 124, or 3.1%; emergency visits of 27,744, an increase
of 836, or 3.1%; and other outpatient visits of 19,329, an increase of 694, or
3.7%.
EBITDA was $6,370,000, an increase of $741,000, or 13.2%, compared to fiscal
1995. Operating expenses were $37,018,000, an increase of $867,000, or 2.4%,
compared to fiscal 1995. Salaries and benefits were $16,023,000, an increase
of $1,016,000, or 6.8%, over fiscal 1995. Of that amount, $648,000, or 4.0%,
represents the salary and benefits cost for cardiopulmonary and physical
therapy services, which were converted from contract to in house effective
August 1, 1995. Outside contract services were $3,584,000, a decrease of
$1,340,000, or 27.2%, compared to fiscal 1995. Of that amount, $942,000, or
70.3% of the decrease, was attributable to converting cardiopulmonary and
physical therapy services from contract to in house. Supply costs were
$5,079,000, an increase of $24,000, or 0.5%, over fiscal 1995. Professional
services and other expenses were $4,438,000, an increase of $12,000, or 0.3%,
over fiscal 1995. Bad debt expense was $6,153,000, an increase of $1,007,000,
or 19.6%, over fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since fiscal 1993, routine capital expenditures of the Hospital have ranged
from approximately $800,000 to $1.4 million. In addition, an addition was
completed in fiscal 1997 at a total cost of approximately $6.7 million. To
date, Mesquite Hospital has financed its capital expenditures and operations
through cash from operations and cash contributions and advances from Manor
Care. Capital expenditures are currently anticipated to be $0.4 million for
fiscal 1998.
Mesquite Hospital believes that cash flow generated from operations and
amounts available via advances from the Parent will be adequate to meet
Mesquite Hospital's currently anticipated capital and other cash requirements.
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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
will be a health care real estate company focused on the ownership,
construction, development and acquisition of health care properties, including
skilled nursing and assisted living facilities. Manor Care Realty will 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 is a
corporation organized in 1981 in the State of Delaware. 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 23,732 beds.
. 26 assisted living facilities under construction in 12 states.
. 87 sites for assisted living facilities under contract and in
development, including 73 Arden Court sites and 14 Springhouse sites.
. Two skilled nursing facilities under construction with 268 beds and
five 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 74 development projects,
including ten skilled nursing facilities, 17 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 also has a quality, geographically diversified portfolio of
long term care properties.
After the Distribution, ManorCare Health Services will be a 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 strive to become a foremost 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 have a
high 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 12-37% premium to total approved development costs of Manor Care
Realty, based on the number of months elapsed since the opening of the
facility. 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 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
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 and operate Manor Care Realty's Skilled
Nursing Facilities pursuant to Lease Agreements under which ManorCare Health
Services will pay monthly fees to Manor Care Realty.
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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 146 Arcadia special-care units providing services to individuals in
the middle to late stages of Alzheimer's disease or afflicted with related
memory impairment. 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 26 assisted living facilities under construction and 87 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. Manor Care Realty utilizes real estate brokers and
consultants on a transaction by transaction basis and currently has no, and
contemplates no, material retainer arrangements with such persons. 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.
INSURANCE
Manor Care Realty has comprehensive liability, fire, extended coverage,
business interruption, and rental loss insurance with respect to its
properties, with policy specifications, insured limits and deductibles that
Manor Care Realty believes are consistent with those customary for similar
properties. Manor Care Realty intends to maintain similar insurance with
respect to future acquisitions as appropriate. In addition, Manor Care Realty
requires its tenants (including ManorCare Health Services) to maintain
comprehensive insurance that is customary for similar properties. Should an
uninsured loss in excess of insured limits occur, Manor Care Realty would lose
its capital investment in the affected properties as well as the anticipated
future revenues from such properties, and would continue to be obligated on
any mortgage indebtedness or other obligations of the properties. Any loss as
to an individual property would not adversely affect Manor Care Realty and its
ability to make distributions to stockholders. Accordingly, management
believes its properties are currently adequately insured. However, there can
be no assurance that Manor Care Realty will be able to continue its present
insurance coverage on satisfactory terms, if at all.
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.
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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. Among other things, the Balanced Budget Act
of 1997 (the "Budget Act") contains numerous and extensive changes affecting
Medicare and Medicaid payment to long-term care facilities and other
providers. 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 prohibit certain direct and indirect payments or fee-splitting
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. These laws include the Federal
"Stark Legislation" which prohibits, with limited exceptions, the referral of
patients for certain designated health services, including home health
services, physical therapy and occupational therapy, by a physician to an
entity in which the physician has a financial ownership interest. The January
1998 notice of proposed rulemaking to issue regulations implementing the Stark
Legislation makes clear that the restrictions apply to referrals for
designated health services provided in skilled nursing facilities. In
addition, ManorCare Health Services is subject to the Federal "anti-kickback
law" which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of 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, Medicaid or other Federal healthcare programs. The Federal
government, private insurers and various state enforcement agencies have
increased their scrutiny of providers, business practices and claims in an
effort to identify and prosecute fraudulent and abusive practices. The Federal
government has issued recent fraud alerts concerning nursing services, double
billing, home health services and the provision of medical supplies to nursing
facilities; accordingly, these areas may come under closer scrutiny by the
government. In addition, in July 1995, Federal officials announced a major
anti-fraud initiative called Operation Restore Trust. This program targets
fraud involving skilled nursing facilities, home health agencies, suppliers of
medical equipment and hospices and is currently operating in 17 states. 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, and have seldom been interpreted by the courts or
regulatory agencies. There can be no assurance that the Federal and State
anti-remuneration laws will ultimately be interpreted in a manner consistent
with the practices of, and business transactions by, ManorCare Health
Services, as the operator of the Skilled Nursing Facilities, or Mesquite
Hospital. Failure to comply with such laws can result in civil money
penalties, exclusion from the Medicare, Medicaid and other Federal health care
programs, and criminal convictions.
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
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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 commenced operations of 64 new skilled nursing facilities, most of which
required CON applications. During the past four fiscal years, Manor Care
received CON approval for 13 skilled nursing facilities and 18 assisted living
facilities.
Federal and State Assistance Programs
Substantially all of Manor Care Realty's Skilled Nursing Facilities and
Mesquite Hospital are currently certified to receive benefits under Medicare
and Medicaid. Both initial and continuing qualification of a nursing center or
hospital to participate in such programs depends on many factors including
accommodations, equipment, services, patient care, safety, personnel, physical
environment and adequate policies, procedures and controls.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to
health care facilities. Manor Care Realty can give no assurance that payments
to ManorCare Health Services under such programs will in the future remain at
a level comparable to the present level or be sufficient to cover the
operating and fixed costs allocable to such patients.
There have been numerous initiatives on the Federal and state levels for
comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods beginning July 1, 1998.
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. The Budget Act also institutes
consolidated billing for skilled nursing facility services, under which
payments for non-physician Part B services for beneficiaries no longer
eligible for Part A skilled care will be made to the facility, regardless of
whether the item or service was furnished by the facility, by others under
arrangement, or under any other contracting or consulting arrangement,
effective for items or services furnished on or after July 1, 1998. Likewise,
the Budget Act requires the Secretary to establish a prospective payment
system for home health services, to be implemented beginning October 1, 1999.
Prior to implementation, the Budget Act establishes certain interim payment
reforms, for cost reporting periods beginning after October 1, 1997, including
reduced home health limits, reducing per visit cost limits, and agency-
specific per beneficiary annual limits on an agency's costs. The legislation
also requires home health agencies to submit claims for all services, and all
payments will be make to the agency regardless of whether the item or service
was furnished by the agency, by others under arrangement, or under any other
contracting or consulting arrangement. With regard to hospices, the Budget Act
limits reimbursement by setting payment rate increase at
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market basket minus 1.0 percentage points for fiscal 1998 through 2002. The
law also institutes a number of reforms of the hospice benefit, including a
requirement that hospices be reimbursed based on the location where care if
furnished (rather than the location of the hospice), effective for cost
reporting periods beginning on or after October 1, 1997. Other provisions
limit Medicare payments for certain drugs, biologicals and supplies.The Budget
Act also gives states greater flexibility in the administration of their
Medicaid programs in that the Budget Act repeals the requirement that payment
be reasonable and adequate to cover the costs of "efficiently and economically
operated" nursing facilities. Further, the Budget Act allows states to mandate
enrollment in managed care systems without seeking approval from the Health
Care Financing Administration for waivers from certain Medicaid requirements
as long as certain standards are met. Although state managed care programs
have historically exempted institutional care, no assurance can be given that
such programs will not ultimately change the reimbursement system for long-
term care facilities from fee-for-service to negotiated or capitated rates or
otherwise affect the levels of payment to ManorCare Health Services skilled
nursing facilities. Such programs could also affect payment levels to In Home
Health and Vitalink. 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. On September 15, 1997, President Clinton imposed a
Medicare moratorium on new home health agencies. So that new regulations could
be imposed to combat fraud. On January 13, 1998, the Clinton Administration
lifted the moratorium, based on the issuance of new regulations for home
health agencies. These regulations require, as mandated by the Budget Act,
that all home health agencies obtain surety bonds to participate in the
Medicare and Medicaid programs, and disclosure of related business interests,
among other new requirements. According to press reports, some health agencies
have had difficulty obtaining bonds meeting the required criteria. If a home
health agency is unable to obtain a bond, the agency could lose certification
to participate in the Medicare and Medicaid programs. 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 of these new requirements.
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property or an
entity that arranges for the disposal or treatment of hazardous or toxic
substances at a disposal site may be held jointly and severally liable for the
cost of removal or remediation of certain hazardous or toxic substances, that
could be located on, in or under such property. Such laws and 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 regulations and could exceed the
property's value and the aggregate assets of the liable party. The presence of
these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property, or to
borrow using the property as collateral. In connection with the ownership and
leasing to third-parties of its properties, Manor Care Realty could be liable
for these costs, as well as certain other costs, including governmental fines
and injuries to persons or properties. 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
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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.
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.
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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 administration. 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 26 assisted living facilities
under construction, three skilled nursing and 87 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 23,732 beds. Most of the skilled nursing
facilities have been designed to permit private and semi-private patient room
accommodations. Most facilities have individually controlled heating and air-
conditioning units. Each skilled nursing facility contains a fully equipped
kitchen, day room areas, administrative offices and in most cases a physical
therapy room.
The table below summarizes certain information regarding Manor Care Realty's
existing facilities as of November 30, 1997 giving pro forma effect to the
Distribution:
SKILLED NURSING FACILITIES
<TABLE>
FACILITY LOCATION BEDS
----------------- -----
<S> <C>
ARIZONA
Tucson.............................................................. 117
-----
Total............................................................... 117
=====
CALIFORNIA
Citrus Heights...................................................... 146
Encinitas........................................................... 117
Fountain Valley..................................................... 146
Hemet............................................................... 176
Palm Desert......................................................... 178
Rancho Bernardo..................................................... 95
Rossmoor............................................................ 119
Sunnyvale........................................................... 138
Walnut Creek........................................................ 153
-----
Total............................................................... 1,268
=====
COLORADO
Boulder............................................................. 149
Denver.............................................................. 151
-----
Total............................................................... 300
=====
DELAWARE
Pike Creek.......................................................... 151
Wilmington.......................................................... 139
-----
Total............................................................... 290
=====
FLORIDA
Boca Raton.......................................................... 178
Boynton Beach....................................................... 179
</TABLE>
<TABLE>
<S> <C>
FACILITY LOCATION BEDS
----------------- -----
Carrollwood......................................................... 117
Dunedin............................................................. 119
Jacksonville........................................................ 114
Naples.............................................................. 116
Palm Harbor......................................................... 179
Plantation.......................................................... 119
Sarasota............................................................ 176
Venice.............................................................. 129
West Palm Beach..................................................... 120
Winter Park......................................................... 132
-----
Total............................................................... 1,678
=====
GEORGIA
Decatur............................................................. 129
Marietta............................................................ 116
-----
Total............................................................... 245
=====
ILLINOIS
Arlington Heights................................................... 153
Champaign........................................................... 98
Decatur............................................................. 95
Elgin............................................................... 79
Elk Grove........................................................... 177
Hinsdale............................................................ 188
Kankakee............................................................ 102
Libertyville........................................................ 149
Naperville.......................................................... 113
Normal.............................................................. 97
Oak Lawn............................................................ 173
</TABLE>
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<TABLE>
FACILITY LOCATION BEDS
----------------- -----
<S> <C>
Oak Lawn Americana..................................................... 141
Orchard Manor.......................................................... 53
Palos Heights.......................................................... 176
Palos Heights West..................................................... 120
Peoria................................................................. 119
Rolling Meadows........................................................ 154
South Holland.......................................................... 185
Urbana................................................................. 97
Westmont............................................................... 115
Wilmette............................................................... 76
-----
Total.................................................................. 2,660
=====
INDIANA
Anderson............................................................... 218
Indianapolis North..................................................... 182
Indianapolis South..................................................... 118
Kokomo................................................................. 100
-----
Total.................................................................. 618
=====
IOWA
Cedar Rapids........................................................... 104
Davenport.............................................................. 100
Dubuque................................................................ 95
Waterloo............................................................... 93
-----
Total.................................................................. 392
=====
KANSAS
Overland Park.......................................................... 175
Topeka................................................................. 120
Wichita................................................................ 117
-----
Total.................................................................. 412
=====
MARYLAND
Bethesda............................................................... 102
Chevy Chase............................................................ 158
Largo.................................................................. 128
Potomac................................................................ 137
Roland Park............................................................ 89
Rossville.............................................................. 180
Ruxton................................................................. 217
Silver Spring.......................................................... 119
Towson................................................................. 126
Wheaton................................................................ 98
-----
Total.................................................................. 1,334
=====
MISSOURI
Florissant............................................................. 97
Fremont................................................................ 220
-----
Total.................................................................. 317
=====
MICHIGAN
Kingsford.............................................................. 105
Windemere.............................................................. 179
-----
Total.................................................................. 284
=====
NEVADA
Reno................................................................... 150
-----
Total.................................................................. 150
=====
NEW JERSEY
Cherry Hill............................................................ 107
Mountainside........................................................... 148
West Deptford.......................................................... 135
-----
Total.................................................................. 390
=====
NEW MEXICO
Camino Vista........................................................... 134
Northeast Heights...................................................... 137
Sandia................................................................. 176
-----
Total.................................................................. 447
=====
NORTH CAROLINA
Pinehurst.............................................................. 114
-----
Total.................................................................. 114
=====
NORTH DAKOTA
Fargo.................................................................. 107
Minot.................................................................. 105
-----
Total.................................................................. 212
=====
OHIO
Akron.................................................................. 100
Barberton.............................................................. 118
Belden Village......................................................... 144
Cincinnati............................................................. 149
Lake Shore............................................................. 199
Mayfield Heights....................................................... 149
North Olmstead......................................................... 177
Oregon................................................................. 108
Rocky River............................................................ 209
Westerville............................................................ 178
Willoughby............................................................. 154
Woodside............................................................... 143
-----
Total.................................................................. 1,828
=====
OKLAHOMA
Midwest City........................................................... 102
Norman................................................................. 108
Northwest Oklahoma City................................................ 116
Southwest Oklahoma City................................................ 116
Tulsa.................................................................. 100
Warr Acres............................................................. 100
Windsor Hills.......................................................... 107
-----
Total.................................................................. 759
=====
</TABLE>
73
<PAGE>
<TABLE>
FACILITY LOCATION BEDS
----------------- -----
<S> <C>
PENNSYLVANIA
Allentown............................................................ 163
Bethel Park.......................................................... 159
Bethlehem-I.......................................................... 227
Bethlehem-II......................................................... 215
Camp Hill............................................................ 118
Carlisle............................................................. 151
Chambersburg......................................................... 205
Dallastown........................................................... 203
Devon Manor.......................................................... 261
Easton............................................................... 224
Elizabethtown........................................................ 96
Harrisburg........................................................... 234
Huntingdon Valley.................................................... 121
Jersey Shore......................................................... 120
King of Prussia...................................................... 148
Kingston Court....................................................... 126
Kingston East........................................................ 177
Lansdale............................................................. 170
Laureldale........................................................... 199
Lebanon.............................................................. 158
McMurray............................................................. 140
Monroeville.......................................................... 121
North Hill........................................................... 199
Pittsburgh........................................................... 149
Pottstown Nursing.................................................... 160
Pottsville........................................................... 176
Sinking Spring....................................................... 216
Sunbury.............................................................. 126
West Reading......................................................... 177
Whitehall............................................................ 173
Williamsport North................................................... 154
Williamsport South................................................... 128
Yardley.............................................................. 140
Yeadon............................................................... 198
York North........................................................... 162
York South........................................................... 126
-----
Total................................................................ 6,020
=====
SOUTH CAROLINA
Charleston........................................................... 116
Columbia............................................................. 128
Lexington............................................................ 112
-----
Total................................................................ 356
=====
SOUTH DAKOTA
Aberdeen............................................................. 98
-----
Total................................................................ 98
=====
TEXAS
Dallas............................................................... 200
Fort Worth........................................................... 158
Forth Worth NW....................................................... 103
San Antonio-Babcock.................................................. 210
San Antonio-North.................................................... 95
San Antonio-Northwest................................................ 143
San Antonio-Windcrest................................................ 187
Sharpview............................................................ 127
Temple............................................................... 102
Temple Care.......................................................... 141
Webster.............................................................. 111
-----
Total................................................................ 1,577
=====
UTAH
Ogden................................................................ 134
-----
Total................................................................ 134
=====
VIRGINIA
Arlington............................................................ 191
Fair Oaks............................................................ 119
Imperial............................................................. 127
Stratford Hall....................................................... 233
-----
Total................................................................ 670
=====
WASHINGTON
Gig Harbor........................................................... 120
Lynwood.............................................................. 113
Meadow Park.......................................................... 124
Spokane.............................................................. 125
-----
Total................................................................ 482
=====
WISCONSIN
Appleton............................................................. 103
Fond du Lac.......................................................... 107
Green Bay-East....................................................... 78
Green Bay-West....................................................... 105
Madison.............................................................. 167
-----
Total................................................................ 560
=====
</TABLE>
TOTAL SKILLED NURSING FACILITIES: 168
TOTAL SKILLED NURSING BEDS: 23,732
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.
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<PAGE>
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.
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 8 10
Colorado.......... 0 1 0 4 5
Connecticut....... 0 0 1 1 2
Delaware.......... 0 0 1 0 1
Florida........... 1 0 6 5 12
Georgia........... 1 0 1 2 4
Illinois.......... 0 2 1 4 7
Kansas............ 0 0 1 0 1
Maryland.......... 1 2 0 3 6
Massachusetts..... 0 0 0 1 1
Michigan.......... 0 0 0 3 3
Nevada............ 0 0 1 0 1
New Jersey........ 3 1 2 7 13
New York.......... 0 0 0 5 5
North Carolina.... 0 0 1 1 2
Ohio.............. 0 1 1 5 7
Pennsylvania...... 0 2 1 9 12
Tennessee......... 0 0 0 1 1
Texas............. 0 1 2 6 9
Virginia.......... 0 1 0 2 3
Washington........ 0 1 0 2 3
--- --- --- --- ---
Total............. 6 14 21 72 113
=== === === === ===
</TABLE>
Manor Care Realty's properties will be subject to mortgages or the
subsidiaries owning such properties will pledge their stock as security for
the Credit Facilities. See "Description of the Transactions--The Credit
Facilities." In addition, Manor Care Realty holds certain properties subject
to certain mortgages and industrial revenue bonds. All mortgages and
industrial revenue bond payments are current and are not in default. Manor
Care Realty anticipates that it will be able to make all payments on these
obligations when due.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of Manor Care Realty. These policies have been determined by the
Board of Directors, if noted, or are the standard operating policies of Manor
Care Realty, and may be amended or revised from time to time by the Board of
Directors or, in the case of standard operating policies, by management of
Manor Care Realty, in their discretion, without notice or a vote of the
stockholders.
INVESTMENT POLICIES
Investment in Real Estate or Interests in Real Estate. Manor Care Realty's
investment objectives are to achieve long-term capital appreciation through
the generation of consistent cash flows from (i) the leasing of its high
quality portfolio of skilled nursing properties (including any properties
subsequently acquired or developed) and (ii) the development and sale of
properties to ManorCare Health Services and others. Manor Care Realty has
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<PAGE>
no current plans to pay dividends on shares of its common stock. Any payments
of dividends on the common stock in the future will be subject to the
discretion of the Board of Directors of Manor Care Realty and will depend
upon, among other things, Manor Care Realty's financial condition, capital
requirements, funds from operations, future business prospects and such other
factors as the Board may deem relevant. See "--Properties" and "--Business
Strategy" for a more detailed discussion of Manor Care Realty's properties and
Manor Care Realty's strategic objectives.
Manor Care Realty's charter does not limit development of new properties to
any geographic area or product type or to a specified percentage of Manor Care
Realty's assets. There is no limit to the amount Manor Care Realty can invest
in any one geographic area or in any one property. However, Manor Care Realty
currently focuses development in the 48 contiguous United States and the top
200 metropolitan statistical areas. Manor Care Realty focuses its development
efforts in metropolitan areas where there is a high density of age and income
qualified seniors who could be potential consumers of high-end, skilled
nursing or assisted living facility services. Manor Care Realty also seeks
locations where there is a favorable regulatory environment for the
development of senior facilities. The prototypical assisted living site is
four to six acres in size. Typically, the sites are improved, located in a
setting of mixed zoning for residential, retail and commercial development and
have the zoning necessary to develop an assisted living facility. See also "--
Business--Real Estate Development and Acquisition Activities."
While Manor Care Realty expects that over the next five years the vast
majority of 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. Manor Care Realty may participate with
third parties through joint ventures or other co-ownership structures for the
development or acquisition of facilities.
Manor Care Realty currently has no plans to invest in real estate mortgages,
although it has no policy against such an investment. Manor Care Realty also
has no current plans to invest in the securities of or interests in persons
primarily engaged in real estate activities; however, Manor Care Realty may,
subject to the terms of Manor Care Realty's and Manor Care Real Estate's
indebtedness, including the Indenture, invest in the securities of real estate
investment trusts, other entities engaged in real estates activities, or
securities of other issuers, including for the purpose of exercising control
over such entities. See "--Policies with Respect to Other Activities."
FINANCING POLICIES
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 capital improvements for new and existing facilities. Manor Care Realty
expects to fund these activities with proceeds of borrowings under the Credit
Facilities described below, 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 fiscal year 1999. 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 financing will be available or sufficient to fund
Manor Care Realty's capital requirements.
If the Board of Directors determines to raise additional equity capital,
Manor Care Realty may (subject to the rules of the NYSE), without stockholder
approval, issue additional shares of common stock or other capital stock up to
the amount of the authorized capital of Manor Care Realty in any manner (and
on such terms and for such consideration) as it deems appropriate, including
in exchange for property. Such securities may be senior to the common stock
and may include preferred stock (which may be convertible into common stock).
Existing stockholders will have no preemptive right to purchase shares in any
subsequent offering of securities by Manor Care Realty, and any such offering
could cause a dilution of a stockholder's investment in Manor Care Realty.
76
<PAGE>
To the extent that the Board of Directors determines to obtain additional
debt financing, Manor Care Realty may seek to extend, expand, reduce or renew
the Credit Facilities, or obtain new credit facilities or lines of credit, or
issue debt securities (which may be convertible into common stock or other
securities of Manor Care Realty). The proceeds from any borrowings may be used
to finance acquisitions, to develop or redevelop properties, to refinance
existing indebtedness, or for working capital or capital improvements. Such
indebtedness may be secured or unsecured and may be cross-collateralized and
contain cross-default provisions. The ability of Manor Care Realty to incur
additional indebtedness will be limited by the terms of Manor Care Realty's
indebtedness.
In connection with the Distribution, Manor Care Real Estate is offering $350
million aggregate principal amount of Notes as more fully described in this
prospectus. In addition, Manor Care, on behalf of Manor Care Real Estate, is
negotiating a commitment letter with The Chase Manhattan Bank and Chase
Securities Inc. relating to an eight-year $150 million term loan facility,
subject to earlier maturity under certain circumstances, and a five-year $300
million revolving credit facility (the "Credit Facilities"). See "Description
of the Transactions--The Credit Facilities."
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 Real Estate Note to be issued by
Manor Care Real Estate and guaranteed by Manor Care Realty. See "Description
of the Transactions--The Real Estate Note."
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.
In September 1996, Manor Care amended its existing $250.0 million
competitive advance and multi-currency revolving credit facility (the
"Existing Revolving Credit Facility") to provide for the spin-off of the
lodging division. The Existing Revolving Credit Facility expires in September
2001. At November 30, 1997, bank lines totaled $275.0 million, of which $38.1
million remained unused. Manor Care intends to replace the Existing Revolving
Credit Facility with the new 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, ManorCare Health Services plans to offer to exchange $1,000
principal amount of its 7 1/2% Senior Notes due 2006 for each $1,000 principal
amount of the 7 1/2% Senior Notes due 2006 of Manor Care properly tendered.
See "Description of the Transactions--The Exchange Offer and Solicitation."
LENDING POLICIES
Manor Care may make loans to subsidiaries, joint ventures and other entities
in which it has an equity interest, or to unaffiliated third parties, when
making such loans is advisable in the opinion of the Board of Directors.
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.
CONFLICT OF INTEREST POLICY
Manor Care Realty's Corporate Ethics Policy provides that no employee may
directly or indirectly maintain any outside business or financial interest, or
engage in any outside business or financial activity, which conflicts or
appears to conflict with the interests of Manor Care Realty or which
interferes with such employee's ability to
77
<PAGE>
fully discharge his or her responsibilities and duties to Manor Care Realty.
Such prohibition includes the diverting, for personal gain, of any business
opportunity from which Manor Care Realty may profit, unless Manor Care Realty
decides to forego such opportunity. All employees are required to disclose in
writing to the Chief Executive Officer of Manor Care Realty any proprietary or
other financial interest they may have or anticipate having in any
organization with which Manor Care Realty does business or with which it
directly or indirectly competes in order that a determination may be made as
to whether any conflict of interest is present.
In addition, the General Corporation Law of the State of Delaware provides
that no contract or transaction between a corporation and one or more of its
directors or officers, or between a corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers, are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
board or committee which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if: (1) the material
facts as to his relationship or interest and as to the contract or transaction
are disclosed or are known to the board of directors or the committee, and the
board or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (2) the material facts
as to his relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (3) the contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the board of
directors, a committee or the shareholders.
The Indenture will contain certain restrictions with respect to transactions
with affiliates.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
Manor Care Realty has authority to repurchase or otherwise acquire its
common stock or other securities in the open market or otherwise and, subject
to certain restrictions imposed by the terms of its indebtedness, may engage
in such activities in the future. Manor Care has reacquired shares of its
common stock in the past in connection with (i) the payment in kind of the
exercise price of options issued under Manor Care's stock option plans; and
(ii) the withholding of taxes on behalf of participants in Manor Care's stock
option and restricted stock plans. It is contemplated that Manor Care Realty
may, subject to certain restrictions imposed by the terms of its indebtedness,
also reacquire shares of its common stock in connection with such activities
in the future.
Manor Care Realty does not currently intend to engage in the material
purchase, sale or trading of securities of unaffiliated issuers except for
purchase, sales or trading made in connection with normal and customary cash
management activities. Manor Care Realty may, subject to certain restrictions
imposed by the terms of its indebtedness, engage in such activities in the
future if Manor Care Realty's Board of Directors finds such action to be
advisable.
Manor Care Realty does not currently intend to invest in the securities of
other issuers for the purposes of exercising control, although Manor Care
Realty may do so in the future if Manor Care Realty's Board of Directors finds
such action to be advisable. In May 1997, Manor Care completed a tender offer
for 1,500,000 shares (approximately 6%) of the common stock of Vitalink, which
increased Manor Care's ownership position to approximately 51% of the common
stock of Vitalink. In October 1995, Manor Care purchased approximately 41% of
the common stock and 100% of the outstanding voting convertible preferred
stock of In Home Health, which resulted in Manor Care having approximately 64%
of the voting power of In Home Health.
Manor Care Realty will be required to file reports and other information
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended. Holders of shares of common stock will
receive annual reports containing audited financial statements, with a report
thereon by Manor Care Realty's independent certified public accountants, in
addition to any other reports required to be furnished to shareholders
pursuant to applicable law or rules of the NYSE, or such other stock exchange
on which Manor Care Realty's common stock may be listed or qualified.
Manor Care Realty does not currently intend to engage in underwriting or
agency distribution or sale of securities of other issuers.
78
<PAGE>
BUSINESS OF MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION
OVERVIEW
ManorCare Health Services believes that it is a leading provider of a full
range of senior support health care services. ManorCare Health Services
provides an array of services that includes skilled nursing, assisted living,
institutional pharmacy and home health care and additional support services
for the frail elderly living at home. ManorCare Health Services is striving to
become the nation's foremost provider of high-quality senior support health
care services within the private pay segment. In order to achieve this goal,
ManorCare Health Services is planning to focus on the rapid acquisition of
assisted living facilities in cluster markets pursuant to the Development
Agreement with Manor Care Realty. Under the Development Agreement, ManorCare
Health Services intends to acquire from Manor Care Realty approximately 170
Arden Courts and 38 Springhouse senior residences to be newly developed by
Manor Care Realty during the next five years. See "Relationship Between Manor
Care Realty and ManorCare Health Services after the Distribution--Development
Agreement." Its strategy for achieving this objective entails aggressive
implementation of the following key initiatives:
. grow through acquisition of proprietary assisted living facilities
developed by Manor Care Realty
. expand on current market leadership position in the private pay segment
. extend leadership position as provider of the most innovative Alzheimer's
services in the industry
. maintain focus on high-quality personalized care and services
. market distinctive products nationally under the ManorCare Health
Services brand name
. build on existing senior support services platform
. focus on development of cluster markets
ManorCare Health Services leases and operates 168 skilled nursing facilities
owned by Manor Care Realty, owns joint venture interests in and manages three
additional skilled nursing facilities. The skilled nursing facilities are
located in 28 states and contain approximately 24,089 beds. These facilities
provide skilled nursing services principally for residents over the age of 65.
Within its skilled nursing facilities, ManorCare Health Services operates 146
Arcadia special-care units which provide care to individuals in the middle to
late stages of Alzheimer's disease and 21 MedBridge high acuity units which
focus on short-term, post-hospital care for medically complex residents and
those in need of aggressive physical rehabilitation. ManorCare Health Services
owns and operates 36 assisted living facilities in 12 states containing 3,770
units. These facilities include 14 Arden Courts, serving persons with early to
middle-stage Alzheimer's disease or related memory impairment, and 20
Springhouse senior residences, serving the general assisted living population.
ManorCare Health Services also has majority control of Vitalink, one of the
largest public institutional pharmacy companies and In Home Health, a national
home health care services company. Vitalink operates 57 institutional
pharmacies in 36 states, serving approximately 173,000 beds. In Home Health
provides home health services in 14 states.
On October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration by Manor Care (and to be considered by ManorCare Health
Services after the distribution) include strategic mergers, joint ventures or
other business combinations that could enhance Vitalink's strategic position
in its markets, better enable it to serve its customers and increase
Vitalink's shareholder value. Vitalink has retained SBC Warburg Dillon Read
Inc. to act as financial advisor in connection with the exploration of
strategic alternatives with respect to Manor Care's interest in Vitalink.
Manor Care has no present commitments or agreements with respect to any such
transaction and there can be no assurance that Manor Care (or ManorCare Health
Services after the Distribution) will decide to enter into any such
transaction or that, should it decide to do so, be able to reach an agreement
with respect to any such transaction on terms acceptable to it.
79
<PAGE>
INDUSTRY TRENDS
There are several trends affecting the long-term care industry. First, the
competitive landscape is changing. The industry is consolidating as smaller,
local operators are being acquired by larger operators. In addition, several
large multi-unit operators have merged to form even larger chains. By 1995,
54% of the skilled nursing homes in the country were part of a chain, up from
28% in 1977. Finally, some long term care providers have recognized the need
to diversify by expanding into assisted living, home health care, and
ancillary services.
Second, many hospitals have developed their own post-acute care capabilities
in response to cost containment pressures. These integrated delivery systems
place a premium on keeping patients within their systems. The development of
post-acute care capabilities by hospitals impacts providers of long-term care,
as these providers have historically received a large number of referrals from
clinical networks, including hospitals, physicians and managed care
organizations. However, shifts away from cost-based reimbursement to
prospective pay systems may cause hospitals to rethink their strategy and
create new opportunities for partnerships with home care and skilled nursing
providers.
Third, the number of elderly in America is expanding faster than the overall
population. As the senior population continues to expand, the demand for
health related services targeted specifically at serving their needs is
increasing. The number of people aged 75 and older, the primary consumer of
senior support health care services, is growing more quickly than the overall
population. According to the U.S. Bureau of the Census, the number of seniors
75 and older is estimated to increase by approximately 37% from 13 million in
1990 to an estimated 17.8 million in 2005. The U.S. Bureau of the Census data
predicts that total U.S. population will only increase by approximately 15%
during the same period.
Other market trends contributing to change in the long-term care industry
include:
. a continued increase in the number of frail, elderly individuals living
alone who require assistance with their activities of daily living
("ADLs") such as dressing, bathing, eating, and medication management;
. the increase in the net worths of older people, which enables a greater
number of individuals to privately pay for support services, home health
care, assisted living and skilled nursing care; and
. the growth in the number of dual-career families who may find it more
difficult to care for their elderly relatives in their homes and who may
also have greater financial resources to better support their elderly
relatives outside the home.
The attractive demographics and future growth opportunities have encouraged
existing market participants to increase their product offerings and have
encouraged new entrants such as real estate developers to offer continuing
care retirement communities and assisted living facilities which are focused
on the frail elderly care market. In addition, more options geared towards
maximizing the individual's ability to live independently in their homes are
becoming available. These industry participants are expanding the set of
senior support health care options for the elderly. The level of care selected
by the elderly and their families depends on the needs of the individual. The
range of health services available for the elderly includes:
. Home health care--the provision of health care service to the elderly in
their homes, including nursing, infusion therapy, hospice,
rehabilitation, personal care, companion care and home making;
. Senior support services--emerging new services geared towards the
elderly, including geriatric care management, financial management and
planning, transportation services and other services that support the
elderly living at home;
. Physician services--geriatric centers and physicians who specialize in
geriatric care and outpatient disease management;
. Short-term care--adult day care and respite care;
. Residential care--congregate care facilities, continuing care retirement
communities, assisted living facilities and skilled nursing facilities;
80
<PAGE>
. Alzheimer's disease care--facilities focused on individuals with
Alzheimer's disease or related memory impairment; and
. Acute care--medical treatment in hospital facilities as well as sub-acute
care in hospitals and skilled nursing facilities.
BUSINESS STRATEGY
ManorCare Health Services' goal is to become the nation's foremost provider
of high-quality senior support health care services within the private pay
segment. ManorCare Health Services intends to aggressively expand its unit
capacity in assisted living while at the same time broadening the range of
products and services for private pay customers still living at home. Its
strategy for achieving this objective entails the following key initiatives:
. Grow through Acquisition of Proprietary Assisted Living Facilities
Developed by Manor Care Realty. ManorCare Health Services believes the
anticipated increased market demand for assisted living facilities
presents ManorCare Health Services with significant opportunities for
growth. ManorCare Health Services will work with Manor Care Realty to
identify target markets for expansion and will acquire from Manor Care
Realty approximately 170 Arden Courts and 38 Springhouse senior
residences over the next five years. Pursuant to the Development
Agreement, Manor Care Realty will develop assisted living facilities for
sale to ManorCare Health Services. ManorCare Health Services will have a
two year option (measured from the time a particular facility opens) to
purchase such facilities; provided that ManorCare Health Services will be
obligated to purchase each such facility if occupancy reaches 75% for a
period of five days during the two-year period measured from the time a
particular facility opens. In addition, ManorCare Health Services will
make acquisitions of other assisted living properties on an opportunistic
basis. The Non-Competition Agreement limits ManorCare Health Services'
ability to develop or enter into management agreements with respect to
assisted living facilities located near assisted living facilities being
developed by Manor Care Realty; however, it does not restrict ManorCare
Health Services' ability to acquire new assisted living facilities.
ManorCare Health Services believes that its experience in delivering
assisted living services and targeting its facilities to private pay
individuals in existing and new cluster markets will enable it to
experience significant growth and higher margins. In addition, ManorCare
Health Services believes it can leverage its experience in Alzheimer's
care to provide the most innovative and highest quality Alzheimer's
services available through its Arden Courts assisted living facilities.
To date, Manor Care Realty has 26 facilities under construction and 87
additional facilities under contract and in development.
. Expand on Current Market Leadership Position in the Private Pay
Segment. In its skilled nursing management business, ManorCare Health
Services believes that continuing to focus on private pay patients
enables it to reduce its exposure to anticipated changes in government
reimbursement practices and enables ManorCare Health Services to achieve
more attractive profit margins. Private pay patients accounted for
approximately 60% of ManorCare Health Services' skilled nursing and
assisted living revenues in fiscal 1997 compared to a 1996 industry
average of approximately 30% for for-profit nursing care providers.
ManorCare Health Services believes that its high-end specialty products
such as Williamsburg (luxurious accommodations including upgraded
furnishings and decor, concierge services and a private dining area with
a gourmet menu), Heritage (luxurious accommodations including upgraded
furnishings and decor, a private lounge and other amenities) and Arcadia
(a secure, self-contained unit designed specifically for Alzheimer's and
other related memory disorder patients) will enable ManorCare Health
Services to continue to attract upper income, service sensitive residents
who pay directly for services without the benefit of any government
assistance program. ManorCare Health Services has set a goal of
dedicating a significant portion of its skilled nursing beds to specialty
products. ManorCare Health Services believes that this drive and
ManorCare Health Services' aggressive expansion into the assisted living
industry will further enhance its leadership position in the private pay
segment. ManorCare Health Services believes that its substantial
investment in direct marketing through advertising, direct mail,
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advanced telemarketing and community outreach will allow it to maintain
its market leadership in this segment.
. Extend Leadership Position as Provider of the Most Innovative Alzheimer's
Services in the Industry. ManorCare Health Services believes that it is
the industry leader in Alzheimer's disease management, with almost 15
years of experience and more than 18% of its total beds devoted to
Alzheimer's care. ManorCare Health Services' Arcadia special-care units
in its skilled nursing facilities meet the needs of individuals in the
middle to late stages of Alzheimer's disease. ManorCare Health Services
plans to continue to develop Arcadia special-care units throughout its
existing markets. ManorCare Health Services' Arden Courts assisted living
facilities serve individuals in the earlier stages of the disease
process. ManorCare Health Services plans to open approximately 170 Arden
Courts in the next five years. ManorCare Health Services also serves
individuals suffering from Alzheimer's and other forms of dementia
through its Springhouse facilities which offer specialized programs for
this population. ManorCare Health Services believes that its proprietary
Alzheimer's care protocols are integral to the high quality of care it
provides to its Alzheimer's residents. ManorCare Health Services'
integrated continuum of care allows ManorCare Health Services to meet the
needs of its Alzheimer's customers from diagnosis to home-based care
through assisted living to high acuity facility-based care. For example,
for an individual moving through the stages of Alzheimer's disease, this
continuum of care would begin with a memory assessment program followed
by home health care. The individual would then reside in an Arden Courts
assisted living facility for the early to middle stages of the disease
and would ultimately, during the middle to late stages of the disease,
move into an Arcadia special-care unit.
. Maintain Focus on High Quality Personalized Care and Services. ManorCare
Health Services is dedicated to delivering the highest level of service
quality and patient satisfaction, striving to provide its residents with
personalized care and services. ManorCare Health Services believes that
delivering the highest product integrity standards will enable it to
achieve ManorCare Health Services' goal of delivering "best in class"
services to its residents--services which are considered superior by
ManorCare Health Services' customers, as well as industry experts, to
those services offered by ManorCare Health Services' competitors.
ManorCare Health Services believes that providing "best in class"
services will reinforce its reputation as the leading provider of high
quality, personalized senior support health care services. ManorCare
Health Services relies on its product management organization to develop
Company-wide care protocols, standards of operation and training
programs, which ensure that ManorCare Health Services delivers superior
and consistent care in all of its facilities. In addition to providing
high quality and consistent services on a Company-wide basis, ManorCare
Health Services personalizes the service package to meet the needs of
each particular resident. The facility staff develops a care plan for
each resident based on professional assessments and family consultations.
The care plan is updated regularly based on the individual needs of the
resident by the facility's health care and social services staff in
conjunction with the resident and his/her family. ManorCare Health
Services also strives to understand its residents' needs by conducting
over 13,000 resident and family member interviews annually. Resident
satisfaction scores from these interviews are a major component of
incentive compensation for all field and corporate managers. A quality
assurance program is administered with the objective of exceeding the
expectations of all residents and their families.
. Market Distinctive Products Nationally under the ManorCare Health
Services Brand Name. ManorCare Health Services believes that its
competitive position will be materially enhanced by continuing to develop
the premier national brand name in the senior support health care
industry. In September 1996, ManorCare Health Services created a unified
national brand name for all the elements in its continuum of care:
"ManorCare Health Services." ManorCare Health Services believes that a
stronger brand identity for its services will make it easier for
ManorCare Health Services to build national awareness and facilitate
customer confidence in the services it provides. In addition, ManorCare
Health Services believes that its aggressive plan to acquire assisted
living facilities will enable it to achieve the critical mass necessary
to establish further its senior support health care services nationally.
ManorCare Health Services is leveraging its premier brand name through
partnership arrangements with complementary
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elder health care providers. ManorCare Health Services' strategy includes
developing a brand name image synonymous with "best in class" in every
element of its business.
. Build on Existing Senior Support Services Platform. ManorCare Health
Services believes that its success depends upon creating a seamless
continuum of care allowing residents to "age in place." ManorCare Health
Services' current continuum of care includes: home health care, assisted
living facilities, skilled nursing facilities and pharmacy services. In
addition to substantially increasing its assisted living offerings,
ManorCare Health Services plans to expand its continuum of care by
providing senior support services to the frail elderly still living at
home. ManorCare Health Services believes that targeting such senior
support services to the middle class to affluent senior population will
enable it both to gather information about the frail elderly who still
reside at home, indicating their possible needs for other ManorCare
Health Services health care or facility-based services, and to cultivate
relationships with these individuals and their families. ManorCare Health
Services is pursuing a strategy to develop information systems technology
to efficiently track its customers and create superior cost-effective
clinical protocols. ManorCare Health Services believes that the
information gathered about these customers coupled with the relationship
formed with them and their families will increase their awareness of and
confidence in the quality of services provided by ManorCare Health
Services.
. Focus on Development of Cluster Markets. ManorCare Health Services has
focused its skilled nursing development on cluster markets in order to
achieve critical mass and improve its competitive advantage with respect
to its regional suppliers and payors. By adding assisted living
facilities to this existing base, ManorCare Health Services believes it
can leverage its cost structure and build on its brand image. In
addition, ManorCare Health Services is centralizing certain corporate
functions, including accounting, billing and other non-care related
functions at the cluster level. ManorCare Health Services has implemented
a major reengineering effort as a way to foster continuous improvement
within its core processes. To support the cluster market structure from
an organizational standpoint, ManorCare Health Services has created a
market management structure in which all products and services within a
cluster market are united under a single market management team. Under a
market management structure, the regional management has responsibility
for the entire continuum of services offered in the specific regional
clusters. ManorCare Health Services also believes that by marketing its
continuum of care in its cluster markets, it can spread its marketing
costs over more facilities and thus outspend its competitors. The market
management structure provides management with greater flexibility to
better respond to market trends and competitive changes in local markets.
SKILLED NURSING SERVICES
ManorCare Health Services believes it is the premier operator of skilled
nursing facilities in the United States. Through a cohesive framework of
proprietary care protocols ManorCare Health Services' skilled nursing
facilities provide (i) long-term care for chronically ill and frail elderly
individuals who need 24-hour skilled nursing and physical, occupational and
speech therapies; (ii) high acuity, short-term, post-hospital care for
medically complex patients and persons in need of aggressive rehabilitation;
and (iii) long-term care for individuals with middle to late-stage Alzheimer's
or related memory impairment. In all cases these services include appropriate
nursing care, room and board, special diets, occupational, speech, physical
and recreational therapy and other services designed to improve the well-being
of the resident. ManorCare Health Services maintains a Quality Assurance
Program to ensure that high standards of care are consistently observed in
each facility. The Quality Assurance Program sets corporate standards for
delivery of care, designed to ensure the provision of "best in class"
services, and provides consulting and training support to the facilities.
ManorCare Health Services will lease and operate Manor Care Realty's 168
skilled nursing facilities in 28 states pursuant to Lease Agreements under
which ManorCare Health Services will pay monthly fees to Manor Care Realty.
ManorCare Health Services will also own the joint venture interests in and
manage three additional skilled nursing facilities. Many of these facilities
are less than ten years old and target affluent to middle income seniors in
need of skilled nursing care. ManorCare Health Services differentiates itself
from its competitors by
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offering unique specialty products designed to meet the needs of specific
customer segments. A significant portion of the beds at skilled nursing
facilities operated and managed by ManorCare Health Services are dedicated to
specialty services, which are attractive because they generate higher per
patient day revenues and profits than standard long-term care. For example,
the Heritage and Williamsburg wings in ManorCare Health Services' skilled
nursing facilities provide residents with upgraded decor, a private lounge,
and special programs and, in the case of the Williamsburg wings, concierge
services and a private dining area with a gourmet menu. ManorCare Health
Services believes that the Heritage and Williamsburg design concepts support
the ManorCare Health Services' reputation as the premier provider of skilled
nursing care and contributes to ManorCare Health Services' high percentage of
private pay residents as compared to the rest of the industry. Within its
skilled nursing facilities, ManorCare Health Services operates 146 Arcadia
special-care units providing services to individuals in the middle to late
stages of Alzheimer's disease or afflicted with related memory impairment.
ManorCare Health Services also operates 21 dedicated MedBridge high acuity
units featuring high staff-to-patient ratios, sophisticated clinical
capabilities and state-of-the-art rehabilitation departments. In addition,
ManorCare Health Services' facilities offer specially designed wound care
programs, oncology and orthopedic rehabilitation programs. See "Relationship
Between Manor Care Realty and ManorCare Health Services After the
Distribution--Lease Agreements."
ManorCare Health Services believes these high-end specialty products will
facilitate marketing efforts to attract longer stay (1-3 years) private pay
residents. ManorCare Health Services-managed skilled nursing and
rehabilitation facilities range in bed capacity from 53 to 261 beds and had an
aggregate bed capacity of 24,089 beds during the 1997 fiscal year. ManorCare
Health Services' nursing facilities are located in the following 28 states:
Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana,
Iowa, Kansas, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico,
North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina,
South Dakota, Texas, Utah, Virginia, Washington and Wisconsin.
ASSISTED LIVING SERVICES
ManorCare Health Services is pursuing an aggressive acquisition strategy in
the assisted living industry in an effort to build upon its current market
position and enhance ManorCare Health Services' competitive position in the
private pay segment. ManorCare Health Services has an acquisition plan
pursuant to which it intends to acquire from Manor Care Realty approximately
170 Arden Courts and 38 Springhouse senior residences during the next five
years. Pursuant to the Development Agreement, Manor Care Realty will develop
assisted living facilities for sale to ManorCare Health Services. ManorCare
Health Services will be obligated to purchase each such facility if occupancy
reaches 75% for a period of five days during the two-year stabilization
period. The purchase price for each facility will be at a premium to Manor
Care Realty's total development costs, such premium ranging from 12% to 37%,
based on the number of months elapsed since the opening of the relevant
facility. Total approved development costs include expenses incurred in
connection with the development and construction of the facilities, but do not
include operating losses incurred during the two-year stabilization period.
The premium to total approved development costs is intended to compensate
Manor Care Realty for the increasing value of its investment over time as well
as for the risks it takes in connection with developing assisted living
facilities, including the risks inherent in operating the facilities during
the two-year stabilization period. This premium will be amortized over a 20 to
30-year period and represents a much smaller annual dilution to earnings than
would have been the case had ManorCare Health Services absorbed the initial
start-up costs associated with each Arden Courts or Springhouse facility. If
ManorCare Health Services does not acquire a facility within such two-year
stabilization period, Manor Care Realty may sell the facility to a third
party. During the two year stabilization period (or such lesser time if
stabilized occupancy is achieved and ManorCare Health Services purchases the
facility) ManorCare Health Services will manage the assisted living facilities
for Manor Care Realty for a fixed monthly fee. See "Relationship Between Manor
Care Realty and ManorCare Health Services After the Distribution--Development
Agreement."
In a strategy similar to that employed in ManorCare Health Services' skilled
nursing facilities, ManorCare Health Services' assisted living facilities
target affluent to middle income seniors in need of a full range of
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assisted living services to optimize their quality of life. These services are
available 24 hours a day and generally include meal service, housekeeping,
personal care, nursing and health related services, social and recreational
services, transportation and special services (such as banking and shopping).
Personal services include bathing, dressing, personal hygiene, grooming,
ambulating and dining assistance. Health-related services, which are tailored
to individual patient needs and applicable state regulatory requirements, may
include assistance with medication management, skin care and injections, as
well as health care monitoring. ManorCare Health Services also believes that
it offers more security to its customers by including these health-related
services as part of its care delivery. ManorCare Health Services believes that
by providing programs with a range of service options responsive to the full
range of the residents' changing needs, ManorCare Health Services affords
greater continuity of care and thereby permits residents to "age in place."
ManorCare Health Services' Arden Courts assisted living facilities are a
distinct product and service segment focused exclusively on individuals
suffering from the early to middle stages of Alzheimer's disease or related
memory impairment. These special purpose assisted living facilities offer a
proprietary, specially designed physical plant with security systems,
structured activities and related resident services and support systems. These
facilities are typically divided into four color-coded houses comprising a
total of 56 units with access to communal living rooms, kitchens, dining rooms
and protected gardens. All aspects of the facilities' operations are managed
by an Executive Director, specially trained in the care of Alzheimer's
patients. Arden Courts assisted living facilities are designed to allow
residents the freedom to move about independently while keeping them safely
contained within a secured area with security systems. ManorCare Health
Services' specially designed social activities provide Arden Courts residents
with a minimum of 8 hours of meaningful interactive activity per day. In
addition, ManorCare Health Services utilizes special nutritional programs to
help assure that caloric intake is maintained in its residents. ManorCare
Health Services' Arden Courts assisted living facilities also offer education,
counseling and support to the residents' families.
ManorCare Health Services' Springhouse senior residences are freestanding,
residential-style facilities designed to meet the needs of the general
assisted living population. ManorCare Health Services' assisted living
facilities are functionally arranged to provide a home-like atmosphere. The
architectural and interior design concepts incorporate the ManorCare Health
Services operating philosophy of delivering superior quality care, protecting
resident privacy, enabling freedom of choice, encouraging independence and
fostering individuality in a home-like setting. Each facility is operated with
certain protocols designed to maintain the health of the residents and to
provide a measure of security and support for those individuals. Each facility
includes common areas designed to promote social interaction among residents,
such as a common dining area, a laundry room, a library, a wellness center,
barber and beauty shop, crafts room, spa and a snack room or ice cream parlor.
In addition, Springhouse residents have access to medication management
services, therapy and other ancillary services as well as dementia programs
and dedicated dementia units in some locations.
ManorCare Health Services provides a wide variety of health care services at
its assisted living facilities, including medication management, monitoring
the resident's general health status and assisting residents in the
performance of their ADLs. In order to determine the individual care needs and
lifestyle preferences of its residents, ManorCare Health Services' facility-
based staff assesses each resident upon admission to determine his/her health
status, including functional abilities, need for personal care services and
assistance with ADLs as well as personal preferences. In addition, ManorCare
Health Services utilizes a current physician's report to ascertain the health
status and needs of the resident. ManorCare Health Services develops a plan of
care for each of its residents and utilizes licensed nurses, certified or
trained staff and third party providers to meet their health care needs. In
order to ensure that the plan of care continues to be tailored to a resident's
current needs, each resident is periodically reassessed. ManorCare Health
Services utilizes the plan of care as the basis for determining the monthly
charges for each resident's care and services. In addition, ManorCare Health
Services fosters resident wellness through health screening such as blood
pressure checks, periodic special services such as influenza inoculations,
chronic disease management such as blood glucose monitoring for diabetics,
dietary and nutritional programs, regular exercise and fitness classes and
special classes given by health care
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professionals. To the extent permitted by state regulations, ManorCare Health
Services also makes available third-party specialized health care services to
patients when necessary.
ManorCare Health Services' facilities accept residents for respite care
(short term placement for several days to several months) to accommodate
short-term exigencies. ManorCare Health Services believes that respite care
services serve as an introduction to the continuum of services it offers as
many residents are frequent returnees and often become permanent residents at
a Company facility.
INSTITUTIONAL PHARMACY SERVICES
ManorCare Health Services owns 51% of Vitalink, a publicly traded company
that provides institutional pharmacy services to nursing facilities, assisted
living facilities and other institutions. ManorCare Health Services believes
it will benefit from increased revenues generated through Vitalink's growth
strategy, including (i) expansion of market share through selective industry
acquisitions which should permit Vitalink to leverage its critical mass,
access new customers and realize operational efficiencies through
consolidation of the combined entities' infrastructure; (ii) continued
penetration of existing markets through targeting of non-ManorCare Health
Services institutional facilities to maximize pharmaceutical facility output;
(iii) further growth from meeting the pharmacy requirements of new or acquired
ManorCare Health Services skilled nursing and assisted living facilities;
(iv) geographically targeting dominant infusion service home care companies to
drive sales of infusion products; (v) development of proprietary information
and database systems to provide state of the art patient care and disease
management capabilities; and (vi) development of new services to provide
support to the elderly while they still reside in their homes, such as disease
management or patient education and compliance programs. Vitalink's recent
acquisition of GranCare's institutional pharmacy business, TeamCare, and the
resultant expansion of the scope of its business to include the provision of
pharmacy services to institutional clients with 173,000 related institutional
beds is indicative of the implementation of Vitalink's growth strategy.
Vitalink, which is the second largest publicly traded institutional pharmacy
in the country, is a high quality, value-added partner with health care
providers and payors and provides four types of services:
. Customized filling of prescription and non-prescription medications for
individual patients pursuant to physician orders delivered to nursing
facilities.
. Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.
. Infusion therapy services, consisting of the administration of a product
(nutrient, antibiotic, chemotherapy or other drugs or fluids) by tube,
catheter or intravenously. Vitalink prepares and delivers the product
which is administered by the nursing center staff.
. Integrated data systems such as VitalCONSULT, an integrated consultant
software package that allows pharmacists and nurses to record outcome
events, laboratory data, and patient status updates and administer
disease management programs and formularies more efficiently, and OPTIMA
(Optimizing Patient Theory in Medication Administration), a state-of-the-
art patient care management system designed to identify individuals who
are at high risk for certain diseases, which focuses on treatment
protocols and incorporates a disease-specific drug formulary. These
innovative systems increase efficiency, enhance clinical support and
result in superior outcomes.
Vitalink operates 57 institutional pharmacies located in 36 states and four
regional infusion pharmacies, which specialize in pharmaceutical dispensing of
individual medications, pharmacy consulting and infusion therapy products. In
the 1997 fiscal year, approximately 13% of the beds serviced by Vitalink were
Manor Care-affiliated. Net revenue from Manor Care and its patients (including
revenues received from government reimbursement programs) accounted for
approximately 29%, 48% and 49% of total net revenues in fiscal years 1997,
1996 and 1995, respectively. The balance came from unrelated third parties. On
October 15, 1997, Manor Care announced that it is exploring strategic
alternatives with respect to its 51% ownership interest in Vitalink. Options
under consideration by Manor Care (and to be considered by ManorCare Health
Services after the
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Distribution) include strategic mergers, joint ventures or other business
combinations that could enhance Vitalink's strategic position in its markets,
better enable it to serve its customers and increase Vitalink's shareholder
value. Manor Care does not believe that any of the strategic alternatives that
it is exploring will have a material effect on the operations of the skilled
nursing business or the assisted living business. Vitalink has retained SBC
Warburg Dillon Read Inc. to act as financial advisor in connection with the
exploration of strategic alternatives with respect to Manor Care's interest in
Vitalink. Manor Care has no present commitments or agreements with respect to
any such transaction and there can be no assurance that Manor Care (or
ManorCare Health Services after the Distribution) will decide to enter into
any such transaction or, should it decide to do so, be able to reach an
agreement with respect to any such transaction on terms acceptable to it.
HOME HEALTH CARE SERVICES
ManorCare Health Services provides home health care services through its
majority owned subsidiary, In Home Health. In those markets in which In Home
Health does not participate, ManorCare Health Services is expanding its
relationships with other regional home health care service providers. Through
In Home Health, ManorCare Health Services offers its clients a broad range of
professional and support services to meet medical and personal needs at home.
These services provide an entry for clients in ManorCare Health Services'
cluster markets into ManorCare Health Services' integrated continuum of care.
In addition, ManorCare Health Services believes that its home health care
businesses profit from referrals from its assisted living and skilled nursing
facilities. In ManorCare's 1997 fiscal year, In Home Health indirectly derived
approximately $6.8 million in revenues (less than 10% of In Home Health's
fiscal 1997 revenues) from referrals from Manor Care facilities. On September
15, 1997, President Clinton imposed a Medicare moratorium on new home health
agencies so that new regulations could be issued to combat fraud. On January
13, 1998, the Clinton Administration lifted the moratorium, based on the
issuance of new regulations for home health agencies. These regulations
require, as mandated by the Budget Act, that all home health agencies obtain
surety bonds to participate in the Medicare and Medicaid programs, and
disclose of related business interests. According to press reports, some home
health agencies have had difficulty obtaining bonds meeting the required
criteria. If a home health agency is unable to obtain a bond, the agency could
lose certification to participate in the Medicare and Medicaid programs.
ManorCare Health Services does not believe that there will be any material
adverse affect on either In Home Health or on ManorCare Health Services as a
result of these new requirements.
The home health care and support services that ManorCare Health Services
provides through In Home Health include skilled nursing, infusion therapy,
hospice, rehabilitation, personal and companion care and homemaking. Hospice
services are an important new area of growth, and In Home Health operates 15
Medicare certified hospices in its 19 markets. In Home Health plans to become
certified in the four remaining geographic markets as soon as it can meet the
requirement of obtaining a Certificate of Need, either through acquisition of
an existing home health agency which has a CON or upon completion and approval
of application for a new CON. This process could take one to three years
because of the current moratorium on home health agency applications and the
long process of receiving approval for a CON. ManorCare Health Services also
expects to broaden the range of home health care options it offers by
providing its home-based Alzheimer's customers with specially trained
companions who can provide daily service ranging from short visits to all day
care.
ManorCare Health Services owns approximately 64% of the voting power of In
Home Health, a publicly traded company which provides home health care
services in 14 states. Each of In Home Health's branches has two divisions: a
Visit Division and an Extended Care Division. The Visit Division provides
clients with round-the-clock care on a short-term basis. The Extended Care
Division provides clients with care up to 24 hours a day on a long-term basis.
In Home Health operates infusion pharmacies which distribute pharmaceutical
drugs, fluids and supplies.
EMPLOYEES
As of the Effective Date, ManorCare Health Services will have approximately
29,500 employees. From time to time, some of the Company-operated skilled
nursing facilities experience shortages of professional nursing help which may
require ManorCare Health Services to seek temporary employees through
employment agencies at an increased cost.
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A vast majority of ManorCare Health Services' employees are paid on an
hourly basis and are covered by the federal minimum wage laws. A few employees
are represented by labor unions and attempts have been made to unionize
employees of certain other facilities. ManorCare Health Services believes that
it enjoys a good relationship with its employees.
PROPERTIES
ManorCare Health Services's signature Arden Courts and Springhouse model
facilities, first designed in 1993 and 1994 respectively, are freestanding,
residential-style facilities. Each Arden Courts facility ranges in size from
25,000 to 28,000 square feet, is built to target a site ranging between three
and four acres and has a capacity of 52 to 56 residents. Each Springhouse
facility ranges in size from 65,000 to 70,000 square feet, is built to target
a site ranging between five and six acres and has a capacity of 105 to 110
residents. Approximately 30-40% of each facility is devoted to common areas
and amenities, including reading rooms, family or living rooms and other areas
designed to promote interaction among residents. The ground level typically
contains a kitchen and common dining area, administrative offices, a laundry
room, a library or living room, a wellness center, barber shop, crafts room,
spa and a snack room. ManorCare Health Services' assisted living facilities
are usually one to three stories and are functionally arranged to provide a
home-like atmosphere. The architectural and interior design concepts
incorporate the ManorCare Health Services operating philosophy of delivering
superior quality care, protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a home-like
setting.
The skilled nursing facilities operated by ManorCare Health Services range
in bed capacity from 53 to 261 beds and have an aggregate bed capacity of
24,089 beds. Most of the skilled nursing facilities have been designed to
permit private and semi-private patient room accommodations. Most facilities
have individually controlled heating and air-conditioning units. Each skilled
nursing facility contains a fully equipped kitchen, day room areas,
administrative offices and in most cases a physical therapy room.
Manor Care has occupied its current headquarters since August 1996. The main
building is approximately 335,000 square feet and is 90% occupied at November
30, 1997. There is another building on the property which is not used by the
company (200,000 square feet of which 180,000 square feet is storage and
20,000 square feet is office) and of which 80,000 square feet is subleased to
an unrelated party. The buildings and the approximately 100 acres of land on
which they are situated are controlled through a lease. The property is zoned
for another 1,000,000 square feet of commercial space. Manor Care believes
that the main building will be adequate for expansion at the current pace at
least through the year 2000. For a description of the arrangements with
respect to the headquarters facility after the Distribution, see "Relationship
Between Manor Care Realty and ManorCare Health Services after the
Distribution--Office Lease Agreement."
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The table below summarizes certain information regarding ManorCare Health
Services' facilities as of November 30, 1997 after giving pro forma effect to
the Distribution:
ASSISTED LIVING SERVICES--SPRINGHOUSE
<TABLE>
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Tucson........................................................ AZ 107(1)
Brea.......................................................... CA 92
Laguna Hills.................................................. CA 288(3)
Whittier...................................................... CA 73
Boynton Beach................................................. FL 127
Boynton Beach--Village........................................ FL 104(1)
Dunedin....................................................... FL 110(1)
Naples........................................................ FL 311(3)
Port Charlotte................................................ FL 84(4)
Sarasota...................................................... FL 106(1)
Peoria........................................................ IL 289(3)
Carmel........................................................ IN 260(3)
Bethesda...................................................... MD 92
Bethesda--Westwood............................................ MD 62(2)
Kensington.................................................... MD 201(5)
Silver Spring................................................. MD 118
Southfield.................................................... MI 101
Fairfield..................................................... OH 257(3)
Westlake...................................................... OH 97
Pottstown Residential......................................... PA 57
West Reading Residential...................................... PA 53
Total Springhouse Facilities.................................. 21
-----
Total Springhouse Units....................................... 2,989
=====
ASSISTED LIVING SERVICES--ARDEN COURTS
<CAPTION>
FACILITY LOCATION STATE UNITS
----------------- ----- -----
<S> <C> <C>
Farmington.................................................... CT 55
West Palm Beach............................................... FL 56(1)
Elk Grove..................................................... IL 54(1)
South Holland................................................. IL 56(1)
Potomac....................................................... MD 48(1)
Silver Spring................................................. MD 49(1)
Sterling Heights.............................................. MI 53
Cherry Hill................................................... NJ 53
Westlake...................................................... OH 56
Allentown..................................................... PA 56
King of Prussia............................................... PA 54(1)
North Hills................................................... PA 56(1)
Yardley....................................................... PA 52(1)
Fair Oaks..................................................... VA 55(1)
Total Arden Courts Facilities................................. 14
-----
Total Arden Courts Units...................................... 753
=====
</TABLE>
- --------
(1) Each parcel of land on which each of these facilities is located is
covered by a 99 year ground lease between Manor Care Realty, as landlord,
and ManorCare Health Services, as tenant. ManorCare Health Services owns
the buildings and improvements located thereon and the furniture, fixtures
and equipment located therein.
(2) This facility is leased by ManorCare Health Services from an unrelated
third party.
(3) These facilities also contain skilled nursing beds in the following
numbers: Naples (101), Laguna Hills (98), Peoria (51), Carmel (55) and
Fairfield (57).
(4) This facility was sold to a third party on March 4, 1998. Proceeds and
costs associated with this transaction are not reflected in the pro forma
financials due to immateriality.
(5) This facility is owned by an unrelated third party and managed by
ManorCare Health Services pursuant to a management agreement.
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SKILLED NURSING SERVICES
<TABLE>
FACILITY LOCATION BEDS
----------------- -----
<S> <C>
ARIZONA
Tucson............................................................... 117
-----
Total................................................................ 117
=====
CALIFORNIA
Citrus Heights....................................................... 146
Encinitas............................................................ 117
Fountain Valley...................................................... 146
Hemet................................................................ 176
Palm Desert.......................................................... 178
Rancho Bernardo...................................................... 95
Rossmoor............................................................. 119
Sunnyvale............................................................ 138
Walnut Creek......................................................... 153
-----
Total................................................................ 1,268
=====
COLORADO
Boulder.............................................................. 149
Denver............................................................... 151
-----
Total................................................................ 300
=====
DELAWARE
Pike Creek........................................................... 151
Wilmington........................................................... 139
-----
Total................................................................ 290
=====
FLORIDA
Boca Raton........................................................... 178
Boynton Beach........................................................ 179
Carrollwood.......................................................... 117
Dunedin.............................................................. 119
Jacksonville......................................................... 114
Naples............................................................... 116
Palm Harbor.......................................................... 179
Plantation........................................................... 119
Sarasota............................................................. 176
Venice............................................................... 129
West Palm Beach...................................................... 120
Winter Park.......................................................... 132
-----
Total................................................................ 1,678
=====
GEORGIA
Decatur.............................................................. 129
Marietta............................................................. 116
-----
Total................................................................ 245
=====
ILLINOIS
Arlington Heights.................................................... 153
Champaign............................................................ 98
Decatur.............................................................. 95
Elgin................................................................ 79
Elk Grove............................................................ 177
Hinsdale............................................................. 188
Kankakee............................................................. 102
Libertyville......................................................... 149
Naperville........................................................... 113
Normal............................................................... 97
Oak Lawn............................................................. 173
Oak Lawn Americana................................................... 141
Orchard Manor........................................................ 53
Palos Heights........................................................ 176
Palos Heights West................................................... 120
Peoria............................................................... 119
Rolling Meadows...................................................... 154
South Holland........................................................ 185
Urbana............................................................... 97
Westmont............................................................. 115
Wilmette............................................................. 76
-----
Total................................................................ 2,660
=====
INDIANA
Anderson............................................................. 218
Indianapolis North................................................... 182
Indianapolis South................................................... 118
Kokomo............................................................... 100
-----
Total................................................................ 618
=====
IOWA
Cedar Rapids......................................................... 104
Davenport............................................................ 100
Dubuque.............................................................. 95
Waterloo............................................................. 93
-----
Total................................................................ 392
=====
KANSAS
Overland Park........................................................ 175
Topeka............................................................... 120
Wichita.............................................................. 117
-----
Total................................................................ 412
=====
MARYLAND
Bethesda............................................................. 102
Chevy Chase.......................................................... 158
Largo................................................................ 128
Potomac.............................................................. 137
Roland Park.......................................................... 89
Rossville............................................................ 180
Ruxton............................................................... 217
Silver Spring........................................................ 119
Towson............................................................... 126
Wheaton.............................................................. 98
-----
Total................................................................ 1,354
=====
</TABLE>
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<PAGE>
<TABLE>
FACILITY LOCATION BEDS
----------------- -----
<S> <C>
MISSOURI
Florissant........................................................ 97
Fremont........................................................... 220
-----
Total............................................................. 317
=====
MICHIGAN
Kingsford......................................................... 105
Windemere......................................................... 179
-----
Total............................................................. 284
=====
NEVADA
Reno.............................................................. 150
-----
Total............................................................. 150
=====
NEW JERSEY
Cherry Hill....................................................... 107
Mountainside...................................................... 148
West Deptford..................................................... 135
-----
Total............................................................. 390
=====
NEW MEXICO
Camino Vista...................................................... 134
Northeast Heights................................................. 137
Sandia............................................................ 176
-----
Total............................................................. 447
=====
NORTH CAROLINA
Pinehurst......................................................... 114
-----
Total............................................................. 114
=====
NORTH DAKOTA
Fargo............................................................. 107
Minot............................................................. 105
-----
Total............................................................. 212
=====
OHIO
Akron............................................................. 100
Barberton......................................................... 118
Belden Village.................................................... 144
Centreville....................................................... 139
Cincinnati........................................................ 149
Lake Shore........................................................ 199
Mayfield Heights.................................................. 149
North Olmstead.................................................... 177
Oregon............................................................ 108
Rocky River....................................................... 209
Sycamore Glen..................................................... 99
Westerville....................................................... 178
Willoughby........................................................ 154
Woodside.......................................................... 143
-----
Total............................................................. 2,066
=====
OKLAHOMA
Midwest City...................................................... 102
Norman............................................................ 108
Northwest Oklahoma City........................................... 116
Southwest Oklahoma City........................................... 116
Tulsa............................................................. 110
Warr Acres........................................................ 100
Windsor Hills..................................................... 107
-----
Total............................................................. 759
=====
PENNSYLVANIA
Allentown......................................................... 163
Bethel Park....................................................... 159
Bethlehem-I....................................................... 227
Bethlehem-II...................................................... 215
Camp Hill......................................................... 118
Carlisle.......................................................... 151
Chambersburg...................................................... 205
Dallastown........................................................ 203
Devon Manor....................................................... 261
Easton............................................................ 224
Elizabethtown..................................................... 96
Fitzgerald Mercy.................................................. 119
Harrisburg........................................................ 234
Huntingdon Valley................................................. 121
Jersey Shore...................................................... 120
King of Prussia................................................... 148
Kingston Court.................................................... 126
Kingston East..................................................... 177
Lansdale.......................................................... 170
Laureldale........................................................ 199
Lebanon........................................................... 158
McMurray.......................................................... 140
Monroeville....................................................... 121
North Hill........................................................ 199
Pittsburgh........................................................ 149
Pottstown Nursing................................................. 160
Pottsville........................................................ 176
Sinking Spring.................................................... 216
Sunbury........................................................... 126
West Reading...................................................... 177
Whitehall......................................................... 173
Williamsport North................................................ 154
Williamsport South................................................ 128
Yardley........................................................... 140
Yeadon............................................................ 198
York North........................................................ 162
York South........................................................ 126
-----
Total............................................................. 6,139
=====
</TABLE>
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<PAGE>
<TABLE>
FACILITY LOCATION BEDS
----------------- -----
<S> <C>
SOUTH CAROLINA
Charleston................................................................ 116
Columbia.................................................................. 128
Lexington................................................................. 112
-----
Total..................................................................... 356
=====
SOUTH DAKOTA
Aberdeen.................................................................. 98
-----
Total..................................................................... 98
=====
TEXAS
Dallas.................................................................... 200
Fort Worth................................................................ 158
Forth Worth NW............................................................ 103
San Antonio-Babcock....................................................... 210
San Antonio-North......................................................... 95
San Antonio-Northwest..................................................... 143
San Antonio-Windcrest..................................................... 187
Sharpview................................................................. 127
Temple.................................................................... 102
Temple Care............................................................... 141
Webster................................................................... 111
-----
Total..................................................................... 1,577
=====
UTAH
Ogden..................................................................... 134
----
Total..................................................................... 134
====
VIRGINIA
Arlington................................................................. 191
Fair Oaks................................................................. 119
Imperial.................................................................. 127
Stratford Hall............................................................ 233
----
Total..................................................................... 670
====
WASHINGTON
Gig Harbor................................................................ 120
Lynwood................................................................... 113
Meadow Park............................................................... 124
Spokane................................................................... 125
----
Total..................................................................... 482
====
WISCONSIN
Appleton.................................................................. 103
Fond du Lac............................................................... 107
Green Bay-East............................................................ 78
Green Bay-West............................................................ 105
Madison................................................................... 167
----
<CAPTION>
Total..................................................................... 560
====
</TABLE>
TOTAL SKILLED NURSING FACILITIES: 171
TOTAL SKILLED NURSING BEDS: 24,089
All of the facilities listed in the above table are owned or leased by Manor
Care Realty and leased by ManorCare Health Services except for five facilities
owned directly by ManorCare Health Services, certain facilities in which Manor
Care Realty has an ownership interest pursuant to joint venture agreements and
certain facilities in which ManorCare Health Services has an ownership
interest pursuant to joint venture agreements. Manor Care Realty owns 35% of
the Winter Park, Florida facility and 94% of the Decatur, Georgia facility.
Pursuant to management agreements with the owner/operator of the facilities,
ManorCare Health Services will manage the facilities. Each management
agreement is for a two-year term with automatic, two-year renewal periods.
ManorCare Health Services owns 50% of each of the Centreville, Ohio facility,
the Sycamore Glen, Ohio facility and the Fitzgerald Mercy, Pennsylvania
facility. Pursuant to the joint venture agreements, ManorCare Health Services
will manage the facilities on a long-term basis.
Set forth below is a chart which illustrates occupancy rates for Manor
Care's skilled nursing facilities and assisted living facilities. These
occupancy rates include facilities that have been operated by ManorCare Health
Services for less than two years.
OCCUPANCY RATES
<TABLE>
<CAPTION>
12 MONTHS ENDED
5/31/97
---------------
<S> <C>
Skilled Nursing.............................................. 88.4%
Assisted Living--Arden Courts................................ 66.4%
Assisted Living--Springhouse................................. 83.9%
</TABLE>
92
<PAGE>
COMPETITION
ManorCare Health Services' principal competitors in the skilled nursing
business are Advocat, Inc., Beverly Enterprises, Inc., Extendicare, Inc.,
Genesis Health Ventures, Inc., Health Care and Retirement Corporation,
Integrated Health Services, Inc., Mariner Health Group, Inc., National
HealthCare L.P., Paragon Health Network, Inc., Sun Healthcare Group, Inc. and
Vencor, Inc. ManorCare Health Services' principal competitors in the assisted
living business are Alternative Living Services, Inc., ARV Assisted Living,
Inc., CareMatrix Corporation, Emeritus Corporation, Kapson Senior Quarters
Corp., Karrington Health, Inc., Marriott International, Inc. and Sunrise
Assisted Living, Inc. ManorCare Health Services' principal competitors in the
institutional pharmacy business are NCS Healthcare, Inc., Omnicare, Inc. and
PharMerica, Inc. ManorCare Health Services' principal competitors in the home
health business are HealthCor Holdings, Inc., Home Health Corporation of
America, Inc., Housecall Medical Resources, Inc., National Home HealthCare
Corp., Olsten Corporation and Option Care, Inc.
The senior housing and health care industries are highly competitive and
ManorCare Health Services expects that the assisted living business in
particular will become more competitive in the future. ManorCare Health
Services' assisted living and skilled nursing facilities compete on a local
and regional basis with other senior support health care providers, some of
which have greater financial resources or operate on a nonprofit basis.
ManorCare Health Services' competes with other providers on the basis of
breadth and quality of services, reputation, location and physical appearance
of the facilities, family preferences, relationship with key referral sources
and, in the case of private patients, pricing. Accordingly, ManorCare Health
Services seeks to meet competition in each locality by establishing a
reputation within the local medical communities for high quality services and
trained, caring staff.
In general, regulatory and other barriers to competitive entry in the
assisted living industry are not substantial. Some of ManorCare Health
Services' present and potential competitors operate on a not-for-profit basis
or as charitable organizations, while others have, or may obtain, greater
financial resources than those of ManorCare Health Services. Consequently,
there can be no assurance that ManorCare Health Services will not encounter
increased competition that could limit its ability to attract residents or
expand its business. Moreover, if the development of new assisted living
facilities outpaces demand for those facilities in certain markets, such
markets may become saturated. Such an oversupply of facilities could cause
ManorCare Health Services to experience decreased occupancy, depressed margins
and lower operating results.
Vitalink competes with national institutional pharmacies as well as numerous
local and regional retail pharmacies, as well as with the pharmacy operations
owned by long-term care providers other than ManorCare Health Services. These
competitors provide product and service offerings similar to those provided by
Vitalink and may be larger or have greater financial resources than ManorCare
Health Services.
The home health care business is highly competitive and many such companies
have experienced declines in performance. In Home Health competes with: (i)
hospitals and public health agencies that provide short term, intermittent
care, (ii) national specialized home care providers and (iii) other
independent home care companies. The primary competitive factors in the home
health care business are the price of the services and quality considerations
such as responsiveness, the technical ability of the professional staff and
the ability to provide comprehensive services.
GOVERNMENT FUNDING
Assisted Living. As a result of limited government funding for the assisted
living business, ManorCare Health Services relies and expects to rely in the
future on the ability of its residents to pay the cost of care from their own
financial resources. Depending on the nature of an individual's health
insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an "alternative care benefit."
Some state or local governments offer limited funding in the form of housing
subsidies for rent or housing-related services for low income seniors. Others
may provide subsidies in the form of additional payment
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<PAGE>
for those who receive Supplemental Security Income. However, the federal
government does not currently provide any reimbursement for ManorCare Health
Services' assisted living facilities.
Medicaid provides benefits for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. Medicaid reimbursement varies from state to state. In 1981, the
federal government approved a Medicaid waiver program called Home and
Community-Based Care which was designed to permit states to develop programs
specific to the health care and housing needs of the low-income elderly
eligible for nursing home placement (a "Medicaid Waiver Program"). Under a
Medicaid Waiver Program, states apply to the Health Care Financing
Administration for a waiver to use Medicaid funds to support community-based
options for low-income elderly who need long-term care. These waivers permit
states to reallocate a portion of Medicaid funding for nursing facility care
to other forms of care such as assisted living. In 1994, the federal
government implemented new regulations which empowered states to further
expand their Medicaid Waiver Programs and eliminated restrictions on the
amount of Medicaid funding states could allocate to community-based care, such
as assisted living. A limited number of states currently have such programs
operating that allow them to pay for assisted living care. Without a Medicaid
Waiver Program, states can only use federal Medicaid funds for long-term care
in nursing facilities.
Skilled Nursing. Patients seeking the service of ManorCare Health Services'
skilled nursing facilities come from a variety of sources, and are principally
referred by hospitals and physicians. ManorCare Health Services targets upper
income, service sensitive patients who pay for services without benefit of any
government assistance program for its skilled nursing facilities. Manor Care
Realty locates its nursing facilities in geographies that are attractive to
private pay patients because ManorCare Health Services believes that focusing
on private pay patients helps reduce its exposure to potential changes in
government reimbursement practice and enables ManorCare Health Services to
achieve relatively attractive profit margins.
ManorCare Health Services expects that state Medicaid and federal Medicare
reimbursement programs will constitute an additional source of future revenues
for its managed skilled nursing facilities. Both initial and continuing
qualification of a skilled nursing care facility to participate in such
programs depend upon many factors including, among other things,
accommodations, equipment, services, patient care, safety, personnel, physical
environment, and adequate policies, procedures and controls. Medicaid programs
typically provide for fixed rate payment to health care providers who must
accept reimbursement from Medicaid as payment in full for all covered services
rendered to Medicaid patients. With respect to skilled nursing, Medicare is a
retrospective payment system in which each facility receives an interim
payment during the year, which is later adjusted to reflect actual allowable
direct and indirect costs of services based on the submission of a cost report
at the end of each year. As a result of the Budget Act, the Medicare payment
system will become prospective such that skilled nursing facilities will be
reimbursed per diem for specific covered services regardless of actual cost.
See "Risk Factors--Regulation" and "--Government Regulation--Federal and State
Assistance Programs." There can be no assurance that either Medicaid or
Medicare will pay rates that recognize all of ManorCare Health Services' costs
of providing services to residents covered by those programs.
Private Pay Patients. As a general rule, the profit margin is higher with
private pay patients than with patients to whom services are rendered with
government assistance programs.
The following table sets forth for the periods specified, the percentage of
private patients, Medicare patients and Medicaid patients in Manor Care's
skilled nursing facilities.
<TABLE>
<CAPTION>
SKILLED NURSING
FACILITIES
LATEST TWELVE
MONTHS AS OF
5/31/97
------------------
% OF % OF
OCCUPANCY REVENUES
--------- --------
<S> <C> <C>
Private Patients......................................... 51% 55%
Medicare Patients........................................ 11% 19%
Medicaid Patients........................................ 38% 26%
--- ---
Total.................................................. 100% 100%
</TABLE>
94
<PAGE>
As of May 31, 1997, all of the residents at Manor Care's assisted living
facilities were private pay.
GOVERNMENT REGULATION
ManorCare Health Services' skilled nursing facilities and assisted living
facilities and the business of Vitalink and In Home Health are subject to
extensive federal, state and local statutes and regulations. In addition, the
facilities are subject to various local building codes and other ordinances.
ManorCare Health Services believes that, at this time, none of its facilities
is in violation of any applicable regulation that would materially threaten
the operation of its business or materially affect the standard of care
provided. Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on
licensure of ManorCare Health Services facilities, eligibility for
participation in federal and state programs, permissible activities, costs of
doing business, or the levels of reimbursement from governmental, private and
other sources. ManorCare Health Services cannot predict the ultimate timing,
the content, or the impact of future legislation and regulations affecting
ManorCare Health Services and the health care industry in general. See "Risk
Factors--Regulation."
Certificate of Need Laws. Many of the states in which ManorCare Health
Services will operate have adopted Certificate of Need ("CON") statutes
applicable to the assisted living and skilled nursing services provided by
ManorCare Health Services. CON or similar laws generally require that approval
must be obtained from the designated state health planning agency for certain
acquisitions and capital expenditures, and determine that a need exists prior
to the expansion of existing facilities, construction of new facilities,
addition of beds, acquisition of major items of equipment or introduction of
new services. Failure to obtain the necessary state approval can result in (i)
the inability to provide services, to operate a facility, or to complete an
acquisition, addition or other change; (ii) the imposition of sanctions; (iii)
adverse action on the facility's license; and/or (iv) adverse reimbursement
action. CONs or other approvals may be required in connection with ManorCare
Health Services' future acquisitions and/or expansions. There can be no
assurance that ManorCare Health Services will be able to obtain the CONs or
other approvals necessary for any or all such projects. There can be no
assurance that states with CON laws may not abolish such laws or that states
without such laws will enact such CON laws. Manor Care has extensive
experience filing for CONs. During the period from 1987 to the present, Manor
Care commenced operations of 64 new skilled nursing facilities, most of which
required CON applications. During the past four fiscal years, Manor Care
received CON approval for 13 skilled nursing facilities and 18 assisted living
facilities.
Anti-remuneration Laws. ManorCare Health Services is subject to federal and
state anti-remuneration laws, such as the Federal anti-kickback law, which
govern certain financial arrangements among health care providers and others
who may be in a position to refer or recommend patients to such providers.
These laws prohibit, among other things, direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of, a particular provider of health care items or
services. The Federal anti-kickback law has been broadly interpreted to apply
to certain contractual relationships between health care providers and sources
of patient referral.
The recently-enacted Budget Act also includes numerous health fraud
provisions, including: new exclusion authority for the transfer of ownership
or control interest in an entity to an immediate family or household member in
anticipation of, or following, a conviction, assessment, or exclusion;
increased mandatory exclusion periods for multiple health fraud convictions,
including permanent exclusion for those convicted of three health care-related
crimes; authority for the Secretary to refuse to enter into Medicare
agreements with convicted felons; new civil money penalties for contracting
with an excluded provider or violating the Medicare and Medicaid anti-kickback
statute; new surety bond and information disclosure requirements for certain
providers and suppliers; and an expansion of the mandatory and permissive
exclusions added by the Health Insurance Portability and Accountability Act of
1996 to any federal health care program (other than the Federal Employees
Health Benefits Program).
In addition, in July 1995, federal officials launched a major anti-fraud
initiative called Operation Restore Trust. This program targets fraud
involving nursing facilities, home health agencies, suppliers of medical
95
<PAGE>
equipment and hospices and is currently operating in 17 states. Over the
longer term, Operation Restore Trust investigative techniques will be used in
all 50 states, and will be applied throughout the Medicare and Medicaid
programs. Enforcement actions could include criminal prosecutions or actions
for civil money penalties, overpayments or Medicare or Medicaid exclusion. See
"Risk Factors--Regulation--Anti-Remuneration Laws." In addition, State fraud
and abuse laws vary from state to state and seldom have been interpreted by
courts or regulatory agencies. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in (i.e., furnishing covered items
or services to beneficiaries of) the Medicare and Medicaid programs. ManorCare
Health Services plans to continue to treat Vitalink and In Home as separate
entities, and will also treat Manor Care Realty as a separate entity, capable
of referring or recommending patients to, or receiving referrals or
recommendations from, ManorCare Health Services.
Billing Regulation. Certain provisions in the Social Security Act authorize
penalties, including exclusion from participation in Medicare and Medicaid,
for various billing-related offenses. The Department of Health and Human
Services can also initiate permissive exclusion actions for improper billing
practices such as submitting claims "substantially in excess" of the
provider's usual costs or charges, failure to disclose ownership and officers,
or failure to disclose subcontractors and suppliers.
Federal and State Assistance Programs. Substantially all of the Skilled
Nursing Facilities which ManorCare Health Services operates 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. ManorCare Health Services can give no assurance that
payments under such programs will in the future remain at a level comparable
to the present level or be sufficient to cover the operating and fixed costs
allocable to such patients.
There have been numerous initiatives on the Federal and state levels for
comprehensive reforms affecting payment for and availability of health care
services. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997
(the "Budget Act") which changes the manner in which Medicare reimburses
skilled nursing facilities for cost reporting periods beginning July 1, 1998.
Medicare is currently a retrospective payment system in which each facility
receives an interim payment during the year, which is later adjusted to
reflect actual allowable direct and indirect costs of services based on the
submission of a cost report at the end of each year. The Budget Act will
result in a shift to a prospective Medicare payment system in which skilled
nursing facilities will be reimbursed per diem for specific covered services
regardless of actual cost. Specifically, the Budget Act provides that, over
three reporting periods starting July 1, 1998, the Medicare program will phase
into this prospective payment system. During the first reporting period,
skilled nursing facilities will receive 75% of their reimbursement based on
actual costs and 25% based on a federally-scheduled per diem rate. In the
second reporting period, reimbursement will be 50% cost-based and 50% rate-
based, in the third, 25% cost-based and 75% rate-based. Thereafter, skilled
nursing facilities will be reimbursed by Medicare solely based on a
prospective payment system. The Budget Act also institutes consolidated
billing for skilled nursing facility services, under which payments for non-
physician Part B services for beneficiaries no longer eligible for Part A
skilled care will be made to the facility, regardless of whether the item or
service was furnished by the facility, by others under arrangement, or under
any other contracting or consulting arrangement, effective for items or
services furnished on or after July 1, 1998. Likewise, the Budget Act requires
the secretary to establish a prospective payment system for home health
services, to be implemented beginning October 1, 1999. Prior to
implementation, the Budget Act establishes certain interim payment measures,
for cost reporting periods beginning after October 1, 1997, including reduced
home health limits, reduced per visit cost limits, and agency-
96
<PAGE>
specific per beneficiary annual limits on an agency's costs. The legislation
also requires home health agencies to submit claims for all services and
mandates that all payments be made to the agency regardless of whether the
item or service was furnished by the agency, by others under arrangement, or
under any other contracting or consulting arrangement. Other provisions limit
Medicare payments for certain drugs, biologicals and supplies. The Budget Act
also gives states greater flexibility in the administration of their Medicaid
programs in that the Budget Act repeals the requirement that payment be
reasonable and adequate to cover the costs of "efficiently and economically
operated" nursing facilities. Further, the Budget Act allows states to mandate
enrollment in managed care systems without seeking approval from the Health
Care Financing Administration for waivers from certain Medicaid requirements
as long as certain standards are met. Although state managed care programs
have historically exempted institutional care, no assurance can be given that
such programs will not ultimately change the reimbursement system for long-
term care to capitated rates or otherwise affect the levels of payment to
ManorCare Health Services' skilled nursing facilities. Such programs could
also affect payment levels to In Home Health and Vitalink. ManorCare Health
Services cannot predict the impact that this change will have on ManorCare
Health Services. ManorCare Health Services cannot predict whether any other
proposals will be adopted at the Federal or state level or, if adopted and
implemented, what effect, if any, such proposals will have on ManorCare Health
Services. ManorCare Health Services believes, however, that government and
private efforts to contain or reduce health care costs will continue and that
these trends are likely to lead to reduced or slower growth in reimbursement
for certain services it provides. A significant change in coverage, reduction
in payment rates by third-party payors or the decline in availability of
funding could have a material adverse effect on the business and financial
condition of ManorCare Health Services.
False Claim Regulation. False claims are prohibited pursuant to criminal and
civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit
filing false claims or making false statements to receive payment or
certification under Medicare or Medicaid, or failing to refund overpayments or
improper payments; offenses for violation are felonies punishable by up to
five years imprisonment, and/or $25,000 fines. Criminal penalties may also be
imposed pursuant to the Federal False Claim Act, 18 U.S.C. Section 287. In
addition, under the Health Insurance Protability and Accountability Act of
1996, Congress enacted a criminal health care fraud statute for fraud
involving a health care benefit program, which is defined to include both
public and private payors. Civil provisions at 31 U.S.C. Section 3729 prohibit
the knowing filing of a false claim or the knowing uses of false statements to
obtain payment; penalties for violations are fines of not less than $5,000 nor
more than $10,000, plus treble damages, for each claim filed. Also, the
statute allows any individual to bring a suit, know as a qui tam action,
alleging false or fraudulent Medicare or Medicaid claims or other violations
of the stature and to potentially share in any amounts paid by the entity to
the government in fines or settlement.
OSHA. Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on ManorCare Health Services
with regard to protecting employees from hazards in the workplace, including
exposure to blood-borne pathogens. ManorCare Health Services believes that it
is in compliance with such regulatory requirements.
Related Party Rule. The Medicare related party rule applies to companies
that are associated or affiliated with, or have control of, or are controlled
by a Medicare provider. Many state Medicaid programs have adopted the same
rule in determining costs that will be included in the payment rates. The
Medicare program may consider Vitalink and In Home Health to be related
parties with ManorCare Health Services. Consequently, unless a provider
qualifies for the exception the related party rule, the Medicare program will
only reimburse for the cost incurred by the related party in providing
products or services, rather than the related party's charge. An organization
can qualify for an exception from the related party rule by meeting the
following criteria: (i) the entities are bona-fide separate organizations;
(ii) a substantial part of the supplying organization's business activity is
conducted with non-related organizations and there is an open, competitive
market for such services or products; (iii) the services or products are
commonly obtained by a provider from other organizations and are not a basic
element of patient care ordinarily furnished directly to patients by the
provider; and (iv) the charge to the provider is in line with the charge for
such services and products in the open market and no more than the charge made
under comparable circumstances to others. The Medicare related party rule and
anti-remuneration
97
<PAGE>
laws could materially affect the relationship among ManorCare Health Services,
Manor Care Realty, Vitalink and In Home Health. The ManorCare Health Services
plans to continue to treat Vitalink and In Home Health as related parties, and
will also treat Manor Care Realty as a related party. Thus there will be no
material adverse effect to ManorCare Health Services as a result of the
Medicare related party rule. As to the anti-remuneration laws, ManorCare
Health Services plans to continue to treat Vitalink and In Home as separate
entities, and will also treat Manor Care Realty as a separate company. Thus,
Manor Care does not believe that there will be a material adverse effect on
ManorCare Health Services as a result of the anti-remuneration laws. There can
be no assurance that ManorCare Health Services will be able to comply with the
related party rule or that the criteria will be interpreted in ways favorable
to ManorCare Health Services.
Home Health Care. On September 15, 1997, President Clinton imposed a
Medicare moratorium on new home health agencies. The moratorium is scheduled
to last for six months so that new regulations can be issued to combat fraud.
On January 13, 1998, the Clinton Administration lifted the moratorium, based
on the issuance of new regulations for home health agencies. These regulations
require, as mandated by the Budget Act, that all home health agencies obtain
surety bonds to participate in the medicare and Medicaid programs and disclose
related business interests. According to press reports, some home health
agencies have had difficulty obtaining bonds meeting the required criteria. If
a home health agency is unable to obtain a bond, the agency could lose
certification to participate in the Medicare and Medicaid programs. ManorCare
Health Services does not believe that there will be any material adverse
affect on either In Home Health or on ManorCare Health Services as a result of
these new requirements.
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 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. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property
as collateral. In connection with the ownership and leasing to third-parties
of its properties, Manor Care Realty could be liable for these costs, as well
as certain other costs, including governmental fines and injuries to persons
or properties.
INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims which are customary risks inherent in the operation
of health facilities and are generally covered by insurance. ManorCare Health
Services maintains property, liability and professional malpractice insurance
policies in amounts and with such coverage and deductibles which are deemed
appropriate by management, based upon historical claims, industry standards
and the nature and risks of its business. In addition, ManorCare Health
Services self insures, either directly or indirectly through insurance
arrangements requiring it to reimburse insurance carriers, some of its
liability risks other than catastrophic exposures.
There can be no assurance that claims will not arise which are in excess of
ManorCare Health Services' insurance coverage or are not covered by ManorCare
Health Services' insurance coverage. A successful claim against ManorCare
Health Services not covered by, or in excess of, ManorCare Health Services'
insurance could have a material adverse effect on ManorCare Health Services'
financial condition and results of operations. Claims against ManorCare Health
Services, regardless of their merit or eventual outcome, may also have a
material adverse effect on ManorCare Health Services' ability to attract
residents or expand its business and would require management to devote time
to matters unrelated to the operation of ManorCare Health Services' business.
In addition, ManorCare Health Services' insurance policies must be renewed
annually and there can be
98
<PAGE>
no assurance that ManorCare Health Services will be able to continue to obtain
liability insurance coverage in the future or, if available, that such
coverage will be available on acceptable terms.
LEGAL PROCEEDINGS
ManorCare Health Services is subject to regulatory and legal actions,
investigations or claims for damages that arise from time to time in the
ordinary course of business. Although it is impossible to predict the outcome
of any legal proceeding and ManorCare Health Services cannot estimate the
range of the ultimate liability, if any, relating to these proceedings,
ManorCare Health Services believes that the outcome of such proceedings should
not, individually or in the aggregate, have a material adverse effect on the
results of operations or financial condition of ManorCare Health Services.
99
<PAGE>
MANORCARE HEALTH SERVICES PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
ManorCare Health Services at November 30, 1997. This data should be read in
conjunction with the pro forma balance sheet and the introduction to the pro
forma financial statements appearing elsewhere in this Prospectus. The pro
forma capitalization table has been derived from the historical financial
statements and reflects certain pro forma adjustments as if the Distribution
had been consummated as of November 30, 1997. See "Pro Forma Financial Data of
ManorCare Health Services."
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
-----------------------------------
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt:
Old MCHS Senior Notes..................... $ 149,490 $(149,490)/1/ $ --
New MCHS Senior Notes..................... -- 149,490 149,490
Existing Revolving Credit Facility........ 215,000 (215,000) --
Promissory Note........................... 21,941 (21,941) --
Mortgages and Capital Leases.............. 71,899 (26,415) 45,484
Vitalink debt............................. 100,733 -- 100,733
---------- --------- --------
Total long-term debt.................... 559,063 (263,356) 295,707
Stockholders' Equity:
Total stockholders' equity.............. 729,023 (36,925)/2/ 692,098
---------- --------- --------
Total capitalization........................ $1,288,086 $(300,281) $987,805
========== ========= ========
</TABLE>
- --------
(1) Reflects the issuance by ManorCare Health Services of the New MCHS Senior
Notes pursuant to the Exchange Offer and assumes that all of the holders
of the Old Senior Notes accept the Exchange Offer. The consummation of the
Exchange Offer is conditioned on, among other things, acceptance of the
Exchange Offer by holders of at least a majority in principal amount of
the outstanding Old Senior Notes. Obligations with respect to Old Senior
Notes not exchanged will remain obligations of Manor Care Realty following
the Distribution. Manor Care may reduce the principal amount of the Real
Estate Note prior to issuance or reduce the amount of the cash portion of
the Capital Contribution to the extent Old Senior Notes remain outstanding
upon consummation of the Exchange Offer.
(2) Reflects the contribution of the net assets from ManorCare Health Services
in connection with the Distribution Agreement.
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<PAGE>
MANORCARE HEALTH SERVICES PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated condensed statements of income for the
fiscal year ended May 31, 1997 and the six month period ended November 30,
1997 give effect to the Distribution and related transactions (including the
Exchange Offer, the Lease Agreements, and the Assisted Living Facility
Management Agreement) as if such transactions occurred on June 1, 1996 and
June 1, 1997, respectively and the Vitalink merger ("TeamCare Merger") with
and into TeamCare, Inc. ("TeamCare") as if it had occurred on June 1, 1996.
The unaudited pro forma consolidated condensed statements of income for the
fiscal year ended May 31, 1997 and the six month period ended November 30,
1997 have been prepared by adjusting the historical consolidated statements of
income to reflect the Distribution and related transactions as if they had
been effected on June 1, 1996. The Company has concluded that the terms of the
Lease Agreements will not affect the operations of the skilled nursing
facilities and, therefore, that the pro forma effects of such agreements can
be estimated with reasonable accuracy.
The unaudited pro forma consolidated condensed balance sheet at November 30,
1997 gives effect to the Distribution and related transactions (including the
Exchange Offer and the Lease Agreements) as if such transactions had occurred
at that date. Such balance sheet has been prepared by adjusting the historical
consolidated balance sheet to reflect the Distribution and related
transactions as if they had been effected on November 30, 1997.
The unaudited pro forma financial statements should be read in conjunction
with the financial data presented elsewhere in this Prospectus. The pro forma
financial data are presented for informational purposes only and may not
reflect the future results of operations or financial position of ManorCare
Health Services or what the results of operations or financial position would
have been had ManorCare Health Services operated as a separate, independent
company during such periods.
101
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED MAY 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------------------
TEAM LEASE MANAGEMENT PRO
HISTORICAL CARE SUBTOTAL DISTRIBUTION MESQUITE(E) AGREEMENTS AGREEMENT FORMA
---------- -------- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,527,247 $192,364 $1,719,611 $ (1,603)(a) $(44,889) $2,483(f) $1,681,966
12,087 (i)
(5,723)(m)
Expenses:
Operating expenses..... 1,202,836 170,681 1,373,517 (2,081)(a) (37,363) $ 177,004 (d) 2,081(f) 1,494,809
5,213 (i) (20,266)(d)
(3,296)(m)
General corporate and
other................. 68,563 68,563 (77)(a) (508) 70,592
2,510 (b)
(5,447)(b)
4,990 (c)
1,977 (i)
(1,416)(m)
Depreciation and
amortization.......... 80,378 8,027 88,405 (365)(a) (1,955) (58,105)(d) 27,797
(183)(m)
Provision for
restructuring charge.. -- 6,950 (j) 6,950
---------- -------- ---------- -------- -------- --------- ------ ----------
Total expenses......... 1,351,777 178,708 1,530,485 8,775 (39,826) 98,633 2,081 1,600,148
---------- -------- ---------- -------- -------- --------- ------ ----------
Income before other
income
and (expenses) and
income taxes........... 175,470 13,656 189,126 (4,014) (5,063) (98,633) 402 81,818
Interest income from
advances
to discontinued lodging
segment................ 21,221 21,221 (21,221)(h) --
Interest income and
other.................. 8,683 127 8,810 21,250 (l) 23,539
(6,412)(k)
(109)(m)
Gain on issuance of
Vitalink stock......... 50,271 50,271 50,271
Minority interest
expense................ (4,001) (4,068) (8,069) 120 (k) (7,949)
Interest expense........ (41,831) (7,737) (49,568) 24,307 (g) (25,113)
148 (m)
---------- -------- ---------- -------- -------- --------- ------ ----------
Income before income
taxes.................. 209,813 1,978 211,791 14,069 (5,063) (98,633) 402 122,566
Provision for income
taxes.................. 84,700 4,175 88,875 5,555 (n) (1,919)(n) (39,817)(n) 162(n) 52,856
---------- -------- ---------- -------- -------- --------- ------ ----------
Net income (loss)....... $ 125,113 $ (2,197) $ 122,916 $ 8,514 $ (3,144) $ (58,816) $ 240 $ 69,710
========== ======== ========== ======== ======== ========= ====== ==========
Weighted average shares
of common stock........ 63,257 63,257
---------- ----------
Income per share of
common stock:
Net income per share... $ 1.98 $ 1.10
========== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed income statement.
102
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------
LEASE MANAGEMENT PRO
HISTORICAL DISTRIBUTION MESQUITE(E) AGREEMENTS AGREEMENT FORMA
---------- ------------ ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $885,623 $ (1,845)(a) $(22,221) $1,867(f) $860,286
(3,138)(m)
Expenses:
Operating expenses.............. 723,244 (1,756)(a) (18,778) $ 93,648 (d) 1,756(f) 785,632 (j)
(1,922)(m) (10,560)(d)
General corporate and other..... 28,208 (151)(a) (257) -- 32,134
1,640 (b)
6,163 (c)
(2,776)(b)
(693)(m)
Depreciation and amortization... 47,818 (446)(a) (1,150) (31,528)(d) -- 14,600
(94)(m)
Provision for restructuring
charge......................... -- 6,950 (j) -- -- -- 6,950
-------- -------- -------- -------- ------ --------
Total expenses.................. 799,270 6,915 (20,185) 51,560 1,756 839,316
-------- -------- -------- -------- ------ --------
Income before other income and
(expenses) and income taxes..... 86,353 (11,898) (2,036) (51,560) 111 20,970
Interest income from advances to
discontinued lodging segment.... 4,994 (4,994)(h) --
Interest income and other........ 4,690 10,625 (l) 63 -- -- 11,682
(3,586)(k)
(110)(c)
Minority interest expense........ 7,294 (79)(k) 7,215
Interest expense................. (22,073) 10,986 (g) 74 -- -- (10,941)
72 (m)
-------- -------- -------- -------- ------ --------
Income before income taxes....... 81,258 1,016 (1,899) (51,560) 111 28,926
Provision for income taxes....... 35,692 402 (n) (745)(n) (20,392)(n) 44(n) 15,001
-------- -------- -------- -------- ------ --------
Net income (loss)................ $ 45,566 $ 614 $ (1,154) $(31,168) $ 67 $ 13,925
======== ======== ======== ======== ====== ========
Weighted average shares of common
stock........................... 63,748 63,748
-------- --------
Income per share of common stock:
Net income per share............ $ 0.71 $ 0.22
======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed income statement.
103
<PAGE>
MANORCARE HEALTH SERVICES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
NOVEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 53,032 $ (27,065)(c) $ 226,513
250,000 (a)
(12,500)(d)
(30,000)(a)
(6,950)(f)
(4)(b)
Other current assets................... 378,919 (63,620)(c) 286,965
(28,189)(e)
(145)(b)
---------- --------- ----------
Total current assets................... 431,951 81,527 513,478
Property and equipment, net.............. 1,076,521 (834,822)(c) 227,184
(14,515)(b)
Goodwill................................. 371,317 (9,366)(c) 361,951
Real Estate Note......................... -- 250,000 (a) 250,000
Other assets............................. 115,475 (392)(b) 68,248
(46,835)(c)
---------- --------- ----------
Total assets............................. $1,995,264 $(574,403) $1,420,861
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities................ $ 227,636 $(76,177)(c) $ 137,540
(207)(b)
(13,712)(e)
Long-term debt........................... 559,063 (233,356)(c) 295,707
(30,000)(a)
Minority Interest........................ 184,299 (1,316)(c) 182,983
Deferred taxes and other long-term
liabilities............................. 295,243 (35,842)(c) 112,533
(146,390)(e)
(478)(b)
---------- --------- ----------
Total liabilities........................ 1,266,241 (537,478) 728,763
Total shareholders' equity............... 729,023 500,000 (a) 692,098
(14,371)(b)
(635,017)(c)
(12,500)(d)
131,913 (e)
(6,950)(f)
---------- --------- ----------
Total liabilities and shareholder's
equity.................................. $1,995,264 $(574,403) $1,420,861
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
condensed balance sheet.
104
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(a) Reflects the elimination of revenues, income and expenses associated with
facilities which opened during fiscal year 1997 (the "Developed
Properties"). These facilities would not have been purchased by ManorCare
Health Services under the terms of the Development Agreement until such
facilities achieved 75% occupancy. All revenues and expenses associated
with the operations of assisted living facilities during the stabilization
period of operations will be reported in the income statement of Manor
Care Realty. When an assisted living facility is sold to ManorCare Health
Services, all subsequent operations of that facility will be recorded on
ManorCare Health Services' income statement.
(b) Reflects incremental annual costs of $2.5 million ($1.6 million for the
six months ended November 30, 1997) and the transfer of expenses of $5.4
million for the fiscal year ended May 31, 1997 and $2.8 million for the
six months ended November 30, 1997. Incremental costs relate primarily to
personnel and related overhead associated with finance, cash management,
human resources and legal functions. These personnel will replace existing
employees in these functions who are transferring to Manor Care Realty,
but whose positions are still required by ManorCare Health Services.
Transferred expenses include costs of finance and accounting, legal, and
construction and development functions as well as additional expenses
related to directors fees, etc. Costs are transferred based on the
historical costs incurred for these functions by Manor Care, Inc.
(c) Reflects the transfer of certain general corporate credits to Manor Care
Realty. Credits of $5.0 million for the fiscal year ended May 31, 1997 and
credits of $6.2 million for the six months ended November 30, 1997 are
related to rental income and gains on the sales of skilled nursing
facilities and of a corporate office building.
(d) Reflects lease payments to Manor Care Realty for skilled nursing
facilities under the terms of the Lease Agreements as well as depreciation
and real estate taxes associated with those properties. During the first
fiscal year under which such agreements are in effect, lease payments are
calculated as the greater of 77% of the aggregate defined net operating
profit or 10% of the aggregate priority basis, plus applicable real estate
taxes and insurance of the respective facilities. For the year ended May
31, 1997, 77% of aggregate defined net operating profit exceeded 10% of
the aggregate priority basis, resulting in pro forma rent expense of $177
million. In subsequent periods the terms of the Lease Agreements require
calculation of rent at the greater of 77% of the defined net operating
profit or 10% of the priority basis on an individual property basis, with
rent deferred on properties for which cashflow is not adequate to pay 10%
of priority basis. Had the rent expense for the year ended May 31, 1997
been calculated under such terms, total rent expense would have been $180
million, which is net of a reduction of rent expense of $10.3 million
relating to 23 facilities which would not have generated adequate cashflow
to pay 10% of priority basis. The $10.3 million would have been deferred
and ultimately canceled. Approximately $6.6 million of the $10.3 million
relates to recently acquired, renovated or developed facilities which are
anticipated to generate sufficient cashflow to make priority rent payments
within the next two fiscal years.
The pro forma rent expense for the six months ended November 30, 1997, of
$93.6 million was calculated on a property by property basis as the greater
of 77% of defined net operating profit or 10% of priority basis.
(e) Reflects the operations of Mesquite Hospital.
(f) Reflects revenues and expenses associated with management of the Developed
Properties under the terms of the Assisted Living Facility Management
Agreement. See Note (a). The income from operations of the Developed
Properties totaled a loss of $0.9 million for fiscal year 1997. Income
from operations of the Developed Properties equals revenues ($1.6 million)
less operating expenses ($2.1 million), general corporate and other
expenses ($0.1 million) and depreciation and amortization ($0.4 million).
If the Distribution had taken place on June 1, 1996, the income from
operations of the Developed Properties would have been equal to the
management fee income of $0.4 million; operating expenses of $2.1 million
would have been unchanged; the general corporate and other expenses and
depreciation and amortization
105
<PAGE>
would have been booked by the developer, Manor Care Realty. Accordingly, if
the Distribution had taken place on June 1, 1996, revenues would have been
equal to $2.5 million, the sum of the management fee income of $0.4 million
plus reimbursement of the operating expenses of $2.1 million. The income
from operations of the Developed Properties totaled a loss of $0.5 million
for the six months ended November 30, 1997. Income from operations is equal
to historical revenues ($1.9 million) less operating expenses ($1.8
million), general corporate and other expenses ($0.2 million) and
depreciation and amortization ($0.4 million). If the Distribution had taken
place on June 1, 1997, the income from operations of the Developed
Properties would have been equal to the management fee income of $0.1
million; operating expenses of $1.8 million would have been unchanged; and
general corporate and other expenses and depreciation and amortization
would have been booked by the developer, Manor Care Realty. Accordingly, if
the Distribution had taken place on June 1, 1997, revenues would have been
equal to $1.9 million, the sum of the management fee income of $0.1 million
plus reimbursement of the operating expenses of $1.8 million.
(g) Reflects interest expense associated with the Existing Revolving Credit
Facility at a weighted average interest rate of 6.0% ($9.4 million for the
fiscal year ended May 31, 1997 and $4.7 million for the six months ended
November 30, 1997), Senior Subordinated Notes at an annual interest rate
of 9 1/2%, ($13.3 million for the fiscal year ended May 31, 1997 and $6.6
million for the six months ended November 30, 1997), and interest related
primarily to mortgages and capital leases on skilled nursing facilities,
net of capitalized interest, at interest rates ranging from 4.0% to 12.0%
($1.6 million for the fiscal year ended May 31, 1997 and ($0.3) million
for the six months ended November 30, 1997).
(h) Reflects the elimination of interest income from advances to the
discontinued lodging segment as the advances have been repaid and,
therefore, this amount is nonrecurring.
(i) Reflects the revenues and expenses of sold facilities which would have
been owned by Manor Care Realty.
(j) Reflects transaction fees and other restructuring costs of $7.0 million.
Included are fees incurred for legal and accounting services of $4.6
million as well as printing, mailing, travel and other miscellaneous
expenses of $2.4 million related to the transaction and the related
public filings.
(k) Reflects interest/other income of $6.3 million at May 31, 1997 and $3.7
million at November 30, 1997 related mainly to rental income of $1.8
million for the fiscal year ended May 31, 1997 and $0.8 million for the
six months ended November 30, 1997, gains on sales of miscellaneous assets
of $1.1 million for the fiscal year ended May 31, 1997 and $0.1 million
for the six months ended November 30, 1997, interest income of $1.7
million for the fiscal year ended May 31, 1997 and $0.5 million for the
six months ended November 30, 1997 and miscellaneous income of $1.7
million for the fiscal year ended May 31, 1997 and $2.3 million for the
six months ended November 30, 1997. This income relates to assets which
will be owned by Manor Care Realty.
(l) Reflects interest income earned at an estimated 8.5% on the Real Estate
Note contributed to ManorCare Health Services on the Effective Date. This
estimated rate is based on a range of actual rates achieved in recent
public bond offerings having similar terms by companies with similar
credit statistics. The final rate will be fixed and will be the same as
that on the $350 million of Manor Care Real Estate Notes. The annual
effect of a 1/8% change in rate is $0.4 million.
(m) Reflects the operations of a skilled nursing facility which will be under
management contract.
(n) Reflects tax effect of adjustments made pursuant to notes (a) through (m).
106
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(a) Reflects cash dividend of $250.0 million, the Real Estate Note and the
repayment of borrowings under the Existing Revolving Credit Facility
related to the Vitalink tender offer.
(b) Reflects the transfer of assets and liabilities attributable to the
Developed Properties to Manor Care Realty. Properties that opened
subsequent to June 1, 1996 and achieved a 75% occupancy prior to November
30, 1997 fall under the Development Agreement for purposes of the pro
forma income statement. These properties had a total cost of $17.7
million. The pro forma purchase price for these properties is
$20.5 million, which represents an average premium over total cost of
15.8%. The pro forma gain on the sale of those properties from Manor Care
Realty to ManorCare Health Services is $3.2 million for the six months
ended November 30, 1997. The fair value of these properties (calculated
using a discounted cash flow model which assumes a 10.25% discount rate
over 10 years) exceeds the total purchase price of the properties as
calculated under the terms of the Development Agreement. Therefore,
ManorCare Health Services would have allocated the total purchase price of
the properties to land, building and equipment.
(c) Reflects the transfer to Manor Care Realty of the skilled nursing
facilities, mortgages and certain other assets and liabilities associated
with the skilled nursing facilities as well as the assets and liabilities
of Mesquite Hospital. Also includes a liability of $3.2 million related to
Manor Care Realty's appreciation rights on the Gaithersburg headquarters
building.
(d) Reflects payment of $12.5 million to Manor Care Realty for working capital
of skilled nursing facilities, which remains at ManorCare Health services.
(e) Reflects the allocation of deferred tax liabilities to Manor Care Realty
pursuant to the Tax Allocation Agreement. Deferred tax assets and
liabilities are allocated between Manor Care Realty and ManorCare Health
Services based upon the allocation of the underlying and liabilities.
(f) Reflects the payment of transaction fees totaling $7.0 million. These
include fees incurred for legal, accounting and other consulting services
of $4.6 million as well as printing, mailing, travel and other
miscellaneous expenses of $2.4 million related to the transaction and the
related public filings.
107
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MANOR CARE
Due to the fact that the majority of the current Manor Care operations will
be transferred to ManorCare Health Services in connection with the
Distribution, the Distribution will be reported for accounting purposes as a
"reverse spin-off." Accordingly, Manor Care, Inc. will continue to present
consolidated results (with no discontinued operations treatment) up to the
date of the Distribution. After the Distribution, ManorCare Health Services
will present Manor Care's historical consolidated results for periods prior to
the Distribution and Manor Care Realty will present the historical results of
Mesquite Hospital, Manor Care Realty's accounting predecessor, for periods
prior to the Distribution.
ManorCare Health Services is included as a co-registrant in this Prospectus
for securities law purposes because it will receive certain of the proceeds of
the Offering. Manor Care Real Estate and the Guarantors are the sole obligors
on the Notes and holders of the Notes may rely only upon Manor Care Real
Estate and the Guarantors for repayment of the Notes. ManorCare Health
Services and its subsidiaries will not be guarantors of the Notes and holders
of the Notes will not have any claim with respect to payment on the Notes
against ManorCare Health Services or its subsidiaries. Historical financial
information relating to Manor Care is presented because ManorCare Health
Services is a co-registrant for securities laws purposes. The historical
financial statements of Manor Care are included solely because (i) after the
Distribution, ManorCare Health Services will present Manor Care's historical
results for periods prior to the Distribution and (ii) the historical
financial statements of Manor Care represent the financial statements of the
Non-Guarantors (other than Mesquite Hospital whose results are included in the
historical financial statements of Manor Care and who is a Guarantor).
Investors in the Notes should not look to the historical financial statements
of Manor Care for repayment of the Notes or the Guarantees. The statements of
income data for the fiscal years ended May 31, 1997, 1996, 1995, 1994 and 1993
and the balance sheet data as of fiscal years ended May 31, 1997, 1996, 1995
and 1994 are derived from the audited consolidated financial statements of
Manor Care. The balance sheet data at May 31, 1993 are derived from unaudited
consolidated financial statements of ManorCare that, in the opinion of Manor
Care, reflect all adjustments consisting of normal recurring adjustments
necessary to present fairly the information set forth below. The statements of
income data for the six month periods ended November 30, 1997 and 1996 and the
balance sheet data as of November 30, 1997 are derived from the unaudited
consolidated financial statements of Manor Care. The following selected
historical financial data of Manor Care should be read in conjunction with the
historical consolidated financial statements and notes thereto included
elsewhere in this Registration Statement. The historical consolidated
financial statements of Manor Care may not necessarily reflect the results of
operations or financial position that would have been obtained had ManorCare
Health Services been a separate, independent company. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF MANORCARE HEALTH SERVICES RESULTS OF OPERATIONS AND
FINANCIAL CONDITION." Earnings per share data are presented elsewhere in this
Registration and on a pro forma basis only. See "MANORCARE HEALTH SERVICES PRO
FORMA FINANCIAL DATA."
108
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, FISCAL YEARS ENDED MAY 31,
-------------------- -----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Revenues................ $ 885,623 $ 688,064 $1,527,247 $1,248,197 $1,019,458 $ 923,308 $ 830,968
Expenses:
Operating expenses.... 723,244 541,482 1,202,836 963,081 769,998 696,199 627,733
Depreciation and
amortization......... 47,818 36,877 80,378 68,086 54,374 49,019 46,394
General corporate and
other................ 28,208 31,873 68,563 72,322 63,197 45,666 46,371
Provision for asset
impairment and
restructuring........ -- -- -- 26,300 -- -- --
--------- --------- ---------- ---------- ---------- ---------- ----------
Total expenses...... 799,270 610,232 1,351,777 1,129,789 887,569 790,884 720,498
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 86,353 77,832 175,470 118,408 131,889 132,424 110,470
Other income and
(expenses):
Interest income from
advances to
discontinued lodging
segment.............. 4,994 10,157 21,221 19,673 15,492 10,665 7,083
Gain on issuance of
Vitalink stock....... -- -- 50,271 -- -- -- --
Interest expense...... (22,073) (19,168) (41,831) (30,338) (22,769) (27,441) (34,988)
Other income
(expenses), net...... 11,984 4,879 4,682 3,728 5,219 3,536 4,884
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations before
income taxes........... 81,258 73,700 209,813 111,471 129,831 119,184 87,449
Income taxes............ 35,692 29,400 84,700 46,000 52,156 50,481 32,720
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations............. $ 45,566 $ 44,300 $ 125,113 $ 65,471 $ 77,675 $ 68,703 $ 54,729
========= ========= ========== ========== ========== ========== ==========
<CAPTION>
AS OF NOVEMBER 30, AS OF MAY 31,
-------------------- -----------------------------------------------------------
1997 1997 1996 1995 1994 1993
-------------------- ---------- ---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $1,995,264 $1,979,704 $1,681,840 $1,289,817 $1,085,636 $1,025,230
Long-term debt.......... 559,063 596,473 490,575 315,271 223,892 330,189
Shareholders' equity.... 729,023 690,431 707,769 624,873 533,815 361,642
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, FISCAL YEARS ENDED MAY 31,
-------------------- -----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided by
continuing operating
activities............. $ 51,367 $ 28,925 $ 80,151 $ 199,307 $ 120,760 N/A N/A
Cash provided by (used
in) continuing
investing activities... 12,726 (90,060) (209,235) (259,118) (191,713) N/A N/A
Cash (used in) provided
by continuing financing
activities............. (43,943) 38,337 87,604 122,644 80,037 N/A N/A
Investment in property
and equipment and
systems development.... 110,720 83,713 183,469 136,332 91,900 N/A N/A
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF MANOR CARE'S
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
On September 15, 1997, Manor Care announced its intention to proceed with a
separation of its skilled nursing facility management, assisted living,
pharmacy and home health businesses (collectively, the "Health Services
Business") from its skilled nursing facility, real estate and healthcare
facility development business via a spin-off of the Health Services Business
(the "Distribution"). The spin-off of the Health Services Business will be
effected by a distribution to Manor Care's shareholders of all the common
stock of New ManorCare Health Services, Inc., a wholly owned subsidiary of
Manor Care, which as of the date of the spin-off will own and operate all
Manor Care's assisted living operations as well as manage and lease the
skilled nursing assets owned by Manor Care. Following the Distribution, New
ManorCare Health Services, Inc. will change its name to ManorCare Health
Services, Inc. and Manor Care will change its name to Manor Care Realty, Inc.
The Board of Directors voted to approve in principle the transaction subject
to receipt of other approvals and consents and satisfactory implementation of
the arrangements for the Distribution. Manor Care anticipates that the
transaction will be completed by the end of fiscal year 1998. The Distribution
is conditional upon certain matters, including receipt of a satisfactory
solvency opinion and the declaration of the special dividend by Manor Care's
Board of Directors.
Due to the fact that the majority of the current Manor Care operations will
be transferred to ManorCare Health Services in connection with the
Distribution, the Distribution will be reported for accounting purposes as a
"reverse spin-off." Accordingly, Manor Care will continue to present
consolidated results up to the date of the Distribution. After the
Distribution, ManorCare Health Services will present Manor Care, Inc.'s
historical consolidated results for periods prior to the Distribution and
Manor Care Realty will present the historical results of Mesquite Hospital,
Manor Care Realty's accounting predecessor, for periods prior to the
Distribution.
A number of significant factors, which are discussed below, affected the
consolidated results of operations, financial condition and liquidity of Manor
Care during the three fiscal years ended May 31, 1997, May 31, 1996 and May
31, 1995 and the six months ended November 30, 1997. This discussion should be
read in conjunction with the Consolidated Financial Statements and notes
thereto for such fiscal years included elsewhere in this Prospectus. ManorCare
Health Services' results of operations, liquidity and capital resources are
derived from the consolidated financial statements of Manor Care, Inc. The
consolidated financial statements include the results of operations of
Vitalink Pharmacy Services, In Home Health and Manor Care's assisted living
and skilled nursing operations as they were operated by Manor Care. However,
these financial statements may not necessarily reflect the consolidated
results of operations or financial position of ManorCare Health Services or
what the results of operations would have been if ManorCare Health Services
had been an independent, public company during those periods.
The health care industry is highly regulated by Federal, state and local
law. See "Risk Factors--Regulation" and "Business of ManorCare Health Services
After the Distribution--Government Regulation." Certain of these regulations
apply to the relationship between ManorCare Health Services and Manor Care
Realty, Vitalink and In Home Health, including the provisions of the Medicare
related party rule and the federal and state anti-remuneration laws. The
Medicare related party rule limits the amount the Medicare program will
reimburse for products and services provided by a related party. See "Business
of ManorCare Health Services After the Distribution--Government Regulation-
Related Party Rule." Manor Care has treated Vitalink and In Home Health as
related parties in compliance with this rule. ManorCare Health Services
intends to continue to treat Vitalink and In Home Health as related parties
and also plans to treat Manor Care Realty as a related party. Accordingly,
ManorCare Health Services does not expect that the Medicare related party rule
will have a material effect on the conduct of its business. The anti-
remuneration laws govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients
to such providers. See "Business of ManorCare Health Services After the
Distribution--Government Regulation--Anti-remuneration laws." Manor Care has
treated, and will continue to treat, Vitalink and In Home Health as separate
entities, capable of referring or recommending patients to, or receiving
referrals or recommendations from, Manor Care
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for purposes of the anti-remuneration laws. ManorCare Health Services intends
to continue to treat Vitalink and In Home Health as separate entities and also
plans to treat Manor Care Realty as a separate entity. Accordingly, ManorCare
Health Services believes that its business arrangements with Vitalink and In
Home Health are in compliance with the anti-remuneration laws.
OVERVIEW AND OUTLOOK
Manor Care owns and operates skilled nursing and assisted living facilities
serving primarily the private pay elderly market. Manor Care's skilled nursing
facilities provide high acuity, long-term care and Alzheimer's services
principally to residents over the age of 65. Manor Care's assisted living
facilities operate under the brand names "Springhouse" and "Arden Courts."
Springhouse facilities serve the general assisted living population of frail
elderly, while Arden Courts facilities are specifically focused on providing
care to persons suffering from early to middle-stage Alzheimer's disease and
related memory impairment. These assisted living facilities provide housing,
personalized support and health care services in a non-institutional setting
designed to address the individual needs of the elderly or Alzheimer's
afflicted requiring assistance with activities of daily living, such as
eating, bathing, dressing and personal hygiene, but who do not require the
level of care provided by a skilled nursing facility.
Manor Care also owns approximately 51% of Vitalink, 64% of the voting stock
of In Home Health and an acute care hospital. Vitalink is a publicly traded
institutional pharmacy company which provides medications, consulting,
infusion and other ancillary services to approximately 172,000 institutional
beds as well as to home infusion patients through 57 pharmacies. In Home
Health is a publicly traded company which provides a broad range of
professional and support services to clients requiring medical and personal
assistance in their homes. Services provided include nursing care, infusion
therapy, rehabilitation, and personal care.
Manor Care has increased skilled nursing capacity by approximately 2.5%
annually over the last five fiscal years. Overall occupancy has remained
relatively stable during this period. Occupancy for mature facilities--those
facilities owned by Manor Care for a full two-year period--decreased from
90.3% to 89.8%, between fiscal year 1996 and fiscal year 1997. This decline in
occupancy has resulted in an annual decrease in revenues of approximately $5
million. During the five-year period from fiscal year 1993 to fiscal year
1997, the Company has increased assisted living capacity substantially, from 3
facilities with 321 beds to 31 facilities with 3,173 beds.
Despite increasing competition for private pay customers, Manor Care has
consistently maintained a high ratio of private pay revenues. The slight
decline in Manor Care's private pay mix over the past four years can be
attributed primarily to the inroads that assisted living providers have
achieved in this market segment.
RESULTS OF OPERATIONS
The following discussion is based on the operations of Manor Care before the
Distribution and related transactions. The operations of the skilled nursing
facilities will continue to have a material impact on ManorCare Health
Services after the Distribution because of the Lease Agreements. The
information contained herein does not indicate the results of operations or
financial condition of ManorCare Health Services that would have been reported
for the periods indicated had the Distribution occurred on the first day of
the periods discussed. Following the Distribution, ManorCare Health Services'
principal sources of revenue will be the management and operation of skilled
nursing facilities under the Lease Agreements, assisted living revenues,
pharmacy revenues and home health revenues. ManorCare Health Services'
operating expenses will consist of operating and payroll expenses relating to
the skilled nursing and assisted living facilities, payments pursuant to the
Lease Agreements and all of the costs of the pharmacy and home health
operations. The payments pursuant to the Lease Agreements essentially replace
depreciation and interest expense associated with the ownership of skilled
nursing facilities. The terms of the Development Agreement dictate that
assisted living facilities which are developed by Manor Care Realty will be
purchased by ManorCare Health Services when they achieve 75% occupancy.
Therefore, all revenues and expenses associated with the operations of
assisted living facilities during
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the period prior to 75% occupancy will be reported in the income statement of
Manor Care Realty. When an assisted living facility is sold to ManorCare
Health Services, subsequent operations of that facility will be recorded in
ManorCare Health Services' income statement. The terms of the Lease and
Development Agreements are not expected to materially impact the conduct of
operations in the skilled nursing and assisted living facilities.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. (See
"Revenue Recognition" footnote disclosure.) For fiscal years 1997, 1996 and
1995, these revenues amounted to $652.1 million, $549.1 million and $431.0
million, respectively. In the opinion of management, any difference between
revenues recorded and final determination will not be significant. ManorCare
Health Services does not anticipate a material effect on revenues as a result
of the Balanced Budget Act of 1997. However, because the regulations
pertaining to this Act have neither been proposed nor implemented, this
preliminary conclusion is subject to change as a result. If the regulations do
have a material effect on ManorCare Health Services, ManorCare Health Services
will disclose any such material effect as may be required.
Six Months ended November 30, 1997 compared to November 30, 1996
SKILLED NURSING FACILITIES. Skilled nursing revenues increased $44.8 million
(8.8%) to $554.3 million for the six months ended November 30, 1997 as
compared to the same period in the prior year. The increase in revenues is
principally attributable to increases in rates (5.1%) and capacity. The growth
in bed capacity is attributable to the purchase of one skilled nursing
facility (179 beds), openings of three newly constructed facilities (387 beds)
and additions or renovations at existing facilities (274 beds). The increase
in rates includes the incremental impact of settlements with government
agencies related to prior period cost reports of $3.9 million for the six
months ended November 30, 1997 as compared to the same period in the prior
year.
Operating expenses increased $31.3 million (8.1%) to $416.2 million for the
six months ended November 30, 1997 as compared to the same period in the prior
year. The increase in operating expenses is attributable to additional
capacity and increased staffing necessitated by higher patient acuity and more
complex product and service offerings. As a result, the operating profit
associated with the operation of the skilled nursing facilities for the six
months ended November 30, 1997 increased to $138.2 million from $124.6 million
in the previous period. Operating margin as a percentage of sales increased
from 24.5% to 24.9%.
PHARMACY. Pharmacy revenues for the six month period ended November 30,
1997, increased over the comparable period of fiscal year 1997 by $158.8
million or 192.0%, primarily due to the inclusion of TeamCare revenues.
TeamCare was acquired in February, 1997. Excluding TeamCare revenues, net
revenues for the six months ended November 30, 1997 increased $18.8 million or
22.7% over the same period last year. This increase results from revenues
contributed by the acquisition of Medisco effective July 31, 1996, an increase
in beds served obtained through marketing and sales efforts and an increase in
revenues per bed.
Pharmacy operating expenses increased $142.6 million or 210.0% for the six
month period ended November 30, 1997 over the comparable period last year.
Included in operating expenses for the six months ended November 30, 1997 is
an unusual item representing a non-recurring charge of $3.1 million relating
to costs associated with the August 1997 resignation of Vitalink's Chief
Executive Officer and the consolidation of all corporate functions in
Naperville, Illinois. Excluding the unusual item, operating expenses increased
$139.5 million to $210.5 million or 85.9% of net revenues in the six months
ended November 30, 1997 compared to $69.7 million or 85.7% of net revenues in
the same prior year period. The increase is primarily attributable to the
inclusion of TeamCare results effective February 1, 1997. The increase in
operating costs as a percentage of net revenue is mainly attributable to
TeamCare's higher payroll costs as a percentage of revenues, TeamCare's higher
selling, general and administration costs and the amortization of goodwill and
pharmacy contracts arising from the TeamCare merger ($3.6 million). Operating
margin decreases also resulted from a variety of pricing related factors,
including certain third party reimbursement reductions and changes in customer
base.
ASSISTED LIVING BUSINESS. Assisted living revenues increased by $8.5 million
or 24.0% for the six month period ended November 30, 1997 from $35.3 million
for the same period last year due to capacity ($4.0 million) and rate ($4.5
million) increases.
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Operating expenses increased by $6.6 million or 23.7% for the six month
period ended November 30, 1997 compared to the six month period ended November
30, 1996, as a result of increases in capacity and inflation.
HOME HEALTH. Home health revenues decreased $14.7 million for the six months
ended November 30, 1997 over the prior year period, primarily due to
adjustments to Medicare receivables in connection with recent Medicare
reimbursement decisions related to the allowability of community liaison costs
and required documentation to support allowable costs. Revenues recorded under
the Medicare program are subject to adjustment upon audit by government
intermediaries. As a result of these decisions, In Home Health increased
recorded reserves for other unresolved cost disputes by approximately $15.5
million.
Operating expenses increased $1.2 million or 1.9% for the six month period
ended November 30, 1997 as compared to the same prior year period. The
increase in operating expenses is primarily due to a restructuring charge of
$2.0 million related to lease costs and related equipment write-offs
associated with vacated office sites and to severance agreements with
involuntarily terminated employees. This charge was a result of a plan to
restructure In Home Health's field operations and reduce its cost structure.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $10.9
million for the six month period ended November 30, 1997, due to increases in
property and equipment resulting from additions and renovations to existing
facilities as well as new construction during the past twelve months.
General corporate and other expense for the six month period ended November
30, 1997, decreased $3.7 million when compared to the same period last year.
This decrease was partially due to a reduction in employees related to the
discontinued lodging operations and reengineering efforts in both
organizational and financial systems. Additionally, a gain of $2.1 million
from the sale of a corporate office building is included in general corporate
and other expense for the six month period ended November 30, 1997. For the
six month period ended November 30, 1996, a gain of $7.3 million from the sale
of four nursing centers and charitable contributions expense of $5.0 million
are included in general corporate and other expense. General corporate and
other expense represented 3.2% of revenues during the six month period ended
November 30, 1997, compared to 4.6% for the same period last year. General
corporate and other expense includes risk management, information systems,
treasury, accounting, legal, human resources and other administrative support
functions.
Interest income from advances to discontinued lodging operations decreased
by $5.2 million for the six months ended November 30, 1997 compared to the
same period last year. This reduction was attributable to the prepayment of
$110.0 million of indebtedness in the fourth quarter of fiscal year 1997 and
the prepayment of the remaining $115.7 million in the second quarter of fiscal
year 1998.
Interest expense increased $2.9 million for the six month period ended
November 30, 1997 over the same prior year period. The increase in interest
expense resulted primarily from an increase in the average outstanding balance
of the $250 million competitive advance and multi-currency revolving credit
facility (the "Existing Credit Facility") as well as increases in borrowings
under Vitalink's $200 million revolving credit facility used to consummate the
TeamCare merger. Interest capitalized in conjunction with construction
programs amounted to $2.4 million for the six months ended November 30, 1997
and $2.6 million for the six months ended November 30, 1996.
Income from continuing operations before income taxes for the six month
period ended November 30, 1997, was $81.3 million. This compares to income
from continuing operations before income taxes in the same period last year of
$73.7 million.
On November 1, 1996, Manor Care completed the spin-off of its lodging
segment by contributing its net investment in discontinued lodging operations
totaling $165.7 million to Choice Hotels International, Inc. Manor Care
shareholders of record on October 10, 1996, received one share of Choice
Hotels International, Inc. common stock for each outstanding share of Manor
Care common stock. Accordingly, lodging results are reported as discontinued
operations for all periods presented. Because the spin-off was completed two
months into the second quarter, results for the six month period ended
November 30, 1996 include less than six months of income and earnings per
share from the discontinued lodging segment.
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On November 20, 1997, a consensus was reached by the Emerging Issues Task
Force regarding reengineering costs (Issue 97-13) providing that all
reengineering costs be expensed as incurred based on the fair value of the
services rendered. As a result, in November 1997, Manor Care expensed $3.2
million of reengineering costs (net of taxes) as the effect of a cumulative
change in accounting principle.
Comparison of Fiscal Year Results
SKILLED NURSING FACILITIES. Skilled nursing revenues increased from $985.2
million to $1.1 billion ($71.0 million or 7%) in fiscal 1997 compared to the
prior year. The increase in revenues is attributable to an increase
in average daily rates of approximately 6.0% ($61 million) and an increase in
bed capacity of approximately 5.7%. The increase in average rates includes the
incremental impact of settlements with government agencies related to prior
period cost reports of $4 million. The growth in bed capacity is attributable
to the purchase of two nursing facilities (279 beds), openings of newly
constructed facilities (398 beds) and additional bed development at existing
centers (467 beds), and is net of the sale of four facilities (498 beds) in
the second quarter of 1997.
Skilled nursing revenues increased from $893.5 million to $985.2 million in
fiscal year 1996 ($91.7 million or 10.3%). The increase in revenues is
attributable to an increase in average daily rates of approximately 6% ($59
million) and an increase in bed capacity of approximately 3.3%. The increase
in rates includes the incremental impact of settlements with government
agencies related to prior period cost reports of approximately $7 million. The
growth in bed capacity is attributable to the purchase of four nursing
facilities (569 beds), openings of newly constructed facilities (360 beds) and
additional bed development at existing centers (35 beds).
Skilled nursing operating expenses increased from $735.7 million in 1996 to
$789.1 million in 1997 ($53.4 million or 7%). Additional capacity accounts for
$20.5 million of this increase. The remainder of the increase is caused by
additional staffing necessitated by higher patient acuity and more complex
product and service offerings. Gross margin as a percentage of sales was flat
at 25.3% in fiscal years 1997 and 1996.
Operating expenses increased from $671.0 million in 1995 to $735.7 million
in 1996 ($64.7 million or 9.6%). The increase in operating expenses was
attributable to additional capacity ($8.3 million), as well as to additional
staffing necessitated by higher patient acuity and more complex product and
service offerings. Gross margin as a percentage of sales increased slightly
from 24.9% to 25.3% from fiscal year 1995 to 1996.
PHARMACY. Pharmacy revenues increased 94% for fiscal year 1997 or $132.6
million primarily as a result of the TeamCare Merger ($94.6 million),
Vitalink's acquisition of a pharmacy ($12.4 million), and capacity and rate
changes at existing pharmacies ($25.6 million). Pharmacy revenues increased
$28.6 million or 26% in fiscal 1996 due to capacity increases ($17.4 million)
and Vitalink's acquisition of a pharmacy and infusion business ($5.1 million).
Operating expenses increased $52.8 million to $100.5 million or 36.8% of net
revenues in fiscal 1997 compared to $47.7 million or 33.9% of net revenues in
fiscal 1996. The increase was principally attributable to the inclusion of
TeamCare results effective February 1, 1997. The increase in operating costs
as a percentage of revenues is attributable to a variety of factors, including
TeamCare's higher payroll cost as a percentage of net revenues (25.3% for
TeamCare v. 20.9% for Vitalink), TeamCare's higher selling, general and
administration costs (10.7% v. 8.4%) and the amortization of goodwill and
pharmacy contracts arising from the TeamCare merger ($3 million).
Operating expenses (excluding cost of goods sold) increased $10.4 million to
$47.7 million or 33.9% of net revenues in fiscal 1996 compared to $37.3
million or 33.2% of net revenues in fiscal 1995. Both payroll and selling,
general and administrative expenses increased to support the growth in beds
serviced. Payroll as a percentage of net revenues increased to 20.7% from
19.7% primarily resulting from investments in staff for information systems
and selling efforts. The increase in depreciation and amortization is the
result of the amortization of pharmacy contracts, goodwill and noncompete
agreements obtained in connection with acquired businesses as well as
depreciation of capital expenditures from existing pharmacies.
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<PAGE>
Gross profit for fiscal year 1997 was $133.6 million, an increase of $64.6
million or 90.9% over fiscal year 1996. The increase was largely attributable
to the TeamCare merger. The gross profit margin declined to 48.9% from 49.7%
principally due to the addition of relatively less profitable new accounts and
reimbursement reductions from certain state Medicaid programs.
Gross profit for fiscal year 1996 was $70.0 million, an increase of $14.0
million or 25.0% over fiscal year 1995. The gross profit margin decreased
slightly to 49.7% in fiscal year 1996 compared to 49.9% in fiscal year 1995.
ASSISTED LIVING. Assisted living revenues increased for fiscal year 1997 by
52.5% or $25.3 million due to increases in rates at existing facilities ($1.9
million), capacity increases ($20.2 million) and occupancy increases ($3.2
million). Assisted living revenues increased $34.3 million or 250% in 1996 due
to capacity growth and rate increases. Manor Care acquired six assisted living
facilities and opened five Arden Courts in fiscal year 1996.
Operating expenses increased $19.1 million to $59.1 million or 80.6% of net
revenues in fiscal year 1997 compared to $40.1 million or 83.2% of net
revenues in fiscal year 1996 as a result of increases in capacity and
inflation.
Operating expenses increased $30.2 million to $40.1 million or 83.2% of net
revenues in fiscal year 1996 compared to $9.9 million or 71.4% of net revenues
in fiscal year 1995 as a result of increases in capacity and inflation. The
increase in operating expenses as a percentage of revenue was due to a
significant level of new assisted living development.
HOME HEALTH. Home health revenues increased 67.7% or $50.2 million for the
fiscal year 1997, reflecting a full year of home health operations. Manor Care
entered into the home health business with the acquisition of In Home Health
in October 1995. Home health revenues of $74.2 million for fiscal year 1996
represent revenues contributed by In Home from its acquisition in October 1995
through May 1996.
Operating expenses increased $50.6 million to $124.5 million or 100.1% of
net revenues in fiscal year 1997 compared to $73.9 million or 99.6% of net
revenues in fiscal year 1996. The increase from 1996 to 1997 represents the
impact of a full year of expenses in fiscal year 1997 versus eight months of
expenses for the fiscal year 1996.
There were no home health revenues or operating expenses in fiscal year
1995, as Manor Care did not enter the home health business until fiscal year
1996.
The majority of In Home Health's revenues is derived from services provided
to Medicare beneficiaries. Currently, Medicare reimburses participating
Medicare certified home health agencies for the reasonable costs incurred to
provide covered visits to eligible beneficiaries, subject to certain cost
limits. Due to certain limitations on the nature and the amount of the costs
that are reimbursable, In Home Health incurs a loss on the Medicare business.
During 1997, several cost reimbursement issues that were in dispute for
several years resolved through decisions by the PRRB and the U.S. District
Court. As a result of these decisions and other communications from HCFA, it
became clear that some costs incurred by In Home Health would not be
reimbursed by Medicare. Although In Home Health has restructured its
operations and eliminated a portion of these nonreimbursable costs, In Home
Health will continue to incur some costs that are not reimbursed by Medicare,
as it believes they constitute a necessary function to the conduct of its
business.
The Balanced Budget Act of 1997 requires HCFA to implement a prospective
payment system for home health agencies by October 1, 1999, with up to a four-
year phase-in period. Prospective rates determined by HHS would reflect a 15%
reduction to the cost limits and per patient limits as of September 30, 1999.
In the event the implementation deadline is not met, the reduction will be
applied to the reimbursement system then in place. The impact of such a
change, if implemented, on In Home Health's results of operations cannot be
predicted with any certainty at this time and would depend, to a large extent,
on the reimbursement rates for home nursing established on an interim basis
and under the prospective payment system. There can be no assurances that such
reimbursement rates, if enacted, would cover the costs incurred by In Home
Health to provide home nursing
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services. Until the prospective payment system takes effect on October 1,
1999, the Budget Act sets up an interim payment system (the "IPS") that
provides for lowering of reimbursement limits for home health visits. Cost
limit increases for fiscal 1995 and 1996 have been eliminated. In addition,
for cost reporting periods beginning on October 1, 1997, home health agencies'
cost limits will be determined at the lesser of (i) their actual costs (ii)
cost limits based on 105% of median costs of free-standing home health
agencies or (iii) an agency-specific per-patient cost cap, based on 98% of
1994 costs adjusted for inflation. In Home Health is unable to determine the
effect of the IPS until HCFA finalizes related regulatory guidance on the
implementation of the IPS. The new cost limits will apply to In Home Health
for the cost reporting period beginning October 1, 1997. A reduction in these
cost limits could have a significant effect on In Home Health's results of
operations; however, the effect of such reductions cannot be predicted with
any level of certainty
OTHER RESULTS OF OPERATIONS. General corporate and other expenses
represented 4.5% of revenue in fiscal year 1997 and 5.8% of revenue in fiscal
year 1996. General corporate and other expenses includes all indirect
operating expenses as well as risk management, information systems, treasury,
accounting, legal and other administrative support for Manor Care and its
various subsidiaries. The reduction of general corporate and other expenses is
partially due to a reduction in employees related to the discontinued lodging
segment and reengineering efforts in both organizational and financial
systems. Additionally, general corporate and other expenses for fiscal year
1997 included a gain of $7.3 million from the sale of four nursing centers and
charitable contributions expense of $5.0 million.
Interest expense increased 38% and 33% in fiscal years 1997 and 1996,
respectively. The interest expense increase of 38% for fiscal year 1997 was
primarily a result of the assumption of $106.4 million of TeamCare debt in
February 1997 as well as additional borrowings in connection with newly
developed facilities and acquisitions, as discussed above. The interest
expense increase of 33% in fiscal year 1996 was primarily attributable to
additional borrowings in connection with facility development and
acquisitions.
Minority interest expense increased $2.3 million during fiscal year 1997 to
$4.0 million. The increase results primarily from Vitalink's merger with
TeamCare.
Manor Care recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long lived assets and costs associated with the
Manor Care's restructuring of its healthcare business. The most significant
components of the provisions were non-cash asset impairment charges of $21.2
million relating to writedowns of property, equipment and capitalized system
development costs.
LIQUIDITY AND CAPITAL RESOURCES
Manor Care maintains adequate capital resources, including strong operating
cash flows and committed lines of credit, to support ongoing operations and to
fulfill capital requirements in the foreseeable future.
On November 1, 1996, Manor Care separated its lodging business from its
healthcare business via a tax-free spin-off of the lodging division. In
conjunction with this spin-off, Manor Care received a three-year, $225.7
million 9% note from its lodging segment. In April 1997, Manor Care received a
prepayment of $110.0 million on the advances to the discontinued lodging
segment. In October 1997, Manor Care received prepayment of the remaining
$115.7 million. All proceeds were used to repay borrowings under the Existing
Credit Facility.
In September 1996, Manor Care amended its Existing Credit Facility to
provide for the spin-off of the lodging division. The Existing Credit Facility
expires in September 2001. At November 30, 1997, bank lines totaled $275.0
million, of which $38.1 million remained unused. ManorCare Health Services
intends to establish a new revolving credit facility in conjunction with the
Distribution.
In June 1996, Manor Care completed a public offering of unsecured Senior
Notes in the amount of $150.0 million, the proceeds of which were used to
repay borrowings under the Existing Credit Facility. The notes are due in June
2006 and carry a 7 1/2% interest rate. In connection with the Distribution,
ManorCare Health Services plans to offer to exchange $1,000 principal amount
of its 7 1/2% Senior Notes due 2006 for each $1,000 principal
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amount of the 7 1/2% Senior Notes due 2006 of Manor Care properly tendered.
See "DESCRIPTION OF THE TRANSACTIONS--The Exchange Offer and Solicitation."
Manor Care's working capital ratio was 1.5 at May 31, 1997 and 1.0 at May
31, 1996.
ACQUISITIONS, OPENINGS, DIVESTITURES AND SALES OF PROPERTY
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares and stock options of GranCare. In
addition, Vitalink funded the redemption of $98.2 million of GranCare's 9 3/8%
Senior Subordinated Notes and assumed approximately $100 million of additional
GranCare indebtedness. The net $1.8 million of untendered GranCare 9 3/8%
senior subordinated notes are due September 15, 2005. The notes require semi-
annual interest payments. A premium of $600,000 has been recorded to reflect
the fair market value of the notes at the date of the TeamCare merger. Also
assumed in the TeamCare merger were various notes payable totaling $5.2
million issued in connection with the previously acquired pharmacy businesses.
The weighted average interest rate on the notes is 7.03% and their annual
maturities over the next five fiscal years are as follows: $1.8 million, $1.9
million, $0.9 million, $0.2 million and $0.2 million. On May 21, 1997, Manor
Care successfully completed its tender offer to purchase 1.5 million shares of
Vitalink common stock. As a result of the tender offer, Manor Care's interest
in Vitalink was increased to approximately 51%. The net pretax gain resulting
from these transactions in Vitalink stock was $50.3 million. Manor Care also
purchased two nursing centers for $17.8 million and Vitalink purchased a
pharmacy for $5.3 million. During fiscal 1996, investment in property and
equipment utilized in continuing operations and systems development amounted
to $136.3 million. Additionally, during fiscal 1996, $51.4 million was spent
to acquire four additional nursing centers and six assisted living facilities
with five attached skilled nursing units. Vitalink also purchased two
pharmacies for $6.3 million. In October 1995, Manor Care purchased
approximately 41% of In Home Health, Inc.'s common stock for $22.9 million and
invested another $20.0 million for 100% of its outstanding voting convertible
preferred stock and for warrants to purchase an additional 6 million shares of
common stock. The In Home Health redeemable preferred stock may be redeemed in
cash at the option of Manor Care on and after October 24, 2000. The In Home
Health redeemable preferred stock ranks senior to the In Home Health common
stock, has voting rights on an as-if converted basis, and is initially
convertible into 10 million shares of In Home Health common stock at a
conversion price of $2.00 per share. The In Home Health redeemable preferred
stock bears dividends at 12% per annum and has a liquidation preference of
$100.00 per share. The In Home Health redeemable preferred stock will accrete
over five years from its fair value of $18,500,000 on the date of issuance to
its redemption price of $20 million as of the redemption date. The In Home
Health warrants purchased by ManorCare Health Services have an exercise price
of $3.75 per share and expire in October 1998.
During the first six months of fiscal years 1998 and 1997, investment in
property and equipment and systems development amounted to $110.7 million and
$83.7 million. During fiscal 1997, investment in property and equipment
utilized in continuing operations and systems development amounted to $183.5
million.
During the first six months of fiscal year 1998, Manor Care opened one newly
constructed skilled nursing facility located in California and sold a
corporate office building located in Maryland. Additionally, Manor Care
purchased certain assets of a pharmacy business for $5.6 million and acquired
another pharmacy business in Oklahoma City, Oklahoma for $0.1 million plus
351,318 shares of Vitalink Common Stock.
During the first six months of fiscal 1997, Manor Care transferred an
assisted living facility to the discontinued lodging operations with an
approximate net book value of $4.9 million. In addition, Manor Care acquired a
nursing center in California for $4.4 million and sold four nursing centers in
Indiana, Iowa, Illinois and Texas for $17.3 million. Manor Care also opened
three newly constructed skilled nursing facilities.
In connection with the Distribution, ManorCare Health Services will receive
cash of approximately $250 million and the Real Estate Note in an aggregate
principal amount of up to $250.0 million. ManorCare Health Services has agreed
not to transfer the Real Estate Note on or prior to the six month anniversary
of the date of
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issuance thereof. In addition, on or after the third anniversary of the
issuance of the Real Estate Note, ManorCare Health Services may request that
Manor Care Real Estate redeem the Real Estate Note. Manor Care Real Estate may
not have adequate funds to effect such redemption and in such case may seek to
obtain funds therefor through additional debt or equity financing. There can
be no assurance that Manor Care Real Estate would be able to obtain such
financing. In addition, the terms of Manor Care Real Estate's outstanding
indebtedness may prohibit such redemption. In the event that ManorCare Health
Services requests that Manor Care Real Estate redeem the Real Estate Note and
Manor Care Real Estate does not redeem the Real Estate Note, the interest rate
on the Real Estate Note will increase by 200 basis points; provided that such
interest rate will not be so increased unless, as of the time such request for
redemption is made, the aggregate amount of rent paid by ManorCare Health
Services under the Lease Agreements with respect to all properties subject to
such Lease Agreements shall be equal to or exceed the aggregate Priority Sum
for all such properties on a cumulative basis from the Effective Date through
the third anniversary thereof (such aggregate amount of rent being herein
referred to as the "Threshold Rent"). Solely for purposes of calculating the
Threshold Rent, (i) the aggregate Priority Sum for the fiscal year ended May
31, 1999 shall be deemed to be the aggregate Priority Sum calculated pursuant
to the Lease Agreements plus $5 million and (ii) the aggregate Priority Sum
for the fiscal year ended May 31, 2000 and thereafter shall be deemed to be
the aggregate Priority Sum calculated pursuant to the Lease Agreements plus
$10 million. Manor Care Realty's high degree of leverage could adversely
affect Manor Care Real Estate's ability to pay principal and interest on or to
redeem the Real Estate Note and may adversely effect the ability of ManorCare
Health Services to sell the Real Estate Note. The failure of Manor Care Real
Estate to pay principal and interest on the Real Estate Note in a timely
manner or the inability of ManorCare Health Services to sell the Real Estate
Note to a third party for its principal amount could have a material adverse
effect on ManorCare Health Services and could require ManorCare Health
Services to seek alternate sources of liquidity for its operations. There can
be no assurances that such alternate sources of liquidity will be available.
For a description of the Real Estate Note, see "Relationship Between Manor
Care Realty and ManorCare Health Services After The Distribution--The Real
Estate Note."
ManorCare Health Services believes that cash flows from operations, together
with the proceeds from the Capital Contribution and available borrowings under
the Existing Credit Facility, will provide it with sufficient resources to
meet its working capital needs, to finance projected capital expenditures and
to meet its liquidity requirements through fiscal year 2001.
ManorCare Health Services' five year strategic plan includes the
acquisitions of 170 Arden Courts and 38 Springhouse facilities from Manor Care
Realty pursuant to the Development Agreement. The aggregate capital required
to complete these acquisitions over the 5 year period is estimated at $1.7
billion. Principal capital sources planned to fund the acquisitions include
$500 million of cash and notes received in connection with the Distribution
and cash provided from operations. ManorCare Health Services' plans call for
the acquisition of 9 Arden Courts and 4 Springhouse facilities during fiscal
year 1999. Total expenditures for these acquisitions are projected to be
approximately $90 million in fiscal year 1999. Additionally, ManorCare Health
Services expects to incur minor expenditures for routine renovation and
maintenance of existing properties.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased to $690.4 million at May 31, 1997 from $707.8
million at May 31, 1996. This decrease was primarily due to the $164.2 million
dividend of the discontinued lodging segment and $6.1 million of cash
dividends paid, offset by net income of $136.9 million and stock options
exercised of $12.3 million.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements included in this Information Statement including the
words "plans," "anticipates," "intends," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements which
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speak only as of the date hereof. ManorCare Health Services undertakes no
obligation to republish revised forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"),
which is effective for fiscal years ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. However, an entity is
permitted to disclose pro forma earnings per share amounts computed under SFAS
128 in the notes to the financial statements in periods prior to adoption. The
statement requires restatement of all prior-period earnings per share data
presented after the effective date. SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
substantially similar to the standard recently issued by the International
Accounting Standards Committee entitled "International Accounting Standards,
Earnings Per Share." ManorCare Health Services plans to adopt SFAS 128 in
fiscal year 1998 and has not determined the impact of adoption to be
significant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of comprehensive
income and its components. ManorCare Health Services plans to adopt SFAS 130
in fiscal year 1999 and has not determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. ManorCare Health Services
plans to adopt SFAS 131 in fiscal year 1999 and has not determined the impact
of adoption.
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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"); (xiv) certain obligations of Manor Care
arising out of the contracts entered into in connection with the Choice Spin-
off; and (xv) any "Covered Claims" under the Distribution Agreement entered
into between Manor Care, Inc. and Choice Hotels Holdings, Inc., dated November
1, 1996.
After giving pro forma effect to the Distribution and related transactions
as if they occurred on November 30, 1997, (and assuming the holders of 100% of
the Old Senior Notes accept the Exchange Offer), ManorCare Health Services
would have assumed approximately (i) $195.1 million of Manor Care Realty's
indebtedness, (ii) liabilities relating to benefits and workers' compensation
of approximately $56.0 million, (iii) current liabilities of the skilled
nursing facilities of approximately $46.6 million, and (iv) deferred tax
liabilities of approximately $40.7 million. In addition, ManorCare Health
Services will assume certain contingent liabilities of Manor Care pursuant to
the terms of the Distribution Agreement. However, the assumption of such
liabilities will not release Manor Care Realty therefrom if ManorCare Health
Services should fail, for any reason, to perform its obligations pursuant to
such assumed liabilities.
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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 Real Estate 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
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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; (iii) the consummation of the
Exchange Offer; (iv) the consummation of the Credit Facilities and the
consummation of the Offering; and (v) the receipt by the Board of Directors of
Manor Care of the Solvency Opinion.
THE REAL ESTATE NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. In order to fund the cash
portion of the Capital Contribution, Manor Care Real Estate will utilize part
of the proceeds 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 Real Estate Note to be issued by
Manor Care Real Estate and guaranteed by Manor Care Realty and its
subsidiaries on the same terms as such entities guarantee the payment of the
Manor Care Real Estate Notes. The Real Estate Note will have the same general
terms (including interest rate and maturity, and parent and subsidiary
guarantees) as the Notes except that Manor Care Real Estate may redeem the
Real Estate Note after three years at a redemption price equal to 100% of the
principal amount thereof plus accrued and unpaid interest. In addition,
ManorCare Health Services has agreed not to transfer the Real Estate Note on
or prior to the sixth month anniversary of the date of issuance thereof. After
such date, ManorCare Health Services may transfer the Real Estate Note without
restriction subject to Manor Care Real Estate's right to redeem the Real
Estate Note. ManorCare Health Services will have certain demand registration
rights with respect to all or any portion of the Real Estate Note. Upon
receipt of any such demand, Manor Care Real Estate is required to use
reasonable efforts to register the portion of the Real Estate Note reflected
in the demand of ManorCare Health Services.
On or after the third anniversary of the issuance of the Real Estate Note,
ManorCare Health Services may request that Manor Care Real Estate redeem the
Real Estate Note. Manor Care Real Estate may not have adequate funds to effect
the redemption of the Real Estate Note and in such case may seek to obtain
such funds through additional debt or equity financing. There can be no
assurance that Manor Care Real Estate would be able to obtain such funds.
Moreover, the anticipated terms of the Credit Facilities will not permit Manor
Care Real Estate to refinance the Real Estate Notes with the proceeds of
borrowings thereunder. In the event that ManorCare Health Services requests
that Manor Care Real Estate redeem the Real Estate Note and Manor Care Real
Estate does not redeem the Real Estate Note, the interest rate on the Real
Estate Note will increase by 200 basis points; provided that such interest
rate will not be so increased unless, as of the time such request for
redemption is made, the aggregate amount of rent paid by ManorCare Health
Services under the Lease Agreements with respect to all properties subject to
such Lease Agreements shall equal or exceed the aggregate Priority Sum for all
such properties on a cumulative basis from the Effective Date through the
third anniversary thereof (such aggregate amount of rent being herein referred
to as the "Threshold Rent"). Solely for purposes of calculating the 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
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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 increase in the interest rate on
the Real Estate Note may have a material adverse effect on Manor Care Realty.
Manor Care may determine to reduce the principal amount of the Real Estate
Note prior to issuance or to reduce the amount of the cash portion of the
Capital Contribution, to the extent Old Senior Notes remain outstanding upon
consummation of the Exchange Offer.
Pursuant to the terms of the Real Estate Note, the holders of a majority of
the aggregate principal amount of the Real Estate Note then outstanding shall
be entitled, on up to four occasions, to request that Manor Care Real Estate
register under the Securities Act the portion of the Real Estate Note subject
to such request. Manor Care Real Estate will be obligated to use its best
efforts to effect such a registration and to enter into an indenture with
respect to such portion of the Real Estate Note, which indenture will contain
substantially similar terms to the indenture relating to the Notes and which
will be qualified under the Trust Indenture Act of 1939, as amended.
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 substantially all of the assets directly owned by Manor Care Realty
and Manor Care Real Estate, by mortgages on certain real property of 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, 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. In the event that the
Commitment Letter is executed, Chase will commit to purchase a portion of such
facilities and CSI will use its best efforts to arrange the balance of such
facilities with other lenders.
THE EXCHANGE OFFER 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 Real Estate Note prior to
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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, pursuant to the Lease Agreements, all of Manor Care Realty's current
skilled nursing facilities and, by separate agreement, its future skilled
nursing facilities. Under each Lease Agreement, ManorCare Health Services' use
of the subject facility will be limited to operating a skilled nursing
facility together with such other ancillary uses as exist on the Effective
Date at such facility. Manor Care Realty and ManorCare Health Services will
also enter into Lease Agreements or similar arrangements pursuant to which
ManorCare Health Services will also lease and operate two skilled nursing
facilities in which Manor Care Realty is a substantial equity investor by
joint venture, common ownership or otherwise.
Under the Lease Agreements, ManorCare Health Services will operate the
facilities and will collect all revenues from the facilities. Under the Lease
Agreement for each facility, ManorCare Health Services will be obligated to
pay Manor Care Realty annual rent ("Premises Rent") equal to the greater of
(i) 77% of Net Operating Profit and (ii) a value of the subject facility
agreed upon by ManorCare Health Services and Manor Care Realty (the "Priority
Basis") multiplied by 10%; provided that the Premises Rent for a specific
Lease Year may be reduced below these two amounts as a result of the deferral
mechanism described below. Manor Care Realty and ManorCare Health Services
have determined that Premises Rent for the fiscal year ended May 31, 1998 will
be paid on an aggregate portfolio basis, not on a facility by facility basis.
The Premises Rent on a facility is payable in installments (each "Monthly
Premises Rent"), as follows: (i) on the first day of each calendar month of
each Lease Year, commencing with the first day of the month following the
month in which the commencement date of the Lease Agreement occurs, ManorCare
Health Services shall pay to Manor Care Realty an amount equal to one-twelfth
of 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 the last day of the immediately preceding
calendar month is greater than 10% of the Priority Basis (the "Priority Sum")
multiplied by a fraction the numerator of which is the number of days that
have passed in the applicable Lease Year and the denominator of which is 365,
ManorCare Health Services shall pay to Manor Care Realty an amount equal to
such excess; and (iii) on or before the fifteenth day of each calendar month
of each Lease Year, commencing with the fifteenth day of the month following
the month in which the commencement date of the Lease Agreement occurs, if the
Net Operating Profit for the Lease Year to the last day of the immediately
preceding calendar month is less than the Priority Sum allocable to the Lease
Year to date, Manor Care Realty shall repay to ManorCare Health Services an
amount equal to such deficiency. Such deficiency amounts paid by Manor Care
Realty to ManorCare Health Services are referred to as "Deferred Premises
Rent." The Priority Basis for each skilled nursing facility will be a
predetermined dollar value for each facility agreed upon by ManorCare Health
Services and Manor Care Realty and will not be subject to increase or decrease
based upon any change in the cost of living or inflation. In determining the
Priority Basis for each facility, the parties reviewed, among other things,
historical and projected cash flows, costs of recent capital improvements, the
location of the facility and relevant market conditions. The computation of
Net Operating
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Profit includes as a Project Expense an amount equal to 6% of Project Revenues
("Tenant's Base Fee"), which is in effect a base fee out of Project Revenues
which ManorCare Health Services is entitled to retain without reduction.
Project Revenues generally include all revenues and income derived by
ManorCare Health Services from the facilities. Project Expenses generally
include all expenses incurred by ManorCare Health Services to comply with its
obligations under the Lease Agreements including Tenant's Base Fee; provided
however that Project Expenses do not include Premises Rent.
Deferred Premises Rent may be deferred until such time as Net Operating
Profit is available to pay it; provided that as of the first day of each new
Lease Year all Deferred Premises Rent for the prior Lease Year which has not
become due and payable shall be deemed cancelled and extinguished and shall
not thereafter be due and payable. To the extent that Net Operating Profit
supports less than all Monthly Premises Rent and Deferred Premises Rent then
due, payments made with respect thereto shall be deemed to be made first to
Deferred Premises Rent (from longest to shortest outstanding) and then to
Monthly Premises Rent. The total amount of fiscal 1997 rent which could have
been deferred and ultimately canceled is approximately $10.3 million relating
to 23 facilities. Approximately $6.6 million of this amount relates to 12
recently acquired, renovated or developed facilities which are anticipated to
pay rent at least equal to Priority Sum within the next two fiscal years.
Each facility will be operated pursuant to an Operating Budget (as defined
in the Lease Agreements). The Operating Budget for the period ending May 31,
1998 will be attached to each of the Lease Agreements as an exhibit. The
Operating Budget for each facility for the period from June 1, 1998 through
May 31, 1999 will be agreed upon by Manor Care Realty and ManorCare Health
Services. Thereafter, each Operating Budget will not be subject to Manor Care
Realty's approval unless (i) the Net Operating Profit for the Lease Year (as
defined in the Lease Agreements) immediately prior to the Lease Year with
respect to which the Operating Budget in question is being prepared was less
than the greater of (a) the Priority Sum and (b) 90% of budgeted Net
Operating Profit for such Lease Year or (ii) budgeted Net Operating Profit
for the current Lease Year is less than the greater of (a) the Priority Sum
for the current Lease Year and (b) 90% of budgeted Net Operating Profit for
the prior Lease Year. ManorCare Health Services will have the right to use
2.75% of aggregate Project Revenues (aggregated across all facilities under
all Lease Agreements) for maintenance capital expenditures at the facilities.
Manor Care Realty shall reimburse ManorCare Health Services for all such
maintenance capital expenditures. In addition, each year, ManorCare Health
Services must prepare and submit to Manor Care Realty for approval a budget
setting forth ManorCare Health Services' estimate of the cost of performing
proposed revenue generating alterations, additions and improvements of the
facilities (i.e., major capital expenditures). Manor Care Realty may withhold
its approval in its absolute discretion. Manor Care Realty 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 its interest in each facility to the extent of 90% of the fair market
value thereof as of the date the Indebtedness is incurred. The Lease
Agreements provide that Manor Care Realty may incur indebtedness in the amount
of at least $100 million which may be secured by a blanket mortgage covering
any number of facilities; provided, however, that in no event shall the
aggregate indebtedness secured by mortgages covering facilities (other than
facilities located in Pennsylvania) exceed an amount equal to 85% of the fair
market value of the facilities covered by such mortgages as of the date the
indebtedness is incurred; and provided, further, that in no event shall the
aggregate indebtedness secured by such mortgages (including mortgages covering
facilities located in Pennsylvania) exceed
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an amount equal to 90% of the fair market value of all of the facilities
whether or not covered by mortgages as of the date the indebtedness is
incurred. The foregoing limitations will not apply to any indebtedness to the
extent secured by 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.
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, (ii) to an affiliate
succeeding to ManorCare Health Services' business operations, or (iii) to an
affiliate succeeding to the skilled nursing facility business operations of
ManorCare Health Services.
The Lease Agreements provide that ManorCare Health Services is obligated to
comply with all applicable laws and must obtain and keep in full force and
effect all licenses and permits necessary to operate the facilities. Pursuant
to the Lease Agreements, with respect to ManorCare Health Services' use,
occupancy and operation of 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
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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 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 in respect of each
Arden Courts facility is the percentage set forth below opposite the month
during which notice of the purchase of the facility is given by ManorCare
Health Services to Manor Care Realty.
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the sixth full
calendar month thereafter............................................. 14.50%
Seventh calendar month................................................. 15.50%
Eighth calendar month.................................................. 15.95%
Ninth calendar month................................................... 17.80%
Tenth calendar month................................................... 19.55%
Eleventh calendar month................................................ 21.15%
Twelfth calendar month................................................. 22.87%
Thirteenth calendar month.............................................. 24.10%
Fourteenth calendar month.............................................. 25.30%
Fifteenth calendar month............................................... 26.85%
Sixteenth calendar month............................................... 27.95%
Seventeenth calendar month............................................. 28.99%
Eighteenth calendar month.............................................. 30.30%
Nineteenth calendar month.............................................. 31.50%
Twentieth calendar month............................................... 32.50%
Twenty-first calendar month............................................ 33.54%
Twenty-second calendar month........................................... 34.75%
Twenty-third calendar month............................................ 35.90%
Twenty-fourth calendar month........................................... 37.00%
</TABLE>
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The premium in respect of each Springhouse facility shall be the percentage
opposite the month set forth below during which the notice of purchase of the
subject facility is given by ManorCare Health Services to Manor Care Realty:
<TABLE>
<CAPTION>
MONTH PREMIUM
- ----- -------
<S> <C>
Opening Date Month and first full calendar month through the sixth full
calendar month thereafter............................................. 12.00%
Seventh calendar month................................................. 13.00%
Eighth calendar month ................................................. 14.00%
Ninth calendar month................................................... 15.00%
Tenth calendar month .................................................. 15.00%
Eleventh calendar month................................................ 16.20%
Twelfth calendar month................................................. 17.40%
Thirteenth calendar month.............................................. 18.40%
Fourteenth calendar month.............................................. 19.40%
Fifteenth calendar month............................................... 20.33%
Sixteenth calendar month............................................... 21.30%
Seventeenth calendar month............................................. 22.30%
Eighteenth calendar month.............................................. 23.00%
Nineteenth calendar month.............................................. 23.90%
Twentieth calendar month............................................... 24.80%
Twenty-first calendar month............................................ 25.65%
Twenty-second calendar month........................................... 26.49%
Twenty-third calendar month............................................ 27.40%
Twenty-fourth calendar month........................................... 28.20%
</TABLE>
The purchase price for each facility is formula-based and may or may not
approximate the fair market value of a particular facility. Given that
pursuant to the Development Agreement, Manor Care Realty's primary activity
will be developing assisted living facilities for ManorCare Health Services,
which facilities ManorCare Health Services will be obligated to buy if certain
conditions are met, Manor Care 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 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
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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 with respect to the assisted living facilities being
developed until the earlier of (i) the second anniversary of the expiration of
the term of the Development Agreement or (ii) the date on which ManorCare
Health Services acquires the last of such facilities.
Agreements with Respect to the Skilled Nursing Business. The Non-Competition
Agreement provides that Manor Care Realty will be a health care real estate
company focused on the ownership, construction, development and acquisition of
health care properties. The Non-Competition Agreement provides that in the
event that ManorCare Health Services identifies a skilled nursing facility
development opportunity or a skilled nursing facility acquisition opportunity,
ManorCare Health Services will notify Manor Care Realty of such opportunity
and if Manor Care Realty does not respond within a specified time or rejects
the opportunity to acquire or develop such facility, ManorCare Health Services
will have the right to present such development or skilled nursing facility
acquisition opportunity to a non-affiliated third-party; provided that
ManorCare Health Services will not, without the prior consent of Manor Care
Realty (which consent may be given or withheld in the sole discretion of Manor
Care Realty), present such development or skilled nursing facility acquisition
opportunity to such non-affiliated third party if such development or
acquisition would result in the acquisition or development of a skilled
nursing facility that is within a five mile radius of a Manor Care Realty
owned skilled nursing facility.
In the event that Manor Care Realty determines to proceed with the
development of a skilled nursing facility or a skilled nursing facility
acquisition, Manor Care Realty will notify ManorCare Health Services of such
determination indicating the material terms on which Manor Care Realty is
prepared to permit ManorCare Health Services to manage and lease such skilled
nursing facility (or facilities) and ManorCare Health Services will have a
specified time after the receipt of such notice to notify Manor Care Realty of
its interest in entering into a management and lease agreement with Manor Care
Realty with respect to such skilled nursing facility (or facilities). In the
event that ManorCare Health Services so notifies Manor Care Realty, ManorCare
Health 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
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Health Services does not respond to such notice within such specified time
period or rejects the opportunity to negotiate with Manor Care Realty with
respect to such skilled nursing facility (or facilities) or (ii) ManorCare
Health Services negotiates with Manor Care Realty but the parties are unable
to reach an agreement during such specified time period, Manor Care Realty
will have the right to enter into a management agreement and/or a lease
agreement relating to such skilled nursing facility (or facilities) with a
non-affiliated third party on terms no more favorable in the aggregate to such
third party than those offered to ManorCare Health Services or manage such
facility itself for a period not to exceed 18 months following commencement of
operations of a Manor Care Realty developed skilled nursing facility or
consummation of the skilled nursing facility acquisition, as the case may be.
In the event Manor Care Realty elects to manage such skilled nursing facility
(or facilities), Manor Care Realty will enter into a management agreement
and/or lease agreement with respect to such skilled nursing facility (or
facilities) with an non-affiliated third party following the expiration of
such 18 month period. The terms of such management agreement and/or a lease
agreement will be no more favorable in the aggregate to such third party than
those offered to ManorCare Health Services. In the event that ManorCare Health
Services desires to acquire a business which also includes one or more skilled
nursing facilities, the ownership or possession of which by ManorCare Health
Services would otherwise be prohibited by the Non-Competition Agreement,
ManorCare Health Services must offer Manor Care Realty the right to purchase
such skilled nursing facilities at a price to be agreed upon by the parties;
provided, however that if the parties are unable to agree on such purchase
price, the parties shall submit the issue to binding arbitration. In the event
Manor Care Realty elects not to purchase such skilled nursing facilities at
such purchase price or the parties have been unable to agree on the purchase
price and have submitted the dispute to arbitration, ManorCare Health Services
nonetheless may complete such acquisition but will use its commercially
reasonable efforts to divest itself of such skilled nursing facilities within
one year of the closing of such acquisition. In the event that ManorCare
Health Services determines to sell the skilled nursing facilities for a price
less than the purchase price offered to Manor Care Realty or determined by the
arbitrator, as the case may be, ManorCare Health Services will notify Manor
Care Realty and Manor Care Realty will have the irrevocable and exclusive
option, to buy on the terms set forth in such notice, such skilled nursing
facilities. If Manor Care Realty does not notify ManorCare Health Services
within a specified time period of its intention to purchase such facilities,
Manor Care Realty will be deemed to have declined to purchase such skilled
nursing facilities and ManorCare Health Services will be free to sell such
skilled nursing facilities at a price equal to 97.5% of or exceeding, the
price and on terms similar to those specified in such notice.
In addition, the Non-Competition Agreement provides that ManorCare Health
Services will not, without the prior consent of Manor Care Realty (which
consent will not be unreasonably withheld), engage in the lease, operation or
management of any skilled nursing facility owned by a third party that is
within a five-mile radius of a Manor Care Realty owned skilled nursing
facility that is leased or managed by ManorCare Health Services and, subject
to certain exceptions, ManorCare Health Services will not own a skilled
nursing facility.
The Non-Competition Agreement also provides that Manor Care Realty will not
engage, either directly or indirectly, in the management of skilled nursing
facilities, except as set forth above and except as may be permitted with
respect to a particular skilled nursing facility by the Lease Agreement or
other agreement between Manor Care Realty and ManorCare Health Services
pursuant to which ManorCare Health Services manages such skilled nursing
facility.
Agreements with Respect to the Assisted Living Business. Except as provided
below and except pursuant to the terms of the Development Agreement, the Non-
Competition Agreement provides that Manor Care Realty will not acquire any
assisted living facility; provided, that Manor Care Realty will not be deemed
to have acquired 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
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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 97.5% of or exceeding, the price and on terms
similar to those specified in such notice. In the event Manor Care Realty
acquires an assisted living facility (or facilities) in such a transaction,
Manor Care Realty will offer ManorCare Health Services the opportunity to
manage and lease such assisted living facility (or facilities) and ManorCare
Health Services and Manor Care Realty will negotiate in good faith to enter
into a management agreement with respect to such assisted living facility (or
facilities). In the event that ManorCare Health Services does not respond to
such offer within a specified time period or rejects the opportunity to
negotiate with Manor Care Realty with respect to such assisted living facility
(or facilities) or ManorCare Health Services negotiates with Manor Care Realty
but the parties are unable to reach an agreement after such time period, Manor
Care Realty will have the right to enter into a management agreement relating
to such assisted living facility (or facilities) with 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 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
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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 which real estate constitutes 40% or
more of the fair market value of such business, ManorCare Health Services must
offer for sale such real estate to Manor Care Realty with the same notices and
rights concerning such real estate as contemplated by the Non-Competition
Agreement with respect to the acquisition by ManorCare Health Services of a
business that includes certain skilled nursing facilities.
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement (the "Employee
Benefits Allocation Agreement"), pursuant to which the employee benefits with
respect to employees who remain employed by Manor Care Realty or its
subsidiaries immediately after the Distribution ("Manor Care Realty
Employees") and the employee benefits of employees who are employed by
ManorCare Health Services immediately after the Distribution ("ManorCare
Health Services Employees") will be allocated.
The Employee Benefits Allocation Agreement provides that all of the vested
and non-vested Incentive Stock Options ("ISOs") of employees of Manor Care who
will be employed by ManorCare Health Services will be converted into ISOs of
ManorCare Health Services. The ISOs of employees who remain employed by Manor
Care Realty will be converted into ISOs of Manor Care Realty. In addition,
both employees who will be employed by ManorCare Health Services and employees
who remain employed by Manor Care Realty will have the right to elect to
convert their vested Manor Care Non-Qualified Stock Options ("NQSOs") into any
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
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be employed by ManorCare Health Services will be converted into NQSOs of
ManorCare Health Services, and one-half of the non-vested NQSOs of any
employee who remains employed by Manor Care Realty will be converted into
NQSOs of Manor Care Realty. The remaining non-vested NQSOs will be converted
into any percentage combination of ManorCare Health Services NQSOs and Manor
Care Realty NQSOs at the election of the employee. Notwithstanding the
foregoing, the NQSOs of one executive officer will be converted on a pro rata
basis to ManorCare Health Services NQSOs and Manor Care Realty NQSOs based on
their relative stock values. Another executive officer will have the option to
convert NQSOs to ManorCare Health Services NQSOs and Manor Care Realty NQSOs
such that such officer's overall option holdings are converted on a pro rata
basis to ManorCare Health Services options and Manor Care Realty options based
on their relative stock values.
The Employee Benefits Allocation Agreement also provides that employees of
Choice Hotels International, Inc. ("Choice Hotels") and Sunburst Hospitality
Corporation ("Sunburst") can elect to convert their Manor Care NQSOs into any
percentage combination of ManorCare Health Services NQSOs and Manor Care
Realty NQSOs.
The Employee Benefits Allocation Agreement also addresses the treatment of
Manor Care NQSOs owned by non-employee directors of Manor Care. The NQSOs of
non-employee directors who become directors of both Manor Care Realty and
ManorCare Health Services will be converted on a pro rata basis to ManorCare
Health Services NQSOs and Manor Care Realty NQSOs based on their relative
stock values. The Employee Benefits Allocation Agreement also provides that
all NQSOs of non-employee directors who remain with Manor Care Realty or who
become directors of ManorCare Health Services will be converted to NQSOs of
Manor Care Realty or ManorCare Health Services, respectively.
The Employee Benefits Allocation Agreement will provide that the adjustment
in stock options will be based upon a predetermined formula related to (i)
stock prices on the first day the shares in the companies are independently
traded and (ii) the election of the optionees. In all cases, however, the
exercise price and the number of the options will be adjusted to maintain the
same financial value to the option holder before and after the Distribution.
The ratio of the exercise price per option to the market value per share will
not be reduced, and the vesting provisions and option period of the original
grant will remain the same.
EMPLOYEE BENEFITS ADMINISTRATION AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Employee
Benefits Administration Agreement (the "Employee Benefits Administration
Agreement"), pursuant to which ManorCare Health Services will administer the
employee benefits plans and programs of Manor Care Realty following the
Distribution.
ManorCare Health Services shall provide such services for a fee which shall
include any or a combination of the following: (i) activity-based charges;
(ii) fixed-fee based charges; (iii) usage-based charges; and (iv) time and
materials charges, as specified in the Corporate Services Agreement. The
Employee Benefits Administration Agreement will remain in effect for one year
from the Effective Date, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Employee Benefits
Administration Agreement.
OFFICE SUBLEASE AGREEMENT
Manor Care leases from Gaitherburg Realty Trust the building complex in
Gaithersburg, Maryland (the "Complex") at which the principal executive
offices of ManorCare Health Services and Manor Care Realty are located. Manor
Care will assign its interest in the lease to ManorCare Health Services,
subject to the consent of Gaithersburg Realty Trust, and ManorCare Health
Services, as sublandlord, and Manor Care Realty, as subtenant, will enter into
a sublease agreement with respect to the Complex (the "Office Sublease
Agreement"). The Complex consists of an office building (the "Office
Building") containing approximately 377,126 gross square feet of space, a
warehouse and distribution building (the "Warehouse Building") containing
approximately 200,000 gross square feet of space, and approximately 98.7974
acres of land.
ManorCare Health Services will sublease to Manor Care Realty approximately
58,714 rentable square feet in the Office Building, for a base term expiring
on August 30, 2002, with options to renew for four (4) successive
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periods of three (3) years each. As Basic Rent for each Lease Year of the base
term, Manor Care Realty will pay Tenant's Pro Rata Share of all Operating
Expenses for such Lease Year. "Tenant's Pro Rata Share" means the ratio of (i)
the number of rentable square feet in the Office Building occupied by Manor
Care Realty as of the commencement of such Lease Year, to (ii) the total
number of rentable square feet in the Office Building occupied by Manor Care
Realty and ManorCare Health Services as of the commencement of such Lease
Year. "Operating Expenses" means all expenses incurred by ManorCare Health
Services (net of rental income paid by third parties) in connection with the
operation and maintenance of the Complex (including vacant space and common
areas), including real estate taxes, insurance, utilities, repairs, property
management, and rent payments to Gaithersburg Realty Trust. ManorCare Health
Services will be responsible for "Landlord's Pro Rata Share" of Operating
Expenses for each Lease Year of the base term, meaning the ratio of (i) the
number of square feet in the Office Building occupied by ManorCare Health
Services as of the commencement of such Lease Year, to (ii) the total number
of rentable square feet in the Office Building occupied by Manor Care Realty
and ManorCare Health Services as of the commencement of such Lease Year. It is
expected that ManorCare Health Services will occupy approximately 202,458
rentable square feet in the Office Building as of the commencement of the
Office Sublease Agreement. Accordingly, based on a total of 261,172 rentable
square feet in the Office Building occupied by Manor Care Realty and ManorCare
Health Services, ManorCare Health Services' Pro Rata Share would be 78% and
Manor Care Realty's Pro Rata Share would be 22%.
It is the intention of the parties to share any appreciation in the value of
the Complex subsequent to the acquisition and leasing of the Complex by the
Gaithersburg Realty Trust in August, 1995. Accordingly, at any time during the
base term of the Office Sublease Agreement or any renewal term, Manor Care
Realty shall have the right to exercise its shared appreciation rights by
requiring ManorCare Health Services to pay to Manor Care Realty approximately
twenty-two percent (22%) of the Complex's appreciation. "Appreciation" is
defined as the difference between (i) the Complex's fair market value at the
time Manor Care Realty exercise its shared appreciation rights, and (ii) the
cost of acquiring the Complex, plus the cost of any capital improvements to
the Complex. Fair market value shall be established by an appraisal, that
assumes that Manor Care Realty and ManorCare Health Services each pay fair
market rental for their respective premises. Until such time as Manor Care
Realty exercises its shares appreciation rights, the Basic Rent payable by
Manor Care Realty for each Lease year during the base term and any subsequent
renewal term shall be Tenant's Pro Rata Share of Operating Expenses as
hereinabove provided. Upon Manor Care Realty's exercise of its shared
appreciation rights, the Basic Rent payable by Manor Care Realty shall convert
to fair market rental as determined by the appraisal process as of the
commencement of the next renewal terms. In each subsequent renewal term the
Basic Rent shall be increased based upon any increase in the CPI Index since
the prior renewal term (but not to exceed 9%).
Manor Care Realty's right to exercise its renewal options is conditional
upon ManorCare Health Services' continuing control over the Complex through an
extension of the existing lease with Gaithersburg Realty Trust beyond its
current expiration date of August 30, 2002, or otherwise. Any income derived
from the Complex will be shared by ManorCare Health Services and Manor Care
Realty in proportion to their Pro Rata Shares.
The Office Sublease Agreement will also cover approximately 5000 square feet
to be occupied by ManorCare Health Services in the Warehouse Building. Space
occupied by ManorCare Health Services in the Warehouse Building will not be
included in the calculation of Landlord's Pro Rata Share. ManorCare Health
Services will pay a market rent for warehouse space and such rental payments
will be treated as third party rental income for purposes of calculating
Operating Expenses.
DISTRIBUTION AGREEMENT
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. In
the event that it impossible to determine which party was the first to take or
fail to take any of such actions, all taxes and other damages resulting from
such failure to qualify shall be allocated between the parties based upon each
party's relative market capitalization on the first day that Manor Care Realty
and ManorCare Health Services trade as two separate companies on the NYSE.
TAX ADMINISTRATION AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Tax
Administration Agreement (the "Tax Administration Agreement"). The Tax
Administration Agreement sets forth the terms and conditions pursuant to which
ManorCare Health Services will provide certain tax-related administrative
services to Manor 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
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combination of the following: (i) activity-based charges; (ii) fixed-fee based
charges; (iii) usage-based charges; and (iv) time and materials charges, as
specified in the Corporate Services Agreement. The Corporate Services
Agreement will remain in effect for one year from the Effective Date, after
which it will renew automatically for one-year periods unless terminated
pursuant to the terms of the Corporate Services Agreement.
TRADEMARK AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Trademark
Agreement (the "Trademark Agreement") pursuant to which Manor Care Realty will
assign to ManorCare Health Services approximately 40 U.S. trademarks and
service marks registered and pending (and all federal, state and foreign
registrations and all other rights and privileges related thereto). These
registrations and applications represent all of the trademarks necessary for
the operations of the business of ManorCare Health Services. Pursuant to the
Trademark Agreement, ManorCare Health Services will assume all obligations
related to such trademarks and trademark applications.
LICENSE AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a License
Agreement (the "License Agreement") pursuant to which ManorCare Health
Services will license to Manor Care Realty the right to use approximately 20
U.S. trademarks and service marks; and certain other marks, trade names,
copyrights, designs and trade dress in connection with the operation of Manor
Care Realty's business. The license granted under the License Agreement
relating to Manor Care Realty's skilled nursing facilities will terminate
within 45 days of the termination of all the Lease Agreements. The license
granted under the License Agreement relating to Manor Care Realty's assisted
living facilities will terminate within a reasonable time after the
termination of the Development Agreement and all the Assisted Living Facility
Management Agreements. Manor Care Realty's right to use such marks with
respect to a single skilled nursing or assisted living facility will terminate
within a reasonable time after ManorCare Health Services ceases to lease or
manage such single nursing or assisted living facility.
DESIGN SERVICES AGREEMENT
Manor Care and ManorCare Health Services will enter into a Design Services
Agreement (the "Design Services Agreement") pursuant to which Manor Care
Realty will provide certain interior design and architectural services in
connection with capitalized renovation projects. The fee for these services
will be $48,000 per month until May 31, 1998 after which the fee will be paid
annually and will be based on the percentage of Manor Care Realty's design
department budget required to provide services to ManorCare Health Services.
Fees under the Design Services Agreement will be credited against the 2.75% of
aggregate annual Project Revenues from all the skilled nursing facilities
leased under Lease Agreements applied toward reasonable repairs, replacements
and renewals to be made in the ordinary course of operations as set forth in
the Lease Agreements. The Design Services Agreement will remain in effect
until May 31, 1999, after which it will renew automatically for one-year
periods unless terminated pursuant to the terms of the Design Services
Agreement.
CASH MANAGEMENT AGREEMENT
ManorCare Health Services and Manor Care Realty will enter into a Cash
Management Agreement (the "Cash Management Agreement"), pursuant to which
after the Distribution ManorCare Health Services will 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.
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RISK MANAGEMENT CONSULTING SERVICES AGREEMENT
Manor Care Realty and ManorCare Health Services will enter into a Risk
Management Consulting Services Agreement (the "Risk Management Consulting
Services Agreement"), pursuant to which ManorCare Health Services will provide
to Manor Care Realty risk management consulting services, including but not
limited to insurance renewals, insurance, indemnity and bond contract review,
surety bond procurement, regulatory compliance services, environmental
management, and risk management services. Manor Care Realty will pay ManorCare
Health Services a fixed annual fee for such services as well as reimbursement
for insurance and self-insurance plans. The Risk Management Consulting
Services Agreement will remain in effect for one year from the Effective Date,
after which it will renew automatically for one-year periods unless terminated
pursuant to the terms of the Risk Management Consulting Services Agreement.
REAL ESTATE NOTE
In connection with the Distribution and in order to fund ManorCare Health
Services' capital expenditures in connection with the expansion of the
Assisted Living Business, on or prior to the Effective Date, Manor Care will
make or cause to be made the Capital Contribution. As part of the Capital
Contribution, Manor Care will contribute or cause to be contributed to
ManorCare Health Services the Real Estate Note. See "Description of the
Transactions--The Real Estate 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 from February 1995 to December 1997; 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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MANAGEMENT OF MANORCARE HEALTH SERVICES AFTER THE DISTRIBUTION
EXECUTIVE OFFICERS OF MANORCARE HEALTH SERVICES
The name, age, proposed title upon consummation of the Distribution and
business background of each of the persons who are expected to become on the
Effective Date the executive officers of ManorCare Health Services are set
forth below. The business address of each of the prospective executive
officers is 11555 Darnestown Road, Gaithersburg, Maryland, 20878, unless
otherwise indicated.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. .... 51 Chairman of the Board
Donald C. Tomasso....... 52 President and Chief Executive Officer
Scott J. Van Hove....... 40 Executive Vice President, Operations
James H. Rempe.......... 67 Senior Vice President, General Counsel and Secretary
Richard A. Goodman...... 49 Senior Vice President, Chief Financial Officer
Carole Y. Prest......... 46 Senior Vice President, Strategy and Marketing
H. David Lundgren....... 46 Senior Vice President, Human Resources
Wolfgang von Maack...... 57 President and Chief Executive Officer of In Home Health
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and ManorCare Health Services, Inc. (a subsidiary
of Manor Care which prior to the Distribution owned and operated Manor Care's
assisted living and skilled nursing facilities) ("Old ManorCare Health
Services") since March 1987; Chief Executive Officer of Manor Care since March
1987 and President since June 1989; Chairman of the Board of Vitalink since
February 1997; Vice Chairman of the Board of Vitalink from February 1995 to
February 1997; Vice Chairman of the Board of Manor Care and subsidiaries from
June 1982 to March 1987; Director of Manor Care since August 1981, of Vitalink
since September 1991, of Old ManorCare Health Services since 1976 and of
Choice and its predecessors since 1977; Chief Executive Officer of Old
ManorCare Health Services since June 1989 and President from May 1990 to May
1991; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995 and President and Chief Executive Officer from
March 1987 to September 1991; Chairman of the Board of Choice from March 1987
to June 1990.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services from May 1991 to
February 1995; Chairman and Chief Executive Officer of Vitalink from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Scott J. Van Hove. Senior Vice President and Chief Administrative Officer of
Manor Care since December 1995; Executive Vice President, Operations of Old
ManorCare Health Services since February 1997; Senior Vice President of Old
ManorCare Health Services from December 1995 to January 1997; Vice President
of Operations, of Manor Care from March 1990 to December 1995.
James H. Rempe. Senior Vice President, General Counsel and Secretary of
Manor Care since August 1981, of Choice and its predecessors from February
1981 to November 1996 and of Old ManorCare Health Services since December
1980; Secretary of Vitalink from January 1993 to January 1997 and a Director
since
141
<PAGE>
September 1994; Senior Vice President and a Director of Vitalink from January
1983 to September 1991; Director of In Home Health since October 1995.
Richard A. Goodman. Previously employed by PepsiCo, Inc. for more than five
years, including as Senior Vice President and Chief Financial Officer of its
Taco Bell Corp. Division from 1994 to 1997, as Senior Vice President and Chief
Financial Officer of its KFC International Division from 1993 to 1994, as Vice
President, Corporate Strategic Planning--International Pepsico, Inc. from 1992
to 1993.
Carole Y. Prest. Vice President, Corporate Strategic Planning of Manor Care
from September, 1995 to September, 1997; previously employed by GenRad, Inc.
for nine years, including Vice President and General Manager of Concord
Products Division; Chairman of Board and President of Manor Care Foundation;
Director of Sunburst Hospitality Corporation.
H. David Lundgren. Vice President, Organizational Strategy and Development
of Aetna, Inc. from 1996 to April 1997; Vice President, Human Resources of
Aetna Inc. from 1992 to 1996.
Wolfgang von Maack. President and Chief Executive Officer of In Home Health
since May 1997; Senior Vice President, Healthcare Services of Old ManorCare
Health Services since June 1990; Vice President, Operations of Old ManorCare
Health Services from March 1988 to June 1990.
The following individuals, who are currently officers or directors of Manor
Care, will be directors and/or executive officers of Manor Care Realty after
the Distribution: (i) Stewart Bainum, Jr. as Chairman of the Board and
Director, (ii) Kennett L. Simmons as Director, (iii) Joseph R. Buckley as
Chief Executive Officer and Director, (iv) Leigh C. Comas as Senior Vice
President and Chief Financial Officer, (v) Larry Godla as Senior Vice
President, Construction and Development, and (vi) Margarita Schoendorfer as
Vice President and Controller.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the annual and
long-term compensation of those persons who, following the Distribution, will
serve as the chairman of the board and the four other most highly compensated
executive officers of ManorCare Health Services (the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------------
FISCAL STOCK STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS SHARES (#)(1) COMPENSATION(2)
- --------------------------- ------ -------- -------- ----- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(3)... 1997 $568,062 $340,837 (4) -- 60,000 $35,074
Chairman of the Board 1996 625,102 337,555 (4) -- 60,000 33,543
1995 572,308 343,385 (4) -- -- 9,000
Donald C. Tomasso........ 1997 428,002 235,401 (4) -- 35,000 18,760
President and 1996 400,005 145,602 (4) -- 50,000 5,750
Chief Executive Officer 1995 345,737 190,155 (4) -- -- 2,250
James H. Rempe........... 1997 281,507 140,754 (4) $271,250 15,000 16,727
Senior Vice President, 1996 269,048 121,072 (4) -- 15,000 15,969
General Counsel and 1995 267,349 133,675 (4) -- -- 9,000
Secretary
Scott J. Van Hove........ 1997 240,192 116,753 (4) -- 50,000 14,542
Executive Vice
President, 1996 210,310 89,754 (4) -- 40,000 8,690
Operations 1995 183,393 68,311 (4) -- -- 6,750
Wolfgang von Maack(5).... 1997 238,992 81,182 (4) -- 14,000 10,588
President and 1996 227,677 76,727 (4) -- 10,000 10,245
Chief Executive Officer, 1995 225,219 66,665 (4) -- -- 6,750
In Home Health, Inc.
</TABLE>
142
<PAGE>
- --------
(1) Represents options to purchase shares of Manor Care Common Stock. The
options shown above represent the number of options held prior to the
Choice Spin-off. In connection with the Choice Spin-off, these options
were converted, in some cases, into options to purchase Manor Care common
stock and options to
purchase Choice common stock. These conversions are reflected in the
following table of "Stock Option Grants in Fiscal 1997." For a discussion
of the treatment of options in connection with the Distribution, see
"Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution--Employee Benefits and Other Employment Matters Allocation
Agreement."
(2) Represents amounts contributed by Manor Care for fiscal 1997, 1996 and
1995 under the 401(k) Plan and the Nonqualified Savings Plan, which
provide retirement and other benefits to eligible employees, including the
Named Officers. Amounts contributed in cash or stock by Manor Care during
fiscal 1997 under the 401(k) Plan for the Named Officers were as follows:
Mr. Bainum, Jr., $9,000; Mr. Tomasso, $6,253; Mr. Rempe, $5,591; Mr. Van
Hove, $4,655 and Mr. von Maack, $3,540. Amounts contributed in cash or
stock by Manor Care during fiscal 1997 under the Nonqualified Savings Plan
for the Named Officers were as follows: Mr. Bainum, Jr., $26,074; Mr.
Tomasso, $12,507; Mr. Rempe, $11,137; Mr. Van Hove, $9,887 and Mr. von
Maack, $7,047.
(3) Mr. Bainum, Jr. will resign as Chief Executive Officer of ManorCare Health
Services effective on the Effective Date. Following the Distribution, Mr.
Bainum, Jr. will be the Chairman of the Board of the Company and the
Chairman of the Board of Manor Care Realty. On November 1, 1996, Manor
Care distributed to its shareholders (the "Choice Spin-off") all of the
shares of its wholly owned subsidiary, Choice Hotels International, Inc.
("Choice"). Mr. Bainum, Jr. is the Chairman of the Board of Choice. In
fiscal 1997, Mr. Bainum, Jr. devoted approximately 75% of his time to
Manor Care and approximately 25% of his time to Choice. The compensation
reflected here is total compensation received for services rendered to
Manor Care and Choice prior to November 1, 1996 and the 75% of Mr. Bainum,
Jr.'s compensation received from Manor Care from November 1, 1996 through
the end of the 1997 fiscal year. Choice has separated its franchising
business and its lodging business through a special dividend to its
shareholders (the "Sunburst Spin-off"). As of the Sunburst Spin-off,
Choice's franchising business is conducted by a separate public company
named Choice Hotels International, Inc. ("Choice Hotels") and Choice's
lodging business is conducted by a separate public company named Sunburst
Hospitality Corporation ("Sunburst"). It is expected that Mr. Bainum, Jr.
will devote 12.5% of his time to Choice Hotels, 12.5% of his time to
Sunburst, 37.5% of his time to ManorCare Health Services and 37.5% of his
time to Manor Care Realty.
(4) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(5) As of the Effective Date, pursuant to an Employee Time Sharing Agreement
by and among Wolfgang von Maack, the Company, In Home Health and Mesquite
Community Hospital, L.P. ("Mesquite"), Mr. von Maack, who will be employed
by ManorCare Health Services, will devote 75% of his professional time to
the affairs of In Home Health and 25% of his professional time to the
affairs of Mesquite. The Employee Time Sharing Agreement provides that In
Home Health and Mesquite will provide ManorCare Health Services with 75%
and 25%, respectively, of Mr. von Maack's annual budgeted expenses and
will be reimbursed or will reimburse ManorCare Health Services in the
event that Mr. von Maack's actual costs are lower than or exceed such
annual budget.
Richard A. Goodman's employment as Chief Financial Officer of ManorCare
Health Services commenced on February 17, 1998. His compensation package
includes an initial base salary of $275,000 per annum and a maximum bonus of
50% of Mr. Goodman's base salary based upon performance of ManorCare Health
Services.
143
<PAGE>
The following tables set forth certain information at May 31, 1997 and for
the fiscal year then ended concerning stock options granted to the Named
Officers. All Common Stock figures and exercise prices have been adjusted to
reflect stock dividends and stock splits effective in prior fiscal years. In
connection with the Distribution, existing Manor Care stock options will be
subject to certain adjustments or to conversion into options to purchase
ManorCare Health Services Common Stock. See "Relationship Between Manor Care
Realty and ManorCare Health Services After the Distribution--Employee Benefits
and other Employment Matters Allocation Agreement."
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATE OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
NUMBER OF GRANTED TO ALL EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME COMPANY GRANTED(1) FISCAL YEAR 1997 PER SHARE DATE 5%(3) 10%(4)
---- ------- ---------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(5).. MNR 60,000 6.3% $25.0505 7/1/06 $ 945,246 $2,395,440
CHI 60,000 (6) $14.5095 7/1/06 547,494 1,387,474
------- ---------- ----------
Total 120,000 $1,492,750 $3,783,904
Donald C. Tomasso(5).... MNR 55,272 3.7%(7) $25.0505 7/1/06 $ 870,760 $2,206,679
CHI 0 -- -- -- --
------- ---------- ----------
Total 55,272 $ 870,760 $2,206,679
James H. Rempe(5)....... MNR 20,430 1.6%(7) $25.0505 7/1/06 $ 321,856 $ 815,647
CHI 5,625 (6) $14.5095 7/1/06 52,327 130,075
------- ---------- ----------
Total 26,055 $ 373,183 $ 945,722
Scott J. Van Hove(5).... MNR 39,480 2.6%(7) $25.0505 7/1/06 $ 621,972 $1,576,199
MNR 25,000(1) 2.6% $27.0000 1/15/07 424,500 1,075,750
CHI 0 -- --
------- ---------- ----------
Total 64,480 $1,046,472 $2,651,949
Wolfgang von Maack(5)... MNR 22,108 1.47%(7) $25.0505 7/1/06 $ 348,285 $ 882,623
CHI 0 -- -- -- -- --
------- ---------- ----------
Total 22,108 $ 348,385 $ 882,623
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) All of the options shown, except for Mr. Van Hove's 25,000 MNR options,
were granted prior to the Choice Spin-off. In connection with the Choice
Spin-off, the existing options were converted, in some cases, into options
to purchase Manor Care Common Stock and options to purchase Choice common
stock. In all cases, the exercise prices were adjusted to maintain the
same financial value to the option holder before and after the Choice
Spin-off. The number of options set forth in the above table present the
number and exercise prices of the options after the Choice Spin-off.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of Manor Care's stock price. Since options are granted at market
price, a zero percent gain in the stock price will result in no realizable
value to the optionees.
(3) A 5% per year appreciation in stock price from $25.0505 per share yields
$40.8046, from $14.5095 per share yields $23.6344, from $13.8933 per share
yields $22.6344 and from $27.00 per share yields $43.98.
(4) A 10% per year appreciation in stock price from $25.0505 per share yields
$64.9745, from $14.5095 per share yields $37.6339, from $13.8933 per share
yields $36.0356 and from $27.00 per share yields $70.03.
(5) The options granted to the officers vest at the rate of 20% per year
commencing on the first through the fifth anniversary of the date of the
stock option grant.
(6) Information is not available for the total number of Choice options
granted during the fiscal year 1997.
(7) This percentage relates to the number of options granted to the officers
prior to the conversion of such options in the Choice Spin-off. The
converted number of options is listed in this table.
144
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT MAY 31, 1997 AT MAY 31, 1997
ACQUIRED VALUE ------------------------- -------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
COMPANY # $ # # EXERCISABLE UNEXERCISABLE
------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. .... MNR 329,791 $2,318,180 174,000 221,000 $3,633,404 $2,749,771
CHI 465,000 3,105,452 239,000 221,000 2,758,324 1,334,863
Donald C. Tomasso....... MNR -- -- 109,138 278,734 1,178,161 3,491,641
CHI -- -- 66,500 0 612,534 --
James H. Rempe.......... MNR 30,587 543,625 22,835 82,881 352,453 1,086,277
CHI -- -- 57,374 28,000 600,600 205,906
Scott J. Van Hove....... MNR -- -- 61,894 212,142 1,159,075 2,415,701
CHI -- -- 45,000 0 457,268 --
Wolfgang von Maack...... MNR -- -- 73,353 102,888 1,578,129 1,497,752
CHI -- -- 71,300 0 840,092 --
</TABLE>
- --------
* References to "MNR" are to Manor Care and "CHI" are to Choice.
(1) The closing price of Manor Care's common stock and for Choice common stock
as reported by the New York Stock Exchange on May 30, 1997, was $28.625
and $15.75, respectively. The value is calculated on the basis of the
difference between the option exercise price and such closing price
multiplied by the number of shares of common stock underlying the option.
RETIREMENT PLANS
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the Supplemental Executive Retirement Plan (the "SERP").
Participants will be selected by the Board or any designated committee and
will be at the level of Senior Vice President or above.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment which produces the highest
average, prior to the first occurring of the early retirement date or the
normal retirement date. The normal retirement age is 65, and participants must
have a minimum of 15 years of service. Participants may retire at age 60 and
may elect to receive reduced benefits commencing prior to age 65, subject to
Board approval. All of the Named Officers who will be participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.
Assuming that the following officers continue to be employed by ManorCare
Health Services until they reach age 65, their credited years of service would
be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. ........................ 23.5 38
Donald C. Tomasso........................... 6 19
Scott J. Van Hove........................... 10 35
</TABLE>
Mr. Rempe has twenty-seven current years of service and had twenty-five years
of service at age sixty-five.
145
<PAGE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
<TABLE>
<CAPTION>
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$300,000 $45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
Prior to the Distribution, it is expected that the existing Manor Care
Retirement Savings and Investment Plan (the "401(k) Plan"), a defined
contribution retirement, savings and investment plan for its employees and the
employees of its participating affiliated companies, will be amended to cover
both Manor Care Realty and ManorCare Health Services. The 401(k) Plan will be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and will include a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over who have worked for
ManorCare Health Services (or Manor Care) for a twelve-month period during
which such employee completed at least 1,000 hours will be eligible to
participate. Subject to certain non-discrimination requirements, each employee
will be able to contribute an amount to the 401(k) Plan on a pre-tax basis up
to 15% of the employee's salary, but not more than the current federal limit
of $9,500. ManorCare Health Services will match contributions made by its
employees subject to certain limitations. The amount of the match will be
equal to a percentage of the amount of salary reduction contribution made on
behalf of a participant during the plan year based upon a formula that
involves the profits of ManorCare Health Services for the year and the number
of years of service of the participant.
Prior to the Distribution, it is expected that the existing Manor Care
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified Savings
Plan") will be amended to cover both Manor Care Realty and ManorCare Health
Services. Certain select highly compensated members of management of ManorCare
Health Services will be eligible to participate in the Plan. The Nonqualified
Savings Plan will mirror the provisions of the 401(k) Plan, to the extent
feasible, and will be structured so as to provide the participants with a pre-
tax savings vehicle to the extent that pre-tax savings are limited under the
401(k) Plan as a result of various governmental regulations, such as non-
discrimination testing.
ManorCare Health Services match under the 401(k) Plan and the Nonqualified
Savings Plan will be limited to a maximum aggregate of 6% of the annual salary
of a participant. Likewise, participant contributions under the two plans will
not exceed the aggregate of 15% of the annual salary of a participant.
OPTION AND STOCK PURCHASE PLANS
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Under the Stock Purchase Plan, all employees who have
completed one year of service are eligible to participate. Eligible employees
may purchase stock of ManorCare Health Services in an amount of no less than
2% nor more than 10% of compensation (as defined in the Stock Purchase Plan),
subject to an overall maximum purchase per employee per calendar year of
$25,000. At the end of each quarterly offering period, ManorCare Health
Services will contribute cash equal to 10% of the purchase price of the common
stock so purchased. ManorCare Health Services will pay the administrative
costs for the purchase of ManorCare Health Services common stock.
146
<PAGE>
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services 1997 Long-Term Incentive Plan (the
"Incentive Plan"), pursuant to which key employees of the Company and its
subsidiaries are eligible to be granted awards under the Incentive Plan. The
types of awards that may be granted under the Incentive Plan are restricted
shares, incentive stock options, nonqualified stock options, stock
appreciation rights and performance shares. A total of up to 7.1 million
shares of common stock will be reserved for issuance pursuant to the Incentive
Plan.
EMPLOYMENT AGREEMENTS
ManorCare Health Services expects to enter into an employment agreement,
effective upon the Effective Date, with Stewart Bainum, Jr. (the "Employment
Agreement"), providing for Mr. Bainum, Jr.'s employment as Chairman of the
Board of ManorCare Health Services. The Employment Agreement will have a term
of three years and either ManorCare Health Services or Mr. Bainum may
terminate the Employment Agreement upon 30 days' prior written notice on the
first and second anniversary dates of the Employment Agreement. The Employment
Agreement will provide that Mr. Bainum, Jr. will devote 12.5% of his
professional time to the affairs of Sunburst, 12.5% of his professional time
to the affairs of Choice Hotels, 37.5% of his professional time to the affairs
of Manor Care Realty and the remaining 37.5% of his professional time to the
affairs of ManorCare Health Services. The Employment Agreement provides for a
base salary of approximately $258,000 per annum for services to ManorCare
Health Services and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of ManorCare Health Services.
ManorCare Health Services has entered into an employment agreement, dated
July 14, 1997, with Scott Jacob Van Hove (the "Van Hove Employment
Agreement"), providing for Mr. Van Hove's employment as Executive Vice
President, Operations of ManorCare Health Services. The Van Hove Employment
Agreement will expire on July 14, 2000, after which the parties may extend the
term if they mutually desire to do so. The Van Hove Employment Agreement
provides for a base salary of approximately $263,000 per annum and a maximum
bonus of 50% of Mr. Van Hove's base compensation based upon the performance of
ManorCare Health Services.
147
<PAGE>
THE BOARD OF DIRECTORS OF MANORCARE HEALTH SERVICES
DIRECTORS OF MANORCARE HEALTH SERVICES
ManorCare Health Services' Board of Directors will be classified into three
classes, designated Class I, Class II and Class III, each class to be as
nearly equal in number of directors as possible. The term of the initial Class
I directors will terminate on the date of the 1998 annual meeting of ManorCare
Health Services' stockholders; the term of the initial Class II directors will
terminate on the date of the 1999 annual meeting of ManorCare Health Services'
stockholders; and the term of the initial Class III directors will terminate
on the date of the 2000 annual meeting of ManorCare Health Services'
stockholders. At each annual meeting of ManorCare Health Services'
stockholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term. Newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
retirement, disqualification, removal or other cause will be filled solely by
the affirmative vote of a majority of the remaining directors then in office.
Increases or decreases in the number of directors will be apportioned among
the classes as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class will
hold office for a term that will coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director.
The name, age, proposed class of directorship upon consummation of the
Distribution and business background (other than executive officers who are
directors) of each of the persons who are expected to become on the Effective
Date the directors of ManorCare Health Services are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. ................ 51 Chairman of the Board; Class I Director
Regina E. Herzlinger................ 53 Class II Director
William H. Longfield................ 59 Class III Director
Frederic V. Malek................... 60 Class II Director
Jerry E. Robertson, Ph.D. .......... 64 Class III Director
Kennett L. Simmons.................. 55 Class III Director
Donald C. Tomasso................... 52 Class I Director
</TABLE>
Stewart Bainum, Jr. Mr. Bainum, Jr. will resign as Chief Executive Officer
of Manor Care on the Effective Date. Following the Distribution, Mr. Bainum,
Jr. will also act as Chairman of the Board of Manor Care Realty. Mr. Bainum,
Jr. has also acted as Chairman of the Board of Choice Hotels since October,
1997, and of Sunburst (formerly named Choice Hotels International, Inc.) since
November 1996. It is expected that Mr. Bainum, Jr. will devote 12.5% of his
time to Choice Hotels, 12.5% of his time to Sunburst, 37.5% of his time to
ManorCare Health Services and 37.5% of his time to Manor Care Realty. Chairman
of the Board of Manor Care and Old ManorCare Health Services since March 1987;
Chief Executive Officer of Manor Care since March 1987 and President since
June 1989; Chairman of the Board of Vitalink since February, 1997; Vice
Chairman of the Board of Vitalink from February 1995 to February 1997; Vice
Chairman of the Board of Manor Care and subsidiaries from June 1982 to March
1987; Director of Manor Care since August 1981, of Vitalink since September
1991, of Old ManorCare Health Services since 1976 and of Choice and its
predecessors since 1977; Chief Executive Officer of Old ManorCare Health
Services since June 1989 and President from May 1990 to May 1991; Chairman of
the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991; Chairman of the Board of Choice from March 1987 to June 1990.
Regina E. Herzlinger. Nancy R. McPherson Professor of Business
Administration, Harvard Business School, since 1971. Director: C.R. Bard,
Inc., Deere & Company, Cardinal Health Care, Inc., Schering-Plough Corporation
and Total Renal Care Inc.
148
<PAGE>
William H. Longfield. Chairman and Chief Executive Officer of C.R. Bard,
Inc. (medical devices) since September 1995; President and Chief Executive
Officer from June 1994 to September 1995; President and Chief Operating
Officer of C.R. Bard, Inc. from September 1991 to June 1994; Executive Vice
President and Chief Operating Officer of C.R. Bard, Inc. from February 1989 to
September 1991. Director: C.R. Bard, Inc., Horizon Mental Health Management,
Inc., United Dental Care, Inc., The West Company and Atlantic Health Systems.
Frederic V. Malek. Chairman, Thayer Capital Partners since March 1993; Co-
chairman of CB Commercial Real Estate Group, Inc. from April 1989 to October
1996; Campaign Manager, Bush-Quayle '92 Campaign from January 1992 to December
1992; Vice Chairman of NWA, Inc. (airlines) from July 1990 to December 1991.
Director: American Management Systems, Inc., Automatic Data Processing Corp.,
CB Commercial Real Estate Group, Inc., Choice, FPL Group, Inc., Northwest
Airlines, Inc. and various Paine Webber mutual funds.
Jerry E. Robertson, Ph.D. Retired; Executive Vice President of 3M Life
Sciences Sector and Corporate Services from November 1984 to March 1994.
Director: Allianz Life Insurance Company of North America, Cardinal Inc.,
Choice Hotels International, Inc., Coherent, Inc., Haemonetics Corporation,
Medwave, Inc., Project Hope and Stris Corporation.
Kennett L. Simmons. Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to E.M. Warburg,
Pincus & Co. from 1991 to 1994; Chairman and Chief Executive Officer of United
Healthcare Corporation from October 1987 to February 1991. Director: United
Healthcare Corporation and Virginia Health Care Foundation.
Donald C. Tomasso. Executive Vice President of Manor Care and President of
Old ManorCare Health Services since September 1996; President, Long-Term Care
Division of Old ManorCare Health Services from February 1995 to August 1996
and a Director of Old ManorCare Health Services since June 1991; President and
Chief Operating Officer of Old ManorCare Health Services from May 1991 to
February 1995; Chairman and Chief Executive Officer of Vitalink from February
1995 to February 1997 and Vice Chairman from September 1991 to February 1995;
previously employed by Marriott Corporation for more than five years,
including as Executive Vice President/General Manager of the Roy Rogers
Division; Director of In Home Health since October 1995.
Prior to the Effective Date, the directors of ManorCare Health Services are
Stewart Bainum, Jr., James H. Rempe, Senior Vice President, General Counsel
and Secretary of Manor Care, and Leigh C. Comas, Vice President, Finance and
Treasurer of Manor Care, and the executive officers of ManorCare Health
Services are Stewart Bainum, Jr., Donald C. Tomasso, James H. Rempe, Leigh C.
Comas and Margarita A. Schoendorfer. Following the Distribution, Stewart
Bainum, Jr. will be Chairman of the Board of the Company and Chairman of the
Board of Manor Care Realty. Mr. Bainum, Jr. is also the Chairman of the Board
of Choice. It is expected that he will devote 12.5% of his time to Choice
Hotels, 12.5% of his time to Sunburst, 37.5% of his time to the Company and
37.5% of his time to Manor Care Realty. After the Distribution, Kennett L.
Simmons will also be a director of Manor Care Realty.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Distribution, the Board of Directors is expected to
consist of eight members. Following the Distribution Date, additional non-
employee directors may be elected to the Board of Directors. The additional
non-employee directors have not yet been determined. It is expected that the
Board of Directors will hold five meetings during the fiscal year and that the
standing committees of the Board will include the Audit Committee, the Finance
Committee, the Compensation/Key Executive Stock Option Plan Committee and the
Nominating/Governance Committee. The members of the committees have not yet
been determined.
The Compensation/Key Executive Stock Option Plan Committee will administer
the Company's stock option plans and grant options thereunder, will review
compensation of officers and key management employees, will recommend
development programs for employees such as training, bonus and incentive
plans, pensions and retirement, and will review other employee fringe benefit
programs.
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The Compensation/Key Executive Stock Option Committee No. 2, will be formed
to comply with certain provisions of the Omnibus Budget Reconciliation Act of
1993 and Rule 16b-3 under the Exchange Act. The Committee will administer the
Company's stock option plans, grant stock options thereunder and review the
compensation of the CEO and the four most highly compensated officers (and
others potentially in that classification) for each fiscal year.
The Quality Assurance Committee will review the operations of ManorCare
Health Services and facilities to determine if acceptance standards of quality
are being maintained.
The Audit Committee will review the scope and results of the annual audit,
will review and approve the services and related fees of ManorCare Health
Services' independent public accountants, will review ManorCare Health
Services' internal accounting controls and will review ManorCare Health
Services' Internal Audit Department and its activities.
The Nominating/Governance Committee will recommend to the Board of Directors
the members to serve on the Board of Directors during the ensuing year and
will deal with corporate governance issues. The Committee will not consider
nominees recommended by stockholders.
NON-EMPLOYEE DIRECTOR PLAN
Prior to the Distribution, it is expected that ManorCare Health Services
will adopt the ManorCare Health Services Inc. Non-Employee Director Stock
Option and Deferred Compensation Stock Purchase Plan (the "Non-Employee
Director Plan"). Part A of the Non-Employee Director Plan provides that
eligible non-employee directors will be granted options to purchase 5,000
shares of Common Stock on their date of election and will be granted options
to purchase 1,000 shares as of each annual stockholders' meeting of ManorCare
Health Services; provided, however that current directors of Manor Care will
not receive 5,000 shares upon election to the ManorCare Health Services Board.
Part B of the Non-Employee Director Plan provides that eligible non-employee
directors may elect, prior to May 31 of each year, to defer a minimum of 25%
of committee fees earned during the ensuing fiscal year. The fees which are so
deferred will be used to purchase Common Stock on the open market within 15
days after December 1, February 28, and May 31 of such fiscal year. Pending
such purchases, the funds will be credited to an Interest Deferred Account,
which will be interest bearing. Stock which is so purchased will be deposited
in a Stock Deferred Account pending distribution in accordance with the Non-
Employee Director Plan.
Directors who will be employees of the Company will receive no separate
remuneration for their services as directors. Prior to the Distribution, it is
expected that ManorCare Health Services will adopt the ManorCare Health
Services, Inc. Non-Employee Director Stock Compensation Plan, pursuant to
which eligible non-employee directors will receive annually, in lieu of cash,
restricted stock of ManorCare Health Services, the fair market value of which
at the time of grant will be equal to $30,000, which will represent the Board
retainer and meeting fees. In addition, all non-employee directors will
receive $1,610 per diem for Committee meetings attending, except where the
Committee meeting is on the same day as a Board meeting, and will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANORCARE HEALTH SERVICES
Based on information which has been obtained from Manor Care's records and a
review of statements filed with the Securities and Exchange Commission (the
"Commission") pursuant to Section 13(g) of the Exchange Act with respect to
Manor Care common stock and received by Manor Care prior to August 5, 1997, no
person known to Manor Care will be the beneficial owner of more than 5% of the
Common Stock of ManorCare Health Services upon completion of the Distribution
other than as set forth below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON PERCENT OF CLASS
STOCK AS OF THE AS OF THE
NAME AND ADDRESS EFFECTIVE DATE EFFECTIVE DATE(2)
---------------- ---------------- -----------------
<S> <C> <C>
Stewart Bainum(1)(3)...................... 10,156,643 15.22%
Stewart Bainum, Jr.(1)(4)................. 15,269,851 22.86%
Barbara Bainum(1)(5)...................... 5,485,815 8.22%
Bruce Bainum(1)(6)........................ 5,482,302 8.21%
Ronald Baron(7)........................... 7,976,459 11.96%
</TABLE>
- --------
(1) Stewart Bainum, Jr., Bruce Bainum and Barbara Bainum are children of
Stewart Bainum. The total beneficial ownership of the Bainum family (set
forth in the table above in the names of Stewart Bainum, Stewart Bainum,
Jr., Barbara Bainum and Bruce Bainum) is 19,978,307 shares (which excludes
overlapping interests). Such collective interest represents 29.95% of the
outstanding Common Stock of Manor Care.
(2) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(3) Includes 3,765,478 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum; his
joint interest in 895,466 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,082,857 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his wife
as a limited partner and as such has the right to acquire at any time a
number of shares equal in value to the liquidation preference of their
limited partnership interest; 3,567,869 shares held directly by Realty
Investment Company, Inc. ("Realty Investment"), a real estate investment
and management company in which Mr. Bainum and his wife have shared voting
authority; 40,305 shares held by the Commonweal Foundation of which Mr.
Bainum is Chairman of the Board of Directors and has shared voting
authority; and 500 shares held by Mid-Pines Associates, L.P. ("Mid-Pines")
in which Mr. Bainum has shared voting authority. Also includes 792 shares
of restricted stock granted pursuant to the Manor Care, Inc. Non-Employee
Director Stock Compensation Plan. Also includes 798,711 shares held by the
Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife. Also includes 3,665 shares which Mr. Bainum has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after August 5, 1997. Does not
include shares owned beneficially by Stewart Bainum, Jr, Mr. Bainum's son,
whose interests are stated in the above table, except shares owned by
Bainum Associates, MC Investments, Realty Investment and Mid-Pines in
which Mr. Bainum has a beneficial interest.
(4) Includes 5,417,761 shares owned by Bainum Associates and 4,415,250 shares
owned by MC Investments, in both of which Mr. Bainum, Jr. is managing
general partner with the sole right to dispose of the shares. Authority to
vote such shares is held by the voting general partner, Mr. B. Houston
McCeney. Also includes 1,779,628 shares owned by Mid-Pines, in which Mr.
Bainum, Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment in which Mr. Bainum, Jr. has
shared voting authority. Also includes 88,000 shares which Mr. Bainum, Jr.
has the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the Manor Care, Inc. Retirement Savings
and Investment Plan (the "401(k) Plan") and the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified
Savings Plan") (based upon a report of each plan's trustee for June 1997).
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(5) Includes 98,013 shares held directly by Ms. Bainum; 3,567,869 shares held
by Realty Investment, and 1,779,628 shares held by Mid-Pines, in both of
which Ms. Bainum has shared voting authority. Also includes 40,305 shares
held by the Commonweal Foundation in which Ms. Bainum has shared voting
authority.
(6) Includes 94,500 shares held directly by Mr. Bainum; 3,567,869 shares held
by Realty Investment, 1,779,628 shares held by Mid-Pines and 40,305 shares
held by the Commonweal Foundation, in all of which Mr. Bainum has shared
voting authority.
(7) Includes 163,620 shares owned directly by Mr. Baron. Also includes 705,000
shares owned by Baron Capital Partners, L.P. and Baron Investment
Partners, L.P., investment partnerships of which Mr. Baron is General
Partner; 5,950,000 shares owned by two investment companies registered
under the Investment Company Act of 1940, Baron Asset Fund and Baron
Growth & Income Fund, which are advised by BAMCO, Inc., a registered
investment adviser which is controlled by Mr. Baron; 1,157,839 shares held
for the accounts of investment advisory clients of Baron Capital
Management, Inc., a registered investment adviser controlled by Mr. Baron.
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BENEFICIAL OWNERSHIP OF MANAGEMENT OF MANORCARE HEALTH SERVICES
The following table sets forth information with respect to the shares of
Common Stock which are expected to be beneficially owned by each director and
Named Executive Officer of ManorCare Health Services and by all directors and
executive officers of ManorCare Health Services as a group as of the Effective
Date based upon their respective holdings of Manor Care common stock as of
August 5, 1997. See "Management of ManorCare Health Services--Compensation of
Executive Officers."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENTAGE(1)
---- -------------------- -------------
<S> <C> <C>
Stewart Bainum, Jr.(2).................. 15,269,851 22.86%
Regina E. Herzlinger(3)................. 7,731 *
William H. Longfield(4)................. 9,207 *
Frederic V. Malek(5).................... 5,457 *
Jerry E. Robertson, Ph.D.(6)............ 19,125 *
Kennett L. Simmons...................... 792 *
Donald C. Tomasso(7).................... 143,424 *
James H. Rempe(8)....................... 61,162 *
Scott J. Van Hove(9).................... 83,181 *
All directors and executive officers of
the Company as a group
(12 persons)(10)....................... 15,599,930 22.86%
</TABLE>
- --------
* Less than 1%.
(1) Percentages are based on 66,709,912 shares outstanding on August 5, 1997
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(2) Includes 5,417,761 shares owned by Bainum Associates Limited Partnership
and 4,415,250 shares owned by MC Investments Limited Partnership, limited
partnerships in both of which Mr. Bainum, Jr. is managing general partner
with the sole right to dispose of the shares. Authority to vote such
shares is held by the voting general partner, Mr. B. Houston McCeney.
Also includes 1,779,628 shares owned by Mid-Pines, in which Mr. Bainum,
Jr. is a managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment Company, Inc., a real estate
investment and management company in which Mr. Bainum, Jr. has shared
voting authority. Also includes 88,000 shares which Mr. Bainum, Jr. has
the right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997, and 350 shares and 993 shares, respectively, which Mr. Bainum, Jr.
has the right to receive upon termination of his employment with the
Company pursuant to the terms of the ManorCare Health Services Retirement
Savings and Investment Plan (the "401(k) Plan") and the ManorCare Health
Services Nonqualified Retirement Savings and Investment Plan (the
"Nonqualified Savings Plan").
(3) Includes 3,159 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(4) Includes 5,791 shares which Mr. Longfield has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(5) Includes 3,665 shares which Mr. Malek has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997.
(6) Includes 13,500 shares held by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority; also includes 3,665 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are presently
exercisable or which become exercisable within 60 days after August 5,
1997.
(7) Includes 40 shares held by adult children of Mr. Tomasso who share the
same household. Beneficial ownership of such shares is disclaimed. Also
includes 135,984 shares which Mr. Tomasso has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 326 shares and 574
shares, respectively, which Mr. Tomasso has the right
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<PAGE>
to receive upon termination of his employment with ManorCare Health
Services pursuant to the terms of the 401(k) Plan and the Nonqualified
Savings Plan.
(8) Includes 3,552 shares which Mr. Rempe has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 780 shares and 424
shares, respectively, which Mr. Rempe has the right to receive upon
termination of his employment with ManorCare Health Services pursuant to
the terms of the 401(k) Plan and Nonqualified Savings Plan.
(9) Includes 81,823 shares which Mr. Van Hove has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after August 5, 1997, and 337 shares and 376
shares, respectively, which Mr. Van Hove has the right to receive upon
termination of his employment with ManorCare Health Services pursuant to
the terms of the 401(k) Plan and Nonqualified Savings Plan.
(10) Includes a total of 410,173 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60
days after August 5, 1997, and a total of 2,592 shares and 3,220 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with ManorCare Health Services
pursuant to the terms of the 401(k) Plan and the Nonqualified Savings
Plan.
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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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<PAGE>
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. Manor Care Real Estate and the
Guarantors are the sole obligors on the Notes and holders of the Notes may
rely only upon Manor Care Real Estate and the Guarantors for repayment of the
Notes. ManorCare Health Services and its subsidiaries will not be guarantors
of the notes and holders of the Notes will not have any claim with respect to
payment on the Notes against ManorCare Health Services or its 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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<PAGE>
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 Real Estate 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 Real Estate 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.
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"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 Real Estate Note, in connection with the
Distribution.
"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.
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"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 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
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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 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 Guarantor to 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.
"Real Estate 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 Real Estate Note is issued, as such
Real Estate 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.
"Unutilized Net Cash Proceeds" has the meaning set forth in the third
paragraph under the "Disposition of Proceeds of Asset Sales" covenant.
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"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 OF MANOR CARE REALTY
THE REAL ESTATE 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 Real Estate Note of Manor Care Real Estate in an
aggregate amount of up to $250 million. See "Description of the Transactions--
The Real Estate 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 scheduled to be 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 promptly upon learning of such anticipated 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.
Initially, the LIBOR margin and ABR margin applicable to loans under the Term
Facility will be 2% and 1%, 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 Real Estate 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 non-
ordinary course asset sales 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; (iii) mortgages
on certain real property owned by Manor Care Real Estate; and (iv) security
interests in the majority of the assets of Manor Care Realty and 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; (viii) material default by Manor
Care Realty or its subsidiaries under material agreements with ManorCare
Health Services and (ix) material default by lessees or other counterparties
under Lease Agreements or certain other material agreements. In the event that
the Commitment Letter is executed, Chase will commit to purchase a portion of
such facilities and CSI will use its best efforts to arrange the balance of
such facilities with other lenders.
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF MANORCARE HEALTH SERVICES
THE MCHS CREDIT FACILITY
ManorCare Health Services is negotiating a commitment letter (the
"Commitment Letter") with Chase and CSI pursuant to which Chase will agree to
act as administrative agent for a syndicate of financial institutions for the
MCHS Credit Facility described below and CSI will agree to act as arranger for
such credit facilities. The following summary of the anticipated provisions of
the Commitment Letter does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the Commitment Letter.
It is anticipated that the Commitment Letter will provide for a five-year
$100,000,000 revolving credit facility, a portion of which may be used for the
issuance of letters of credit.
It is anticipated that the loans under the MCHS Credit Facility (the
"Revolving Loans") will bear interest, at ManorCare Health Services' option,
at LIBOR or Chase's adjusted base rate, in each case plus a variable margin
which will be adjusted depending on ManorCare Health Services' senior,
unsecured long-term debt rating by Standard & Poor's Corporation and Moody's
Investor's Service. It is anticipated that ManorCare Health Services will pay
a variable quarterly facility fee on the full amount of the MCHS Credit
Facility, irrespective of usage.
ManorCare Health Services expects that the MCHS Credit Facility will be used
by ManorCare Health Services for general corporate purposes, including working
capital, capital expenditures and acquisitions.
ManorCare Health Services expects that the Credit Agreement will contain
covenants customary for transactions of this type, including, without
limitation, restrictions on indebtedness; liens and sale-leaseback
transactions; investments, loans and advances; mergers and consolidations;
asset sales; transactions with affiliates; business of ManorCare Health
Services and subsidiaries; and agreements restricting dividends, intercompany
loans and advances by subsidiaries. The Credit Agreement will also contain
financial covenants including ratio of consolidated EBITDA to consolidated
interest expense and ratio of total debt to consolidated EBITDA.
It is anticipated that events of default under the MCHS Credit Facility will
include, without limitation, and subject to certain cure periods and
exceptions: (i) the nonpayment of principal, interest, fees and other amounts
payable when due; (ii) the failure to observe or perform any covenant or
undertaking contained in the documentation for the MCHS Credit Facility; (iii)
any representation or warranty shall prove to have been incorrect in any
material respect when made; (iv) a change of control of ManorCare Health
Services; (v) the existence of defaults with respect to any material
indebtedness of ManorCare Health Services; (vi) the occurrence of certain
material adverse events with respect to ERISA plans; (vii) the imposition of
certain judgment defaults on ManorCare Health Services or the commencement of
a voluntary or involuntary bankruptcy of ManorCare Health Services or any of
its subsidiaries; and (viii) material default by ManorCare Health Services
under material agreements with Manor Care Realty. In the event that the
Commitment Letter is executed, Chase will commit to purchase a portion of such
facilities and CSI will use its best efforts to arrange the balance of such
facilities with other lenders.
NEW MCHS SENIOR NOTES
In connection with the Distribution, ManorCare Health Services plans to
offer $1,000 principal amount of its 7 1/2% Senior Notes due June 15, 2006
(the "New MCHS Senior Notes") in exchange for each $1,000 principal amount of
7 1/2% Senior Notes due June 15, 2006 of Manor Care properly tendered (the
"Old Senior Notes"). Concurrently with the Exchange Offer, Manor Care plans to
solicit (the "Solicitation") consents ("Consents") to certain amendments (the
"Proposed Amendments") to the indenture governing the Old Senior Notes (the
"Old Indenture"). The Proposed Amendments would, among other things, eliminate
the covenants in the Old Indenture that restrict (i) the creation, incurrence
or assumption of liens, (ii) sale leaseback transactions
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and (iii) transactions with affiliates. If Consents are received from the
holders of at least a majority in principal amount of the Old Senior Notes
(the "Requisite Consents"), the Old Indenture will be amended in accordance
with the Proposed Amendments. As a result of the Exchange Offer, ManorCare
Health Services, not Manor Care Realty, will be the obligor on the New MCHS
Senior Notes; and Manor Care Realty, not ManorCare Health Services, will
remain the obligor on the Old Senior Notes. Consummation of the Exchange Offer
is conditioned upon, among other things, acceptance of the Exchange Offer by
holders of at least a majority in principal amount of the Old Senior Notes
(the "Minimum Tender Condition") and consummation of the Distribution. Manor
Care may in its reasonable discretion waive any such conditions and accept for
exchange any Old Senior Notes properly tendered. Holders of Old Senior Notes
who tender into the Exchange Offer will be required, as a condition to valid
tender, to have given their Consent to the Proposed Amendments. The Proposed
Amendments will become operative only upon consummation of the Exchange Offer.
If the Exchange Offer is consummated, then, unless the Requisite Consents have
not been obtained, the Proposed Amendments will become effective and each
nonexchanging holder of the New MCHS Senior Notes will be bound by such
amendment even though such holder did not consent to the Proposed Amendment.
The principal amount of the Real Estate Note may be decreased to the extent
that Old Senior Notes remain outstanding upon consummation of the Exchange
Offer.
The New MCHS Senior Notes will be senior unsecured obligations of ManorCare
Health Services and will rank pari passu in right of payment with all senior
debt of ManorCare Health Services. After giving pro forma effect to the
Distribution and related transactions as if they occurred on November 30,
1997, ManorCare Health Services would have had approximately $45.5 million of
secured indebtedness, principally mortgage bond indebtedness. The New MCHS
Senior Notes will be issued pursuant to an indenture between ManorCare Health
Services and the Wilmington Trust Company, as trustee.
The aggregate principal amount of the New MCHS Senior Notes will be limited
to $150 million. The New MCHS Senior Notes will mature on June 15, 2006 and
will bear interest at the rate of 7 1/2% per annum.
The New MCHS Senior Notes will be redeemable, at the option of ManorCare
Health Services, in whole at any time or in part from time to time at a
redemption price equal to the greater of (i) 100% of their principal amount
and (ii) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted, on a semiannual basis, at the
Treasury Rate (as defined in the indenture), plus 15 basis points, plus
accrued interest thereon to the date of redemption.
The New MCHS Senior Notes Indenture contains certain covenants which impose
certain limitations and restrictions on the ability of ManorCare Health
Services to (i) create, incur or assume liens, (ii) enter into sale leaseback
transactions and (iii) enter into affiliated transactions.
The Exchange Offer will expire at 12:00 midnight, New York City time, on
, 1998 or at any later time and date to which the Exchange Offer may be
extended by Manor Care.
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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 Sublease 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."
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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.
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.
189
<PAGE>
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.
190
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MANOR CARE, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of May 31, 1997 and 1996 and November 30,
1997 (unaudited)......................................................... F-3
Consolidated Statements of Income for the fiscal years ended May 31, 1997,
1996 and 1995 and the
six months ended November 30, 1997 and 1996 (unaudited).................. F-4
Consolidated Statements of Cash Flows for the fiscal years ended May 31,
1997, 1996 and 1995
and the six months ended November 30, 1997 and 1996 (unaudited).......... F-5
Consolidated Statements of Shareholders' Equity as of May 31, 1997, 1996,
1995 and 1994 and
November 30, 1997 (unaudited)............................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-25
Balance Sheets as of May 31, 1997 and 1996 and November 30, 1997 (unau-
dited)................................................................... F-26
Statements of Income for the fiscal years ended May 31, 1997, 1996 and
1995 and the
six months ended November 30, 1997 and 1996 (unaudited).................. F-27
Statements of Cash Flows for the fiscal years ended May 31, 1997, 1996 and
1995
and the six months ended November 30, 1997 and 1996 (unaudited).......... F-28
Statements of Shareholder's Equity as of May 31, 1997, 1996, 1995 and 1994
and
November 30, 1997 (unaudited)............................................ F-29
Notes to Financial Statements............................................. F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF MANOR CARE, INC.:
We have audited the accompanying consolidated balance sheets of Manor Care,
Inc. (a Delaware Corporation) and subsidiaries as of May 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended May 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Manor Care, Inc. and
subsidiaries as of May 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the index in Item 16,
Exhibit 99.1 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated
financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
June 27, 1997
(except for the Distribution as discussed in the footnotes
entitled "Principles of Consolidation" and "Transactions between
Manor Care Realty and ManorCare Health Services" which is dated
September 14, 1997)
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
MAY 31, 1997 MAY 31, 1996 1997
------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ 32,882 $ 62,533 $ 53,032
Receivables (net of allowances for
doubtful accounts of $41,493, $24,311
and $40,970)......................... 215,191 107,267 256,162
Inventories........................... 37,724 18,734 39,257
Income taxes.......................... 41,856 40,420 54,812
Other................................. 9,817 6,107 28,688
---------- ---------- ----------
Total current assets................ 337,470 235,061 431,951
---------- ---------- ----------
Property and equipment, at cost, net of
accumulated depreciation............... 1,027,571 918,207 1,076,521
---------- ---------- ----------
Goodwill................................ 356,460 54,646 371,317
---------- ---------- ----------
Advances to discontinued lodging
segment................................ 115,723 225,723 --
---------- ---------- ----------
Net investment in discontinued lodging
segment................................ -- 159,537 --
---------- ---------- ----------
Other assets............................ 142,480 88,666 115,475
---------- ---------- ----------
Total assets........................ $1,979,704 $1,681,840 $1,995,264
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt..... $ 14,845 $ 23,984 $ 8,728
Accounts payable...................... 82,457 85,804 79,314
Accrued expenses...................... 130,519 113,426 125,882
Income taxes payable.................. -- 8,614 13,712
---------- ---------- ----------
Total current liabilities........... 227,821 231,828 227,636
---------- ---------- ----------
Mortgages and other long-term debt...... 596,473 490,575 559,063
---------- ---------- ----------
Deferred income taxes ($202,937,
$151,410 and $213,752) and other....... 279,014 218,256 295,243
---------- ---------- ----------
Minority interest....................... 185,965 33,412 184,299
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.10 par, 160.0 million
shares authorized; 66.8 million, 65.8
million and 67.0 million shares
issued .............................. 6,682 6,581 6,710
Contributed capital................... 194,640 174,364 198,605
Retained earnings..................... 538,630 571,925 575,020
Cumulative translation adjustment..... -- (1,362) --
Treasury stock, 3.2 million, 3.0
million and 3.2 million shares, at
cost................................. (49,521) (43,739) (51,312)
---------- ---------- ----------
Total shareholders' equity.......... 690,431 707,769 729,023
---------- ---------- ----------
$1,979,704 $1,681,840 $1,995,264
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31 NOVEMBER 30, 1997
------------------------------------ ------------------
1997 1996 1995 1997 1996
---------- ---------- ---------- -------- --------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $1,527,247 $1,248,197 $1,019,458 $885,623 $688,064
---------- ---------- ---------- -------- --------
Expenses:
Operating expenses.... 1,202,836 963,081 769,998 723,244 541,482
Depreciation and
amortization......... 80,378 68,086 54,374 47,818 36,877
General corporate and
other................ 68,563 72,322 63,197 28,208 31,873
Provisions for asset
impairment and
restructuring........ -- 26,300 -- -- --
---------- ---------- ---------- -------- --------
Total expenses........ 1,351,777 1,129,789 887,569 799,270 610,232
---------- ---------- ---------- -------- --------
Income from continuing
operations before other
income and (expenses)
and income taxes....... 175,470 118,408 131,889 86,353 77,832
---------- ---------- ---------- -------- --------
Other income and
(expenses):
Interest income from
advances to
discontinued lodging
segment.............. 21,221 19,673 15,492 4,994 10,157
Gain on issuance of
Vitalink stock....... 50,271 -- -- -- --
Interest income and
other................ 8,683 5,416 7,348 4,690 4,633
Minority interest
expense.............. (4,001) (1,688) (2,129) 7,294 246
Interest expense...... (41,831) (30,338) (22,769) (22,073) (19,168)
---------- ---------- ---------- -------- --------
Total other income and
(expenses), net...... 34,343 (6,937) (2,058) (5,095) (4,132)
---------- ---------- ---------- -------- --------
Income from continuing
operations before
income taxes........... 209,813 111,471 129,831 81,258 73,700
Income taxes............ 84,700 46,000 52,156 35,692 29,400
---------- ---------- ---------- -------- --------
Income from continuing
operations............. 125,113 65,471 77,675 45,566 44,300
Discontinued lodging
operations
Income from
discontinued lodging
operations (net of
income taxes of
$8,734, $14,966,
$13,144, $0, and
$8,734
respectively)........ 11,829 20,436 16,811 -- 11,829
Extraordinary item, net
of taxes............... -- -- -- (3,216) --
Cumulative change in
accounting principle,
net of taxes .......... -- -- -- (3,173) --
---------- ---------- ---------- -------- --------
Net income.............. $ 136,942 $ 85,907 $ 94,486 $ 39,177 $ 56,129
========== ========== ========== ======== ========
Weighted average share
of common stock........ 63,257 62,628 62,480 63,748 63,040
---------- ---------- ---------- -------- --------
Income per share of
common stock
Income from continuing
operations........... $ 1.98 $ 1.04 $ 1.24 $ 0.72 $ 0.70
Income from
discontinued lodging
operations........... 0.19 0.33 0.27 -- 0.19
Extraordinary item.... -- -- -- (0.05) --
Cumulative change in
accounting
principle............ -- -- -- (0.05) --
---------- ---------- ---------- -------- --------
Net income per share of
common stock........... $ 2.16(a) $ 1.37 $ 1.51 $ 0.62 $ 0.89
========== ========== ========== ======== ========
</TABLE>
- --------
(a) Fiscal year 1997 does not add due to rounding.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
------------------------------- ------------------
1997 1996 1995 1997 1996
--------- --------- --------- -------- --------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.............. $ 136,942 $ 85,907 $ 94,486 $ 39,177 $ 56,129
Reconciliation of net
income to net cash pro-
vided by operating ac-
tivities:
Gain on issuance of
Vitalink stock......... (50,271) -- -- -- --
Income from discontinued
lodging operations..... (11,829) (20,436) (16,811) -- (11,829)
Depreciation and amorti-
zation................. 80,378 68,086 54,374 47,818 36,877
Cumulative change in ac-
counting principle..... -- -- -- 5,288 --
Adjustments to In Home
Health Medicare re-
serves................. -- -- -- 15,451 --
Provisions for asset im-
pairment and restruc-
turing................. -- 26,300 -- -- --
Amortization of debt
discount............... 513 455 499 115 397
Provisions for bad
debts.................. 20,341 16,190 12,587 19,311 7,987
Increase (decrease) in
deferred taxes......... 48,200 (4,314) 1,579 3,794 5,014
Gain on sale of
healthcare facilities.. (7,322) -- -- (2,057) (7,321)
Minority interest....... 4,001 1,668 2,129 (7,104) 246
Changes in assets and
liabilities (excluding
sold facilities and ac-
quisitions):
Change in receivables... (87,205) (39,551) (20,128) (53,694) (26,109)
Change in inventories
and other current as-
sets................... (6,528) (1,569) (9,115) (19,579) (20,918)
Change in current lia-
bilities............... (27,812) 48,366 15,839 (8,993) (8,995)
Change in income taxes
payable................ (6,169) 12,879 (12,681) 7,988 8,863
Change in other liabili-
ties................... (13,088) 5,306 (1,998) 3,852 (11,456)
--------- --------- --------- -------- --------
Net cash provided by con-
tinuing operations...... 80,151 199,307 120,760 51,367 28,925
Net cash provided by dis-
continued lodging opera-
tions................... 40,599 52,682 48,604 -- 40,599
--------- --------- --------- -------- --------
Net cash provided by op-
erating activities...... 120,750 251,989 169,364 51,367 69,524
--------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in property
and equipment.......... (167,716) (121,896) (83,500) (91,815) (78,165)
Acquisition of assisted
living facilities...... -- (19,050) -- -- --
Investment in systems
development............ (15,753) (14,436) (8,400) (18,905) (5,548)
Acquisition of pharmacy
business............... (97,400) -- -- -- --
Acquisition of
healthcare facilities.. (17,793) (32,369) (56,745) -- (4,440)
Acquisition of pharma-
cies................... (5,291) (6,270) (2,451) (5,672) (5,291)
GranCare settlement..... -- -- -- 18,500 --
Acquisition of Vitalink
stock.................. (30,000) -- -- -- --
Purchase of home health
business............... -- (22,950) -- -- --
Sale of healthcare busi-
ness................... -- -- 13,334 -- --
Sale of healthcare fa-
cilities............... 17,283 -- -- -- 17,283
Receipts from (advances
to) discontinued lodg-
ing segment............ 113,267 (27,201) (51,461) 115,723 --
Other items, net........ (5,832) (14,946) (2,490) (5,105) (13,899)
--------- --------- --------- -------- --------
Net cash (utilized) pro-
vided by investing ac-
tivities of continuing
operations.............. (209,235) (259,118) (191,713) 12,726 (90,060)
Net cash utilized by in-
vesting activities of
discontinued lodging op-
erations................ (29,424) (169,641) (92,422) -- (29,424)
--------- --------- --------- -------- --------
Net cash (utilized) pro-
vided by investing ac-
tivities................ (238,659) (428,759) (284,135) 12,726 (119,484)
--------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term
debt................... 277,381 149,000 207,254 109,543 149,400
Principal payments of
long-term debt......... (180,241) (23,030) (122,496) (6,770) (108,547)
Proceeds from exercise
of stock options....... 12,254 3,307 841 3,989 10,149
Treasury stock ac-
quired................. (5,782) (1,131) (73) (1,807) --
Retirement of deben-
tures.................. (9,900) -- -- (146,100) (9,900)
Dividends paid.......... (6,108) (5,502) (5,489) (2,798) (2,765)
--------- --------- --------- -------- --------
Net cash provided (uti-
lized) by financing ac-
tivities of continuing
operations.............. 87,604 122,644 80,037 (43,943) 38,337
Net cash provided by
financing activities of
discontinued lodging
operations.............. 654 43,687 50,008 -- 654
--------- --------- --------- -------- --------
Net cash provided (uti-
lized) by financing ac-
tivities................ 88,258 166,331 130,045 (43,943) 38,991
--------- --------- --------- -------- --------
Net change in cash and
cash equivalents........ (29,651) (10,439) 15,274 20,150 (10,969)
--------- --------- --------- -------- --------
Cash and cash equiva-
lents, at beginning of
year.................... 62,533 72,972 57,698 32,882 62,533
--------- --------- --------- -------- --------
Cash and cash equiva-
lents, at end of year... $ 32,822 $ 62,533 $ 72,972 $ 53,032 $ 51,564
========= ========= ========= ======== ========
NON-CASH ACTIVITIES:
Liabilities assumed in
connection with acqui-
sition of properties... $ 172,778 $ 68,250 $ -- $ -- $ --
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- CONTRIBUTED RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
---------- ------ ----------- --------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT COMMON SHARES)
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994..... 65,436,734 $6,545 $167,316 $ 402,520 $ (31)
Net income.............. -- -- -- 94,486 --
Exercise of stock op-
tions.................. 77,000 8 833 -- --
Cash dividends.......... -- -- -- (5,489) --
Other................... -- -- 550 3 740
---------- ------ -------- --------- -------
Balance, May 31, 1995..... 65,513,734 6,553 168,699 491,520 709
Net income.............. -- -- -- 85,907 --
Exercise of stock op-
tions.................. 269,156 28 3,279 -- --
Cash dividends.......... -- -- -- (5,502) --
Other................... -- -- 2,386 -- (2,071)
---------- ------ -------- --------- -------
Balance, May 31, 1996..... 65,782,890 6,581 174,364 571,925 (1,362)
Net income.............. -- -- -- 136,942 --
Exercise of stock op-
tions.................. 1,011,951 101 12,153 -- --
Cash dividends.......... -- -- -- (6,108) --
Dividend of discontinued
lodging segment........ -- -- -- (164,225) 1,362
Tax benefit of common
stock transactions
related to employee
benefit plans.......... -- -- 6,818 -- --
Other................... -- -- 1,305 96 --
---------- ------ -------- --------- -------
Balance, May 31, 1997..... 66,794,841 6,682 194,640 538,630 --
Net income.............. -- -- -- 39,177 --
Exercise of stock op-
tions.................. 212,524 28 3,961 -- --
Cash dividends.......... -- -- -- (2,798) --
Other................... -- -- 4 11 --
---------- ------ -------- --------- -------
Balance, November 30, 1997
(unaudited).............. 67,007,365 $6,710 $198,605 $ 575,020 $ --
========== ====== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Manor Care,
Inc. and its subsidiaries (the "Company"). As a result of the Company's spin-
off of its lodging operations, the accompanying financial statements reflect
the lodging segment as a discontinued operation. All significant intercompany
transactions have been eliminated, except for advances to the discontinued
lodging segment and the related interest income.
On September 15, 1997, the Company announced its intention to proceed with a
separation of its skilled nursing facility management, assisted living,
pharmacy and home health businesses (collectively, the "Health Services
Business") from its skilled nursing facility management, real estate and
healthcare facility development business via a spin-off of the Health Services
Business (the "Distribution"). The spin-off of the Health Services Business
will be effected by a distribution to the Company's shareholders of all the
common stock of New ManorCare Health Services, Inc., a wholly owned subsidiary
of the Company, which as of the date of the spin-off, will own and operate all
the Company's assisted living operations as well as manage and lease the
skilled nursing assets owned by the Company. Following the Distribution, New
ManorCare Health Services, Inc. will change its name to ManorCare Health
Services, Inc. and the Company will change its name to Manor Care Realty, Inc.
The Board of Directors voted to approve in principle the transaction subject
to receipt of other approvals and consents and satisfactory implementation of
the arrangements for the Distribution. The Company anticipates that the
transaction will be completed by the end of fiscal year 1998. The Distribution
is conditional upon certain matters, including receipt of a satisfactory
solvency opinion, and the declaration of the special dividend by the Company's
Board of Directors.
Following the Distribution, Manor Care Realty's principal sources of revenue
will be payments pursuant to the leasing of the skilled nursing facilities to
ManorCare Health Services, the operations of the developed assisted living
facilities prior to sale, the proceeds of the sale of assisted living
facilities, and revenues of Mesquite Hospital. Manor Care Realty's principal
operating expenses will be related to the operation of the assisted living
facilities prior to sale, the operating expenses of Mesquite Hospital and
general overhead expenses. ManorCare Health Services' principal sources of
revenue will be from the management of skilled nursing facilities owned by
Manor Care Realty, the operations of assisted living facilities, pharmacy
operations, home health operations and management fees from the developed
assisted living facilities owned by Manor Care Realty. ManorCare Health
Services' principal operating expenses will be expenses related to the
operation of skilled nursing and assisted living facilities, lease payments to
Manor Care Realty, and the operations of pharmacy and home health segments.
Due to the fact that the majority of the current Manor Care, Inc. operations
will be transferred to ManorCare Health Services, Inc. as a result of the
Distribution, this transaction will be reported as a reverse Distribution.
Accordingly, consolidated results for Manor Care, Inc. will be shown up to the
date of the Distribution. After the Distribution, ManorCare Health Services,
Inc. will present consolidated Manor Care, Inc. results for periods prior to
the Distribution and Manor Care Realty, Inc. will present the historical
financial statements of its subsidiary, Community Hospital of Mesquite, Inc.
for periods prior to the Distribution.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet as of November 30, 1997, the consolidated
statements of income and the consolidated statements of cash flows for the six
months ended November 30, 1997 and 1996, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows at November 30, 1997
and for all periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
F-7
<PAGE>
or omitted. The results of operations and cash flows for the six month periods
ended November 30, 1997 and 1996 are not necessarily indicative of the
operating results or cash flows for the full year.
CASH
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, were:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Land............................................ $ 97,569 $ 92,884
Building and improvements....................... 971,850 887,184
Capitalized leases.............................. 12,747 12,747
Furniture, fixtures and equipment............... 242,143 209,035
Facilities in progress.......................... 58,200 49,067
------------ ------------
1,382,509 1,250,917
Less: Accumulated depreciation and amortiza-
tion........................................... (354,938) (332,710)
------------ ------------
$ 1,027,571 $ 918,207
============ ============
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows.
<TABLE>
<S> <C>
Building and improvements........................................ 10-40 years
Furniture, fixtures and equipment................................ 3-20 years
</TABLE>
Accumulated depreciation includes $9.4 million and $9.7 million at May 31,
1997 and 1996, respectively, relating to capitalized leases. Capitalized
leases are amortized on a straight-line basis over the lesser of the lease
term or the remaining useful life of the leased property.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property
and equipment accounts. Upon sale or retirement of property, the cost and
related accumulated depreciation are eliminated from the accounts and the
related gain or loss is taken into income. Maintenance, repairs, and minor
replacements are charged to expense.
Construction overhead and costs incurred to ready a project for its intended
use are capitalized for major development projects and are amortized over the
lives of the related assets.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1997, $4.6 million; 1996,
$3.1 million; 1995, $1.8 million.
ACCOUNTING FOR CAPITALIZED SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the estimated useful
lives of the related systems of not more than five years.
F-8
<PAGE>
ACCOUNTING FOR INVESTMENTS IN JOINT VENTURES
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliates as they occur. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee. These investments will be transferred in connection with the
Distribution.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
certain acquisitions over the recorded fair value of the net assets. Goodwill
is amortized over 40 years. Amortization expense amounted to $4.5 million,
$1.0 million and $0.7 million in each of the years ended May 31, 1997, 1996
and 1995, respectively.
PHARMACY CONTRACTS
Pharmacy contracts, principally representing the estimated value of acquired
contracts to service customers, are amortized over their estimated useful
lives, not to exceed 20 years. The recoverability of these assets is evaluated
annually. Amortization expense charged to operations for pharmacy contracts
was $1.5 million in 1997, $0.9 million in 1996 and $0.9 million in 1995.
MINORITY INTEREST
The Company has controlling investments in certain entities which are not
wholly owned. Amounts reflected as minority interest represent the minority
owners' share of income in these entities. Minority interest liability
represents the cumulative minority owners' share of income in these entities.
SELF-INSURANCE PROGRAMS
The Company self-insures for certain levels of general and professional
liability, automobile liability, and workers' compensation coverage. The
estimated costs of these programs are accrued at present values at a discount
rate of 7% based on actuarial projections for known and incurred but not
reported claims.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company has disclosed herein pro
forma net income and pro forma earnings per share in the footnotes using the
fair value based method beginning in fiscal year 1997 with comparable
disclosures for fiscal year 1996.
F-9
<PAGE>
NET INCOME PER COMMON SHARE
Net income per common share has been computed based on the weighted average
number of shares of common stock outstanding. Stock options are included in
the calculation when dilutive.
REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the patient.
The Company records revenue for services to Medicare beneficiaries at the time
the services are rendered and based on the Medicare cost reimbursement
principles. Under those principles, Medicare reimburses the Company for the
reasonable costs (as defined) incurred in providing care to Medicare
beneficiaries. The Company reports as reimbursable costs in the Medicare cost
reports only those costs it believes to be reimbursable under the applicable
Medicare cost reimbursement principles. In determining the amount of revenue
to be recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement principles
in effect at that time. Accordingly, this process results in recording revenue
only for the costs that the Company believes are reasonable assured of
recovery. Refer to "Commitments and Contingencies" footnote for additional
information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported or disclosed in its financial
statements and the notes related thereto. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain amounts previously presented have been reclassified to conform to
the 1997 presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS 128"), which is effective for fiscal years
ending after December 15, 1997, including interim periods. Earlier adoption is
not permitted. However, an entity is permitted to disclose pro forma earnings
per share amounts computed under SFAS 128 in the notes to the financial
statements in periods prior to adoption. The statement requires restatement of
all prior-period earnings per share data presented after the effective date.
SFAS 128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard recently
issued by the International Accounting Standards Committee entitled
"International Accounting Standards, Earnings Per Share." The Company plans to
adopt SFAS 128 in fiscal year 1998 and has not determined the impact of
adoption.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal
years beginning after December 15, 1997. The statement establishes standards
for reporting and display of comprehensive income and its components. The
Company plans to adopt SFAS 130 in fiscal year 1999 and has not determined the
impact of adoption.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997.
The Company plans to adopt SFAS 131 in fiscal year 1999 and has not determined
the impact of adoption.
F-10
<PAGE>
LONG-TERM RECEIVABLES
Long-term receivables of $22 million and $19.1 million at May 31, 1997 and
1996, respectively, represent accounts receivable for Medicare at In Home
Health, Inc. ("IHHI"), relating primarily to the reimbursement of disputed
costs from prior years.
Approximately 55% of IHHI's revenue is derived from services provided to
Medicare beneficiaries through cost reimbursement programs. Virtually all of
the payments for these services are based on the Medicare program's
reimbursable costs incurred in rendering the services. Cost reports are filed
annually and are subject to audit and retroactive adjustment. IHHI reports
revenue for those costs that it believes are probable of recovery under
applicable Medicare statutes and regulations.
Over the years Medicare auditors have claimed that certain costs were not
reimbursable under the Medicare program. These positions are based on
interpretations promulgated after the period covered by the cost reports that
are contrary to IHHI's interpretation or on what IHHI believes is the
misapplication of specific reimbursement principles.
As of May 31, 1997, IHHI has received reports challenging $18.9 million of
these costs. An additional $18.8 million of costs similar to the costs which
have been challenged have been incurred through May 31, 1997 related to open
cost reporting years. Of this $37.7 million, approximately $22.5 million
related to the treatment of certain community liaison personnel costs, which
Medicare alleges are unreimbursable sales costs. Other significant disputed
costs related to physical therapists employed by IHHI and certain other branch
and corporate expenses.
As of May 31, 1997 total IHHI accounts receivable due from Medicare were
approximately $40.5 million including the disputed costs of $37.7 million. On
a consolidated basis, the Company had established reserves against these
disputed costs of $9.8 million. The Company does not believe that the
resolutions of these disputed costs will be accomplished in the next year.
Therefore, they have been classified as a non-current asset. Additionally, as
of May 31, 1997, IHHI had received approximately $12.5 million in payment from
Medicare for disputed costs. Because Medicare may seek repayment of these
amounts, the potential liability is recorded in Accrued Liabilities. In August
1997, IHHI received three court decisions relating to certain of these
amounts.
IHHI has, on a preliminary basis, evaluated these decisions on its recorded
accounts receivable and, accordingly, recorded a reserve of $15.5 million in
the six months ended November 30, 1997. The net impact to the Company after
taxes and minority interest was approximately $3.8 million.
F-11
<PAGE>
ACCRUED EXPENSES
Accrued expenses at May 31, 1997 and 1996 were as follows.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Payroll........................................... $ 63,783 $ 53,986
Taxes, other than income.......................... 14,507 12,302
Insurance......................................... 18,271 22,310
Interest.......................................... 8,100 1,875
Other............................................. 25,858 22,953
------------ ------------
$ 130,519 $ 113,426
============ ============
</TABLE>
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1997 were as follows.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
(IN THOUSANDS OF DOLLARS)
<S> <C>
1998............................................... $ 14,845
1999............................................... 8,605
2000............................................... 7,891
2001............................................... 6,536
2002............................................... 6,279
2003 to 2024....................................... 567,162
--------
$611,318
========
</TABLE>
Long-term debt, consisting of mortgages, capital leases, Senior Notes, and
Senior Subordinated Notes, was net of discount of $1.2 million and $1.0
million at May 31, 1997 and 1996, respectively. Amortization of discount was
$0.5 million in 1997, 1996, and 1995, including the write-off associated with
debt redemptions. At May 31, 1997, the Company had mortgages and capital
leases of $80.2 million, of which $45.6 million is related to mortgages on
assisted living facilities. Mortgages on assisted living facilities are held
by the Company and will be transferred to New ManorCare Health Services on the
Distribution Date.
Interest paid was $35.6 million in 1997, $29.9 million in 1996 and $22.5
million in 1995. During fiscal year 1997, interest rates on subordinated debt
ranged from 4.8% to 9.5%. Interest rates on mortgages and other long-term debt
ranged from 2.6% to 12.0%. The weighted average interest rate in fiscal year
1997 was 7.2%.
In June 1996, the Company issued $150.0 million of 7 1/2% Senior Notes due
2006. These notes are redeemable at the option of the Company at any time at a
price equal to the greater of (a) the principal amount or (b) the sum of the
present values of the remaining scheduled payments of principal and interest,
discounted with an applicable treasury rate plus 15 basis points, plus accrued
interest to the date of redemption. The proceeds of this offering were used to
repay borrowings under the Company's $250.0 million competitive advance and
multi-currency revolving credit facility (the "Facility").
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased
$9.9 million of the 9 1/2% Senior Subordinated Notes for $10.5 million.
In September 1996, the Company amended the Facility provided by a group of
sixteen banks. The Facility provides that up to $75.0 million is available for
borrowings in foreign currencies. Borrowings under the Facility
F-12
<PAGE>
are, at the option of the Company, at one of several rates including LIBOR
plus 20 basis points. In addition, the Company has the option to request
participating banks to bid on loan participation at lower rates than those
contractually provided by the Facility. The Facility presently requires the
Company to pay fees of 1/10 of 1% on the entire loan commitment. The facility
requires payment of interest only prior to its termination date of September
6, 2001. At May 31, 1997, outstanding revolver borrowings amounted to $85.0
million.
Various debt agreements impose, among other restrictions, restrictions
regarding financial ratios and payment of dividends. Pursuant to such
restrictions, owned property with a net book value of $145.8 million was
pledged or mortgaged and approximately $167.4 million of retained earnings was
not available for cash dividends.
During fiscal year 1997, Vitalink Pharmacy Services, Inc. ("Vitalink")
entered into a committed $200 million revolving credit facility (the "Vitalink
Credit Facility") which expires February 12, 2002 with Chase Manhattan Bank.
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 Vitalink Credit Facility requires payment of interest
only prior to its termination date of February 12, 2002, and therefore the
debt related to the Vitalink Credit Facility is classified as long-term on the
consolidated balance sheet.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2035. Future minimum
lease payments are as follows.
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
1998.......................................... $ 13,458 $ 1,825
1999.......................................... 11,678 1,045
2000.......................................... 10,028 719
2001.......................................... 8,715 292
2002.......................................... 7,101 292
Thereafter.................................... 45,862 1,904
------------- ------------
Total minimum lease payments.................. $ 96,842 $ 6,077
------------- ------------
Less: Amount representing interest............ 1,606
------------
Present value of lease payments............... 4,471
------------
Less: Current portion......................... 1,445
------------
Lease obligations included in long-term debt.. $ 3,026
============
</TABLE>
Rental expense under noncancelable operating leases was $11.9 million in
1997, $8.0 million in 1996 and $4.9 million in 1995.
F-13
<PAGE>
INTEREST RATE HEDGING
The Company has entered into multiple interest rate swap agreements to hedge
its exposure to fluctuations in interest rates on its long-term debt and
operating leases. At May 31, 1997, the Company had three interest rate swap
agreements outstanding, with a total notional principal amount of $30.3
million. These agreements effectively convert the Company's interest rate
exposure on a floating rate operating lease to a fixed interest rate of 5.60%
and mature simultaneously with the relevant operating lease in 2002. The
weighted average interest rate under the lease was 6.21% for the year ended
May 31, 1997. While the Company is exposed to credit loss in the event of
nonperformance by other parties to outstanding interest rate swap agreements,
the Company does not anticipate any such credit losses.
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2%
Senior Notes, the Company also entered into a series of interest rate swap and
treasury lock agreements having a total notional principal amount of $150.0
million. Agreements with a total notional principal amount of $100.0 million
were terminated concurrent with the pricing of the notes offering on May 30,
1996 with a $2.7 million cash gain. The remaining agreement, with a total
notional principal amount of $50.0 million was terminated on October 23, 1996
with a $1.4 million cash gain. The gains on the termination of the agreements
have been deferred and are being amortized against interest expense over the
life of the 7 1/2% Senior Notes effectively reducing the interest rate on the
Notes to 7.1%. The effect of the agreements on interest expense during the
period that the agreements were outstanding was to reduce interest expense to
6.9%.
INCOME TAXES
Because of the relative ownership percentages, the Company files separate
income tax returns for the Company's 51% owned pharmacy subsidiary, Vitalink
Pharmacy Services, Inc. ("Vitalink") (effective February 1, 1997) and In Home
Health, Inc. ("IHHI"). The consolidated tax provision, therefore, is based
upon the separate tax provisions of each of the companies.
Income tax provisions were as follows for the year ended May 31.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current tax expense:
Federal........................................ $ 30,001 $ 41,427 $ 41,432
State.......................................... 6,499 8,887 9,145
Deferred tax expense:
Federal........................................ 39,341 (3,450) 1,296
State.......................................... 8,859 (864) 283
-------- -------- --------
$84,700 $ 46,000 $ 52,156
</TABLE>
F-14
<PAGE>
Deferred tax assets (liabilities) are comprised of the following at May 31.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Depreciation and amortization.............. $(117,213) $ (83,237) $ (80,554)
Purchased tax benefits..................... (44,110) (45,527) (46,212)
Gain on stock issuance..................... (37,187) (11,896) (11,896)
Other...................................... (23,368) (19,514) (17,956)
--------- --------- ---------
Gross deferred tax liabilities............. (221,878) (160,174) (156,618)
--------- --------- ---------
Tax deposit................................ 5,754 5,754 12,000
Reimbursement reserve...................... 9,550 16,882 5,064
Reserve for doubtful accounts.............. 20,267 10,206 8,309
Deferred compensation...................... 13,982 9,526 9,476
Acquisition costs.......................... 3,833 -- --
Other...................................... 7,263 6,816 8,030
--------- --------- ---------
Gross deferred tax assets.................. 60,649 49,184 42,879
--------- --------- ---------
Net deferred tax........................... $(161,229) $(110,990) $(113,739)
========= ========= =========
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Federal income tax rate....................... 35% 35% 35%
======== ======== ========
Federal taxes at statutory rate............... $ 73,435 $ 39,015 $ 45,441
State income taxes, net of Federal tax
benefit...................................... 9,983 5,215 6,128
Minority interest............................. 2,289 499 1,521
Tax credits................................... (143) (19) (910)
Other......................................... (864) 1,290 (24)
-------- -------- --------
Income tax expense............................ $ 84,700 $ 46,000 $ 52,156
======== ======== ========
</TABLE>
Income taxes paid on a consolidated basis for the years ended May 31, 1997,
1996, and 1995 were $54.0 million, $54.3 million, and $69.7 million,
respectively.
CAPITAL STOCK
There are 5.0 million shares of authorized but unissued preferred stock with
a par value of $1.00 per share. The rights of the preferred shares will be
determined by the Board of Directors when the shares are issued.
During fiscal years 1997 and 1996, the Company acquired 134,118 and 30,208
shares of its common stock for a total cost of $5.8 million and $1.1 million,
respectively. A total of 8.9 million shares of common stock have been
authorized, under various stock option plans, to be granted to key executive
officers and key employees. At May 31, 1997 and 1996, options for the purchase
of an aggregate of 3,041,807 and 3,667,527 shares were outstanding at prices
equal to the market value of the stock at date of grant. Options totaling
822,717 are presently exercisable and 2,219,090 will become exercisable from
fiscal year 1998 to 2002 and will expire at various dates to February 2007. In
addition, 49,957 options have been granted to non-employee directors. Options
totaling 7,630 are presently exercisable and 42,327 options will become
exercisable from fiscal year 1998 to 2001 and will expire at various dates to
September 2001.
F-15
<PAGE>
Option activity under the above plans was as shown in the table below.
<TABLE>
<CAPTION>
OPTIONS 1997 1996 1995
------- --------- --------- ---------
<S> <C> <C> <C>
Granted: No. of shares........................ 956,400 582,168 110,000
Avg. Option Price........................... $ 38.82 $ 30.89 $ 27.50
Adjustment as a result of the spin-off: No. of
shares....................................... 1,454,915 -- --
Exercised: No. of shares...................... 1,011,951 269,156 77,000
Avg. Option Price........................... $ 8.45 $ 12.34 $ 10.92
Canceled: No. of shares....................... 2,010,127 148,735 --
Avg. Option Price........................... $ 22.42 $ 20.57 --
Outstanding at May 31:
No. of shares............................... 3,091,764 3,702,527 3,538,250
Avg. Option Price........................... $ 14.87 $ 16.87 $ 14.36
Available for grant at May 31: No. of shares.. 1,680,826 1,089,899 1,603,500
</TABLE>
In connection with the spin-off of the Company's lodging segment, the
outstanding options held by current and former employees of the Company as of
November 1, 1996 were redenominated in both Company and lodging company stock
and the number and exercise prices of the options were adjusted based on the
relative trading prices of shares of the common stock of the two companies to
retain the intrinsic value of the options. The total number of options
outstanding increased by 1,454,915 as a result of this adjustment.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its various stock option plans and employee
stock purchase plan and, accordingly, no compensation expense has been
recognized for options granted and shares purchased under the provisions of
these plans. Had compensation expense for options granted and shares purchased
under the stock-based compensation plans been determined based on the fair
value at the grant dates, net income and earnings per share would have been as
follows for the years ended May 31.
<TABLE>
<CAPTION>
1997 1996
------------- ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income:
As reported..................................... $ 136,942 $ 85,907
Pro forma....................................... $ 128,141 $ 81,697
Earnings per share:
As reported..................................... $ 2.16 $ 1.37
Pro forma....................................... $ 2.03 $ 1.30
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not likely
to be representative of the effects on reported net income for future years.
SFAS 123 does not apply to awards granted prior to fiscal year 1996 and
additional awards are anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed a risk-free interest rate equal to
approximately 6.36% and 6.37% for fiscal years 1997 and1996, respectively,
expected volatility of 12.8%, dividend yields based on historical dividends of
$.088 per share annually and expected option lives of eight years. The average
fair values of the options granted during 1997 and 1996, as measured on the
dates of the grants, are estimated to be $15.12 and $11.96, respectively.
ACQUISITIONS AND DIVESTITURES
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares of GranCare. In addition,
F-16
<PAGE>
Vitalink funded the redemption of $98.2 million of GranCare's 9 3/8% Senior
Subordinated Notes and assumed approximately $10.0 million of additional
GranCare indebtedness. As a result of the excess of fair value of Vitalink
shares over the book value of TeamCare, Vitalink recorded approximately $292.5
million of goodwill. As a result of the merger, the Company's ownership
interest in Vitalink decreased to 45%. On May 21, 1997, the Company
successfully completed its tender offer to purchase 1.5 million shares of
Vitalink common stock. As a result of the tender offer, the Company's interest
in Vitalink was increased to approximately 51%. The Company's net pretax gain
resulting from these transactions was $50.3 million.
During fiscal year 1997, Vitalink purchased a pharmacy in California which
services 5,100 institutional beds for a total of $5.3 million. In addition,
the Company acquired a nursing center in California for $4.4 million and a
nursing center in Michigan for $13.4 million. Through new construction, the
Company opened four skilled nursing centers and six assisted living
facilities. The Company sold four nursing centers in Indiana, Iowa, Illinois,
and Texas for $17.3 million and transferred an assisted living facility with
an approximate net book value of $4.9 million to the discontinued lodging
segment.
During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was
cash and the remainder was assumed liabilities. Additionally, six assisted
living facilities, with five attached skilled nursing units, were purchased
for $74.3 million, of which $19.0 million was cash and the remainder was
assumed liabilities. Vitalink purchased a pharmacy servicing 2,200
institutional beds and an infusion therapy business for a total of $6.3
million. In October 1995, the Company purchased for $22.9 million
approximately 41% of the common stock of IHHI, a provider of home health
services. The Company paid an additional $20.0 million to IHHI for 100% of its
outstanding voting convertible preferred stock and for warrants to purchase an
additional 6.0 million shares of common stock. As a result of this
transaction, the Company currently has effective control of approximately 63%
of the voting stock of IHHI. IHHI is consolidated in the Company's financial
statements.
During fiscal year 1995, the Company purchased nine nursing centers and
assisted living facilities for approximately $56.7 million. Vitalink purchased
a pharmacy servicing 1,300 institutional beds for $2.5 million. In March 1995,
the Company sold its investment in a physicians' practice management business
for $13.3 million. The physicians' practice management investment was made in
fiscal year 1994 in the amount of $10.0 million.
Unless otherwise noted, acquisitions are accounted for as purchases.
Acquisition costs in excess of fair market value of the assets acquired are
allocated to goodwill.
The following unaudited pro forma statement of operations information gives
effect to the TeamCare merger transactions described above as though they had
occurred on June 1, 1995, after giving effect to certain adjustments,
including amortization of goodwill, additional depreciation and amortization
expense, increased interest expense on debt related to the merger, and related
income tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the merger
occurred at the beginning of the respective years.
PRO FORMA STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------
1997 1996
------------ ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues................................ $ 1,719,611 $ 1,480,559
Income from continuing operations before income
taxes............................................ $ 211,791 $ 114,408
Income from discontinued operations............... $ 11,829 $ 20,436
Net income........................................ $ 134,745 $ 81,380
Net income per share.............................. $ 2.13 $ 1.30
</TABLE>
F-17
<PAGE>
PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company periodically reviews the net realizable value of its long-term
assets based on certain circumstances which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net
realizable value, an impairment loss is recorded in the period the impairment
is determined.
The Company recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long-lived assets and costs associated with the
Company's restructuring. The most significant components of the provisions
were non-cash impairment charges of $21.2 million relating to writedowns of
property, equipment and capitalized systems development costs and $5.1 million
related to the spinoff of the lodging segment in fiscal year 1996.
In fiscal year 1996, the Company determined that it incurred costs in excess
of the original amount expected to complete a systems development project for
billing and receivables which began in fiscal year 1995. Intensive testing
during a six month pilot identified over 100 major system problems. At this
time, it was determined that the newly developed system was not functional and
that a major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs. The carrying amount was
determined to be in excess of the fair value and accordingly, the related
assets were written down by $13 million to the net realizable value.
DISCONTINUED OPERATIONS
On November 1, 1996, the Company completed the spin-off of its lodging
segment. The Company's shareholders of record on October 10, 1996 received one
share of Choice Hotels International, Inc. common stock for each outstanding
share of Manor Care common stock. Accordingly, lodging results are reported as
discontinued operations for all periods presented.
The revenues, income from discontinued operations before income taxes, and
net income from discontinued operations for the years ended May 31, 1997,
1996, and 1995 were as follows.
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues.......................................... $89,849 $374,873 $302,535
Income from discontinued operations before income
taxes............................................ $20,563 $ 35,402 $ 29,955
Net income from discontinued operations........... $11,829 $ 20,436 $ 16,811
</TABLE>
Net income from discontinued operations for the year ended May 31, 1996
includes the results of operations of the lodging segment through March 7,
1996, the measurement date. During the period from the measurement date
through May 31, 1996, the lodging segment incurred a net loss of $12.0
million. The net loss was primarily the result of provisions for asset
impairment and costs and expenses directly associated with the spin-off
totaling $33.3 million. The non-cash provision for asset impairment in the
discontinued lodging segment reflects primarily the writedown of European
hotel assets based on expected future cash flows. This non-cash provision was
recorded in accordance with SFAS 121. No loss on the disposal of the
discontinued lodging operations was recognized as the discontinued lodging
segment generated income between the measurement date and the date of the
spin-off.
Included in discontinued lodging operations is interest expense charged by
the continuing healthcare segment to the discontinued lodging segment relating
to cash advances provided to the discontinued lodging segment for the
acquisition and renovation of lodging assets. For the years ended May 31,
1997, 1996, and 1995, interest so allocated amounted to $3.4 million, $19.7
million, and $15.5 million, respectively. The indebtedness related to lodging
acquisitions and renovations is reflected as advances to discontinued lodging
segment in the consolidated balance sheets. Such advances amounted to $115.7
million and $225.7 million at May 31, 1997 and
F-18
<PAGE>
1996, respectively. The indebtedness is to be repaid over a three year period
from the date of the spin-off. Interest is charged at an annual rate of 9% on
the indebtedness. The Company received a prepayment of $110.0 million on the
advances to the discontinued lodging segment. This payment was subject to a
prepayment penalty of $1.9 million.
General corporate expenses of $5.5 million, $7.4 million, and $6.3 million,
respectively, were charged to discontinued lodging operations for the years
ended May 31, 1997, 1996, and 1995. Allocation of general corporate charges
was principally determined based on time allocations.
For purposes of providing an orderly transition after the spin-off, the
Company has entered into various agreements with the discontinued lodging
segment, including, among others, a Tax Sharing Agreement, Corporate Services
Agreement, Employee Benefits Allocation Agreement and Support Services
Agreement. These agreements provide, among other things, that the Company (i)
will provide certain corporate and support services, such as accounting, tax,
and computer systems support and (ii) will provide certain risk management
services and other miscellaneous administrative services. These agreements
will extend for a period of 30 months from the spin-off date or until such
time as the discontinued lodging segment has arranged to provide such services
in-house or through another unrelated provider of such services.
TRANSACTIONS BETWEEN MANOR CARE REALTY AND MANORCARE HEALTH SERVICES
For purposes of providing an orderly transition after the Distribution,
Manor Care Realty and ManorCare Health Services will enter into various
agreements, including, among others, Lease Agreements, Development Agreement,
Assisted Living Facility Management Agreement, Tax Sharing Agreement, Tax
Administration Agreement, Corporate Services Agreement, Employee Benefits and
Other Employment Matters Allocation Agreement and Employee Benefits
Administration Agreement. Effective at the Distribution Date, these agreements
will provide, among other things, that ManorCare Health Services (i) will
perform certain corporate and support services, such as accounting, risk
management and computer systems support, (ii) will establish or participate in
pension, profit sharing and incentive plans similar to those in place at the
Company, (iii) will receive certain miscellaneous administrative services and
(iv) will lease skilled nursing facilities from Manor Care Realty. These
agreements will extend from the Distribution Date until such time as ManorCare
Health Services or Manor Care Realty has arranged to provide such services in-
house or through another unrelated provider of such services.
LEASE AGREEMENTS
On the Distribution Date, Manor Care Realty and ManorCare Health Services
will enter into Lease Agreements, pursuant to which Manor Care Realty will
lease to ManorCare Health Services all of its skilled nursing facilities.
Under each Lease Agreement, ManorCare Health Services' use of the subject
facility will be limited to skilled nursing operations.
Manor Care Realty will be responsible for paying all real property taxes and
insurance costs. ManorCare Health Services will be obligated to pay to Manor
Care Realty under each Lease Agreement an annual amount equal to the Owner's
Priority ("Land Rent"). In addition, each Lease Agreement will provide for
ManorCare Health Services to retain a base fee monthly of 6% of Project
Revenues (as defined in the Lease Agreement) and an incentive fee of up to 23%
of Net Operating Profit (as defined in the Lease Agreement).
Under each Lease Agreement, Manor Care Realty will have the right to
terminate if certain financial results are not achieved or if, due to
ManorCare Health Services' fault, the facility is decertified as a skilled
nursing facility or is disqualified from participation in Medicare or
Medicaid. The Lease Agreements will also provide for termination in the event
of additional defaults such as monetary default, breach of covenant and
bankruptcy defaults. Manor Care Realty will be obligated to pay to Manor Care
Health Services a termination fee in certain situations.
F-19
<PAGE>
DEVELOPMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into a development agreement (the "Development Agreement") pursuant to
which Manor Care Realty will develop assisted living facilities for sale to
ManorCare Health Services and retain ownership of such facilities until
occupancy has stabilized at 75% or more for a period of 5 days. The purchase
price for each facility will be at a premium to the total development costs,
which will be based upon the time elapsed since the opening of the facility.
ASSISTED LIVING FACILITY MANAGEMENT AGREEMENT
On the Effective Date, Manor Care Realty and ManorCare Health Services will
enter into an assisted living facility management agreement (the "Assisted
Living Facility Management Agreement") pursuant to which during the two-year
stabilization period under the Development Agreement, ManorCare Health
Services will manage the facility for Manor Care Realty. During the management
period, ManorCare Health Services will be reimbursed for all operating costs
and will receive a fixed monthly fee.
7 1/2% SENIOR NOTES
In connection with the Exchange Offer, ManorCare Health Services will assume
$150 million of 7 1/2% Senior Notes due 2006 from the Company. These notes
will be redeemable at the option of ManorCare Health Services at any time at a
price equal to the greater of (a) the principal amount or (b) the sum of the
present values of the remaining scheduled payments of principal and interest,
discounted with an applicable treasury rate plus 15 basis points, plus accrued
interest to the date of redemption.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company,
the ultimate outcome of such litigation will not have a material adverse
effect on the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. For
fiscal years 1997, 1996, and 1995 these revenues amounted to $652.1 million,
$549.1 million, and $431.0 million, respectively. In the opinion of
management, any difference between revenues recorded and final determination
will not be significant. The increase in revenues subject to audit adjustment
is due, in large part, to acquisitions made by Vitalink and, in fiscal year
1996, to the investment in IHHI. The Company does not anticipate a material
effect on revenues as a result of the Balanced Budget Act of 1997. However,
the regulations pertaining to this Act have neither been proposed nor
implemented, and therefore, this preliminary conclusion may change as a
result.
In fiscal year 1997, the Health Care Financing Administration issued a
modification to regulations governing the treatment of interest expense and
investment income offsets for Medicare reimbursement purposes. As a result of
this modification the Company recognized revenues of approximately $20 million
in fiscal year 1997, which had been reserved in prior years.
As of May 31, 1997, the Company had contractual commitments of $58.2 million
relating to its internal construction program.
Vitalink has a limited guarantee to Health Retirement Properties Trust
("HRPT") of up to $15.0 million for default mortgage payments of GranCare
facility leases assumed in connection with the merger. In return, Vitalink is
the beneficiary of a $15.0 million line of credit from GranCare in the event
that any of the facilities defaults on its mortgage to HRPT.
F-20
<PAGE>
One or more subsidiaries or affiliates of the Company have been identified
as potentially responsible parties ("PRPs") in a variety of actions (the
"Actions") relating to waste disposal sites which allegedly are subject to
remedial action under the Comprehensive Environmental Response Compensation
Liability Act, as amended, 42 U.S.C. (S)(S)9601 et seq. ("CERCLA") and similar
state laws. CERCLA imposes retroactive, strict joint and several liability on
PRPs for the costs of hazardous waste clean-up. The Actions arise out of the
alleged activities of Cenco, Incorporated and its subsidiary and affiliated
companies ("Cenco"). Cenco was acquired in 1981 by a wholly owned subsidiary
of the Company. The Actions allege that Cenco transported and/or generated
hazardous substances what came to be located at the sites in question. The
Company believes that the waste disposal activities at issue occurred prior to
the Manor Care subsidiary's acquisition of Cenco. Environmental proceedings
such as the Actions may involve owners and/or operators of the hazardous waste
site, multiple waste generators and multiple waste transportation disposal
companies. Such proceedings typically involve efforts by governmental entities
and/or private parties to allocate or recover site investigation and clean-up
costs, which costs may be substantial. The potential liability exposure for
currently pending environmental claims and litigation, without regard to
insurance coverage, cannot be quantified with precision because of the
inherent uncertainties of litigation in the Actions and the fact that the
ultimate cost of the remedial actions for some of the waste disposal sites
where the Company is alleged to be a potentially responsible party has not yet
been quantified. The Company believes that the potential environmental
liability exposure, after consideration of insurance coverage, is
approximately $3 million. Future liabilities for the pending environmental
claims and litigation, without regard to insurance, currently are not expected
to exceed approximately $46 million. The Company estimated future liabilities
without regard to insurance based on counsel's evaluation of the range of
potential liability and cost of defense in each of the Actions. The Company
has accrued the liabilities based on its estimate of the likely outcome of the
Actions, taking into account insurance coverage available for the liabilities.
F-21
<PAGE>
BUSINESS SEGMENT INFORMATION
The Company operates principally in four segments: skilled nursing
operations, pharmacy services, assisted living operations and home health
operations. Revenues for the pharmacy segment include sales to skilled nursing
and assisted living facilities which are subsequently eliminated in
consolidation. Income (loss) from operations consists of total revenues less
operating, depreciation and amortization, and general corporate expenses.
<TABLE>
<CAPTION>
SKILLED ASSISTED HOME
NURSING PHARMACY LIVING HEALTH ELIMINATIONS TOTAL
---------- -------- -------- -------- ------------ ----------
1997
- ---- (IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,118,208 $274,038 $54,853 $124,354 $(44,206) $1,527,247
Income (loss) from
operations............. 144,865 33,109 (2,739) (2,928) 3,163 175,470
Identifiable assets..... 1,223,808 516,805 178,684 60,407 -- 1,979,704
Depreciation and
amortization........... 61,068 9,527 6,723 3,060 -- 80,378
Capital expenditures.... 122,812 4,648 55,967 42 -- 183,469
1996
- ----
Revenues................ $1,034,190 $141,115 $37,276 $ 74,153 $(38,537) $1,248,197
Income (loss) from
operations............. 99,174(a) 22,301 (6,982)(a) 67 3,848 118,408
Identifiable assets..... 1,383,072 79,013 147,157 72,598 -- 1,681,840
Depreciation and
amortization........... 56,362 4,363 5,613 1,748 -- 68,086
Capital expenditures.... 109,063 3,537 23,170 562 -- 136,332
1995
- ----
Revenues................ $ 938,946 $112,257 $12,368 -- $(44,113) $1,019,458
Income (loss) from
operations............. 110,691 18,726 (1,202) -- 3,674 131,889
Identifiable assets..... 1,153,648 63,825 72,344 -- -- 1,289,817
Depreciation and
amortization........... 48,675 3,753 1,946 -- -- 54,374
Capital expenditures.... 62,509 2,163 27,228 -- -- 91,900
</TABLE>
- --------
(a) Includes total provisions for asset impairment and restructuring of $26.3
million, of which $25.1 million relates to skilled nursing operations and
$1.2 million relates to assisted living operations.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
The Company has various pension and profit sharing plans, including a
supplemental executive retirement plan, and contributes to certain union
welfare plans. The provision for these plans amounted to $11.8 million in
1997, $11.6 million in 1996, and $11.0 million in 1995. All vested benefits
under retirement plans are funded or accrued.
The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees. Contributions of up to 6% of each covered
employee's salary are determined based on the employee's level of contribution
to the plan, years of service and Company profitability. The cost of the plan
totaled $7.2 million in 1997, $5.8 million in 1996, and $4.8 million in 1995.
Also included in the Company's retirement plans is a defined benefit pension
plan covering substantially all of its employees. The benefits are based on
service credits for years of participation after January 1, 1992. In addition,
there is a prior benefit equal to the accrued benefit at December 31, 1991 for
certain individuals who were participants in a predecessor plan. No new
participants were eligible to enter this plan after August 15, 1996 and
service credits for all participants were frozen as of December 31, 1996.
Service cost benefits earned during fiscal years 1997, 1996 and 1995
approximated the plan's annual costs of $4.0 million, $2.8 million, and $2.7
million, respectively. As of February 28, 1997, 1996, and 1995, plan assets
F-22
<PAGE>
of approximately $20.3 million, $14.4 million, and $11.0 million compared to
vested benefit obligations of $17.0 million, $12.4 million, and $8.7 million,
respectively.
Projected benefit obligations were not significantly different from
accumulated benefit obligations of $21.0 million, $16.3 million, and $11.0
million as of the same dates. Liabilities recorded on the Company's balance
sheets as of May 31, 1997, 1996, and 1995 were $2.3 million, $2.0 million, and
$0.5 million, respectively. Projected benefit obligations were determined
using an assumed discount rate of 7.5% for 1997, 7.0% for 1996, and 8.5% for
1995, an assumed rate of return on plan assets of 8.25%, and an assumed
compensation increase of 4.5%.
The Company also has various incentive compensation plans for certain
personnel. Incentive compensation expense was $5.3 million in 1997, $4.4
million in 1996, and $4.1 million in 1995.
As part of the Vitalink merger with TeamCare, a temporary 401(k) plan has
been established for employees who were former participants in the GranCare
401(k) plan. Vitalink expects to establish a permanent plan in fiscal year
1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term debt instruments were determined by discounting
future cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the balance sheet.
The balance sheet carrying amounts of cash, cash equivalents, and
receivables approximate fair value due to the short-term nature of these
items. Management believes that the fair value of the advances to the
discontinued lodging segment approximates the carrying value.
Total fair market value for the outstanding interest rate swap agreements at
May 31, 1997 and 1996 was $1.4 million and $1.8 million, respectively. Fair
values were determined based on quoted rates.
SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
INCOME FROM
CONTINUING
OPERATIONS BEFORE
QUARTERS ENDED OTHER INCOME AND
(IN THOUSANDS OF DOLLARS, (EXPENSES) AND
EXCEPT PER SHARE DATA) REVENUE INCOME TAXES NET INCOME PER SHARE
- ------------------------- ---------- ----------------- ---------- ---------
<S> <C> <C> <C> <C>
FISCAL 1997
August....................... $ 336,479 $ 36,126 $ 23,685 $ .38
November..................... 351,585 41,706 32,444 .51
February..................... 388,747 46,792 61,392 .97
May.......................... 450,436 50,846 19,421 .30
---------- -------- -------- -----
$1,527,247 $175,470 $136,942 $2.16
========== ======== ======== =====
FISCAL 1996
August....................... $ 273,992 $ 30,512 $ 28,426 $ .45
November..................... 299,722 38,050 28,788 .46
February..................... 334,404 36,844 22,302 .36
May.......................... 340,079 13,002 6,391 .10
---------- -------- -------- -----
$1,248,197 $118,408 $ 85,907 $1.37
========== ======== ======== =====
</TABLE>
F-23
<PAGE>
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK AND DIVIDENDS PAID
(UNAUDITED)
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE CASH DIVIDENDS PAID
------------------------ ----------------------
PER SHARE
QUARTERS ENDED HIGH LOW AMOUNT DATE
- -------------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C>
FISCAL 1997
August......................... $ 39.63* $ 31.50* $ .022 8/27/96
November....................... $ 42.25* $ 23.75 $ .022 11/27/96
February....................... $ 28.00 $ 24.13 $ .022 2/27/97
May............................ $ 28.38 $ 21.88 $ .022 5/27/97
FISCAL 1996
August......................... $ 34.25* $ 27.78* $ .022 8/25/95
November....................... $ 35.58* $ 30.50* $ .022 11/27/95
February....................... $ 40.25* $ 32.75* $ .022 2/27/96
May............................ $ 43.50* $ 36.50* $ .022 5/24/96
</TABLE>
- --------
* Market prices prior to November 1, 1996, are reflective of the stock value
prior to the spin-off of the discontinued lodging business.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Community Hospital of Mesquite, Inc.:
We have audited the accompanying balance sheets of Community Hospital of
Mesquite, Inc. (a Delaware Corporation and wholly-owned indirect subsidiary of
Manor Care, Inc. the "Company") as of May 31, 1997 and 1996, and the related
statements of income, shareholder's equity and cash flows for each of the
three years in the period ended May 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Community Hospital of
Mesquite, Inc., as of May 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended May 31,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, DC
February 27, 1998
F-25
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF MAY 31,
1997 1997 1996
------------------ ------- -------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................. $ 183 $ 164 $ 288
Accounts receivable, net of allowance for
doubtful accounts of $3,729, $3,093 and
$3,642................................... 4,921 5,704 6,031
Prepaid expenses and other................ 211 202 236
Inventories............................... 1,164 1,004 992
------- ------- -------
Total current assets.................... 6,479 7,074 7,547
------- ------- -------
Deferred income tax asset................. 1,634 1,543 1,677
Property and equipment, net............... 19,829 20,751 17,288
------- ------- -------
TOTAL ASSETS............................ $27,942 $29,368 $26,512
------- ------- -------
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current liabilities:
Accounts payable.......................... $ 951 $ 1,419 $ 994
Accrued expenses.......................... 847 985 797
Due to Parent............................. 363 2,700 3,826
------- ------- -------
Total current liabilities............... 2,161 5,104 5,617
------- ------- -------
Estimated third-party payor settlements..... 528 815 590
Liability to limited partners............... 650 -- --
------- ------- -------
TOTAL LIABILITIES....................... 3,339 5,919 6,207
------- ------- -------
Common stock ($2 par, 500 shares authorized,
issued and outstanding).................... 1 1 1
Contributed capital......................... 1,101 1,101 1,101
Retained earnings........................... 23,501 22,347 19,203
------- ------- -------
TOTAL SHAREHOLDER'S EQUITY.............. 24,603 23,449 20,305
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY................................. $27,942 $29,368 $26,512
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEARS ENDED MAY
NOVEMBER 30, 31,
--------------- -----------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Net patient revenues................... $22,221 $21,827 $44,889 $42,044 $40,505
Operating expenses:
Salaries and benefits................ 8,241 8,410 16,832 16,023 15,007
Supplies............................. 2,605 2,717 5,613 5,079 5,055
Department contracts................. 1,428 1,605 3,189 3,584 4,924
Other................................ 2,211 2,311 4,896 4,438 4,426
Bad debt expense..................... 4,293 3,017 6,833 6,153 5,146
Depreciation......................... 1,150 865 1,955 1,344 1,275
Management fees...................... 257 254 508 397 318
------- ------- ------- ------- -------
Total operating expenses............... 20,185 19,179 39,826 37,018 36,151
------- ------- ------- ------- -------
Operating income....................... 2,036 2,648 5,063 5,026 4,354
Other expenses:
Interest............................. 74 -- -- -- --
Limited partners' interest........... 63 -- -- -- --
------- ------- ------- ------- -------
Total other expenses................... 137 -- -- -- --
------- ------- ------- ------- -------
Income before provision for income tax-
es.................................... 1,899 2,648 5,063 5,026 4,354
Provision for income taxes............. 745 1,032 1,919 1,907 1,647
------- ------- ------- ------- -------
Net income............................. $ 1,154 $ 1,616 $ 3,144 $ 3,119 $ 2,707
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these income statements.
F-27
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEARS ENDED
NOVEMBER 30, MAY 31,
------------------ ----------------------
1997 1996 1997 1996 1995
-------- -------- ------ ------ ------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income.................... $ 1,154 $ 1,616 $3,144 $3,119 $2,707
Reconciliation of net income
to net cash (utilized) pro-
vided by
operating activities:
Depreciation ............... 1,150 865 1,955 1,344 1,275
Provision for bad debts..... 4,293 3,017 6,833 6,153 5,146
Change in deferred taxes.... (91) 132 134 (656) (246)
Limited partners' interest . 63 -- -- -- --
Change in assets and liabili-
ties:
Change in accounts receiv-
able....................... (3,510) (3,360) (6,506) (5,933) (5,992)
Change in prepaid expenses
and other ................. (9) 54 34 87 (151)
Change in inventories....... (160) (67) (12) (31) (35)
Change in accounts payable
and accrued expenses....... (669) 225 613 130 323
Change in estimated third-
party payor settlements.... (287) 267 225 590 (125)
Change in due to Parent..... (2,337) (664) (1,126) 3,076 (1,394)
-------- -------- ------ ------ ------
NET CASH (UTILIZED) PRO-
VIDED BY OPERATING (403) 2,085 5,294 7,879 1,508
ACTIVITIES............... -------- -------- ------ ------ ------
CASH FLOWS FROM INVESTING AC-
TIVITIES:
Investment in property and (228) (1,962) (5,418) (7,678) (1,421)
equipment.................. -------- -------- ------ ------ ------
NET CASH UTILIZED BY (228) (1,962) (5,418) (7,678) (1,421)
INVESTING ACTIVITIES..... -------- -------- ------ ------ ------
CASH FLOWS FROM FINANCING AC-
TIVITIES:
Offering of limited partner- 650 -- -- -- --
ship units................. -------- -------- ------ ------ ------
NET CASH PROVIDED BY FI- 650 -- -- -- --
NANCING ACTIVITIES....... -------- -------- ------ ------ ------
CHANGE IN CASH AND CASH EQUIV-
ALENTS....................... 19 123 (124) 201 87
CASH AND CASH EQUIVALENTS, BE- 164 288 288 87 --
GINNING OF PERIOD............ -------- -------- ------ ------ ------
CASH AND CASH EQUIVALENTS, END $ 183 $ 411 $ 164 $ 288 $ 87
OF PERIOD.................... -------- -------- ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------
CONTRIBUTED RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ----------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT
COMMON SHARES)
<S> <C> <C> <C> <C>
Balance, May 31, 1994........................ 500 $ 1 $1,101 $13,377
Net income.................................. -- -- -- 2,707
--- --- ------ -------
Balance, May 31, 1995........................ 500 1 1,101 16,084
Net income.................................. -- -- -- 3,119
--- --- ------ -------
Balance, May 31, 1996........................ 500 1 1,101 19,203
Net income.................................. -- -- -- 3,144
--- --- ------ -------
Balance, May 31, 1997........................ 500 1 1,101 22,347
Net income (unaudited)...................... -- -- -- 1,154
--- --- ------ -------
Balance, November 30, 1997 (unaudited)....... 500 $ 1 $1,101 $23,501
=== === ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF MAY 31, 1997 AND 1996 AND FOR THE FISCAL YEARS ENDED MAY 31, 1997, 1996
AND 1995
1. ORGANIZATION
Mesquite Community Hospital (the "Hospital") is a 172-bed general
medical/surgical acute care hospital located in Mesquite, Texas. The Hospital
provides inpatient, outpatient and emergency care services. Admitting
physicians are primarily practitioners in the greater Dallas area. The
Hospital was incorporated in 1976 as Community Hospital of Mesquite, Inc., the
"Company" a wholly-owned indirect subsidiary of Manor Care, Inc., a Delaware
company (the "Parent"). In June of 1997, Mesquite Community Hospital, L.P., a
Texas limited partnership, was formed to own and operate the Hospital. As a
result of this new partnership, the Company is the General Partner and now
owns 97.7% of the Hospital with the remainder owned by limited partners. The
limited partners consist of doctors and other key employees of the Hospital.
(See Subsequent Event--Note 12.)
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of November 30, 1997 and the statements of
income and cash flows for the six month periods ended November 30, 1997 and
November 30, 1996 have been prepared by the Company without audit. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principals have
been omitted. The Company believes the disclosures made are adequate to make
the information presented not misleading. In the opinion of the Company, the
accompanying unaudited financial statements reflect all adjustments, including
only normal recurring adjustments necessary to present fairly the financial
position of the Company at November 30, 1997 and the results of operations and
cash flows for the six months ended November 30, 1997 and November 30, 1996.
Interim results are not necessarily indicative of fiscal year performance.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
INVENTORIES
Inventories, consisting primarily of surgical and medical supplies, are
valued at the lower of cost (first in, first out "FIFO") or market. This
estimated replacement cost for these inventories is not materially different
from the FIFO value.
PROPERTY AND EQUIPMENT
Property and equipment acquisitions are recorded at cost. Depreciation is
provided over the estimated useful life of each class of depreciable asset and
is computed using the straight-line method. A summary of the ranges of
estimated useful lives is as follows:
<TABLE>
<S> <C>
Building and improvements................................... 10-40 years
Equipment................................................... 3-20 years
</TABLE>
F-30
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NET PATIENT REVENUE
Net patient revenue is reported at the estimated net realizable amounts from
patients, third-party payors, and others for services rendered.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are recorded in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.
The Company participates in charity care and, accordingly, foregoes charges
for services and supplies furnished under this policy. The amounts related to
charity care in fiscal years 1997, 1996 and 1995 were $1,576,000, $1,387,000
and $1,245,000, respectively.
3. INCOME TAXES
The provisions for income taxes are as follows for the years ended May 31.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $1,573 $2,259 $1,667
State............................................ 212 304 226
------ ------ ------
Total current.................................... 1,785 2,563 1,893
------ ------ ------
Deferred:
Federal.......................................... 112 (578) (217)
State............................................ 22 (78) (29)
------ ------ ------
Total deferred .................................. 134 (656) (246)
------ ------ ------
Total provision for income taxes................... $1,919 $1,907 $1,647
====== ====== ======
</TABLE>
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets (liabilities) are comprised of the following
at May 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Depreciation............................................. $ (986) $ (860)
Other.................................................... -- (45)
------ ------
Gross deferred tax liabilities........................... (986) (905)
------ ------
Reserve for doubtful accounts............................ 1,243 1,358
Third-party receivable reserves.......................... 309 223
Self-insurance........................................... 977 1,001
------ ------
Gross deferred tax assets................................ 2,529 2,582
------ ------
Net deferred tax assets.................................. $1,543 $1,677
====== ======
</TABLE>
Management has determined that no valuation allowance related to deferred
tax assets is necessary at May 31, 1997 and 1996.
F-31
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company joins with the Parent in the filing of a consolidated Federal
tax return and files a separate tax return for the state of Texas. The Parent
allocates taxes to the Company as if the Company were a separate entity. The
Parent pays income taxes on behalf of the Company, the cumulative effect of
which is reflected in due to Parent.
4. NET ACCOUNTS RECEIVABLE
The Company has agreements with third-party payors that provide for payments
to the Company at amounts different from established rates. A summary of the
payment arrangements with major third-party payors follows.
MEDICARE
Inpatient acute care services rendered to Medicare program beneficiaries
are paid at prospectively determined rates per discharge. These rates vary
according to a patient classification system that is based on clinical,
diagnostic, and other factors. Inpatient nonacute services and certain
outpatient service costs related to Medicare beneficiaries are paid on a
cost reimbursement methodology or fixed for schedule. The Company is
reimbursed for cost reimbursable items at a tentative rate with the final
settlement determined after submission of annual cost reports by the
Company and audits thereof by the Medicare fiscal intermediary.
MEDICAID
Inpatient acute care services rendered to Medicaid program beneficiaries
are paid at prospectively determined rates per discharge. These rates vary
according to a patient classification system that is based on clinical,
diagnostic, and other factors. Certain outpatient services rendered to
Medicaid program beneficiaries are reimbursed under a cost reimbursement
methodology or fixed fee schedule. The Company is reimbursed at a tentative
rate with final settlement determined after submission of annual cost
reports by the Company and audits thereof by the Medicaid fiscal
intermediary.
The Company also has payment agreements with certain commercial insurance
carriers, health maintenance organizations, and preferred provider
organizations. The basis for payment to the Company under these agreements
includes prospectively determined rates per discharge, discounts from
established charges, and prospectively determined daily rates.
In the opinion of management, any differences between net patient service
revenues recorded and final determination will not be significant.
5. PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, 1997 and 1996 were as
follows.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Land.................................................. $ 615 $ 615
Building and improvements............................. 17,111 10,152
Equipment............................................. 16,410 12,396
Construction in process............................... -- 6,737
-------- --------
34,136 29,900
Less accumulated depreciation......................... (13,385) (12,612)
-------- --------
$ 20,751 $ 17,288
======== ========
</TABLE>
In June 1996, the Company opened a new addition to the building with a cost
of $6.7 million, which accommodates emergency room and ambulatory surgery
suites. The amounts of capitalized interest related to the construction were
$15,014, $256,018 and $39,643, respectively, in fiscal years 1997, 1996 and
1995.
F-32
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses as of May 31, 1997 and 1996, were as follows.
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN
THOUSANDS
OF
DOLLARS)
<S> <C> <C>
Payroll......................................................... $598 $514
Vacation........................................................ 213 154
Taxes and other................................................. 174 129
---- ----
$985 $797
==== ====
</TABLE>
7. CONCENTRATIONS OF CREDIT RISK
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements. The
mix of gross receivables from patients and third-party payors at May 31, 1997,
and 1996, was as follows.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Medicare...................................................... 22% 23%
Medicaid...................................................... 16 13
Blue Cross.................................................... 4 3
Other third-party payors...................................... 35 27
Self-pay...................................................... 23 34
--- ---
100% 100%
=== ===
</TABLE>
8. DUE TO PARENT
The Company participates in a cash management program with the Parent
whereby the Parent receives and disburses cash on behalf of the Company.
Receipts for patient billings are received by the Parent, and are then used to
make disbursements for the operations of the Company.
The Parent funds the contribution requirements for the Company's employees'
participation in the Parent's retirement and group health insurance plans and
makes payments for the Company's insurance and self-insurance programs,
including occurrence-based malpractice coverage, when applicable. The Company
reimburses the Parent for these fundings and payments via the Due to Parent
account. The expenses incurred by the Company for retirement, group health
insurance and general and professional liability insurance for fiscal years
1997, 1996 and 1995 are: $259,056, $274,291 and $300,000; $681,100, $656,906
and $578,524 and $755,102, $773,935 and $819,085, respectively.
F-33
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The cumulative effect of this activity, plus intercompany allocations
discussed herein, has resulted in an intercompany payable to the Parent at May
31, 1997. No interest is charged from the Parent to the Company on this
amount.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C>
Balance, May 31, 1994........................... $ 2,144
Income taxes.................................... 1,893
Invoices paid by Parent, net.................... 1,828
Cash transfers to Parent, net................... (5,115)
-------
Balance, May 31, 1995........................... 1,678
Income taxes.................................... 2,563
Invoices paid by Parent, net.................... 7,889
Cash transfers to Parent, net................... (8,309)
-------
Balance, May 31, 1996........................... 3,826
Income taxes.................................... 1,785
Invoices paid by Parent, net.................... 3,014
Cash transfers to Parent, net................... (5,925)
-------
Balance, May 31, 1997........................... $ 2,700
=======
</TABLE>
9. MANAGEMENT FEES
The Parent provides risk management, benefits administration, accounting
support and other services to the Company. The Company pays management fees to
the Parent based on predetermined estimates of services to be provided.
Management fee expense was $508,000, $397,000, and $318,000 for fiscal years
1997, 1996 and 1995, respectively. These amounts would not be materially
different if the Company retained these services from a third party.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The balance sheet carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses, amounts due to Parent and
estimated third-party payor settlements approximate fair value due to the
short-term nature of these items.
11. COMMITMENTS AND CONTINGENCIES/LITIGATION
The Company is involved in litigation and regulatory investigations arising
in the ordinary course of business. After consultation with legal counsel,
management estimates that these matters will be resolved without material
adverse effect to the Company's financial position and results of operations.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
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 approximately
$22,385,000, $20,024,000, and $19,908,000, respectively. In the opinion of
management, any difference between revenues recorded and final determination
will not be significant.
F-34
<PAGE>
COMMUNITY HOSPITAL OF MESQUITE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT
Effective June 1, 1997, Mesquite Community Hospital, L.P., a Texas limited
partnership, was formed to own and operate the Hospital. The Company
contributed all of the assets and liabilities of the Hospital to the
partnership. The partnership sold limited partnership interests to doctors and
other key employees. As a result, the Company is the general partner of
Mesquite Community Hospital, L.P. and now owns 97.7% of the partnership.
Because of its general partnership interest, the Company will continue to
consolidate the partnership in its financial statements. The limited
partnership units sold to the doctors and other key employees contain a "put"
feature which will allow these parties to "put" their units to the Company at
formula amounts based principally on an agreed upon multiple of earnings
before interest, taxes, depreciation and amortization. Increases or decreases
in the formula will be recorded as limited partners' interest in the
accompanying financial statements.
F-35
<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 Relating to Manor Care Realty ............................... 20
Risk Factors Relating to ManorCare Health Services........................ 37
Use of Proceeds........................................................... 47
Manor Care Realty Pro Forma Capitalization................................ 49
Manor Care Realty Pro Forma Financial Data................................ 50
Selected Historical Financial Data of Manor Care Realty................... 57
Management's Discussion and Analysis of Manor Care's Results of Operations
and Financial Condition.................................................. 58
Business of Manor Care Realty After the Distribution...................... 60
Business of ManorCare Health Services after the Distribution.............. 79
ManorCare Health Services Pro Forma Capitalization........................ 100
ManorCare Health Services Pro Forma Financial Data........................ 101
Selected Historical Financial Data of Manor Care.......................... 108
Management's Discussion and Analysis of Manor Care's Results of Operations
and Financial Condition.................................................. 110
Description of the Transactions........................................... 120
Relationship Between Manor Care Realty and ManorCare Health Services After
the Distribution......................................................... 125
Management of Manor Care Realty After the Distribution.................... 139
Management of ManorCare Health Services after the Distribution............ 141
The Board of Directors of ManorCare Health Services....................... 148
Security Ownership of Certain Beneficial Owners of ManorCare Health
Services................................................................. 151
Beneficial Ownership of Management of ManorCare Health Services........... 153
Description of the Notes.................................................. 155
Description of Certain Indebtedness of Manor Care Realty ................. 184
Description of Certain Indebtedness of ManorCare Health Services.......... 186
Certain Relationships..................................................... 188
Underwriting.............................................................. 189
Legal Matters............................................................. 190
Experts................................................................... 190
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$350,000,000
MANOR CARE REAL ESTATE CORP.
(WHICH IS NAMED MANORCARE HEALTH SERVICES, INC. PRIOR TO THE DISTRIBUTION
REFERRED TO HEREIN)
FULLY AND UNCONDITIONALLY GUARANTEED BY
MANOR CARE REALTY, INC.
(WHICH IS NAMED MANOR CARE, INC. PRIOR TO THE DISTRIBUTION REFERRED TO HEREIN)
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 13 TO FORM S-1, ITEM 14 TO FORM S-3. 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 Registrants 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 14 TO FORM S-1, ITEM 15 TO FORM S-3. 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 Manor Care Realty's Amended Certificate of Incorporation contains such a
provision.
Article VII of the Amended Bylaws of Manor Care Realty provide that Manor
Care Realty shall indemnify its directors and officers to the fullest extent
permitted by Delaware Law. Manor Care Realty 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 Manor Care
II-1
<PAGE>
Realty. Such agreements are intended to be in furtherance, and not in
limitation of, the general right to indemnification provided in Manor Care
Realty's Amended Certificate of Incorporation. Manor Care Realty's Amended
Bylaws also authorize Manor Care Realty to purchase and maintain insurance on
behalf of an officer or director, past or present, against any liability
asserted against him in any such capacity whether or not Manor Care Realty
would have the power to indemnify him against such liability under the
provisions of the Amended Certificate of Incorporation of Manor Care Realty or
section 145 of the Delaware Law.
Pursuant to authority conferred by Delaware General Corporation Law Section
102, ManorCare Health Services' Charter provides that no director of ManorCare
Health Services will be liable to ManorCare Health Services or its
stockholders for monetary damages for breach of fiduciary duty as a director
except for breach of the director's duty of loyalty to ManorCare Health
Services or the stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for unlawful
payment of dividends, unlawful stock redemptions or repurchases and for any
transaction from which the director derived an improper personal benefit. This
provision is intended to eliminate the risk that a director might incur
personal liability to ManorCare Health Services or its stockholders for breach
of the duty of care. ManorCare Health Services' Charter also provides that if
Delaware law is amended to further limit the liability of directors, then the
liability of a director of ManorCare Health Services will be further limited
to the fullest extent permitted by Delaware law as so amended.
ManorCare Health Services' Charter contains provisions requiring
indemnification by ManorCare Health Services of its directors and officers to
the fullest extent permitted by law. Among other things, ManorCare Health
Services' Charter provides indemnification for officers and directors against
liabilities for judgments in and settlement of lawsuits and other proceedings
and for the advance any payment of fees and expenses reasonably incurred by
the director or officer in defense of any such lawsuit or proceeding.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrants
pursuant to the foregoing provisions, the Registrants have 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 Manor Care
Realty, its officers who sign the Registration Statement and directors, and
persons who control Manor Care Realty under certain circumstances.
The foregoing summaries are necessarily subject to the complete text of the
statutes, Registrants' Certificate of Incorporation and Registrants' Bylaws
and the agreements referred to above and are qualified in their entirety by
reference thereto.
ITEM 15 TO FORM S-1. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16 TO FORMS S-1 AND S-3. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<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
Manor Care and ManorCare Health Services.*
3.1 --Amended Certificate of Incorporation of Manor Care, incorporated
by reference to Exhibit 3.1 to Manor Care's Annual Report on Form
10-K for the fiscal year ended May 31, 1997.
3.2 --Amended Bylaws of Manor Care, incorporated by reference to
Exhibit 3.2 to Manor Care's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997.
3.3 --Restated Certificate of Incorporation of ManorCare Health
Services.*
3.4 --Amended Bylaws of ManorCare Health Services.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
4.1 --Indenture, dated as of June 4, 1996, between Manor Care and
Wilmington Trust Company, Trustee, related to Manor Care Realty's
7 1/2% Senior Notes due 2006, incorporated by reference to
Exhibit 4.1 to Manor Care's Form 8-K dated June 4, 1996.
4.2 --Supplemental Indentures, dated as of June 4, 1996, between Manor
Care and Wilmington Trust Company, Trustee, relating to Manor
Care's 7 1/2% Senior Notes due 2006, incorporated by reference to
Exhibit 4.2 to Manor Care's Form 8-K dated June 4, 1996.
4.3 --Form of Second Supplemental Indenture between Manor Care and
Wilmington Trust Company, Trustee, relating to Manor Care's 7
1/2% Senior Notes due 2006.*
4.4 --Form of Indenture between Registrant and The Wilmington Trust
Company, as Trustee, relating to the Registrant's 7 1/2% Senior
Notes due 2006.*
4.5 --Form of Indenture among Manor Care Real Estate, the Guarantors
and , as Trustee.*
4.6 --Form of % Senior Note due 2008 (included in Exhibit 4.5).*
5.1 --Opinion of James H. Rempe (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
Manor Care and ManorCare Health Services.*
10.2 --Form of Tax Administration, dated as of , 1998, between Manor
Care and the ManorCare Health Services.*
10.3 --Form of Corporate Services Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.4 --Credit Agreement, dated as of , 1998, among Manor Care
Realty, 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 --Credit Agreement, dated as of , 1998, among ManorCare Health
Services, Manor Care, The Chase Manhattan Bank and Chase
Securities Inc.*
10.7 --Commitment Letter, dated , 1998, among ManorCare Health
Services, Manor Care, The Chase Manhattan Bank and Chase
Securities, Inc.*
10.8 --Form of Assisted Living Facility Management Agreement, dated as
of , 1998, between Manor Care and ManorCare Health Services.*
10.9 --Form of Master Development Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.10 --Form of Master Lease Agreement, dated as of , 1998, between
Manor Care and ManorCare Health Services.*
10.11 --Form of Non-Competition Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.12 --Form of Employee Benefits and Other Employment Matters
Allocation, dated as of , 1997, between Manor Care and
ManorCare Health Services.*
10.13 --Form of Employee Benefits Administration Agreement, dated as of
, 1998, between Manor Care and ManorCare Health Services.*
10.14 --Form of Office Sublease Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.15 --Form of Trademark Agreement, dated as of , 1998, between
Manor Care and ManorCare Health Services.*
10.16 --Form of Cash Management Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.17 --Form of Risk Management Consulting Service Agreement, dated as
of , 1998, between Manor Care and ManorCare Health Services.*
10.18 --Form of License Agreement, dated as of , 1998, between
ManorCare Health Services and the Manor Care.*
10.19 --Form of % Senior Note due 2008 of Manor Care Real Estate (Real
Estate Note).*
10.20 --Form of Vehicle Lease Agreement, dated as of , 1998, between
ManorCare Health Services and the Manor Care.*
10.21 --Form of Design Services Agreement, dated as of , 1998,
between ManorCare Health Services and the Manor Care.*
10.22 --Form of New ManorCare Health Services, Inc. Non-Employee
Director Stock Compensation Plan.*
10.23 --Form of New ManorCare Health Services, Inc. Long-term Incentive
Plan.*
10.24 --Form of New ManorCare Health Services, Inc. Supplemental
Executive Retirement Plan.*
10.25 --Form of New ManorCare Health Services, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase
Plan.*
10.26 --Form of Employment Agreement, dated as of , 1998, between
Stewart Bainum, Jr. and the Registrant.*
10.27 --Form of Employment Agreement, dated as of , 1998, between
Scott J. Van Hove and the Registrant.*
21.1 --Subsidiaries of ManorCare Health Services.*
23.1 --Consent of Independent Public Accountants
23.2 --Consent of James H. Rempe (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 by amendment.
ITEM 17 TO FORMS S-1 AND S-3. UNDERTAKINGS.
(a) The undersigned Manor Care hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Manor Care'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 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
II-4
<PAGE>
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-5
<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 16th day of March, 1998.
Manor Care, Inc.
By: /s/ James H. Rempe
---------------------------------
NAME: JAMES H. REMPE
TITLE: SECRETARY
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 March 16, 1998:
SIGNATURES TITLE
---------- -----
* Chairman of the
- ------------------------------------- Board, President,
STEWART BAINUM, JR. Chief Executive
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
MARGARITA A. SCHOENDORFER (Principal
Accounting Officer)
* Director
- -------------------------------------
REGINA E. HERZLINGER
* Director
- -------------------------------------
WILLIAM H. LONGFIELD
II-6
<PAGE>
* Director
- -------------------------------------
FREDERIC V. MALEK
* Director
- -------------------------------------
JERRY E. ROBERTSON, PH.D.
* Director
- -------------------------------------
KENNETT L. SIMMONS
*By /s/ James H. Rempe
---------------------------------
AS ATTORNEY-IN-FACT
II-7
<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 16th day of March, 1998.
For the Registrants set forth on the
table of additional Co-Registrants
By: /s/ James H. Rempe
--------------------------------
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 March 16, 1998.
SIGNATURES TITLE
---------- -----
* (2)
- -------------------------------------
STEWART BAINUM, JR.
* (3)
- -------------------------------------
DONALD C. TOMASSO
* (4)
- -------------------------------------
LEIGH C. COMAS
* (5)
- -------------------------------------
MARGARITA A. SCHOENDORFER
II-8
<PAGE>
SIGNATURES TITLE
---------- -----
* (6)
- -------------------------------------
K. PETER KEMEZYS
* (7)
- -------------------------------------
DARRELL A. CARLISLE
* (8)
- -------------------------------------
JOSEPH R. BUCKLEY
* (9)
- -------------------------------------
JAMES A. MACCUTCHEON
*By /s/ James H. Rempe
---------------------------------
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.,
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 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
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., 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., 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., 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-9
<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-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Gaithersburg, State of Maryland, on March 16, 1998.
New ManorCare Health Services, Inc.
By: /s/ James H. Rempe
---------------------------------
NAME: JAMES H. REMPE
TITLE: SECRETARY
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 March 16, 1998:
SIGNATURES TITLE
---------- -----
* Chairman and Chief
- ------------------------------------- Executive Officer
STEWART BAINUM, JR. and Director
* President
- -------------------------------------
DONALD C. TOMASSO
Vice President-
* Finance, Treasurer
- ------------------------------------- and Director
LEIGH C. COMAS
Vice President and
* Controller
- ------------------------------------- (Principal
MARGARITA A. SCHOENDORFER Accounting Officer)
* By: /s/ James H. Rempe
---------------------------
AS ATTORNEY IN FACT
II-11
<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 Manor Care and ManorCare Health Services.*
3.1 --Amended Certificate of Incorporation of Manor Care,
incorporated by reference to Exhibit 3.1 to Manor Care's
Annual Report on Form 10-K for the fiscal year ended May
31, 1997.
3.2 --Amended Bylaws of Manor Care, incorporated by reference
to Exhibit 3.2 to Manor Care's Annual Report on Form 10-K
for the fiscal year ended May 31, 1997.
3.3 --Restated Certificate of Incorporation of ManorCare Health
Services.*
3.4 --Amended Bylaws of ManorCare Health Services.*
4.1 --Indenture, dated as of June 4, 1996, between Manor Care
and Wilmington Trust Company, Trustee, related to Manor
Care Realty's 7 1/2% Senior Notes due 2006, incorporated
by reference to Exhibit 4.1 to Manor Care's Form 8-K dated
June 4, 1996.
4.2 --Supplemental Indentures, dated as of June 4, 1996,
between Manor Care and Wilmington Trust Company, Trustee,
relating to Manor Care's 7 1/2% Senior Notes due 2006,
incorporated by reference to Exhibit 4.2 to Manor Care's
Form 8-K dated June 4, 1996.
4.3 --Form of Second Supplemental Indenture between Manor Care
and Wilmington Trust Company, Trustee, relating to Manor
Care's 7 1/2% Senior Notes due 2006.*
4.4 --Form of Indenture between Registrant and The Wilmington
Trust Company, as Trustee, relating to the Registrant's 7
1/2% Senior Notes due 2006.*
4.5 --Form of Indenture among Manor Care Real Estate, the
Guarantors and , as Trustee.*
4.6 --Form of % Senior Note due 2008 (included in Exhibit
4.5).*
5.1 --Opinion of James H. Rempe (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 Manor Care and ManorCare Health Services.*
10.2 --Form of Tax Administration, dated as of , 1998,
between Manor Care and the ManorCare Health Services.*
10.3 --Form of Corporate Services Agreement, dated as of ,
1998, between Manor Care and ManorCare Health Services.*
10.4 --Credit Agreement, dated as of , 1998, among Manor Care
Realty, 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 --Credit Agreement, dated as of , 1998, among ManorCare
Health Services, Manor Care, The Chase Manhattan Bank and
Chase Securities Inc.*
10.7 --Commitment Letter, dated , 1998, among ManorCare
Health Services, Manor Care, The Chase Manhattan Bank and
Chase Securities, Inc.*
10.8 --Form of Assisted Living Facility Management Agreement,
dated as of , 1998, between Manor Care and ManorCare
Health Services.*
10.9 --Form of Master Development Agreement, dated as of ,
1998, between Manor Care and ManorCare Health Services.*
10.10 --Form of Master Lease Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NO.
----------- ---------------------- ----
<C> <S> <C>
10.11 --Form of Non-Competition Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.12 --Form of Employee Benefits and Other Employment Matters
Allocation, dated as of , 1997, between Manor Care and
ManorCare Health Services.*
10.13 --Form of Employee Benefits Administration Agreement, dated
as of , 1998, between Manor Care and ManorCare Health
Services.*
10.14 --Form of Office Sublease Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.15 --Form of Trademark Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.16 --Form of Cash Management Agreement, dated as of , 1998,
between Manor Care and ManorCare Health Services.*
10.17 --Form of Risk Management Consulting Service Agreement,
dated as of , 1998, between Manor Care and ManorCare
Health Services.*
10.18 --Form of License Agreement, dated as of , 1998, between
ManorCare Health Services and the Manor Care.*
10.19 --Form of % Senior Note due 2008 of Manor Care Real
Estate (Real Estate Note).*
10.20 --Form of Vehicle Lease Agreement, dated as of , 1998,
between ManorCare Health Services and the Manor Care.*
10.21 --Form of Design Services Agreement, dated as of , 1998,
between ManorCare Health Services and the Manor Care.*
10.22 --Form of New ManorCare Health Services, Inc. Non-Employee
Director Stock Compensation Plan.*
10.23 --Form of New ManorCare Health Services, Inc. Long-term
Incentive Plan.*
10.24 --Form of New ManorCare Health Services, Inc. Supplemental
Executive Retirement Plan.*
10.25 --Form of New ManorCare Health Services, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock
Purchase Plan.*
10.26 --Form of Employment Agreement, dated as of , 1998,
between Stewart Bainum, Jr. and the Registrant.*
10.27 --Form of Employment Agreement, dated as of , 1998,
between Scott J. Van Hove and the Registrant.*
21.1 --Subsidiaries of ManorCare Health Services.*
23.1 --Consent of Independent Public Accountants
23.2 --Consent of James H. Rempe (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 (Manor Care, Inc.).
27.2 --Financial Data Schedule (Community Hospital of Mesquite,
Inc.).
99.1 --Schedule II -- Valuation and Qualifying Accounts (Manor
Care, Inc.).
99.2 --Schedule II -- Valuation and Qualifying Accounts
(Community Hospital of Mesquite, Inc.).
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on Manor Care, Inc. dated June 27, 1997 (except for the Distribution as
discussed in the footnotes entitled "Principles of Consolidation" and
"Transactions between Manor Care Realty and ManorCare Health Services" which
are dated September 14, 1997) and our report on Community Hospital of
Mesquite, Inc. dated February 27, 1998 included in or made a part of this
registration statement, and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN, LLP
Washington, DC,
March 16, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR MANOR CARE, INC.
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF
INCOME AND THE CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 32,882
<SECURITIES> 0
<RECEIVABLES> 256,684
<ALLOWANCES> 41,493
<INVENTORY> 37,724
<CURRENT-ASSETS> 337,470
<PP&E> 1,382,509
<DEPRECIATION> 354,938
<TOTAL-ASSETS> 1,979,704
<CURRENT-LIABILITIES> 227,821
<BONDS> 596,473
0
0
<COMMON> 6,682
<OTHER-SE> 683,749
<TOTAL-LIABILITY-AND-EQUITY> 1,979,704
<SALES> 0
<TOTAL-REVENUES> 1,527,247
<CGS> 0
<TOTAL-COSTS> 1,182,495
<OTHER-EXPENSES> 80,378
<LOSS-PROVISION> 20,341
<INTEREST-EXPENSE> 41,831
<INCOME-PRETAX> 209,813
<INCOME-TAX> 84,700
<INCOME-CONTINUING> 125,113
<DISCONTINUED> 11,829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,942
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 2.16
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR COMMUNITY HOSPITAL OF
MESQUITE, INC. EXTRACTED FROM THE BALANCE SHEETS, THE STATEMENTS OF INCOME AND
THE STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 164
<SECURITIES> 0
<RECEIVABLES> 8,797
<ALLOWANCES> 3,093
<INVENTORY> 1,004
<CURRENT-ASSETS> 7,074
<PP&E> 34,136
<DEPRECIATION> 13,385
<TOTAL-ASSETS> 29,368
<CURRENT-LIABILITIES> 5,104
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 23,448
<TOTAL-LIABILITY-AND-EQUITY> 29,368
<SALES> 0
<TOTAL-REVENUES> 44,889
<CGS> 0
<TOTAL-COSTS> 31,038
<OTHER-EXPENSES> 1,955
<LOSS-PROVISION> 6,833
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,063
<INCOME-TAX> 1,919
<INCOME-CONTINUING> 3,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,144
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
SCHEDULE II
MANOR CARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING OF PROFIT WRITE- END
DESCRIPTION PERIOD AND LOSS OTHER OFFS OF PERIOD
- ----------- ------------ --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Six months ended Novem-
ber 30, 1997
Allowance for doubtful
accounts.............. $41,493 $19,311 $ -- $(19,834) $40,970
Year ended May 31, 1997
Allowance for doubtful
accounts.............. $24,311 $20,341 $10,644(a) $(13,803) $41,493
Year ended May 31, 1996
Allowance for doubtful
accounts.............. $18,797 $16,190 $ 1,030(a) $(11,706) $24,311
Year ended May 31, 1995
Allowance for doubtful
accounts.............. $15,481 $12,587 $ -- $(9,271) $18,797
</TABLE>
(a) Represents reserves of acquired companies.
<PAGE>
EXHIBIT 99.2
SCHEDULE II
COMMUNITY HOSPITAL OF MESQUITE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING OF PROFIT WRITE- END
DESCRIPTION PERIOD AND LOSS OFFS OF PERIOD
- ----------- ------------ --------- ------- ----------
<S> <C> <C> <C> <C>
Six months ended November 30, 1997
Allowance for doubtful accounts..... $3,093 $4,293 $(3,657) $3,729
Year ended May 31, 1997
Allowance for doubtful accounts..... $3,642 $6,833 $(7,382) $3,093
Year ended May 31, 1996
Allowance for doubtful accounts..... $3,518 $6,153 $(6,029) $3,642
Year ended May 31, 1995
Allowance for doubtful accounts..... $2,928 $5,146 $(4,556) $3,518
</TABLE>
