S-4/A

   1
 
   
                                            Registration Statement No. 333-43549
    
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                      ------------------------------------
   
                                Amendment No. 1
    
   
                                       to
    
                                    Form S-4
                             REGISTRATION STATEMENT
                                   UNDER THE
                             SECURITIES ACT OF 1933
                      ------------------------------------
                       EXTENDICARE HEALTH SERVICES, INC.
             (Exact name of Registrant as specified in its charter)
 
                                                          
          DELAWARE                          8051                         98-0066268
(State or other jurisdiction    (Primary Standard Industrial          (I.R.S. Employer
     of incorporation or        Classification Code Number)         Identification No.)
       organization)


 
                            105 WEST MICHIGAN STREET
                           MILWAUKEE, WISCONSIN 53203
                                 (414) 271-9696
    (Address, including zip code and telephone number, including area code,
                  of Registrant's principal executive offices)
                      SEE TABLE OF ADDITIONAL REGISTRANTS
                      ------------------------------------
    CT CORPORATION SYSTEM, 1633 BROADWAY, NEW YORK, NY 10019 (212) 664-1666
(Name, address, including zip code and telephone number, including area code, of
                               agent for service)
 
                                    COPY TO:
                             CHRISTOPHER W. MORGAN
                    SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
                         ROYAL BANK PLAZA, NORTH TOWER
                           200 BAY STREET, SUITE 1820
                        TORONTO, ONTARIO, CANADA M5J 2J4
                                 (416) 777-4700
                      ------------------------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
   
                      ------------------------------------
    
 
     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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 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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   2
 
                        TABLE OF ADDITIONAL REGISTRANTS
 


                                                    STATE OR OTHER     PRIMARY STANDARD
                                                   JURISDICTION OR        INDUSTRIAL       I.R.S. EMPLOYER
                                                   INCORPORATION OR     CLASSIFICATION     IDENTIFICATION
                      NAME                           ORGANIZATION        CODE NUMBER           NUMBER
- ------------------------------------------------   ----------------    ----------------    ---------------
                                                                                  
Adult Services Unlimited, Inc...................    Pennsylvania             8051             23-2284465
Alternacare Plus Enterprises, Inc...............    Ohio                     8051             31-1204113
Arbor Health Care Company.......................    Delaware                 8051             34-1469604
Arbors East, Inc................................    Ohio                     8051             34-1677616
Arbors at Ft. Wayne, Inc........................    Indiana                  8051             31-1330028
Arbors at Toledo, Inc...........................    Ohio                     8051             34-1645103
Bay Geriatric Pharmacy, Inc.....................    Florida                  8051             59-1195042
Coventry Care, Inc..............................    Pennsylvania             8051             25-1212961
Edgewood Nursing Center, Inc....................    Pennsylvania             8051             25-1203766
Elder Crest, Inc................................    Pennsylvania             8051             25-1115979
Extendicare Great Trail, Inc....................    Delaware                 8051             39-1893202
Extendicare Health Facilities, Inc..............    Wisconsin                8051             39-1045271
Extendicare Health Facility Holdings, Inc.......    Delaware                 8051             39-1441286
Extendicare Homes, Inc..........................    Delaware                 8051             39-1441287
Extendicare of Indiana, Inc.....................    Delaware                 8051             39-1792004
Fir Lane Terrace Convalescent Center, Inc.......    Washington               8051             91-1085334
Haven Crest, Inc................................    Pennsylvania             8051             25-1102724
Health Poconos, Inc.............................    Pennsylvania             8051             23-2651850
Home Care Pharmacy, Inc. of Florida.............    Florida                  8051             59-2758082
Marshall Properties, Inc........................    Ohio                     8051             38-2583847
Meadow Crest, Inc...............................    Pennsylvania             8051             25-1412967
Northern Health Facilities, Inc.................    Delaware                 8051             39-1406172
Oak Hill Home of Rest and Care, Inc.............    Pennsylvania             8051             25-1181655
Poly-Stat Computer Applications, Inc............    Ohio                     8051             31-1316190
Poly-Stat Supply Corporation....................    Ohio                     8051             31-1141419
Q.D. Pharmacy, Inc..............................    Michigan                 8051             38-2420417
The Druggist, Inc...............................    Ohio                     8051             31-0959044
The Progressive Step Corporation................    Wisconsin                8051             39-1878099
United Professional Companies, Inc..............    Delaware                 8051             39-1104974
United Professional Services, Inc...............    Wisconsin                8051             39-1325589
United Rehabilitation Services, Inc.............    Wisconsin                8051             39-1783897

 
     The address, including zip code and telephone number, including area code,
of each of the above Registrant's principal executive offices is: 105 West
Michigan Street, Milwaukee, Wisconsin 53203, (414) 271-9696.
   3
 
PROSPECTUS
 
                                  $200,000,000
                                   OFFER FOR
            ALL OUTSTANDING 9.35% SENIOR SUBORDINATED NOTES DUE 2007
                                IN EXCHANGE FOR
                    9.35% SENIOR SUBORDINATED NOTES DUE 2007
    WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
                                       OF
 
                                      LOGO
                            ------------------------
 
        THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
                     ON            , 1998 UNLESS EXTENDED.
                            ------------------------
    Extendicare Health Services, Inc., a Delaware corporation (the "Company")
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange an aggregate principal amount of up to
$200,000,000 of 9.35% Senior Subordinated Notes Due 2007 (the "Exchange Notes")
of the Company, which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement (as defined
herein) of which this Prospectus constitutes a part, for a like principal amount
of 9.35% Senior Subordinated Notes Due 2007 (the "Outstanding Notes" and, with
the Exchange Notes, the "Notes") of the Company with the holders (the "Holders")
thereof.
   
    The terms of the Exchange Notes are identical in all material respects to
the Outstanding Notes except for certain transfer restrictions and registration
rights relating to the Outstanding Notes and except that, if the Exchange Offer
is not consummated or a shelf registration statement is not declared effective
on or prior to April 16, 1998, the per annum interest rate of the Outstanding
Notes will increase by 0.5% per annum for the first 90 days following such date
and will increase by an additional 0.5% per annum beginning at each subsequent
90-day period until the Exchange Offer is consummated; provided, however, that
in no event will the interest rate borne by the Outstanding Notes be increased
by more than 1.5% per annum. The Exchange Notes are offered hereunder in order
to satisfy certain obligations of the Company under the Purchase Agreement dated
as of November 25, 1997 (the "Purchase Agreement") among the Company, the
existing Guarantors (as defined below) and the initial purchasers of the
Outstanding Notes (the "Initial Purchasers") and the Registration Rights
Agreement dated December 2, 1997 (the "Registration Rights Agreement") among the
Company, the existing Guarantors and the Initial Purchasers. The Exchange Notes
evidence the same debt as the Outstanding Notes and are issued under and are
entitled to the same benefits under the Indenture (as defined herein) as the
Outstanding Notes. In addition, the Exchange Notes and the Outstanding Notes are
treated as one series of securities under the Indenture.
    
    The net proceeds from the offering of the Outstanding Notes, together with a
portion of the net proceeds of the financing described in the New Credit
Facilities (as defined herein), were used by the Company to fund the acquisition
(the "Acquisition") of all of the issued and outstanding common stock of Arbor
Health Care Company ("Arbor") by AHC Acquisition Corp., a wholly owned
subsidiary of the Company ("AHC Acquisition"). On October 3, 1997, Extendicare
Inc., the Company's indirect parent ("Extendicare"), and AHC Acquisition
commenced a tender offer (the "Tender Offer") for such stock. On November 25,
1997, over 99% of the issued and outstanding common stock of Arbor was tendered
pursuant to the Tender Offer. See "The Acquisition" and "Description of Other
Indebtedness -- New Credit Facilities." On November 26, 1997, the Company
effected a merger of AHC Acquisition with and into Arbor.
   
    The Notes mature on December 15, 2007, unless previously redeemed. Interest
on the Notes is payable semiannually on June 15 and December 15, commencing June
15, 1998. The Notes are redeemable at the option of the Company, in whole or in
part, on or after December 15, 2002, at the redemption prices set forth herein,
plus accrued and unpaid interest thereon to the redemption date. In addition, at
any time on or prior to December 15, 2000, the Company may redeem up to 35% of
the sum of (i) the initial aggregate principal amount of the Notes and (ii) the
initial aggregate principal amount of any Additional Notes (as defined herein)
with the net proceeds of one or more Equity Offerings (as defined herein) at a
redemption price equal to 109.35% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption; provided that at least
65% of the sum of (i) the initial aggregate principal amount of the Notes and
(ii) the initial aggregate principal amount of the Additional Notes remains
outstanding after such redemption. Upon a Change of Control (as defined herein),
the Company will be required to offer to repurchase all outstanding Notes at
101% of the principal amount thereof plus accrued and unpaid interest thereon,
if any, to the date of repurchase. There can be no assurance that the Company
will have sufficient financial resources to effect such a repurchase. In
addition, the Company's New Credit Agreement (as defined herein) could prevent
the Company from repurchasing the Notes and Additional Notes, if any, which
would constitute an Event of Default under the Indenture and would, in turn,
constitute a default under the New Credit Agreement. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders (as defined herein) of Notes and Additional Notes. Although the
existence of a Holder's right to require the Company to repurchase the Notes and
Additional Notes, if any, in respect of a Change of Control may deter a third
party from acquiring the Company in a transaction that constitutes a Change of
Control, the provisions of the Indenture relating to a Change of Control in and
of themselves may not afford Holders of the Notes and Additional Notes, if any,
protection in the event of a highly leveraged transaction, reorganization,
recapitalization, restructuring, merger or similar transaction is not the type
of transaction included within the definition of a Change of Control. See
"Description of the Notes -- Repurchase at the Option of Holders -- Change of
Control."
    
 
                                                   (continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
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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.
 
   
               The date of this Prospectus is February    , 1998.
    
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     The Notes are unsecured senior subordinated obligations of the Company and
are subordinated in right of payment to all existing and future Senior
Indebtedness (as defined herein) of the Company, including indebtedness under
its New Credit Facilities (as defined herein). The Notes rank pari passu with
all existing and future senior subordinated indebtedness of the Company and rank
senior to all other existing and future subordinated indebtedness of the
Company. The Notes are fully and unconditionally guaranteed on a joint and
several, unsecured, senior subordinated basis (the "Note Guarantees") by all
existing and future United States Restricted Subsidiaries of the Company
(collectively, the "Guarantors"). The Notes are also effectively subordinated to
all existing and future Senior Indebtedness of the Guarantors. At September 30,
1997, on a pro forma basis after giving effect to the Acquisition, the issuance
of the Notes, the other financing transactions described herein and the
application of the net proceeds therefrom, the aggregate amount of indebtedness
(excluding intercompany indebtedness) that would have effectively ranked senior
to the Notes and the Note Guarantees would have been approximately $523.4
million, and the Company would have had additional availability of $113.9
million (net of letters of credit) for borrowings under the New Credit
Facilities, all of which would be Senior Indebtedness, if borrowed.
    
 
   
     The Exchange Notes will be issued in the form of a global note (the "Global
Note"), which will be deposited with, or on behalf of, the Depository (as
defined herein) and registered in the name of the Depository or its nominee.
Except as set forth herein, owners of beneficial interests in the Global Note
will not be entitled to have the Exchange Notes represented by the Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Exchange Notes in definitive form and will not be
considered to be the owners or holders of any Exchange Notes under the Global
Note. Payment of principal of and interest on Exchange Notes represented by the
Global Note registered in the name of and held by the Depository or its nominee
will be made to the Depository or its nominee, as the case may be, as the
registered owner and holder of the Global Note. See "Description of the Notes --
Book Entry, Delivery and Form."
    
 
     The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in certain no-action letters addressed to other parties in other transactions.
However, the Company has not sought its own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Based upon
these interpretations by the staff of the Commission, the Company believes that
Exchange Notes issued pursuant to this Exchange Offer in exchange for
Outstanding Notes may be offered for resale, resold and otherwise transferred by
a holder thereof, other than (i) a broker-dealer who purchased such Outstanding
Notes directly from the Company for resale pursuant to Rule 144A or other
available exemptions under the Securities Act of 1933, as amended (the
"Securities Act") or (ii) a person that is an "affiliate" (as defined in Rule
405 of the Securities Act) of the Company without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holder's
business and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of such
Exchange Notes. Holders of Outstanding Notes accepting the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes may not
rely on the position of the staff of the Commission as set forth in these
no-action letters and would have to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. A secondary resale transaction in the United States by a
holder who is using the Exchange Offer to participate in the distribution of
Exchange Notes must be covered by an effective registration statement containing
the selling securityholder information required by Item 507 of Regulation S-K
under the Securities Act.
 
   
     Each broker-dealer (other than an "affiliate" of the Company) that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Outstanding Notes as a result of market-making
activities or other trading activities and will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act even though it may be
deemed to be an underwriter for purposes of such Act. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
    
 
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   5
 
Notes where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period (the "Exchange Offer Registration Period") the longer
of (A) the period until consummation of the Exchange Offer and (B) two years
after the effectiveness of the Registration Statement (as defined herein)
(unless, in the case of (B), all resales of Exchange Notes covered by the
Registration Statement have been made), the Company will make this Prospectus,
as amended or supplemented, available to any such broker-dealer for use in
connection with any such resale; provided, however, that the Company shall not
be required to maintain the effectiveness of the Registration Statement for more
than 60 days following the consummation of the Exchange Offer unless the Company
has been notified in writing on or prior to the 60th day following the
consummation of the Exchange Offer by one or more broker-dealers that such
holder has received Exchange Notes as to which it will be required to deliver
this Prospectus upon resale. See "Plan of Distribution". Any broker-dealer who
is an affiliate of the Company may not rely on such no-action letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transactions. See "The
Exchange Offer".
 
     There is currently no market for the Exchange Notes. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the Exchange Notes, they are not obligated to do so, and any such
market-making may be discontinued at any time without notice. Accordingly, there
can be no assurance as to the development or liquidity of any market for the
Exchange Notes. The Company does not intend to apply for listing of the Exchange
Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
 
     Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the rights and preferences and
will be subject to the limitations applicable thereto under the Indenture.
Following consummation of the Exchange Offer, the holders of Outstanding Notes
will continue to be subject to the existing restrictions upon transfer thereof
and the Company will have no further obligation to such holders to provide for
the registration under the Securities Act of the Outstanding Notes held by them.
To the extent that Outstanding Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Outstanding Notes could be
adversely affected. It is not expected that an active market for the Outstanding
Notes will develop while they are subject to restrictions on transfer.
 
     The Company will accept for exchange any and all Outstanding Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time,
on the date the Exchange Offer expires, which will be           , 1998 (the
"Expiration Date"), unless the Exchange Offer is extended by the Company, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. Tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date, unless previously accepted for payment by the Company. The Exchange Offer
is not conditioned upon any minimum principal amount of Outstanding Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. The Exchange Notes will bear interest from
the last interest payment date of the Outstanding Notes to occur prior to the
issue date of the Exchange Notes or, if no such interest has been paid, from
December 2, 1997. Holders of the Outstanding Notes whose Outstanding Notes are
accepted for exchange will not receive interest on such Outstanding Notes for
any period subsequent to the last interest payment date to occur prior to the
issue date of the Exchange Notes or, if no such interest has been paid, from
December 2, 1997, and will be deemed to have waived the right to receive any
interest payment on the Outstanding Notes accrued from and after such date.
 
                             AVAILABLE INFORMATION
 
     The Company will be subject to certain of the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, will file reports and other information with the
Commission. Such reports and other information filed by the Company can be
inspected and copied at public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices for the Commission: New York Regional Office,
 
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Seven World Trade Center, 13th Floor, New York, New York 10048; and Chicago
Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60611. Copies of such material can be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and are also publicly available through the Commission's
web site (http://www.sec.gov). In addition, the Indenture (as defined herein)
provides that whether or not the Company is subject to the reporting
requirements of the Exchange Act, the Company will furnish without cost to each
holder of Notes and file with the Commission and the Trustee copies of the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to Section 13(a) and
15(d) of the Exchange Act or any successor provision thereto if the Company were
so required.
    
 
   
     This Prospectus constitutes a part of a registration statement of Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company and the Guarantors with the Commission under the Securities Act.
This Prospectus, which forms a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. Separate financial statements of the Guarantors are not included
because (a) the Guarantors are wholly-owned and constitute all of the Company's
direct and indirect subsidiaries (other than subsidiaries which are
inconsequential individually and in the aggregate), (b) the Guarantors have
fully and unconditionally guaranteed the Exchange Notes on a joint and several
basis, (c) the Company has no operations separate from its direct and indirect
investments in the respective Guarantors, (d) the aggregate assets, liabilities,
earnings, and equity of the Guarantors are substantially equivalent to the
assets, liabilities, earnings, and equity of the Company on a consolidated basis
and (e) management of the Company has determined that the separate financial
statements and other disclosures concerning the Guarantors are not material to
investors. Reference is hereby made to the Registration Statement and related
exhibits and schedules filed therewith for further information with respect to
the Company and the Guarantors and the Exchange Notes offered hereby. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
    
                               ------------------
 
         SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 
     Certain of the matters discussed under the captions "Summary," "Risk
Factors," "Unaudited Pro Forma Condensed Consolidated Financial Information,"
"Management's Discussion and Analysis," "Business" and elsewhere in this
Prospectus contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition, including, among other
things, the Company's business strategy. These statements are based on the
Company's expectations and are subject to various risks and uncertainties.
Actual results could differ materially from those anticipated due to a number of
factors, including those identified under "Risk Factors" and elsewhere in this
Prospectus.
 
                                        4
   7
 
                                    SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless the context indicates otherwise, the terms "Company" or "EHSI" refers to
Extendicare Health Services, Inc. and its subsidiaries. The issuance of the
Outstanding Notes and the consummation of the transactions contemplated in the
New Credit Facilities are hereinafter sometimes collectively referred to as the
"Financing Transactions." References herein to the "last twelve months" refers
to the last twelve months ended September 30, 1997. All figures are in thousands
of dollars as they relate to financial information, unless otherwise noted.
 
                                  THE COMPANY
 
   
     The Company is one of the largest providers of long-term care and related
medical specialty services in the United States. Through its geographically
clustered facilities, the Company offers a continuum of healthcare services,
including skilled nursing care, assisted living care and related medical
specialty services, such as subacute care and rehabilitative therapy,
institutional pharmacy supplies and services and medical equipment, supplies and
services. On September 30, 1997, the Company announced an agreement to acquire
Arbor Health Care Company, a prominent regionally based provider of long-term
care and related medical specialty services focused on providing subacute
medical services. The Acquisition enhances and complements the Company's
presence in the Ohio and Florida markets and solidifies the Company's position,
on a combined basis, as one of the top ten operators of long-term care
facilities in the United States in terms of both number of beds and revenues,
with 194 skilled nursing facilities (20,985 beds) and 38 assisted living and
retirement facilities (1,480 units) located in 15 states. On a pro forma
combined basis at September 30, 1997, the Company would have owned approximately
85% of its facilities, enhancing its credit quality and financial flexibility.
In addition, on a pro forma combined basis for the nine months ended September
30, 1997, the Company would have generated revenues and earnings from operations
of $854.7 million and $35.7 million, respectively, with occupancy rates
averaging approximately 88% and a strong quality mix (defined as non-Medicaid
revenue) of approximately 64%.
    
 
EHSI OVERVIEW
 
   
     The Company provides high quality long-term care and related medical
specialty services through a total of 201 long-term care facilities with a total
resident capacity of 18,769 in 13 states as of September 30, 1997. The Company
has been able to achieve strong occupancy rates, a favorable payor mix and
sustained growth in total and same facility revenues throughout its network of
long-term care facilities. The Company had an average occupancy rate of
approximately 88% in its nursing facilities and in its assisted living and
retirement facilities for the nine months ended September 30, 1997. In addition,
the Company has improved its quality mix from 53% in 1992 to 64% for the nine
months ended September 30, 1997, primarily as the result of successful efforts
to shift its patient mix to higher acuity patients requiring subacute care
services. Payment coverage for such services is provided principally by the
Medicare program. In addition, since 1992, the Company has increased its
resident capacity by 12.6%. As a result of these factors, the Company's revenues
have increased to $824.3 million in 1996 from $534.8 million in 1992, and the
Company's earnings from operations have increased to $57.0 million in 1996 from
$25.1 million in 1992. For the last twelve months, the Company generated
revenues and earnings from operations of $873.7 million and $65.7 million,
respectively.
    
 
     The Company's long-term care services include skilled nursing care,
assisted living care and related support services traditionally provided in
long-term care facilities. The Company's medical specialty services provide (i)
subacute care and rehabilitative therapy, (ii) pharmacy supplies and services,
and (iii) medical equipment, supplies and services to all its long-term care
facilities, as well as to non-affiliated long-term care facilities.
 
     Long-term Care Services.  The Company's nursing facilities provide a broad
     range of geriatric, subacute care and rehabilitative therapy services,
     including skilled nursing care and ancillary services, to persons who do
     not require the more extensive and specialized services and supervision
     provided by a hospital. The nursing facilities employ registered nurses,
     licensed practical nurses, therapists, certified nursing
 
                                        5
   8
 
     assistants and qualified healthcare aides who provide care as prescribed by
     each resident's attending physician in addition to a full range of personal
     support. All nursing facilities provide daily dietary services, social
     services and recreational activities, as well as basic services such as
     housekeeping and laundry. The Company's assisted living facilities provide
     homelike accommodations, meals and assistance in the activities of daily
     living to seniors who do not require the level of nursing care provided by
     a nursing facility. An assisted living facility enhances the value of an
     existing nursing facility where the two facilities operate side by side,
     and allows the Company to better serve the communities in which it operates
     by providing a broader continuum of service. All of the Company's assisted
     living facilities are within close proximity to its nursing facilities. At
     September 30, 1997, the Company operated a total of 163 skilled nursing
     facilities with 17,289 licensed beds in 13 states and 38 assisted living
     and retirement facilities with 1,480 units in 10 states.
 
     Medical Specialty Services.  The Company also provides, through its network
     of 27 regional service centers that comprise the UPC Health Network,
     patient-centered, outcome-oriented subacute care and rehabilitative therapy
     services to residents in its long-term care facilities and to other
     non-affiliated facilities. The patients receiving such services are
     generally those who are medically stable yet require specialized therapy
     and other services that are more intensive than traditional nursing
     facility care but less than acute hospital care. These services may include
     wound care and respiratory, infusion and intravenous therapies. The Company
     provides rehabilitative therapy services on an inpatient and outpatient
     basis to clients who require, for example, physical or occupational
     therapy, or speech-language pathology. The Company's subacute and
     rehabilitation teams seek to return each patient to maximum functional
     independence, with many patients typically being discharged within 30 to 90
     days. The UPC Health Network also provides pharmacy supplies and services
     to more than 30,000 beds (16,000 of which are not affiliated with the
     Company) in nursing facilities, assisted living facilities and other
     healthcare institutions through 11 locations in eight states. These
     supplies and services include unit-dose medication distribution,
     computerized patient documentation, full-service consultants and on-call
     service. In addition, the UPC Health Network's retail and home health
     operations distribute durable medical equipment and supplies, such as
     wheelchairs, hospital beds, oxygen and diabetic supplies, and provide a
     wide range of services such as intravenous therapy products and
     respiratory, oxygen and enteral therapies.
 
ARBOR OVERVIEW
 
     Arbor provides subacute medical services and traditional long-term care
services through its network of 31 licensed nursing centers (the "Arbor
Centers") and 3,696 beds as of September 30, 1997. The Arbor Centers are located
in five states, with approximately 89% of its bed capacity located in Florida
and Ohio. At September 30, 1997, Arbor had three facilities under construction,
totaling 276 beds, that are scheduled to open over the next 12 months. In
addition, at such date, Arbor held three certificate of need ("CON") approvals
for 275 beds in Florida, along with two additional CON approvals for 240 beds
that have been appealed by other providers and therefore are not yet final.
 
     The Arbor Centers are designed to provide subacute and basic health care
services to diverse but related types of patients. Arbor Centers are generally
located in markets that require both services, with some Arbor Centers
allocating up to 50% of total bed capacity to subacute care. Arbor also operates
four institutional pharmacies which have experienced significant growth in the
last three years.
 
     Subacute Services.  Arbor's subacute units provide treatment programs
     appropriate for medically stable patients who may require medical
     rehabilitation, ventilator weaning and respiratory therapy, and complex
     medical services such as cardiac recovery, infusion therapy, and wound
     care. Such units concentrate on medically complex patients with high acuity
     medical needs requiring greater skills and services than those associated
     with the more general subacute population. Arbor's principal focus is on
     developing higher revenue and higher margin specialized subacute units,
     targeting predominantly commercial insurance and managed care organizations
     (health maintenance organizations ("HMOs"), preferred provider
     organizations ("PPOs") and indemnity insurers), which currently are the
     most profitable payor sources. As of September 30, 1997, Arbor operated 30
     subacute units, totaling 1,209 beds, within its 31 Arbor Centers.
 
                                        6
   9
 
     Basic Health Care Services.  Arbor's basic health care services primarily
     consist of general and restorative ("G&R") nursing care to patients with
     chronic illnesses, diminished physical function, impaired cognition or
     behavioral problems. Arbor's G&R nursing units also provide a step-down in
     medical intensity for geriatric subacute patients who cannot be discharged
     to their homes and need lower intensity nursing for extended periods of
     time. Similarly, geriatric patients in G&R units who develop a need for
     rehabilitative or higher intensity services can be transferred to a
     subacute unit within the same Arbor Center. Arbor also operates assisted
     living units in five of its Arbor Centers.
 
     Other Services.  Arbor's pharmacy division consists of four institutional
     pharmacies and related services. The pharmacy division services
     approximately 26,000 beds (22,500 of which are not affiliated with Arbor)
     in three states. As of January 1, 1997, Arbor began providing outpatient
     rehabilitation services with the acquisition of 10 outpatient
     rehabilitation facilities in Pennsylvania and Florida and has subsequently
     opened two additional outpatient rehabilitation facilities. These are
     specialized facilities organized to deliver comprehensive, case managed,
     interdisciplinary rehabilitation services under physician directive,
     including physical therapy, occupational therapy, speech therapy,
     psychological services and social work. Utilizing the same clinical models
     that are currently used in Arbor's inpatient subacute units, the Company
     believes these facilities will provide the cost advantages that allow Arbor
     to offer low-cost rehabilitation services to managed care organizations.
 
   
     Arbor provides subacute care in its primary Ohio and Florida markets
through a strategy of utilizing its skilled nursing facilities as a platform for
providing care to high acuity patients at low costs. At September 30, 1997,
approximately 62% of Arbor's revenue was generated from subacute care (including
pharmacy). Since 1992, Arbor has increased its occupancy from 88% to 91% for the
nine months ended September 30, 1997. Furthermore, Arbor has been effective at
increasing its quality mix from 62% in 1992 to 68% for the nine months ended
September 30, 1997 as a result of a high Medicare component, reflecting its
presence in subacute care. Arbor's focus on quality mix and high occupancy
levels has resulted in an increase in revenues to $218.8 million in 1996 from
$106.3 million in 1992, and an increase in income from operations to $17.4
million in 1996 from $5.2 million in 1992. For the last twelve months, Arbor
generated revenues and income from operations of $238.9 million and $19.8
million, respectively.
    
 
INDUSTRY OVERVIEW
 
   
     According to industry sources, long-term care spending was estimated at
approximately $120 billion in 1996, or approximately 11% of total national
health expenditures, with nursing facilities accounting for $84 billion of this
total. Approximately 1.7 million people reside in nursing facilities, while
another 5.6 million elderly persons require care and services in their homes or
in community-based settings. It is estimated that the number of elderly persons
requiring long-term care services will grow from approximately 7.3 million in
1995 to over 9 million in the year 2005. Of these totals, one-third or more are
expected to be comprised of nursing facility residents while the others are
expected to receive care in home or community-based settings. As home healthcare
and subacute care services become more accepted and demographics shift toward an
aging population with increased long-term care needs, it is estimated that
long-term care expenditures (defined as nursing facility expenditures plus home
care expenditures) will grow to $250 billion by the year 2005, representing 14%
of total national health expenditures.
    
 
   
     The long-term care and post-acute care industries include rehabilitation
hospitals and facilities, skilled nursing facilities, assisted living
facilities, intermediate care facilities, and home health services. Each of
these segments has experienced rapid growth in the last ten years. The number of
rehabilitation hospitals has grown 149% since 1986, while rehabilitation units
within acute care hospitals have grown 86% since 1986. While the number of
freestanding nursing facilities has remained flat over the last ten years
(17,100 in 1986 vs. 17,400 in 1996), hospital-based skilled nursing facilities
have increased from 1,145 in 1990 to 2,088 in 1996 (an 80% increase). Home
health agencies have grown even more rapidly over the last five years. Between
1990 and 1995 the number of home health agencies grew 60% from 11,765 to 18,874.
    
 
     In addition to an aging population, the long-term care industry is changing
as a result of several fundamental factors. First, the acquisition and
construction of additional skilled nursing facilities are subject to
 
                                        7
   10
 
certain restrictions on supply, including government-legislated moratoriums on
new capacity and licensing restrictions limiting the growth of services. Such
restrictions on supply, coupled with an aging population, are causing a decline
in the availability of long-term beds per person aged 85 years or older. Second,
in response to rising healthcare costs, governmental and private pay sources
have adopted cost containment measures that encourage reduced length of stays in
acute care hospitals. As a result, average acute care hospital stays have been
shortened, and many patients are discharged despite a continuing need for
nursing or specialty healthcare services. This trend has increased demand for
long-term care, home healthcare, outpatient facilities, hospices and assisted
living facilities. In addition, long-term care companies with an integrated
network and a broad range of services will be well positioned to contract with
managed care companies and other payors. Lastly, as a result of the growing
number of two-income families, many people are not able to care for elderly
parents in their homes. Two-income families are, however, better able to provide
financial support for elderly parents to receive the care they need in a nursing
or assisted living facility.
 
BUSINESS STRATEGY
 
     The Company has experienced significant growth in revenues and EBITDA since
1992. The Company seeks to continue this growth through a strategy based on its
ongoing commitment to the provision of high-quality healthcare services while
positioning itself to take advantage of the changing healthcare environment. The
Company seeks to implement its strategy by: (i) selectively building and
acquiring skilled nursing facilities in markets with attractive regulatory,
reimbursement and demographic environments while maintaining the geographical
clustering of its facilities, (ii) developing assisted living and retirement
facilities on sites adjacent or in close proximity to its nursing facilities,
(iii) continually improving its quality mix by increasing its subacute care,
rehabilitative therapy and assisted living services, (iv) expanding the UPC
Health Network, (v) maintaining its focus on smaller urban communities and (vi)
continuing to emphasize ownership of assets.
 
THE ARBOR ACQUISITION
 
   
     Consistent with the Company's strategy, the Company acquired Arbor for an
aggregate purchase price of $430.1 million (exclusive of transaction costs and
fees), including the assumption of $109.7 million of Arbor's debt. The
Acquisition solidifies the Company's position as one of the top ten operators of
long-term care facilities in the United States and enhances and complements the
Company's presence in Florida and Ohio. In addition, the Acquisition provides
the Company with eight approved CONs for 791 new beds, 80 of which are in Ohio
(which currently has a moratorium on new CONs). The Company estimates that 431
of the 791 beds will be constructed in 1998, representing four new facilities
and one facility addition. Two of the approved CONs for an aggregate of 240 new
beds have been appealed by other providers and therefore are not yet final. The
Company intends to build such additional facilities upon resolution of such
appeals in the Company's favor. The Acquisition will also provide the Company
and Arbor with increased access to managed care contracts, cross selling
opportunities for their pharmacy businesses and an extension of their group
purchasing services. Furthermore, given Arbor's size and the geographic overlap
with the Company, annual cost savings are anticipated to be achieved in staff
related areas, corporate general and administrative functions and pharmacy
overhead.
    
 
                                        8
   11
 
     The following table illustrates the sources and uses of funds for the
Acquisition, as of September 30, 1997, on a pro forma basis, assuming the
Acquisition and the Financing Transactions had occurred on such date (dollars in
thousands).
 
   
                                                                         
    Sources of Funds
      New Credit Facilities
         Revolving Credit Facility(1)........................................    $  54,104
         Tranche A Term Loan Facility due 2003...............................      200,000
         Tranche B Term Loan Facility due 2004...............................      200,000
      Senior Subordinated Notes due 2007(2)..................................      200,000
      Equity from Extendicare................................................       44,600
                                                                                  --------
         Total Sources.......................................................    $ 698,704
                                                                                  ========
    Uses of Funds
      Purchase price(3)......................................................    $ 320,404
      Refinancing of existing debt(4)........................................      353,800
      Estimated transaction fees and expenses................................       24,500
                                                                                  --------
         Total Uses..........................................................    $ 698,704
                                                                                  ========

    
    
 
- ---------------
 
   
(1) The Revolving Credit Facility has a total availability of $200,000, leaving
    unused borrowing capacity thereunder of approximately $113,896 (net of
    letters of credit in the amount of $32,000).
    
 
(2) The net proceeds from the sale of the Outstanding Notes were used to repay
    the Tranche C Loan Facility under the New Credit Facilities, which was used
    to finance the Tender Offer.
 
   
(3) Includes the cost of 7,266,218 shares of Arbor stock at $45 per share, net
    of $6,576 of proceeds related to the exercise of Arbor stock options.
    
 
   
(4) Includes refinancing of approximately $243,500 of the Company's indebtedness
    and $101,700 of Arbor's indebtedness, and approximately $8,600 of debt
    prepayment penalties, net of tax.
    
 
   
     The Company is an indirect wholly owned subsidiary of Extendicare Inc.
("Extendicare"), which is based in Toronto, Canada. Extendicare is the sixth
largest (by total number of beds) operator of long-term care facilities and
hospitals in North America (United States and Canada), with resident capacity as
of September 30, 1997 of 28,411 in 281 facilities. All of Extendicare's U.S.
healthcare operations are conducted through the Company, which accounted for
approximately 76% of Extendicare's total revenues and 80% of total earnings
before interest and income taxes in fiscal 1996. In addition to operations in
the United States, Extendicare operates 60 nursing and retirement facilities and
four hospitals in Canada and 15 nursing facilities and one hospital in the
United Kingdom. Extendicare's subordinate voting shares are listed for trading
on The Toronto Stock Exchange, the Montreal Exchange and the New York Stock
Exchange. The holders of Extendicare's subordinate voting shares are entitled to
one vote per share (as opposed to Extendicare's multiple voting shares, which
are listed for trading only on The Toronto Stock Exchange and the Montreal
Exchange, whose holders are entitled to ten votes per share). Extendicare's
subordinate voting shares and multiple voting shares have the same priority in
the event of any liquidation, dissolution or winding-up of Extendicare or other
distribution of assets. As of November 24, 1997, Extendicare had a market
capitalization of approximately $1.0 billion.
    
 
     The Company is located at 105 West Michigan Street, Milwaukee, Wisconsin
53203. The Company's telephone number is (414) 271-9696.
 
                                        9
   12
 
                               THE EXCHANGE OFFER
 
   
Securities Offered.........  Up to $200,000,000 principal amount of 9.35% Senior
                             Subordinated Notes Due 2007, which have been
                             registered under the Securities Act. The terms of
                             the Exchange Notes are identical in all material
                             respects to the Outstanding Notes except for
                             certain transfer restrictions and registration
                             rights relating to the Outstanding Notes and except
                             that, if the Exchange Offer is not consummated or a
                             shelf registration statement is not declared
                             effective on or prior to April 16, 1998, the per
                             annum interest rate of the Outstanding Notes will
                             increase by 0.5% per annum for the first 90 days
                             following such date and will increase by an
                             additional 0.5% per annum beginning at each
                             subsequent 90-day period until the Exchange Offer
                             is consummated; provided, however, that in no event
                             will the interest rate borne by the Outstanding
                             Notes be increased by more than 1.5% per annum.
    
 
The Exchange Offer.........  The Exchange Notes are being offered in exchange
                             for a like principal amount of Outstanding Notes.
                             The issuance of the Exchange Notes is intended to
                             satisfy obligations of the Company contained in the
                             Registration Rights Agreement. The Exchange Notes
                             evidence the same debt as the Outstanding Notes and
                             will be issued, and holders thereof are entitled to
                             the same benefits as holders of the Outstanding
                             Notes, under the Indenture (as defined herein).
 
Tenders, Expiration Date;
  Withdrawal...............  The Exchange Offer will expire at 5:00 p.m., New
                             York City time on           , 1998, or such later
                             date and time to which it is extended. Tenders of
                             Outstanding Notes may be withdrawn at any time
                             prior to the Expiration Date. Any Outstanding Notes
                             not accepted for exchange for any reason will be
                             returned without expense to the tendering holder
                             thereof as promptly as practicable after the
                             expiration or termination of the Exchange Offer.
                             See "The Exchange Offer" for a description of the
                             procedures for tendering the Outstanding Notes.
 
Federal Income Tax
  Consequences.............  The exchange pursuant to the Exchange Offer should
                             not result in income, gain or loss to the holders
                             of Notes who participate in the Exchange Offer or
                             to the Company for U.S. federal income tax
                             purposes. See "Certain Income Tax Considerations".
 
Use of Proceeds............  There will be no proceeds to the Company from the
                             exchange pursuant to the Exchange Offer.
 
Exchange Agent.............  The Bank of Nova Scotia Trust Company of New York
                             is serving as Exchange Agent (the "Exchange Agent")
                             pursuant to the Exchange Offer.
 
                                       10
   13
 
  CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER
 
     The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in certain no-action letters addressed to other parties in other transactions.
However, the Company has not sought its own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Based upon
these interpretations by the staff of the Commission, the Company believes that
Exchange Notes issued pursuant to this Exchange Offer in exchange for
Outstanding Notes may be offered for resale, resold and otherwise transferred by
a holder thereof, other than (i) a broker-dealer who purchased such Outstanding
Notes directly from the Company for resale pursuant to Rule 144A or other
available exemptions under the Securities Act or (ii) a person that is an
"affiliate" (as defined in Rule 405 of the Securities Act) of the Company
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of such Exchange Notes. Holders of Outstanding
Notes accepting the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may not rely on the position of the staff of
the Commission as set forth in these no-action letters and would have to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any secondary resale transaction. A secondary resale
transaction in the United States by a holder who is using the Exchange Offer to
participate in the distribution of Exchange Notes must be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K under the Securities Act.
 
   
     Each broker-dealer (other than an "affiliate" of the Company) that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Outstanding Notes as a result of market-making
activities or other trading activities and will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act even though it may be deemed to be an underwriter for
purposes of such Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Outstanding Notes where such Outstanding
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for the
Exchange Offer Registration Period, the Company will make this Prospectus, as
amended or supplemented, available to any such broker-dealer for use in
connection with any such resale; provided, however, that the Company shall not
be required to maintain the effectiveness of the Registration Statement for more
than 60 days following the consummation of the Exchange Offer unless the Company
has been notified in writing on or prior to the 60th day following the
consummation of the Exchange Offer by one or more broker-dealers that such
holder has received Exchange Notes as to which it will be required to deliver
this Prospectus upon resale. See "Plan of Distribution". Any broker-dealer who
is an affiliate of the Company may not rely on such no-action letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transactions. See "The
Exchange Offer".
    
 
                                       11
   14
 
                   SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
 
   
     The terms of the Exchange Notes are identical in all material respects to
the Outstanding Notes except for certain transfer restrictions and registration
rights relating to the Outstanding Notes and except that, if the Exchange Offer
is not consummated or a shelf registration statement is not declared effective
on or prior to April 16, 1998, the per annum interest rate of the Outstanding
Notes will increase by 0.5% per annum for the first 90 days following such date
and will increase by an additional 0.5% per annum beginning at each subsequent
90-day period until the Exchange Offer is consummated; provided, however, that
in no event will the interest rate borne by the Outstanding Notes be increased
by more than 1.5% per annum. The Exchange Notes will bear interest from the last
interest payment date of the Outstanding Notes to occur prior to the issue date
of the Exchange Notes or, if no such interest has been paid, from December 2,
1997. Holders of the Outstanding Notes whose Outstanding Notes are accepted for
exchange will not receive interest on such Outstanding Notes for any period
subsequent to the last interest payment date to occur prior to the issue date of
the Exchange Notes or, if no such interest has been paid, from December 2, 1997,
and will be deemed to have waived the right to receive any interest payment on
the Outstanding Notes accrued from and after such date.
    
 
Issuer.....................  Extendicare Health Services, Inc.
 
Securities Offered.........  $200,000,000 aggregate principal amount of 9.35%
                             Senior Subordinated Notes Due 2007.
 
Maturity Date..............  December 15, 2007.
 
Interest Payment Dates.....  June 15 and December 15, commencing June 15, 1998.
 
   
Note Guarantees............  The Notes are fully and unconditionally guaranteed
                             on a joint and several, unsecured, senior
                             subordinated basis by each of the existing and
                             future U.S. subsidiaries of the Company (including
                             Arbor and its U.S. subsidiaries but excluding
                             inactive subsidiaries as of the closing date of the
                             offering of the Outstanding Notes). Each of the
                             Note Guarantees (as defined herein) is a guarantee
                             of payment and not of collection. See "Description
                             of the Notes -- Notes Guarantees."
    
 
   
Subordination..............  The Notes are general unsecured obligations of the
                             Company, subordinated in right of payment to all
                             existing and future Senior Indebtedness of the
                             Company, which include borrowings under the New
                             Credit Facilities. The Notes are also effectively
                             subordinated to all existing and future Senior
                             Indebtedness of the Guarantors. At September 30,
                             1997, on a pro forma basis after giving effect to
                             the Acquisition, the Financing Transactions and the
                             application of the net proceeds therefrom, the
                             aggregate amount of indebtedness (excluding
                             intercompany indebtedness) that would have
                             effectively ranked senior to the Notes and the Note
                             Guarantees would have been approximately $523.4
                             million, and the Company would have had additional
                             availability of $113.9 million (net of letters of
                             credit of $32 million) under the New Credit
                             Facilities, all of which would be Senior
                             Indebtedness, if borrowed. The Note Guarantees are
                             subordinated in right of payment to all existing
                             and future Senior Indebtedness of the relevant
                             Guarantor. See "Description of the Notes --
                             Subordination;" and "Description of the Notes --
                             Subordination of Note Guarantees; Release of Note
                             Guarantees."
    
 
Optional Redemption........  On or after December 15, 2002, the Company may
                             redeem the Notes, in whole or in part, at the
                             redemption prices set forth herein, plus accrued
                             and unpaid interest, if any, to the date of
                             redemption. Notwithstanding the foregoing, at any
                             time or from time to time prior to December 15,
                             2000, the Company may redeem, on one or more
                             occasions, up to 35% of
 
                                       12
   15
 
                             the sum of (i) the initial aggregate principal
                             amount of the Notes and (ii) the initial aggregate
                             principal amount of any Additional Notes with the
                             net proceeds of one or more Equity Offerings at a
                             redemption price equal to 109.35% of the principal
                             amount thereof, plus accrued interest, if any, to
                             the redemption date (subject to the right of
                             holders of record on the relevant record date to
                             receive interest due on an interest payment date);
                             provided that, immediately after giving effect to
                             such redemption, at least 65% of the sum of (i) the
                             initial aggregate principal amount of the Notes and
                             (ii) the initial aggregate principal amount of any
                             Additional Notes remain outstanding; provided
                             further that such redemptions shall occur within 60
                             days of the date of closing of each Equity
                             Offering. See "Description of the Notes -- Optional
                             Redemption."
 
Mandatory Redemption.......  None, except at maturity on December 15, 2007.
 
Change of Control..........  Upon a Change of Control (as defined herein), the
                             Company will be required to make an offer to
                             repurchase all outstanding Notes at 101% of the
                             principal amount thereof plus accrued and unpaid
                             interest thereon to the date of repurchase. See
                             "Description of the Notes -- Repurchase at Option
                             of Holders -- Change of Control."
 
Covenants..................  The indenture pursuant to which the Notes are
                             issued (the "Indenture") restricts, among other
                             things, the Company's ability to incur additional
                             indebtedness, pay dividends or make certain other
                             restricted payments, incur liens to secure pari
                             passu or subordinated indebtedness, sell stock of
                             subsidiaries, apply net proceeds from certain asset
                             sales, merge or consolidate with any other person,
                             sell, assign, transfer, lease, convey or otherwise
                             dispose of substantially all of the assets of the
                             Company, enter into certain transactions with
                             affiliates, or incur indebtedness that is
                             subordinate in right of payment to any Senior
                             Indebtedness and senior in right of payment to the
                             Notes. See "Description of the Notes -- Certain
                             Covenants."
 
Use of Proceeds............  The Company will not receive any proceeds from the
                             Exchange Offer.
 
                                  RISK FACTORS
 
     For a discussion of certain matters that should be considered by
prospective investors in connection with this offering, see "Risk Factors."
 
                                       13
   16
 
    SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 
   
     The following presents summary unaudited pro forma condensed consolidated
financial information of the Company and Arbor for the nine months ended
September 30, 1997 and the year ended December 31, 1996. The pro forma
statements of operations give effect to the Acquisition, the Financing
Transactions and the acquisition of the assets of Medi-Management, Inc.
("Medi-Management") as if each such transaction had occurred on January 1, 1996.
The pro forma balance sheet information was prepared as if the Acquisition and
the Financing Transactions had occurred on September 30, 1997. For further
information regarding the acquisition of the assets of Medi-Management, see
"Management's Discussion and Analysis -- The Company -- Acquisitions."
    
 
     The summary unaudited pro forma condensed consolidated financial
information does not necessarily reflect the results of operations or the
financial positions of the Company and Arbor that actually would have resulted
had the Acquisition, the Financing Transactions and the acquisition of the
assets of Medi-Management been consummated as of the dates referred to above.
Accordingly, such information should not be viewed as fully representative of
the past performance of the Company or Arbor or indicative of future results.
The summary unaudited pro forma condensed consolidated financial information
should be read together with the Unaudited Pro Forma Condensed Consolidated
Financial Information, the EHSI Consolidated Financial Statements, the EHSI
Unaudited Interim Consolidated Financial Statements, the Arbor Consolidated
Financial Statements and the Arbor Unaudited Interim Consolidated Financial
Statements included elsewhere in this Prospectus.
 
   


                                                                  NINE MONTHS           YEAR
                                                                     ENDED             ENDED
                                                                 SEPTEMBER 30,      DECEMBER 31,
                                                                     1997               1996
                                                                 -------------      ------------
                                                                  (DOLLARS IN THOUSANDS UNLESS
                                                                        OTHERWISE NOTED)
                                                                              
PRO FORMA INCOME STATEMENT DATA:
Revenues......................................................    $   854,715        $1,066,110
Costs and expenses:
  Operating...................................................        692,560           867,100
  General and administrative..................................         35,729            42,942
  Lease costs.................................................         10,434            13,223
  Depreciation and amortization...............................         39,485            48,955
  Interest, net...............................................         40,705            56,213
  Other, net..................................................            132               494
                                                                      819,045         1,028,927
Earnings from operations......................................         35,670            37,183
Earnings before minority interests and extraordinary items....    $    20,287        $   19,693
Net earnings before extraordinary items.......................    $    19,626        $   19,257
Earnings per share before extraordinary items.................    $        21        $       20
Weighted average shares outstanding...........................            947               947
PRO FORMA BALANCE SHEET DATA (AT PERIOD END):
Working capital...............................................    $    89,065
Total assets..................................................      1,214,402
Long-term debt................................................        677,897
Shareholder's equity..........................................        268,234
PRO FORMA OTHER DATA:
Property and equipment capital expenditures...................    $    55,321        $   77,044
Ratio of earnings to fixed charges(1).........................            1.7x              1.6x

    
 
                                       14
   17
 
   


                                                                  NINE MONTHS           YEAR
                                                                     ENDED             ENDED
                                                                 SEPTEMBER 30,      DECEMBER 31,
                                                                     1997               1996
                                                                 -------------      ------------
                                                                  (DOLLARS IN THOUSANDS UNLESS
                                                                        OTHERWISE NOTED)
                                                                              
Operating Data:
Number of facilities (end of period)(2)
  Nursing.....................................................            194               190
  Assisted living and retirement..............................             38                31
Resident capacity (end of period)(2)
  Nursing (beds)..............................................         20,985            20,764
  Assisted living and retirement (units)......................          1,480             1,140
Average occupancy rate
  Nursing.....................................................             89%               89% 
  Assisted living and retirement(3)...........................             87                86
Payor source as percentage of total revenue
  Private pay.................................................             33%               32% 
  Medicare....................................................             31                30
  Medicaid....................................................             36                38

    
 
- ---------------
 
(1) The ratio of earnings to fixed charges is calculated by dividing earnings
    from operations before income taxes plus fixed charges (excluding
    capitalized interest) by fixed charges (including capitalized interest).
    Fixed charges consist of interest expense, including amortization of
    deferred financing costs, and that portion of rental expense deemed to be
    representative of the interest component of rental expense.
 
(2) Includes managed facilities.
 
(3) Reflects occupancy rate for assisted living and retirement facilities
    following one year of operation as a Company facility.
 
                                       15
   18
 
                       SUMMARY HISTORICAL FINANCIAL DATA
 
     Set forth below and on the next three pages are summary historical
financial data for the Company and Arbor.
 
THE COMPANY -- HISTORICAL
 
     The following table presents summary historical data of the Company as of
and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 and the
nine months ended September 30, 1997 and 1996. The financial information
presented for the fiscal years ended December 31, 1996, 1995, 1994, 1993 and
1992 has been derived from the consolidated financial statements of the Company
as audited by KPMG Peat Marwick LLP, independent certified public accountants
(together with the notes thereto and the accountants' report thereon, the "EHSI
Consolidated Financial Statements"). The financial information presented for the
nine months ended September 30, 1997 and 1996, has been derived from the
unaudited interim consolidated financial statements of the Company (together
with the notes thereto, the "EHSI Unaudited Interim Consolidated Financial
Statements") and, in the opinion of management of the Company, reflects a fair
presentation of the Company's financial information. The following information
should be read in conjunction with the EHSI Consolidated Financial Statements,
the EHSI Unaudited Interim Consolidated Financial Statements and "Management's
Discussion and Analysis -- The Company" included elsewhere in this Prospectus.
 


                                              NINE MONTHS
                                                 ENDED
                                             SEPTEMBER 30,                        YEAR ENDED DECEMBER 31,
                                          --------------------    --------------------------------------------------------
                                          1997(1)       1996        1996        1995        1994        1993        1992
                                          --------    --------    --------    --------    --------    --------    --------
                                                           (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
                                                                                             
INCOME STATEMENT DATA:
Revenues:
  Routine care and assisted living.....   $413,633    $395,333    $526,486    $498,140    $470,310    $436,663    $417,048
  Medical specialty....................    243,001     213,928     290,515     242,339     188,419     154,543     112,155
  Other................................      6,799       4,844       7,346       6,649       6,265       6,065       5,566
                                          --------    --------    --------    --------    --------    --------    --------
                                           663,433     614,105     824,347     747,128     664,994     597,271     534,769
Costs and expenses:
  Operating............................    543,234     508,815     677,159     626,405     559,744     507,088     446,323
  General and administrative...........     27,648      24,239      33,262      28,672      24,944      23,004      22,446
  Lease costs..........................      7,132       6,560       8,756       9,005       8,920       8,705       8,486
  Depreciation and amortization........     24,538      21,979      29,703      25,872      23,092      21,378      19,686
  Interest, net........................     13,633      14,011      18,477      14,776      13,083      12,094      12,703
                                          --------    --------    --------    --------    --------    --------    --------
                                           616,185     575,604     767,357     704,730     629,783     572,269     509,644
                                          --------    --------    --------    --------    --------    --------    --------
Earnings from operations...............     47,248      38,501      56,990      42,398      35,211      25,002      25,125
Net earnings...........................   $ 28,630    $ 22,859    $ 34,008    $ 25,521    $ 21,709    $ 22,306    $ 20,117
Earnings per share.....................   $     30    $     24    $     36    $     27    $     23    $     24    $     21
Dividends per share (dollars)..........         --          --          --          --    $  10.56          --          --
Weighted average shares outstanding....        947         947         947         947         947         947         947
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................   $ 60,764                $ 60,492    $ 38,555    $ 23,858    $ 30,033    $  8,435
Total assets...........................    683,473                 591,851     525,634     444,664     394,600     374,638
Long-term debt.........................    256,397                 222,954     196,769     166,808     153,184     153,135
Shareholder's equity...................    233,834                 201,521     167,513     141,992     130,283     117,586
OTHER DATA:
Ratio of earnings to fixed
  charges(2)...........................        3.6x        3.2x        3.5x        3.1x        3.0x        2.4x        2.4x
Property and equipment capital
  expenditures.........................   $ 41,311    $ 36,896    $ 53,581    $ 56,469    $ 35,271    $ 18,779    $ 20,832

 
                                       16
   19
 


                                              NINE MONTHS
                                                 ENDED
                                             SEPTEMBER 30,                        YEAR ENDED DECEMBER 31,
                                          1997(1)       1996        1996        1995        1994        1993        1992
                                          --------    --------    --------    --------    --------    --------    --------
                                                           (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
                                                                                             
OPERATING DATA:
Number of facilities (end of period)(3)
  Nursing..............................        163         157         155         152         150         144         146
  Assisted living and retirement.......         38          31          31          22          16          13           9
Resident capacity (end of period)(3)
  Nursing (beds).......................     17,289      17,120      16,644      16,551      16,425      15,833      16,195
  Assisted living and retirement
    (units)............................      1,480       1,140       1,140         874         708         562         473
Average occupancy rate
  Nursing..............................         88%         89%         89%         89%         91%         93%         93%
  Assisted living and retirement(4)....         87          88          86          88          89          90          89
Payor source as a percentage of total
  revenue
  Private pay..........................         33%         32%         32%         33%         35%         36%         37%
  Medicare.............................         31          30          30          26          22          19          16
  Medicaid.............................         36          38          38          41          43          45          47

 
- ---------------
 
(1) Includes the acquisition of the assets of Medi-Management on May 31, 1997
    for approximately $24,000 and assumed debt of approximately $9,200. See
    "Management's Discussion and Analysis -- The Company -- Acquisitions."
 
(2) The ratio of earnings to fixed charges is calculated by dividing earnings
    from operations before income taxes plus fixed charges (excluding
    capitalized interest) by fixed charges (including capitalized interest).
    Fixed charges consist of interest expense, including amortization of
    deferred financing costs, and that portion of rental expense deemed to be
    representative of the interest component of rental expense.
 
(3) Includes managed facilities.
 
(4) Reflects occupancy rate for assisted living and retirement facilities
    following one year of operation as a Company facility.
 
                                       17
   20
 
ARBOR -- HISTORICAL
 
     The following table presents summary historical data of Arbor as of and for
the fiscal years ended December 31, 1996, 1995, 1994, 1993 and 1992 and the nine
months ended September 30, 1997 and 1996. The financial information presented
for the fiscal years ended December 31, 1996, 1995, 1994, 1993 and 1992 has been
derived from the consolidated financial statements of Arbor as audited by Ernst
& Young LLP, independent auditors, except as noted below (together with the
notes thereto and the auditors' report thereon, the "Arbor Consolidated
Financial Statements"). The financial information presented for the nine months
ended September 30, 1997 and 1996, has been derived from the unaudited interim
consolidated financial statements of Arbor (together with the notes thereto, the
"Arbor Unaudited Interim Consolidated Financial Statements") and, in the opinion
of management of Arbor, reflects a fair presentation of Arbor's financial
information. The following information should be read in conjunction with the
Arbor Consolidated Financial Statements, the Arbor Unaudited Interim
Consolidated Financial Statements and "Management's Discussion and Analysis --
Arbor" included elsewhere in this Prospectus.
 


                                                NINE MONTHS
                                                   ENDED
                                               SEPTEMBER 30,                        YEAR ENDED DECEMBER 31,
                                            --------------------    --------------------------------------------------------
                                              1997        1996        1996        1995        1994        1993        1992
                                            --------    --------    --------    --------    --------    --------    --------
                                                            (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                                               
INCOME STATEMENT DATA:
Net revenues
  Subacute care..........................   $ 94,623    $ 82,971    $113,123    $100,945    $ 82,874    $ 62,008    $ 38,562
  Basic care.............................     63,901      62,722      84,015      75,931      65,615      60,999      55,974
  Pharmacy and other.....................     22,680      15,385      21,639      15,282      10,302       9,273      11,806
                                            --------    --------    --------    --------    --------    --------    --------
Total net revenues.......................    181,204     161,078     218,777     192,158     158,791     132,280     106,342
Expenses
  Operating..............................    141,614     127,011     171,170     151,922     126,249     104,883      83,995
  General corporate......................      8,081       7,123       9,680       8,992       7,353       6,230       4,460
  Operating lease rental.................      3,292       3,410       4,450       4,301       4,062       3,939       4,289
  Interest...............................      6,106       5,161       7,108       5,822       4,642       5,043       4,700
  Depreciation and amortization..........      7,928       6,498       8,924       7,450       5,636       4,436       3,661
                                            --------    --------    --------    --------    --------    --------    --------
Total expenses...........................    167,021     149,203     201,332     178,487     147,942     124,531     101,105
                                            --------    --------    --------    --------    --------    --------    --------
Income from operations...................     14,183      11,875      17,445      13,671      10,849       7,749       5,237
Net income (unaudited pro forma for
  1993 and 1992)(1)......................   $  8,558    $  6,956    $ 10,223    $  8,452    $  6,903    $  4,884    $  3,236
Net income per share (unaudited pro forma
  for 1993 and 1992)(1)..................   $   1.22    $   1.00    $   1.47    $   1.23    $   1.01    $   0.82    $   0.60
Weighted average shares outstanding
  (000's)................................      7,035       6,970       6,969       6,881       6,842       5,986       5,408
BALANCE SHEET DATA (AT PERIOD END):
Working capital..........................   $ 18,325                $ 14,422    $  4,207    $ 10,175    $ 11,857    $  9,609
Total assets.............................    233,895                 209,474     178,783     136,591     116,311     100,651
Long-term obligations, less current
  maturities.............................    103,720                  94,643      74,741      52,956      48,354      57,426
Stockholders' equity and redeemable
  stock..................................     75,102                  66,016      55,628      46,485      39,575      19,098
OTHER DATA:
Ratio of earnings to fixed charges(2)....        2.9x        2.7x        2.9x        2.7x        2.7x        2.2x        1.8x
Property and equipment capital
  expenditures...........................   $ 14,010    $ 18,417    $ 23,463    $ 23,159    $ 18,549    $ 13,795    $ 18,119
OPERATING DATA:
Number of facilities (end of
  period)(3).............................         31          29          30          27          25          23          22
Resident capacity (end of period)(3).....      3,696       3,458       3,578       3,244       2,996       2,767       2,637
Average occupancy rate(4)................         91%         89%         89%         89%         88%         89%         88%
Payor source as a percentage of total
  revenue
  Private pay(5).........................         36%         33%         34%         33%         35%         37%         41%
  Medicare...............................         32          35          34          36          34          29          21
  Medicaid...............................         32          32          32          31          31          34          38

 
                                                                      (footnotes
on following page)
 
                                       18
   21
 
(1) Unaudited pro forma net income resulted from pro forma income taxes which
    include income taxes computed as if Marshall Properties, Inc. had been
    included in Arbor's consolidated group for income tax purposes prior to its
    acquisition and pooling of interests effective June 30, 1993.
 
(2) The ratio of earnings to fixed charges is calculated by dividing earnings
    from operations before income taxes plus fixed charges (excluding
    capitalized interest) by fixed charges (including capitalized interest).
    Fixed charges consist of interest expense, including amortization of
    deferred financing costs, and that portion of rental expense deemed to be
    representative of the interest component of rental expense.
 
(3) Includes managed facilities.
 
(4) Represents total billed patient days divided by total available days with
    respect to owned and leased facilities.
 
(5) Private revenues as classified by Arbor include reimbursement received from
    individuals, HMOs, PPOs, indemnity insurers, and other charge-based sources,
    the management of one center and in 1992 the development of facilities for
    others.
 
                                       19
   22
 
                                  RISK FACTORS
 
     In addition to other information contained in this Prospectus, holders of
Outstanding Notes should carefully consider the following factors before
tendering their Outstanding Notes in the Exchange Offer, although the risk
factors set forth below (other than "-- Consequences of Failure to Exchange")
are generally applicable whether or not the Outstanding Notes are exchanged.
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
   
     Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Outstanding Notes as set forth in the
legend thereon as a consequence of the issuance of the Outstanding Notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Outstanding Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register
Outstanding Notes under the Securities Act. In addition, the tender of
Outstanding Notes pursuant to the Exchange Offer may have an adverse effect upon
holders of, and may increase the volatility of the market price of, the
Outstanding Notes due to a reduction in liquidity. Based on interpretations by
the staff of the Commission, Exchange Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such Holders' business and such Holders have
no arrangement or understanding with any person to participate in the
distribution of Exchange Notes. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If any Holder is an affiliate of the Company, is
engaged in or intends to engage in or has any arrangement or understanding with
respect to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, such Holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer (other than an "affiliate" of the
Company) that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Outstanding Notes as a
result of market-making activities or other trading activities and will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act even though it may be deemed to be an underwriter
for purposes of such Act. This Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Outstanding Notes where such Outstanding
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for the
Exchange Offer Registration Period, the Company will make this Prospectus, as
amended or supplemented, available to any such broker-dealer for use in
connection with any such resale; provided, however, that the Company shall not
be required to maintain the effectiveness of the Registration Statement for more
than 60 days following the consummation of the Exchange Offer unless the Company
has been notified in writing on or prior to the 60th day following the
consummation of the Exchange Offer by one or more broker-dealers that such
holder has received Exchange Notes as to which it will be required to deliver
this Prospectus upon resale. See "Plan of Distribution". In addition, to comply
with the securities laws of certain jurisdictions, if applicable, the Exchange
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdictions or an exemption from registration or
qualification is available and is complied with. The Company does not currently
intend to register or qualify the sale of the Exchange Notes in any such
jurisdictions. See "The Exchange Offer; Registration Rights -- Consequences of
Failure to Exchange; Resale of Exchange Notes".
    
 
                                       20
   23
 
     Issuance of the Exchange Notes in exchange for the Outstanding Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of such Outstanding Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents. Therefore, holders of
the Outstanding Notes desiring to tender such Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to tenders of Outstanding Notes for exchange. Outstanding Notes that are
not tendered or that are tendered but not accepted by the Company for exchange,
will, following consummation of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof under the Securities Act and,
upon consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate.
 
SUBSTANTIAL LEVERAGE
 
   
     The Company is highly leveraged and has significant debt service
obligations. As of September 30, 1997, after giving pro forma effect to the
Acquisition and the Financing Transactions, the Company would have had
approximately $677.9 million of consolidated long-term indebtedness outstanding
which would have represented approximately 71% of its total capitalization. See
"Capitalization." Subject to certain limitations, the New Credit Facilities and
the Indenture permit the Company and its subsidiaries to incur additional
indebtedness.
    
 
     The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
may be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations; (iii)
all of the indebtedness incurred under the New Credit Facilities is scheduled to
become due prior to the time any principal payments are required on the Notes;
(iv) certain of the Company's borrowings are and will continue to be at variable
rates of interest, which causes the Company to be vulnerable to increases in
borrowing rates; and (v) certain of the Company's indebtedness contains
financial and other restrictive covenants which, if breached, could result in an
event of default under such indebtedness.
 
     The ability of the Company to service its indebtedness, and to comply with
the financial and restrictive covenants contained in the New Credit Facilities
and the Indenture, is dependent upon the Company's future performance and
business growth which are subject to financial, economic, competitive,
regulatory and other factors affecting the Company, many of which are beyond its
control. There can be no assurance that the Company will be able to generate
sufficient cash flow to meet its debt service obligations. If the Company is
unable to generate sufficient funds to meet its debt service obligations, it may
be required to refinance some or all of such debt, sell assets or raise
additional equity. No assurance can be given that such refinancings, asset sales
or equity sales could be accomplished or, if accomplished, would raise
sufficient funds to meet its debt service obligations. The Company's high degree
of leverage and related financial covenants could have a material adverse effect
on its ability to withstand competitive pressures or adverse economic
conditions, make material acquisitions, obtain future financing or take
advantage of business opportunities that may arise. In addition, a downturn in
general economic conditions or in its business could have a material adverse
effect on the Company's ability to meet its debt service obligations or to
conduct its business in the ordinary course.
 
RESTRICTIVE COVENANTS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
 
     The Indenture restricts, among other things, the ability of the Company and
its subsidiaries to incur additional indebtedness, pay dividends or make certain
other restricted payments, incur liens to secure pari passu or subordinated
indebtedness, sell stock of subsidiaries, apply net proceeds from certain asset
sales, merge or consolidate with any other person, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of the assets of the
Company, enter into certain transactions with affiliates, or incur indebtedness
that is subordinate in right of payment to any Senior Indebtedness and senior in
right of payment to the Notes. In addition, the New Credit Facilities contain
more extensive and restrictive covenants and restrictions than the Indenture and
also require the Company to maintain specified financial ratios and satisfy
 
                                       21
   24
 
certain financial condition tests. The Company's ability to meet those financial
ratios and tests can be affected by events beyond its control, and there can be
no assurance that the Company will be able to maintain those ratios or meet
those tests. A breach of any of these covenants could result in a default under
the New Credit Facilities and under the Indenture. Upon the occurrence of an
event of default under the New Credit Facilities, depending on actions taken by
the lenders under the New Credit Facilities, the Company could be prohibited
from making any payments of principal or interest on the Notes. Furthermore,
such lenders could elect to declare all amounts outstanding under the New Credit
Facilities, including accrued interest or other obligations, to be immediately
due and payable. If the Company were unable to repay those amounts, such lenders
could proceed against the collateral granted to them to secure that
indebtedness. If any Senior Indebtedness were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
that indebtedness and the other indebtedness of the Company, including the
Notes. See "-- Subordination of Notes and Note Guarantees; Asset Encumbrances;
Holding Company Structure," "Description of Certain Indebtedness -- New Credit
Facilities" and "Description of the Notes -- Subordination."
 
SUBORDINATION OF NOTES AND NOTE GUARANTEES; ASSET ENCUMBRANCES; HOLDING COMPANY
STRUCTURE
 
   
     The Notes are subordinated in right of payment to all existing and future
Senior Indebtedness of the Company, including borrowings under the New Credit
Facilities. In addition, each Note Guarantee is similarly subordinated in right
of payment to all existing and future Senior Indebtedness of the relevant
Guarantor, including such Guarantor's guarantee of the Company's indebtedness
under the New Credit Facilities. The aggregate principal amount of Senior
Indebtedness of the Company, as of September 30, 1997, would have been $523.4
million on a pro forma basis after giving effect to the Acquisition, the
Financing Transactions and the application of the net proceeds therefrom and the
Company would have had additional availability of $113.9 million (net of letters
of credit in the amount of $32 million) under the New Credit Facilities, all of
which would be Senior Indebtedness if borrowed. The aggregate amount of Senior
Indebtedness of the Guarantors, as of September 30, 1997 on a pro forma basis
after giving effect to the Acquisition and the Financing Transactions, would
have been $506.8 million (including obligations of such Guarantors under
guarantees of $454.1 million of Senior Indebtedness of the Company under the New
Credit Facilities). Additional Senior Indebtedness may be incurred by the
Company and the Guarantors from time to time, subject to certain restrictions.
In the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company and the Guarantors will be available to pay obligations on
the Notes only after all Senior Indebtedness of such entities has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes then outstanding. In addition, under certain circumstances
the Company will not be permitted to pay its obligations under the Notes in the
event of a default under certain Senior Indebtedness. See "Description of the
Notes -- Subordination"; "Description of the Notes -- Subordination of Note
Guarantees; Release of Note Guarantees."
    
 
     In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Notes are not secured by any of the Company's
assets. The obligations of the Company under the New Credit Facilities are
secured by a security interest in the capital stock of the Company and its U.S.
subsidiaries. If the Company becomes insolvent or is liquidated, or if payment
under the New Credit Facilities is accelerated, the lenders under the New Credit
Facilities would be entitled to exercise the remedies available to a secured
lender under applicable law and pursuant to the New Credit Facilities.
Accordingly, such lenders will have a prior claim with respect to such assets.
 
   
     The Company is a holding company and, accordingly, its cash flow and
ability to service debt, including the Notes, is dependent upon the earnings of
its subsidiaries and the payment of funds by those subsidiaries to the Company
in the form of loans, dividends or otherwise or pursuant to a Guarantor's
guarantee of the Notes. Moreover, while the Notes are fully and unconditionally
guaranteed on a joint and several, unsecured senior subordinated basis by the
Guarantors, the Guarantors are obligors with respect to substantial
indebtedness, including in their capacity as guarantors under the New Credit
Facilities on a senior basis, and the capital stock of the Guarantors is pledged
to secure amounts borrowed thereunder. See also "Risk Factors -- Fraudulent
Conveyance Statutes."
    
 
                                       22
   25
 
ABILITY TO SUCCESSFULLY INTEGRATE ARBOR
 
     The integration and consolidation of Arbor into the Company following the
Acquisition will require substantial management, financial and other resources
and may pose risks with respect to results of operations and market share. While
the Company believes that it has sufficient financial and management resources
to accomplish the integration of Arbor, there can be no assurance in this regard
or that the Company will not experience difficulties with customers, personnel
or others. In addition, although the Company's management believes that the
Acquisition will enhance the competitive position and business prospects of the
Company, there can be no assurance that such benefits will be realized or that
the combination of the Company and Arbor will be successful.
 
     As the Company adapts to the current healthcare environment and integrates
Arbor, it will make certain operational changes, including the consolidation of
operations, designed to improve the future profitability of the Company. There
can be no assurance, however, as to the timing or amount of any cost savings
that are actually realized as a result of such operational changes. These
operational changes may also result in significant disruption to the Company's
operations, which could have a material adverse effect on the Company's
business. See "Management's Discussion and Analysis -- The Company."
 
POTENTIAL ADVERSE EFFECT OF BALANCED BUDGET ACT OF 1997 AND OTHER HEALTHCARE
REFORMS
 
     In recent years, an increasing number of legislative proposals have been
adopted at the federal and state levels for comprehensive reforms affecting the
payment for and availability of healthcare services, including a number of
proposals that would significantly limit reimbursement under Medicare and
Medicaid. In an effort to limit the United States federal budget deficit, the
Clinton Administration and Congress recently approved the Balanced Budget Act of
1997 (the "Balanced Budget Act"). The Balanced Budget Act 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 the
methodology of Medicare payments to skilled nursing facilities and, among other
things, repeals the federal payment standard for Medicaid nursing facilities and
hospitals. See "Business -- Sources of Revenue." There can be no assurance that
these changes will not adversely affect the Company.
 
     The Company expects that there may continue to be numerous initiatives on
the federal and state levels for comprehensive reforms affecting the payment and
availability of healthcare services, including proposals that will further limit
reimbursement under Medicare and Medicaid. It is not clear at this time what
proposals, if any, will be adopted in addition to the Balanced Budget Act or, if
any such proposals are adopted, what effect such proposals will have on the
Company's business. See "-- Reimbursement by Third-Party Payors". There can be
no assurance that currently proposed or future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have any adverse effect on the Company or that payments under
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. Concern about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in the healthcare and related industries and may
similarly affect the price of the Notes in the future. See "-- Government
Regulation" and "Business -- Government Regulation."
 
RISKS RELATED TO MANAGED CARE STRATEGY
 
   
     Managed care payors and traditional indemnity insurers have experienced
pressure from their policyholders to curb or reduce the growth in premiums paid
to such organizations for healthcare services. HMOs are applying pressure to
healthcare providers to reduce prices or to share in the financial risk of
providing care through alternate fee structures such as exceptional or fixed
case rates. Given the increasing importance of managed care in the healthcare
marketplace and the continued cost containment pressures for Medicare and
Medicaid, the Company is concentrating on developing managed care contracts.
Additionally, the Company, through the UPC Health Network, provides a network of
services to meet the needs of managed care organizations. The success of the
Company's managed care strategy will depend in large part on its ability to
increase demand for post-acute services among managed care organizations, to
obtain favorable agreements
    
 
                                       23
   26
 
with managed care organizations and to manage effectively its operations and
healthcare delivery costs through various methods, including utilization
management and competitive pricing for purchased services. There can be no
assurance that pricing pressures faced by healthcare providers will not have a
significant adverse effect on the Company's business, results of operations and
financial condition.
 
GOVERNMENT REGULATION
 
     The provision of institutional care through nursing facilities is subject
to regulation by various federal, state and local governmental authorities in
the United States. There can be no assurance that such authorities will not
impose additional restrictions on the Company's activities that might adversely
affect the Company's business.
 
     Nursing facilities, assisted living facilities and other healthcare
businesses, including institutional pharmacy operations, are subject to annual
licensure and other regulatory requirements of state and local authorities. In
addition, in order for a nursing facility to be approved for payment under the
Medicare and Medicaid reimbursement programs, it must meet the participation
requirements of the Social Security Act and the regulations thereunder. The
regulatory requirements for nursing facility licensure and participation in
Medicare and Medicaid generally prescribe standards relating to provision of
services, resident rights, physical environment and administration. Nursing and
assisted living facilities are generally subject to unannounced annual
inspections by state or local authorities for purposes of relicensure and
nursing facilities for purposes of recertification under Medicare and Medicaid.
 
     In 1987, the United States Congress passed the Omnibus Budget
Reconciliation Act which included extensive revisions to the Medicare and
Medicaid statutory requirements for nursing facilities. These provisions
prescribe an outcome-oriented approach to the provision of services and require
that each resident receive the necessary care and services to attain or maintain
the highest practicable physical, mental and psychosocial well-being in
accordance with the resident's individualized assessment and plan of care. The
rules also established requirements for survey, certification and enforcement
procedures. The Health Care Financing Administration of the Department of Health
and Human Services ("HCFA") promulgated regulations, effective July 1, 1995, to
implement the survey, certification and enforcement procedures. The survey
process is intended to review the actual provision of care and services, with an
emphasis on resident outcomes to determine whether the care provided meets the
assessed needs of the individual residents. Surveys are generally conducted on
an unannounced annual basis by state survey agencies. Remedies are assessed for
deficiencies based upon the scope and severity of the cited deficiencies. The
regulations specify that the remedies are intended to motivate facilities to
return to compliance and to facilitate the removal of chronically poor
performing facilities from the program. Remedies range from directed plans of
correction, directed in-service training and state monitoring for minor
deficiencies; denial of Medicare or Medicaid reimbursement for existing
residents or new admissions and civil money penalties up to $3,000 per day for
deficiencies that do not constitute immediate jeopardy to resident health and
safety; and appointment of temporary management, termination from the program
and civil money penalties of up to $10,000 for one or more deficiencies that
constitute immediate jeopardy to resident health or safety. The regulations
allow state survey agencies to identify alternative remedies that must be
approved by HCFA prior to implementation. From time to time, the Company
receives notices from federal and state regulatory agencies relating to alleged
deficiencies for failure to comply with all components of the regulations. While
the Company does not always agree with the positions taken by the agencies, the
Company reviews such notices and takes corrective action when appropriate. Due
to the fact that the new regulatory process provides the Company with limited
appeal rights, many alleged deficiencies are not challenged even if the Company
is not in agreement with the allegation.
 
     The July 1995 regulation mandates that facilities which are not in
substantial compliance and do not correct deficiencies within a certain time
frame must be terminated from the Medicare and/or Medicaid programs. Generally,
the facility has no more than six months from deficiency identification to
correct the deficiency, but shorter time frames apply when immediate jeopardy to
the health or safety of the residents is alleged by the survey agency. While the
Company endeavors to comply with all applicable regulatory requirements, from
time to time certain of the Company's nursing facilities have been subject to
various
 
                                       24
   27
 
sanctions and penalties as a result of deficiencies alleged by HCFA or state
survey agencies. While in certain instances denial of certification or licensure
revocation actions have been threatened, no such actions are currently pending.
There can be no assurance that the Company will not be subject to such sanctions
and penalties in the future.
 
     The Company's acquisition and construction of additional nursing facilities
are subject to state regulation. All of the states in which the Company
currently operates (other than Idaho) have adopted CONs and other laws to
regulate expansion, which generally require that a state agency approve certain
acquisitions or physical plant changes and determine that a need exists prior to
the addition of beds or services, the implementation of the changes or the
occurrence of certain capital expenditures. Certain states have also passed
legislation, enacted rules and regulations and adopted policies that prohibit,
restrict or delay the issuance of CONs. In addition, in most states the
reduction of beds or the closure of a facility requires the approval of the
appropriate state regulatory agency and, if the Company were to determine to
reduce beds or close a facility, the Company could be adversely affected by a
failure to obtain or a delay in obtaining such approval. To the extent that CON
or other similar approvals are required for expansion of the Company's
operations, either through facility acquisitions, construction of new facilities
or additions to existing facilities, or expansion or provision of new services
or other changes, the Company's expansion proposals could be adversely affected
by the inability to obtain the necessary approvals, changes in the standards
applicable to such approvals and possible delays and expenses associated with
obtaining such approvals.
 
     The Company is also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. Such laws include
the illegal remuneration provisions of the Social Security Act, which make it a
felony to solicit, receive, offer to pay or pay any kickback, bribe or rebate in
return for referring a person for any item or service or in return for
purchasing, leasing, ordering or arranging for any good, facility, service or
item paid by federal health care programs. The Office of the Inspector General
("OIG") of the Department of Health and Human Services ("HHS"), the Department
of Justice and other federal agencies interpret these fraud and abuse provisions
liberally and enforce them aggressively. The recently enacted Balanced 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 federal
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 the summer of 1995, OIG announced
a major anti-fraud demonstration project, "Operation Restore Trust". See
"Business -- Government Regulation -- Regulation of Certain Transactions." In
addition, some states restrict certain business relationships between physicians
and other providers of healthcare services. Many states prohibit business
corporations from providing, or holding themselves out as providers 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 (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies. A
civil action to exclude a provider from the Medicaid and/or Medicare programs
may be brought. There are also other civil and criminal statutes applicable to
nursing facilities and other health care providers, such as those governing
false claims. The Company believes it is in compliance with the foregoing
statutes and regulations. However, there can be no assurance that government
officials responsible for enforcing these statutes will not assert that the
Company or certain transactions in which the Company is involved are in
violation of these statutes.
 
     In its role as owner and/or operator of properties, the Company may be
responsible for investigating and remedying any hazardous substances that have
come to be located on the property, including such substances that may have
migrated off, or emitted, discharged, leaked, escaped or been transported from,
the property.
 
                                       25
   28
 
Ancillary to the Company's operations are, in various combinations, the
handling, use, storage, transportation, disposal and/or discharge of hazardous,
infectious, toxic, radioactive, flammable and other hazardous materials, wastes,
pollutants or contaminants. Such activities may result in damage to individuals,
property or the environment; may interrupt operations and/or increase their
costs; may result in legal liability, damages, injunctions or fines; may result
in investigations, administrative proceedings, penalties or other governmental
agency actions; and may not be covered by insurance. There can be no assurance
that the Company will not encounter such risks in the future, and such risks may
have a material adverse effect on the operations or financial condition of the
Company.
 
REIMBURSEMENT BY THIRD PARTY PAYORS
 
     The sources and amounts of the Company's patient revenues derived from the
operation of its skilled nursing facilities are determined by a number of
factors including licensed bed capacity of its facilities, occupancy rate, the
mix of patients and the rates of reimbursement among payor categories (private,
Medicare and Medicaid). For the first nine months of fiscal 1997 and for fiscal
1996 and 1995, the Company derived approximately 36%, 38% and 41%, respectively,
of its total revenue from Medicaid, 31%, 30% and 26%, respectively, from
Medicare and 33%, 32%, and 33%, respectively, from private pay sources. On a pro
forma basis after giving effect to the Acquisition, for the first nine months of
1997 and fiscal 1996, the Company would have derived approximately 36% and 38%,
respectively, of its total revenue from Medicaid, approximately 31% and 30%,
respectively, from Medicare and approximately 33% and 32%, respectively, from
private pay sources. The Company typically receives a higher rate for services
to private pay and Medicare patients than for services to patients eligible for
assistance under state Medicaid programs. Changes in the mix of the Company's
patients among Medicaid, Medicare and private pay sources, and with respect to
different types of private pay sources, can significantly affect the revenue and
profitability of the Company's operations.
 
     Both governmental and private third party payors such as insurance
companies and HMOs have employed cost containment measures designed to limit
payments made to healthcare providers such as the Company. These measures
include the adoption of initial and continuing recipient eligibility criteria
which may limit payment for services, the adoption of coverage 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. Most recently, the Balanced Budget Act requires the establishment of a
prospective payment system ("PPS") for Medicare skilled nursing facilities under
which facilities will be paid a federal per diem rate for virtually all covered
nursing facility services. The law contains numerous other changes that will
adversely affect payment to Medicare and Medicaid providers. In addition, prior
to the enactment of the Balanced Budget Act, federal law required state Medicaid
programs to reimburse nursing facilities for the costs that are incurred by
efficiently and economically operated providers in order to meet quality and
safety standards. The Balanced Budget Act repealed this payment standard,
effective for services provided on or after October 1, 1997, thereby granting
states greater flexibility in establishing payment rates. There can be no
assurance that budget constraints or other factors will not cause states to
reduce Medicaid reimbursement to nursing facilities or that payments to nursing
facilities will be made on a timely basis. Any such efforts to reduce Medicaid
payment rates or failure of states to meet their Medicaid obligations on a
timely basis would have a material adverse effect on the Company. See "Business
- -- Sources of Revenue." Furthermore, governmental reimbursement programs,
including Medicare and Medicaid, are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative ceilings and government
funding restrictions, all of which may materially increase or decrease the rate
of program payments to the Company 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 allowable to patients eligible for reimbursement
pursuant to such programs. In addition, there can be no assurance that
facilities owned, leased or managed by the Company, or the provision of services
and supplies by the Company, now or in the future, will continue to meet the
requirements of participation in such programs. The Company could be adversely
affected by the continuing efforts of governmental and private third party
payors to restrain the amount of reimbursement for healthcare services. Efforts
to impose reduced allowances, greater discounts and more stringent cost controls
by governments and other payors are expected to continue.
 
                                       26
   29
 
     Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. These organizations are expanding their participation in the Medicare
risk HMO plans and thus are providing a significant amount of Medicare services
in certain regions. Changes announced in the Balanced Budget Act are expected to
support the expansion of Medicare risk HMO plans. These organizations generally
enter into service agreements with a limited number of providers for needed
services. In addition, under the Balanced Budget Act, Provider Service
Organizations ("PSOs") will be allowed to contract directly with Medicare in
1998, and receive payment based upon a capitated basis. The Company will have to
be active in regions which establish PSOs in order to ensure it remains an
active provider of service to the Medicare-funded PSOs. If the Company is not
successful in becoming a preferred or exclusive provider to these HMOs and PSOs
ensuring utilization of its contracts with such plans, its business could be
materially adversely affected.
 
   
RISKS ASSOCIATED WITH REIMBURSEMENT PROCESS AND NON-PAYMENT OF PREVIOUSLY
RECOGNIZED REVENUES
    
 
     The Company's financial condition and results of operations may also be
affected by the revenue reimbursement process, which in the Company's industry
is complex and can involve lengthy delays between the time that revenue is
recognized and the time that reimbursement amounts are settled. Net revenues
realizable under third party payor agreements are subject to change due to
examination and retroactive adjustment by payors during the settlement process.
Payors may disallow, in whole or in part, requests for reimbursement based on
determinations that certain costs are not reimbursable or because additional
supporting documentation is necessary. The Company recognizes revenues from
third party payors and accrues estimated settlement amounts in the period in
which the related services are provided. The Company estimates these settlement
balances by making determinations based on its prior settlement experience and
its understanding of the applicable reimbursement rules and regulations. The
majority of third party payor balances are settled within two to three years
following provision of services. The Company's results of operations would be
materially and adversely affected if the amount actually received from third
party payors in any reporting period differed materially from the amounts
accrued in prior periods. The Company's financial condition and results of
operations may also be affected by the timing of reimbursement payments and rate
adjustments from third party payors. The Company has from, time to time,
experienced delays in receiving reimbursement from intermediaries.
 
     For those services covered by the Medicare program, the Company is
currently reimbursed for its direct costs plus an allocation of indirect costs
up to a regional limit. The Company has submitted and will be required to submit
exception requests to recover the costs in excess of such regional limits from
Medicare. There is no assurance the Company will be able to recover such excess
costs under pending or any future requests. The failure to recover these excess
costs in the future would adversely affect the Company's financial position and
results of operations. The Company is subject to periodic audits by the Medicare
and Medicaid programs, and the paying agencies for these programs have various
rights and remedies against the Company if they assert that the Company has
overcharged the programs or failed to comply with program requirements. Such
payment agencies could seek to require the Company to repay any overcharges or
amounts billed in violation of program requirements, or could make deductions
from future amounts due to the Company. Such agencies could also impose fines,
criminal penalties or program exclusions.
 
POTENTIAL OBLIGATION FOR REIMBURSEMENTS PAID TO OPERATORS OF ACQUIRED FACILITIES
 
     The Company's growth strategy relies heavily on the acquisition of
long-term and subacute care facilities. Regardless of the legal form of the
acquisition, the Medicare and Medicaid programs often require that the Company
assume certain obligations relating to the reimbursement paid to the former
operators of facilities acquired by the Company. For example, the Company may be
responsible for any final cost report settlements or findings in the examination
process which result in the recoupment from the Company of reimbursement
previously paid to the former owner if the former owner is unable to meet its
repayment obligations.
 
                                       27
   30
 
RISKS ASSOCIATED WITH RELATED PARTY TRANSACTIONS
 
     Current Medicare regulations that apply to transactions between related
parties, such as the Company's subsidiaries, are relevant to the amount of
Medicare reimbursement that the Company is entitled to receive for goods and
services which are charged to the Medicare program. The amount charged on
related party transactions is dependent upon whether or not the related party
exception applies. For transactions between each provider and the applicable
related party which do not qualify for the related party exception, the
transaction is recorded at cost and no profit may be earned by the related
party. For transactions which do qualify for the related party exception, the
transaction is recorded at fair market value.
 
     In order for transactions to qualify as an exception to the related party
rule which requires transactions to be recorded at cost, the following
conditions must be met: (i) the related party must be a bona fide organization;
(ii) a substantial part of the services of each such related party must be
transacted with non-affiliated entities, and there must be an open, competitive
market for such services; (iii) the services provided by each such entity
commonly are obtained by long-term care facilities from other organizations, and
are not a basic element of patient care provided by such facilities; and (iv)
the prices charged to the Company's long-term care facilities by such entities
are in line with the charges for such services in the open market, and no more
than the prices charged by such entities under comparable circumstances to
non-affiliated long-term care facilities.
 
     The related party regulations do not indicate a specific level of services
that must be provided to non-affiliated entities in order to satisfy the
"substantial part" requirement of such regulations. In instances where this
issue has been litigated by others, no consensus has emerged as to the
appropriate threshold necessary to satisfy the "substantial part" requirement.
The Company believes that it satisfies the requirements for exception to the
related party rules in transactions between its long-term care facilities and
its UPC Health Network. If, upon audit by federal or state reimbursement
agencies, such agencies found that these regulations had not been satisfied for
these periods, and if, after appeal, such findings were sustained, the Company
could be required to refund the difference between its cost of providing these
services to any entity found to be subject to the related party regulations and
the higher amount actually received.
 
     If the Company has failed or, in the future, fails to satisfy regulations
for the related party exception with respect to inter-corporate transactions,
the Medicare reimbursement that the Company received or will receive could be
reduced, and as a result, the Company's financial condition could be materially
and adversely affected. While the Company believes that it has satisfied, and
will continue to satisfy these regulations, there can be no assurance that its
position would prevail if contested by relevant reimbursement agencies.
Furthermore, the Company's ability to satisfy these regulations in the future
could be affected by a number of factors, including the interpretation of
Medicare regulations by federal or state reimbursement agencies and the
Company's ability to provide services to non-affiliated facilities.
 
GEOGRAPHIC CONCENTRATION
 
     After giving effect to the Acquisition, the Company's long-term care
facilities will be located in Arkansas, Delaware, Florida, Idaho, Indiana,
Kentucky, Maryland, Minnesota, Ohio, Oregon, Pennsylvania, Texas, Washington,
West Virginia and Wisconsin. Any adverse change in the regulatory environment,
the reimbursement rates paid under the Medicaid program or in the supply and
demand for services in the states in which the Company operates, and
particularly in Florida, Ohio, Pennsylvania and Wisconsin (in each of which the
Company, on a pro forma basis after giving effect to the Acquisition, would have
derived more than 10% of its total net revenues for fiscal 1996 and the nine
months ended September 30, 1997), could have a material adverse effect on the
Company.
 
POSSIBLE INABILITY TO IMPLEMENT GROWTH STRATEGY
 
     There can be no assurance that the Company will be able to continue its
growth or be able to implement its strategy to expand its nursing facility
operations, develop assisted living and retirement facilities, expand its
subacute care and rehabilitative therapy capabilities and expand the UPC Health
Network, including through acquisitions. Furthermore, there can be no assurance
that suitable acquisitions, for which other healthcare
 
                                       28
   31
 
companies (including those with greater financial resources than the Company)
may be competing, can be accomplished on terms favorable to the Company or that
financing, if necessary, can be obtained for such acquisitions on terms
favorable to the Company. The Company may not be able to effectively and
profitably integrate the operations of Arbor or future acquisitions or otherwise
achieve the intended benefits of such acquisitions. See "-- Ability to
Successfully Integrate Arbor." In addition, unforeseen expenses, difficulties,
complications or delays may be encountered in connection with the expansion of
operations, which could inhibit the Company's growth.
 
COMPETITION
 
     The long-term care industry in the United States is highly competitive,
with companies offering a variety of similar services. The Company faces
competition locally and regionally from other healthcare providers, including
for-profit and not-for-profit organizations, home health agencies, institutional
pharmacies, medical supplies and service agencies, and rehabilitative therapy
providers. Significant competitive factors affecting the placement of residents
in nursing and assisted living facilities include quality of care, services
offered, reputation, physical appearance, location and, in the case of private
pay residents, cost of the services. Since there is little price competition
with respect to Medicaid and Medicare residents, the range of services provided
by the Company's nursing facilities and their locations affect a facility's
competitive position in its market. The Company's pharmacy and medical services
and supplies operation and its group purchasing operation also compete with
other similar operations ranging from small local operators to companies which
are national in scope and distribution capability. There can be no assurance
that the Company will not encounter increased competition which could adversely
affect its business, results of operations or financial condition.
 
     The Company also competes with other providers in the acquisition and
development of additional facilities. Other competitors may accept a lower rate
of return and therefore present significant price competition. In addition,
tax-exempt not-for-profit organizations may finance acquisitions and capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company.
 
AVAILABILITY OF QUALIFIED PERSONNEL
 
     Labor costs account for a large percentage of the Company's operating
expenses. In the past, the healthcare industry, including the Company's
long-term care facilities, has experienced a shortage of nurses to staff
healthcare operations, and, more recently, the healthcare industry has
experienced a shortage of therapists. The Company is not currently experiencing
a nursing or therapist shortage, but it competes with other healthcare providers
for the services of nurses, therapists and other professional and
non-professional employees. A nursing or therapist shortage could force the
Company to pay higher salaries and make greater use of higher cost temporary or
contract personnel.
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's operations are dependent on the efforts, ability and
experience of its key executive officers. The Company's continued growth and
success depends on its ability to attract and retain skilled employees and on
the ability of its officers and key employees to successfully manage the
Company's operations. The loss of some or all of these key executive officers
and skilled employees could have a material adverse impact on the Company's
future results of operations.
 
LIABILITY, INSURANCE AND LEGAL PROCEEDINGS
 
   
     The Company's business entails an inherent risk of liability. In recent
years, participants in the long-term care industry have become subject to an
increasing number of lawsuits arising from operations. The Company is from time
to time subject to such suits as a result of the nature of its business. The
Company currently maintains insurance policies, including comprehensive general
liability, property coverage, and workers' compensation/employer's liability
insurance, in amounts and with such coverage and deductibles as it deems
appropriate, based on the nature and risks of its business, historical
experience and industry standards. In addition, the Company would not be liable
for malpractice claims made against non-employees of the
    
 
                                       29
   32
 
   
Company, including attending physicians at its own facilities and employees of
facilities managed by the Company. There can be no assurance, however, that
claims will not arise which are in excess of the Company's insurance coverage or
are not covered by the Company's insurance coverage. A successful claim against
the Company not covered by, or in excess of, the Company's insurance could have
a material adverse effect on the Company's financial condition and results of
operations. Claims against the Company, regardless of their merit or eventual
outcome, would require management to devote time to matters unrelated to the
operation of the Company's business and, due to publicity, may also have a
material adverse effect on the Company's ability to attract residents or expand
its business. In addition, the Company's insurance policies must be renewed
annually and there can be no assurance that the Company 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.
    
 
FRAUDULENT CONVEYANCE STATUTES
 
     Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Guarantor, at the time it incurred the indebtedness evidenced by the
Notes or its Note Guarantee, (i)(a) was or is insolvent or rendered insolvent by
reason of such occurrence or (b) was or is engaged in a business or transaction
for which the assets remaining with the Company or such Guarantor constituted
unreasonably small capital or (c) intended or intends to incur, or believed or
believes that it would incur, debts beyond its ability to pay such debts as they
mature, and (ii) the Company or such Guarantor received or receives less than
reasonably equivalent value or fair consideration for the incurrence of such
indebtedness, the Notes and the Note Guarantee, and any pledge or other security
interest securing such indebtedness, could be voided, or claims in respect of
the Notes or the Note Guarantees could be subordinated to all other debts of the
Company or such Guarantor, as the case may be. The voiding or subordination of
any such pledges or other security interests or of any of such indebtedness
could result in an Event of Default (as defined in the Indenture) with respect
to such indebtedness, which could result in acceleration thereof. In addition,
the payment of interest and principal by the Company pursuant to the Notes or
the payment of amounts by a Guarantor pursuant to a Note Guarantee could be
voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or such Guarantor, as the
case may be.
 
     The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the fair saleable value of all of its assets at a fair valuation or
if the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
 
     On the basis of their historical financial information, recent operating
history as discussed in "Selected Consolidated Financial Information -- The
Company -- Historical" and "Management's Discussion and Analysis -- The Company"
and other factors, the Company and each Guarantor believes that, after giving
effect to the indebtedness incurred in connection with the offering of the
Outstanding Notes, it (i) will not be insolvent, will not have unreasonably
small capital for the businesses in which it is engaged and will not incur debts
beyond its ability to pay such debts as they mature and (ii) will have
sufficient assets to satisfy any probable money judgment against it in any
pending action. There can be no assurance, however, as to what standard a court
would apply in making such determinations.
 
                                       30
   33
 
ABSENCE OF PUBLIC MARKET
 
     There is no existing market for the Exchange Notes and there can be no
assurance as to the liquidity of any markets that may develop from the Exchange
Notes, the ability of holders of the Exchange Notes to sell their Exchange
Notes, or the prices at which holders would be able to sell their Exchange
Notes. Future trading prices of the Exchange Notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. The Initial Purchasers
have advised the Company that they currently intend to make a market in the
Exchange Notes; however, the Initial Purchasers are not obligated to do so and
any market making may be discontinued at any time without notice. The Company
does not intend to apply for listing of the Exchange Notes offered hereby on any
securities exchange.
 
                                THE ACQUISITION
 
   
     Extendicare, AHC Acquisition and Arbor were parties to an agreement and
plan of merger, dated as of September 29, 1997 (the "Merger Agreement") pursuant
to which the parties agreed to proceed with the Tender Offer and the subsequent
merger of AHC Acquisition with and into Arbor (the "Merger"), with Arbor as the
surviving corporation. The Tender Offer was commenced on October 3, 1997 and
expired on November 25, 1997. Over 99% of the issued and outstanding common
shares of Arbor (the "Shares") were tendered pursuant to the Tender Offer. On
November 26, 1997, the Merger was consummated. The aggregate purchase price for
all of the outstanding Shares, and the payments to be made with respect to
unexercised options and warrants, was $430.1 million (exclusive of transaction
costs and fees), including $109.7 million of assumed debt of Arbor.
    
 
                                       31
   34
 
                                USE OF PROCEEDS
 
     The net proceeds received by the Company from the sale of the Outstanding
Notes were approximately $193.5 million, after deducting the estimated
underwriting discounts and offering expenses. Such net proceeds, together with
borrowings under the New Credit Facilities, were used (i) to finance the
Acquisition and (ii) to refinance existing indebtedness of the Company and of
Arbor and will be used, (i) to fund working capital, (ii) to finance capital
expenditures and (iii) for other general corporate purposes.
 
     The following table illustrates the sources and uses of funds for the
Acquisition, as of September 30, 1997, on a pro forma basis, assuming the
Acquisition and the Financing Transactions had occurred on such date (dollars in
thousands).
 
   
                                                                       
    Sources of Funds
      New Credit Facilities
         Revolving Credit Facility(1).....................................      $  54,104
         Tranche A Term Loan Facility due 2003............................        200,000
         Tranche B Term Loan Facility due 2004............................        200,000
      Senior Subordinated Notes due 2007(2)...............................        200,000
      Equity contribution from Extendicare................................         44,600
                                                                                 --------
         Total Sources....................................................      $ 698,704
                                                                                 ========
    Uses of Funds
      Purchase price(3)...................................................      $ 320,404
      Refinancing of existing debt(4).....................................        353,800
      Estimated transaction fees and expenses.............................         24,500
                                                                                 --------
         Total Uses.......................................................      $ 698,704
                                                                                 ========

    
    
 
- ---------------
 
   
(1) The Revolving Credit Facility has a total availability of $200,000, leaving
    unused borrowing capacity thereunder of approximately $113,896 (net of
    letters of credit in the amount of $32,000).
    
 
(2) The net proceeds from the sale of the Outstanding Notes were used to repay
    the Tranche C Loan under the New Credit Facilities, which was used to
    finance the Tender Offer.
 
   
(3) Includes the cost of 7,266,218 shares of Arbor stock at $45 per share, net
    of $6,576 of proceeds related to the exercise of Arbor stock options.
    
 
   
(4) Includes refinancing of approximately $243,500 of the Company's indebtedness
    and $101,700 of Arbor's indebtedness and approximately $8,600 of debt
    prepayment penalties, net of tax. The indebtedness of the Company and of
    Arbor to be repaid had a weighted average interest rate at September 30,
    1997 of 7.43% and 7.46%, respectively, with maturities ranging from 1997 to
    2015 and from 1997 to 2017, respectively.
    
 
     The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby, the terms of which are identical in all material
respects to those of the Outstanding Notes. The Outstanding Notes surrendered in
exchange for the Exchange Notes will be cancelled and cannot be reissued. The
issuance of the Exchange Notes will not result in any change in the aggregate
indebtedness of the Company.
 
                                       32
   35
 
                                 EXCHANGE OFFER
 
   
     The Outstanding Notes were not registered under the Securities Act or any
state securities laws. The Outstanding Notes were offered and sold (i) to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) in compliance with Rule 144A, (ii) to a limited number of institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) and (iii) pursuant to offers and sales that occurred outside the
United States in accordance with Regulation S under the Securities Act. The
Outstanding Notes sold to "qualified institutional buyers" are eligible for
trading in the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL") market.
    
 
TERMS OF THE EXCHANGE OFFER
 
     Promptly after the Registration Statement of which this Prospectus
constitutes a part has been declared effective, the Company will offer the
Exchange Notes in exchange for surrender of the Outstanding Notes. The Company
will keep the Exchange Offer open for not less than 30 days and not more than 45
days (or longer if required by applicable law) after the date on which notice of
the Exchange Offer is mailed to the holders of the Outstanding Notes. For each
Outstanding Note validly tendered to the Company pursuant to the Exchange Offer
and not withdrawn by the holder thereof, the holder of such Outstanding Note
will receive an Exchange Note having a principal amount equal to the principal
amount of such surrendered Outstanding Note. Interest on each Exchange Note will
accrue from the last interest payment date on which interest was paid on the
Outstanding Note surrendered in exchange therefor or, if no interest has been
paid on such Outstanding Note, from the date of the original issue of the
Outstanding Notes. The Exchange Notes evidence the same debt as the Outstanding
Notes and are issued under and are entitled to the same benefits under the
Indenture as the Outstanding Notes. In addition, the Exchange Notes and the
Outstanding Notes are treated as one series of securities under the Indenture.
 
   
     In the event that the Exchange Offer has not been consummated or a shelf
registration statement is not declared effective on or prior to April 16, 1998,
then the per annum interest rate on the Outstanding Notes will increase by 0.5%
for the first 90 days following April 16, 1998. Such interest rate will be
increased by an additional 0.5% per annum beginning at each subsequent 90-day
period until the Exchange Offer is consummated; provided, however, that in no
event will the interest rate borne by the Outstanding Notes be increased by more
than 1.5% per annum. Upon the consummation of the Exchange Offer or the
effectiveness of a shelf registration statement, as the case may be, the
interest rate borne by the Notes from the date of such consummation or
effectiveness, as the case may be, will be reduced to the original interest rate
of 9.35% per annum; provided, however, that, if after such reduction in interest
rate, a different event specified above occurs, the interest rate may again be
increased pursuant to the foregoing provisions.
    
 
PERIOD FOR TENDERING OUTSTANDING NOTES
 
     Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Outstanding Notes which
are properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on           , 1998; provided, however, that if the period of
time for which the Exchange Offer is open is extended, the term "Expiration
Date" means the latest time and date to which the Exchange Offer is extended.
 
   
     As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about           , 1998, to all Holders of
Outstanding Notes known to the Company. The Company's obligation to accept
Outstanding Notes for exchange pursuant to the Exchange Offer is subject to
certain conditions set forth under "-- Certain Conditions to the Exchange Offer"
below.
    
 
     Outstanding Notes tendered in the Exchange Offer must be in denominations
of principal amount of $1,000 or any integral multiple thereof.
 
                                       33
   36
 
     The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "-- Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Outstanding Notes
as promptly as practicable, such notice in the case of any extension to be
issued by means of a press release or other public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
 
PROCEDURES FOR TENDERING OUTSTANDING NOTES
 
     The tender to the Company of Outstanding Notes by a Holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to tender
Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to The Bank of Nova Scotia
Trust Company of New York (the "Exchange Agent") at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Outstanding Notes must be received by
the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Outstanding Notes, if such procedure is available, into the Exchange Agent's
account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date, or (iii) the Holder must comply with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO THE ISSUER.
 
     Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Outstanding Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered Holder of the
Outstanding Notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined below). In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantees must be made by a
firm which is a member of a registered national securities exchange or a member
of the National Association of Securities Dealers, Inc. or by a commercial bank
or trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions").
 
     All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Outstanding Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Outstanding Notes not properly tendered or to not
accept any particular Outstanding Notes which acceptance might, in the judgment
of the Company or its counsel, be unlawful. The Company also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Outstanding Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any Holder
who seeks to tender Outstanding Notes in the Exchange Offer). The interpretation
of the terms and conditions of the Exchange Offer as to any particular
Outstanding Notes either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Outstanding Notes for exchange must be cured
within such reasonable period of time as the Company shall determine. Neither
the Company, the Exchange Agent nor any other person shall be under any duty to
give
 
                                       34
   37
 
notification of any defect or irregularity with respect to any tender of
Outstanding Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
 
     If Outstanding Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Outstanding Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered Holder with the
signature thereon guaranteed by an Eligible Institution.
 
     If the Letter of Transmittal or any Outstanding Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
 
     In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Outstanding Notes
or a timely Book-Entry Confirmation of such Outstanding Notes in the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Outstanding Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer or if Outstanding Notes are submitted
for a greater principal amount than the Holder desires to exchange, such
unaccepted or non-exchanged Outstanding Notes will be returned without expense
to the tendering Holder thereof (or, in the case of Outstanding Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry procedures described below, such
non-exchanged Outstanding Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
 
BOOK-ENTRY TRANSFER
 
     The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility system may make book-entry delivery of Outstanding Notes by causing DTC
to transfer such Outstanding Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with DTC's procedures for transfer.
However, although delivery of Outstanding Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and any
other required documents, must, in any case, be transmitted to and received by
the Exchange Agent at one of the addresses set forth below under "-- Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
 
GUARANTEED DELIVERY PROCEDURES
 
     If a registered Holder of the Outstanding Notes desires to tender such
Outstanding Notes and the Outstanding Notes are not immediately available, or
time will not permit such Holder's Outstanding Notes or other required documents
to reach the Exchange Agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent received from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, or mail or
hand delivery), setting forth the name and address of the Holder of Outstanding
Notes and the amount of Outstanding Notes tendered, stating that the tender is
being made thereby and guaranteeing that within five NYSE trading days after the
date of execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Outstanding Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for
 
                                       35
   38
 
all physically tendered Outstanding Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
 
WITHDRAWAL RIGHTS
 
     Tenders of Outstanding Notes may be withdrawn at any time prior to the
Expiration Date.
 
     For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Outstanding Notes to be withdrawn, identify the
Outstanding Notes to be withdrawn (including the principal amount of such
Outstanding Notes), and (where certificates for Outstanding Notes have been
transmitted) specify the name in which such Outstanding Notes are registered, if
different from that of the withdrawing Holder. If certificates for Outstanding
Notes have been delivered or otherwise identified to the Exchange Agent, then,
prior to the release of such certificates the withdrawing Holder must also
submit the serial numbers of the particular certificates to be withdrawn and a
signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such Holder is an Eligible Institution. If Outstanding Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn
Outstanding Notes and otherwise comply with the procedures of such facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Outstanding Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Outstanding Notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to the Holder thereof
without cost to such Holder (or, in the case of Outstanding Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Outstanding Notes will be credited to an account maintained with such Book-Entry
Transfer Facility for the Outstanding Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Outstanding Notes may be retendered by following one of the procedures
described under "-- Procedures for Tendering Outstanding Notes" above at any
time on or prior to the Expiration Date.
 
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
 
     Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue Exchange Notes in
exchange for, any Outstanding Notes and may terminate or amend the Exchange
Offer, if at any time before the acceptance of such Outstanding Notes for
exchange or the exchange of the Exchange Notes for such Outstanding Notes, any
of the following events shall occur:
 
     (a)  the Exchange Offer violates applicable law or any applicable
          interpretation of the staff of the Commission;
 
     (b)  an action or proceeding shall have been instituted or threatened in
          any court or by any governmental agency which might materially impair
          the ability of the Company to proceed with the Exchange Offer, or a
          material adverse development shall have occurred in any existing
          action or proceeding with respect to the Company; or
 
     (c)  all governmental approvals shall not have been obtained, which
          approvals the Company deems necessary for the consummation of the
          Exchange Offer.
 
   
     The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable judgment. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
    
 
                                       36
   39
 
     In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
 
EXCHANGE AGENT
 
     The Bank of Nova Scotia Trust Company of New York has been appointed as the
Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below. Questions and requests for assistance, requests for additional copies of
the Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
 
 Main Delivery to:  The Bank of Nova Scotia Trust Company of New York, Exchange
                                     Agent
 
                      By Mail, Hand or Overnight Delivery:
 
               The Bank of Nova Scotia Trust Company of New York
                         One Liberty Plaza, 23rd Floor
                               New York, NY 10006
                             Attention:  Pat Keane
 
                           Facsimile:  (212) 225-5436
                     Confirm by Telephone:  (212) 225-5427
 
     DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
 
FEES AND EXPENSES
 
     The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
 
     The Company will pay certain other expenses to be incurred in connection
with the Exchange Offer, including the fees and expenses of the Exchange Agent,
accounting and certain legal fees.
 
TRANSFER TAXES
 
     Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register Exchange Notes in the name of, or request
that Outstanding Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
     Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Outstanding Notes as set forth in the
legend thereon as a consequence of the issuance of the Outstanding Notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Outstanding Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register
Outstanding Notes under the Securities Act. To the extent that Outstanding Notes
are tendered and accepted in connection with the Exchange Offer, any trading
market for Outstanding Notes not tendered in connection with the Exchange Offer
could be adversely affected. The tender of Outstanding Notes pursuant to the
Exchange Offer may have an adverse effect upon, and increase the volatility of,
the market price of the Outstanding Notes due to a reduction in liquidity.
 
                                       37
   40
 
                                 CAPITALIZATION
 
     The following table sets forth the consolidated capitalization of the
Company: (i) as of September 30, 1997; (ii) on a pro forma basis to give effect
to the Acquisition and the financing under the New Credit Facilities; and (iii)
as adjusted to give effect to the offering of the Outstanding Notes and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds". For additional information, see the Unaudited Pro Forma Condensed
Consolidated Financial Information, the EHSI Consolidated Financial Statements
and the EHSI Unaudited Interim Consolidated Financial Statements included
elsewhere in this Prospectus.
 
   


                                                                                        PRO FORMA
                                                               ACTUAL     PRO FORMA    AS ADJUSTED
                                                              --------    ---------    -----------
                                                                     (DOLLARS IN THOUSANDS)
                                                                              
Short-term indebtedness and current maturities of long-term
  debt.....................................................   $ 49,397    $ 45,461      $  45,461
                                                              ========    ========       ========
Long-term debt
  Bank credit facility.....................................     41,635          --             --
  Notes payable............................................    201,143      44,655         44,655
  New Credit Facilities:
     Revolving Credit Facility(1)..........................         --      54,104         54,104
     Term Loan Facilities..................................         --     573,000        373,000
  Mortgages................................................     13,619       6,138          6,138
  Senior Subordinated Notes due 2007.......................         --          --        200,000
                                                              --------    --------       --------
     Total long-term debt..................................    256,397     677,897        677,897
Minority interests.........................................      2,101       2,101          2,101
Shareholder's equity.......................................    233,834     268,234        268,234
                                                              --------    --------       --------
     Total capitalization..................................   $492,332    $948,232      $ 948,232
                                                              ========    ========       ========

    
 
- ---------------
 
   
(1) The Revolving Credit Facility has a total availability of $200,000, leaving
    unused borrowing capacity thereunder of approximately $113,896 (net of
    letters of credit in the amount of $32,000).
    
 
                                       38
   41
 
        UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 
   
     The following Unaudited Pro Forma Condensed Consolidated Financial
Information is based on the historical financial information appearing elsewhere
in this Prospectus. The Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended September 30, 1997 and for the year ended
December 31, 1996 give effect to the Acquisition, the Financing Transactions and
the acquisition of the assets of Medi-Management as if they had occurred on
January 1, 1996. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
gives effect to the Acquisition and the Financing Transactions as if such
transactions had occurred as of September 30, 1997.
    
 
   
     The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable and are described in the
notes accompanying the Unaudited Pro Forma Condensed Consolidated Statements of
Operations and the Unaudited Pro Forma Condensed Consolidated Balance Sheet. The
Unaudited Pro Forma Condensed Consolidated Financial Information is provided for
informational purposes only and does not purport to represent what the Company's
results of operations or financial position would actually have been had the
transactions in fact occurred at such dates or to project the Company's results
of operations or financial position at or for any future date or period. The
Unaudited Pro Forma Condensed Consolidated Financial Information has been
prepared using the purchase method of accounting, whereby the total cost of the
Acquisition has been allocated to the tangible and intangible assets acquired
and liabilities assumed based upon their respective fair values at the effective
date of the Merger.
    
 
     The Unaudited Pro Forma Condensed Consolidated Financial Information should
be read in conjunction with "Capitalization," "Management's Discussion and
Analysis," the EHSI Consolidated Financial Statements, the EHSI Unaudited
Interim Consolidated Financial Statements, the Arbor Consolidated Financial
Statements and the Arbor Unaudited Interim Consolidated Financial Statements
appearing elsewhere in this Prospectus.
 
                                       39
   42
 
            UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)
 
   


                                                               AS OF SEPTEMBER 30, 1997
                                                 -----------------------------------------------------
                                                 HISTORICAL   HISTORICAL   TRANSACTION       PRO FORMA
                                                    EHSI        ARBOR      ADJUSTMENTS       COMBINED
                                                 ----------   ----------   -----------       ---------
                                                                                 
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents....................   $  14,866    $   6,781    $      --        $  21,647
  Accounts receivable..........................     172,429       50,676           --          223,105
  Other current assets.........................      11,808        7,459           --           19,267
  Deferred state income taxes..................       1,575           --           --            1,575
  Due from shareholder - Deferred Federal
     income taxes..............................       8,716        2,218           --           10,934
                                                   --------     --------     --------        ----------
     Total current assets......................     209,394       67,134           --          276,528
PROPERTY AND EQUIPMENT, NET....................     447,605      144,603       77,313(1)       669,521
GOODWILL.......................................       9,690       20,124      (20,124)(1)      227,293
                                                                              217,603(1)
OTHER ASSETS...................................      16,784        2,034       15,660(1)        41,060
                                                                                9,282(1)
                                                                               (2,700)(3)
                                                   --------     --------     --------        ----------
                                                  $ 683,473    $ 233,895    $ 297,034        $1,214,402
                                                   ========     ========     ========        ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
  Bank indebtedness............................   $  16,587    $      --    $      --        $  16,587
  Notes payable................................      18,913           --      (18,913)(2)           --
  Current maturities of long-term debt.........      13,897        4,940      (16,963)(2)       28,874
                                                                               27,000(2)
  Accounts payable and accrued liabilities.....      96,808       27,089           --          123,897
  Other current liabilities....................         767       16,780       (1,100)(3)       16,447
  Due to shareholder and affiliates............       1,658           --           --            1,658
                                                   --------     --------     --------        ----------
     Total current liabilities.................     148,630       48,809       (9,976)         187,463
LONG-TERM DEBT:
  Existing long-term debt......................     256,397      103,720     (309,324)(2)       50,793
  New Credit Facilities........................          --           --      427,104(2)(3)    427,104
  Senior Subordinated Notes Due 2007...........          --           --      200,000(2)       200,000
OTHER LONG-TERM LIABILITIES....................      11,339           --           --           11,339
DUE TO SHAREHOLDER AND AFFILIATES:
  Deferred Federal income taxes................      23,018        6,264       29,932(1)        59,214
  Other........................................       3,484           --           --            3,484
DEFERRED STATE INCOME TAXES....................       4,670           --           --            4,670
MINORITY INTERESTS.............................       2,101           --           --            2,101
SHAREHOLDER'S EQUITY
  Common stock.................................           1          208         (208)(1)            1
  Additional paid-in capital...................     153,937       30,827      (30,827)(1)      198,537
                                                                               44,600(2)
  Retained earnings............................      79,896       44,067      (44,067)(1)       69,696
                                                                              (10,200)(3)
                                                   --------     --------     --------        ----------
     Total shareholder's equity................     233,834       75,102      (40,702)         268,234
                                                   --------     --------     --------        ----------
                                                  $ 683,473    $ 233,895    $ 297,034        $1,214,402
                                                   ========     ========     ========        ==========

    
 
  See accompanying Notes To Unaudited Pro Forma Condensed Consolidated Balance
                                     Sheet
 
                                       40
   43
 
       NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)
 
   
    The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the Acquisition and the Financing Transactions as if such transactions had
occurred as of September 30, 1997. The Tender Offer, to acquire all of the
issued and outstanding shares of Arbor for $45.00 per share, was commenced on
October 3, 1997 and expired on November 25, 1997. Over 99% of the issued and
outstanding common shares of Arbor were tendered pursuant to the Tender Offer.
On November 26, 1997, the Company effected the Merger whereupon Arbor became an
indirect wholly owned subsidiary of the Company. The Acquisition has been
accounted for using the purchase method, whereby the total cost of the
Acquisition has been allocated to the tangible and intangible assets acquired
and liabilities assumed based upon their respective fair values at the effective
date of the Merger.
    
 
   
    Proceeds of the New Credit Facilities and the Outstanding Notes together
with the $44,600 equity contribution from Extendicare were used to complete the
acquisition of Arbor for approximately $320,404, to pay transaction costs and
fees related thereto of approximately $24,500, to refinance certain indebtedness
of the Company and of Arbor of approximately $243,500 and $101,700,
respectively, and to finance approximately $8,600 of debt prepayment penalties,
net of tax. The balance of the Revolving Credit Facility of approximately
$113,896 (net of letters of credit in the amount of $32,000) is available for
working capital and general corporate purposes.
    
 
(1) Reflects the allocation of costs of the Acquisition in excess of the fair
    value of the net assets acquired, and the elimination of Arbor's equity on
    acquisition under purchase accounting. The excess purchase price will not be
    deductible for tax purposes.
 
   
                                                                      
                   Purchase price.......................................................    $320,404
                   Transaction costs and fees...........................................      24,500
                                                                                            --------
                                                                                             344,904
                   Elimination of:
                     Arbor shareholders' equity.........................................     (75,102)
                     Arbor goodwill.....................................................      20,124
                                                                                            --------
                   Purchase price in excess of the net book value of the net assets
                     acquired...........................................................     289,926
                   Allocation to:
                     Deferred financing costs...........................................     (15,660)
                     Leasehold rights, to adjust to fair value..........................      (9,282)
                     Property and equipment to adjust to fair value.....................     (77,313)
                     Deferred taxes.....................................................      29,932
                                                                                            --------
                   Goodwill.............................................................    $217,603
                                                                                            ========

                   
    
 
(2) Reflects the New Credit Facilities, the Outstanding Notes, the contribution
    of equity from Extendicare and the repayment of the portion of the existing
    debt of both the Company and Arbor that is to be refinanced.
 
   
   Sources of funds are as follows:
    
 
   
                                                                      
                   Revolving Credit Facility............................................    $ 54,104
                   Tranche A Term Loan (including current maturities of $25,000)........     200,000
                   Tranche B Term Loan (including current maturities of $2,000).........     200,000
                   Senior Subordinated Notes............................................     200,000
                   Equity contribution from Extendicare.................................      44,600
                                                                                            --------
                                                                                             698,704
                                                                                            ========

                   
    
 
   
    The repayment of existing debt of the Company and Arbor is reflected as
    follows:
    
 
   
                                                                      
                   Notes payable........................................................      18,913
                   Current maturities of long-term debt.................................      16,963
                   Long-term debt.......................................................     309,324
                                                                                            --------
                                                                                             345,200
                                                                                            ========

                   
    
 
   
(3) Reflects the estimated extraordinary loss, net of taxes, resulting from the
    pre-payment of existing debt. The extraordinary loss includes pre-payment
    penalties of $14,000 and the elimination of deferred financing costs
    associated with such debt prepaid of $2,700, net of taxes of $5,400 and
    $1,100, respectively.
    
 
                                       41
   44
 
             UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
                                 OF OPERATIONS
                 (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
 
   


                                                  FOR THE YEAR ENDED DECEMBER 31, 1996
                                 -----------------------------------------------------------------------
                                                               TRANSACTION ADJUSTMENTS
                                 HISTORICAL    HISTORICAL    ---------------------------      PRO FORMA
                                    EHSI         ARBOR       MEDI-MANAGEMENT    ARBOR(2)       COMBINED
                                 ----------    ----------    ---------------    --------      ----------
                                                                               
REVENUES.......................   $ 824,347     $ 218,777        $22,986(1)     $     --      $1,066,110
COSTS AND EXPENSES:
  Operating....................     677,159       171,170         18,771(1)           --         867,100
  General and administrative...      33,262         9,680             --              --          42,942
  Lease costs..................       8,756         4,450             17(1)           --          13,223
  Depreciation and
     amortization..............      29,703         8,924          1,347(1)        8,981(3)       48,955
  Interest, net................      18,477         7,108          2,369(1)       28,259(4)       56,213
  Other, net...................          --           494             --              --             494
                                   --------      --------         ------          ------       ---------
                                    767,357       201,826         22,504          37,240       1,028,927
                                   --------      --------         ------          ------       ---------
     Earnings before income
       taxes, minority
       interests and
       extraordinary items.....      56,990        16,951            482         (37,240)         37,183
PROVISION FOR INCOME TAXES.....      22,546         6,728            190(1)      (11,974)(5)      17,490
                                   --------      --------         ------          ------       ---------
     Earnings before minority
       interests and
       extraordinary items.....      34,444        10,223            292         (25,266)         19,693
MINORITY INTERESTS.............         436            --             --              --             436
                                   --------      --------         ------          ------       ---------
     Earnings before
       extraordinary items.....   $  34,008     $  10,223        $   292        $(25,266)     $   19,257
                                   ========      ========         ======          ======       =========
EARNINGS PER SHARE BEFORE
  EXTRAORDINARY ITEMS(6).......   $      36                                                   $       20
                                   ========                                                    =========
OTHER DATA:
Ratio of earnings to fixed
  charges(7)...................         3.5x                                                         1.6x

    
 
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
                                 of Operations
 
                                       42
   45
 
             UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
                          OF OPERATIONS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
 
   


                                                FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                   ----------------------------------------------------------------------
                                                                 TRANSACTION ADJUSTMENTS
                                   HISTORICAL    HISTORICAL    ---------------------------      PRO FORMA
                                      EHSI         ARBOR       MEDI-MANAGEMENT    ARBOR(2)      COMBINED
                                   ----------    ----------    ---------------    --------      ---------
                                                                                 
REVENUES.........................   $ 663,433     $ 181,204        $10,078(1)     $     --      $ 854,715
COSTS AND EXPENSES:
  Operating......................     543,234       141,614          7,712(1)           --        692,560
  General and administrative.....      27,648         8,081             --              --         35,729
  Lease costs....................       7,132         3,292             10(1)           --         10,434
  Depreciation and
     amortization................      24,538         7,928            571(1)        6,448(3)      39,485
  Interest, net..................      13,633         6,106            960(1)       20,006(4)      40,705
  Other, net.....................          --           132             --              --            132
                                     --------      --------         ------          ------      ---------
                                      616,185       167,153          9,253          26,454        819,045
                                     --------      --------         ------          ------      ---------
     Earnings before income
       taxes, minority interests
       and
       extraordinary items.......      47,248        14,051            825         (26,454)        35,670
PROVISION FOR INCOME TAXES.......      17,957         5,493            289(1)       (8,356)(5)     15,383
                                     --------      --------         ------          ------      ---------
     Earnings before minority
       interests and
       extraordinary items.......      29,291         8,558            536         (18,098)        20,287
MINORITY INTERESTS...............         661            --             --              --            661
                                     --------      --------         ------          ------      ---------
     Earnings before
       extraordinary items.......   $  28,630     $   8,558        $   536        $(18,098)     $  19,626
                                     ========      ========         ======          ======      =========
EARNINGS PER SHARE
  BEFORE EXTRAORDINARY
  ITEMS(6).......................   $      30                                                   $      21
                                     ========                                                   =========
OTHER DATA:
Ratio of earnings to fixed
  charges(7).....................         3.6x                                                        1.7x

    
 
See accompanying Notes To Unaudited Pro Forma Condensed Consolidated Statements
                                 of Operations
 
                                       43
   46
 
                     NOTES TO UNAUDITED PRO FORMA CONDENSED
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)
 
   
    The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1996 and for the nine months ended September 30,
1997 give effect to the Acquisition, the Financing Transactions and the
acquisition of the assets of Medi-Management as if they had occurred on January
1, 1996. The Acquisition has been accounted for using the purchase method,
whereby the total cost of the Acquisition has been allocated to the tangible and
intangible assets acquired and liabilities assumed based upon their respective
fair values at the effective date of the Merger.
    
 
   
(1) The Company acquired the assets of Medi-Management on May 31, 1997, for
    approximately $24,000, and assumed historical debt of approximately $9,200.
    The information presented represents the results of operations of
    Medi-Management from January 1, 1996 through to December 31, 1996, and from
    January 1, 1997 through to May 31, 1997, with respect to the results for the
    year ended 1996, and for the nine months ended September 30, 1997,
    respectively.
    
 
(2) Management anticipates achieving annual general and administrative cost
    savings of approximately $7,100 as a result of the elimination of
    duplicative positions of Arbor, the closing of Arbor's corporate offices,
    the elimination of costs associated with Arbor's airplane, the elimination
    of various public company costs and the reduction of professional and
    accounting fees. Management believes additional opportunities exist for cost
    savings and revenue enhancements as a result of the Acquisition. However,
    there can be no assurance that these cost savings or revenue enhancements
    will be realized. There also can be no assurance that other costs and
    expenses of the Company will not increase, thereby lowering or offsetting
    management's estimated cost savings. The Company has not included an
    estimate for cost savings in the determination of pro forma financial
    information pursuant to the Securities and Exchange Commission regulations.
 
   
(3) Reflects the increase in amortization due to deferred financing costs of
    $15,660, related to the refinancing of the Company's debt, and the increase
    in depreciation and amortization of goodwill resulting from the allocation
    of the purchase price in excess of the net book value of the assets acquired
    to property and equipment, leasehold rights and goodwill of $77,313, $9,282
    and $217,603, respectively. The property and equipment will be depreciated
    over their useful lives. The leasehold rights will be amortized over the
    remaining term of the lease plus one renewal period. Goodwill allocated to
    pharmacy operations of $56,313 will be amortized over 20 years, and the
    remaining goodwill of $161,290 allocated to the skilled nursing facility
    operations will be amortized over 40 years.
    
 
    Incremental Depreciation and Amortization Expense:
 
   


                                                                                 YEAR ENDED    NINE MONTHS ENDED
                                                                                DECEMBER 31,     SEPTEMBER 30,
                                                                                    1996             1997
                                                                                ------------   -----------------
                                                                                (DOLLARS IN THOUSANDS)
                                                                                         
    Amortization of goodwill...................................................    $6,848           $ 5,136
    Amortization of leasehold rights...........................................     1,137               853
    Amortization of deferred financing costs...................................     2,734             1,937
                                                                                   ------            ------
                                                                                   10,719             7,926
    Less amortization of intangible assets recorded by Arbor and amortization
      of deferred financing costs written off..................................     1,858             1,568
                                                                                   ------            ------
    Increase in amortization expense...........................................     8,861             6,358
    Increase in depreciation expense...........................................       120                90
                                                                                   ------            ------
    Pro forma adjustment.......................................................    $8,981           $ 6,448
                                                                                   ======            ======

    
 
                                       44
   47
 
                     NOTES TO UNAUDITED PRO FORMA CONDENSED
              CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
(4) Reflects the estimated increase in interest expense resulting from the
    Acquisition and the incurrence of indebtedness under the New Credit
    Facilities and the Outstanding Notes to finance the Acquisition and repay a
    portion of existing indebtedness of the Company and Arbor, offset partially
    as a result of proceeds of the contribution of equity from Extendicare.
 
    Incremental Interest Expense:
 
   


                                                                                 YEAR ENDED    NINE MONTHS ENDED
                                                                                DECEMBER 31,     SEPTEMBER 30,
                                                                                    1996             1997
                                                                                ------------   -----------------
                                                                                     (DOLLARS IN THOUSANDS)
                                                                                         
    Interest expense on the New Credit Facilities:
      Revolving Credit Facility (LIBOR + 1.75%)................................   $  4,068         $   3,051
      Tranche A (LIBOR + 1.75%)................................................     15,039            11,279
      Tranche B (LIBOR + 2.00%)................................................     15,539            11,654
    Interest expense on Outstanding Notes (9.35%)..............................     18,700            14,025
    Commitment fee on unused portion of Revolving Credit Facility and fee on
      interim financing........................................................      1,905               304
    Interest expense on debt retained..........................................      3,021             2,434
                                                                                   -------           -------
    Total estimated pro forma interest expense, with a weighted average rate on
      debt at period end of 8.11%..............................................     58,272            42,747
    Add interest income........................................................      1,084             1,155
    Less capitalized interest..................................................        975               887
                                                                                   -------           -------
    Total interest, net........................................................     56,213            40,705
    Less interest expense and amortization related to retired debt.............     27,954            20,699
                                                                                   -------           -------
                                                                                  $ 28,259         $  20,006
                                                                                   =======           =======

    
 
   
    For purposes of the above pro forma interest calculations, LIBOR at
    September 30, 1997 of 5.77% has been used. Each .25% change in the interest
    rate of long-term debt would change the Company's pro forma interest expense
    by $1,135.
    
 
(5) Represents income tax expense at an effective tax rate of 39.4% for the year
    ended December 31, 1996, and 39.2% for the nine and twelve months ended
    September 30, 1997, excluding the amortization of non-deductible goodwill.
    The primary difference between the expense calculated at statutory rates and
    the amounts reflected in the pro forma statements is attributable to
    non-deductible goodwill and the provision for state income taxes.
 
(6) Earnings per share is computed using the weighted average outstanding shares
    of 947 for the respective periods.
 
(7) The ratio of earnings to fixed charges is calculated by dividing earnings
    from operations before income taxes plus fixed charges (excluding
    capitalized interest) by fixed charges (including capitalized interest).
    Fixed charges consist of interest expense, including amortization of
    deferred financing costs, and that portion of rental expense deemed to be
    representative of the interest component of rental expense.
 
                                       45
   48
 
                     SELECTED FINANCIAL AND OPERATING DATA
 
     Set forth below and on the next three pages are selected historical
financial data for the Company and Arbor.
 
THE COMPANY -- HISTORICAL
 
     The following table presents selected consolidated financial and operating
data of the Company as of and for the years ended December 31, 1996, 1995, 1994,
1993 and 1992 and the nine months ended September 30, 1997 and 1996. The
financial information presented for the fiscal years ended December 31, 1996,
1995, 1994, 1993 and 1992 has been derived from the EHSI Consolidated Financial
Statements. The financial information presented for the nine months ended
September 30, 1997 and 1996, has been derived from the EHSI Unaudited Interim
Consolidated Financial Statements, and, in the opinion of management of the
Company, reflects a fair presentation of the Company's financial information.
The following information should be read in conjunction with the EHSI
Consolidated Financial Statements, the EHSI Unaudited Interim Consolidated
Financial Statements and "Management's Discussion and Analysis -- The Company"
included elsewhere in this Prospectus.
 


                                                      NINE MONTHS
                                                         ENDED
                                                     SEPTEMBER 30,                    YEAR ENDED DECEMBER 31,
                                                  -------------------   ----------------------------------------------------
                                                  1997(1)      1996       1996       1995       1994       1993       1992
                                                  --------   --------   --------   --------   --------   --------   --------
                                                                (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
                                                                                               
INCOME STATEMENT DATA:
Revenues:
  Routine care and assisted living..............  $413,633   $395,333   $526,486   $498,140   $470,310   $436,663   $417,048
  Medical specialty.............................   243,001    213,928    290,515    242,339    188,419    154,543    112,155
  Other.........................................     6,799      4,844      7,346      6,649      6,265      6,065      5,566
                                                  --------   --------   --------   --------   --------   --------   --------
                                                   663,433    614,105    824,347    747,128    664,994    597,271    534,769
Costs and expenses:
  Operating.....................................   543,234    508,815    677,159    626,405    559,744    507,088    446,323
  General and administrative....................    27,648     24,239     33,262     28,672     24,944     23,004     22,446
  Lease costs...................................     7,132      6,560      8,756      9,005      8,920      8,705      8,486
  Depreciation and amortization.................    24,538     21,979     29,703     25,872     23,092     21,378     19,686
  Interest, net.................................    13,633     14,011     18,477     14,776     13,083     12,094     12,703
                                                  --------   --------   --------   --------   --------   --------   --------
                                                   616,185    575,604    767,357    704,730    629,783    572,269    509,644
                                                  --------   --------   --------   --------   --------   --------   --------
Earnings from operations........................    47,248     38,501     56,990     42,398     35,211     25,002     25,125
Net earnings....................................  $ 28,630   $ 22,859   $ 34,008   $ 25,521   $ 21,709   $ 22,306   $ 20,117
Earnings per share..............................  $     30   $     24   $     36   $     27   $     23   $     24   $     21
Dividends per share (dollars)...................        --         --         --         --   $  10.56         --         --
Weighted average shares outstanding.............       947        947        947        947        947        947        947
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................................  $ 60,764              $ 60,492   $ 38,555   $ 23,858   $ 30,033   $  8,435
Total assets....................................   683,473               591,851    525,634    444,664    394,600    374,638
Long-term debt..................................   256,397               222,954    196,769    166,808    153,184    153,135
Shareholder's equity............................   233,834               201,521    167,513    141,992    130,283    117,586
OTHER DATA:
Ratio of earnings to fixed charges(2)...........      3.6x       3.2x       3.5x       3.1x       3.0x       2.4x       2.4x
Property and equipment capital expenditures.....  $ 41,311   $ 36,896   $ 53,581   $ 56,469   $ 35,271   $ 18,779   $ 20,832

 
                                       46
   49
 


                                                      NINE MONTHS
                                                         ENDED
                                                     SEPTEMBER 30,                    YEAR ENDED DECEMBER 31,
                                                  -------------------   ----------------------------------------------------
                                                  1997(1)      1996       1996       1995       1994       1993       1992
                                                  --------   --------   --------   --------   --------   --------   --------
                                                                (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
                                                                                               
OPERATING DATA:
Number of facilities (end of period)(3)
  Nursing.......................................       163        157        155        152        150        144        146
  Assisted living and retirement................        38         31         31         22         16         13          9
Resident capacity (end of period)(3)
  Nursing (beds)................................    17,289     17,120     16,644     16,551     16,425     15,833     16,195
  Assisted living and retirement (units)........     1,480      1,140      1,140        874        708        562        473
Average occupancy rate
  Nursing.......................................        88%        89%        89%        89%        91%        93%        93%
  Assisted living and retirement(4).............        87         88         86         88         89         90         89
Payor source as a percentage of total revenue
  Private pay...................................        33%        32%        32%        33%        35%        36%        37%
  Medicare......................................        31         30         30         26         22         19         16
  Medicaid......................................        36         38         38         41         43         45         47

 
- ---------------
 
(1) Includes the acquisition of the assets of Medi-Management on May 31, 1997
    for approximately $24,000 and assumed debt of approximately $9,200. See
    "Management's Discussion and Analysis -- The Company -- Acquisitions."
 
(2) The ratio of earnings to fixed charges is calculated by dividing earnings
    from operations before income taxes plus fixed charges (excluding
    capitalized interest) by fixed charges (including capitalized interest).
    Fixed charges consist of interest expense, including amortization of
    deferred financing costs, and that portion of rental expense deemed to be
    representative of the interest component of rental expense.
 
(3) Includes managed facilities.
 
(4) Reflects occupancy rate for assisted living and retirement facilities
    following one year of operation as a Company facility.
 
                                       47
   50
 
ARBOR -- HISTORICAL
 
     The following table presents selected consolidated financial and operating
data of Arbor as of and for the fiscal years ended December 31, 1996, 1995,
1994, 1993 and 1992 and each of the nine months ended September 30, 1997 and
1996. The financial information presented for the fiscal years ended December
31, 1996, 1995, 1994, 1993 and 1992 has been derived from the Arbor Consolidated
Financial Statements. The financial information presented for the nine months
ended September 30, 1997 and 1996, has been derived from the Arbor Unaudited
Interim Consolidated Financial Statements, and, in the opinion of management of
Arbor, reflects a fair presentation of Arbor's financial information. The
following information should be read in conjunction with the Arbor Consolidated
Financial Statements, the Arbor Unaudited Interim Consolidated Financial
Statements and "Management's Discussion and Analysis -- Arbor" included
elsewhere in this Prospectus.
 


                                                      NINE MONTHS
                                                         ENDED
                                                     SEPTEMBER 30,                    YEAR ENDED DECEMBER 31,
                                                  -------------------   ----------------------------------------------------
                                                    1997       1996       1996       1995       1994       1993       1992
                                                  --------   --------   --------   --------   --------   --------   --------
                                                               (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                                                               
INCOME STATEMENT DATA:
Net revenues
  Subacute care.................................  $ 94,623   $ 82,971   $113,123   $100,945   $ 82,874   $ 62,008   $ 38,562
  Basic care....................................    63,901     62,722     84,015     75,931     65,615     60,999     55,974
  Pharmacy and other............................    22,680     15,385     21,639     15,282     10,302      9,273     11,806
                                                  --------   --------   --------   --------   --------   --------   --------
Total net revenues..............................   181,204    161,078    218,777    192,158    158,791    132,280    106,342
Expenses
  Operating.....................................   141,614    127,011    171,170    151,922    126,249    104,883     83,995
  General corporate.............................     8,081      7,123      9,680      8,992      7,353      6,230      4,460
  Operating lease rental........................     3,292      3,410      4,450      4,301      4,062      3,939      4,289
  Interest......................................     6,106      5,161      7,108      5,822      4,642      5,043      4,700
  Depreciation and amortization.................     7,928      6,498      8,924      7,450      5,636      4,436      3,661
                                                  --------   --------   --------   --------   --------   --------   --------
Total expenses..................................   167,021    149,203    201,332    178,487    147,942    124,531    101,105
                                                  --------   --------   --------   --------   --------   --------   --------
Income from operations..........................    14,183     11,875     17,445     13,671     10,849      7,749      5,237
Net income (unaudited pro forma for 1993 and
  1992)(1)......................................  $  8,558   $  6,956   $ 10,223   $  8,452   $  6,903   $  4,884   $  3,236
Net income per share (unaudited pro forma for
  1993 and 1992)(1).............................  $   1.22   $   1.00   $   1.47   $   1.23   $   1.01   $   0.82   $   0.60
Weighted average shares outstanding (000's).....     7,035      6,970      6,969      6,881      6,842      5,986      5,408
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................................  $ 18,325              $ 14,422   $  4,207   $ 10,175   $ 11,857   $  9,609
Total assets....................................   233,895               209,474    178,783    136,591    116,311    100,651
Long-term obligations, less current
  maturities....................................   103,720                94,643     74,741     52,956     48,354     57,426
Stockholders' equity and redeemable stock.......    75,102                66,016     55,628     46,485     39,575     19,098
OTHER DATA:
Ratio of earnings to fixed charges(2)...........       2.9x       2.7x       2.9x       2.7x       2.7x       2.2x       1.8x
Property and equipment capital expenditures.....  $ 14,010   $ 18,417   $ 23,463   $ 23,159   $ 18,549   $ 13,795   $ 18,119
OPERATING DATA:
Number of facilities (end of period)(3).........        31         29         30         27         25         23         22
Resident capacity (end of period)(3)............     3,696      3,458      3,578      3,244      2,996      2,767      2,637
Average occupancy rate(4).......................       91%        89%        89%        89%        88%        89%        88%
Payor source as a percentage of total revenue
  Private pay(5)................................       36%        33%        34%        33%        35%        37%        41%
  Medicare......................................        32         35         34         36         34         29         21
  Medicaid......................................        32         32         32         31         31         34         38

 
- ---------------
 
(1) Unaudited pro forma net income resulted from pro forma income taxes which
    include income taxes computed as if Marshall Properties, Inc. had been
    included in Arbor's consolidated group for income tax purposes prior to its
    acquisition and pooling of interests effective June 30, 1993.
 
(2) The ratio of earnings to fixed charges is calculated by dividing earnings
    from operations before income taxes plus fixed charges (excluding
    capitalized interest) by fixed charges (including capitalized interest).
    Fixed charges consist of interest expense, including
 
                                       48
   51
 
    amortization of deferred financing costs, and that portion of rental expense
    deemed to be representative of the interest component of rental expense.
 
(3) Includes managed facilities.
 
(4) Represents total billed patient days divided by total available days with
    respect to owned and leased facilities.
 
(5) Private revenues as classified by Arbor include reimbursement received from
    individuals, HMOs, PPOs, indemnity insurers, and other charge-based sources,
    the management of one center and in 1992 the development of facilities for
    others.
 
                                       49
   52
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
 
     Except as otherwise indicated, the following discussion and analysis of the
results of operations and financial condition of the Company and Arbor covers
periods before completion of the Acquisition. Accordingly, the discussion and
analysis of such periods does not reflect the significant impact that the
Acquisition and the Financing Transactions will have on the Company after the
Merger. See "Unaudited Pro Forma Condensed Consolidated Financial Statements"
and "The Acquisition."
 
THE COMPANY
 
     The Company is one of the largest providers of long-term care and related
services in the United States. The Company operated 163 nursing facilities
(17,289 operational beds) and 38 assisted living and retirement facilities
(1,480 units) at September 30, 1997. The Company's facilities are located in 13
states. The Company also operates an institutional pharmacy business, which at
September 30, 1997 serviced approximately 30,300 nursing facility beds in
regional markets throughout the United States.
 
     The Company's revenues are derived through the provision of healthcare
services in its network of facilities, including long-term care services such as
skilled nursing care, assisted living care and related support services and
medical specialty services such as subacute care and rehabilitative therapy,
pharmacy supplies and services and medical equipment, supplies and services.
From 1994 to September 30, 1997, the percentage of the Company's revenue derived
from routine care and assisted living care has declined from 70.7% to 62.3%,
while the percentage of revenue derived from medical specialty services has
increased from 28.3% to 36.6%. The increase in the percentage of revenue
attributable to medical specialty services reflects the Company's focus on
expanding its provision of higher revenue specialized subacute care services.
 
     The Company receives payment for its services and products from Federal
(Medicare) and State (Medicaid) funded cost reimbursement programs, as well as
from private payors. The private pay classification includes payments from
individuals, commercial insurers, health maintenance organizations, and other
fee-based payment sources, including Blue Cross Associations and the Veterans
Administration. The following table sets forth the Company's private pay,
Medicare and Medicaid sources of revenue by percentage of total revenue:
 


                                                              NINE MONTHS
                                                                 ENDED             YEAR ENDED
                                                              SEPTEMBER 30        DECEMBER 31
                                                              ------------    --------------------
                                                              1997    1996    1996    1995    1994
                                                              ----    ----    ----    ----    ----
                                                                               
Private pay...............................................      33%     32%     32%     33%     35%
Medicare..................................................      31      30      30      26      22
Medicaid..................................................      36      38      38      41      43

 
     Funds received by the Company under the Medicare and Medicaid programs are
subject to audit with respect to the application of various payment formulas and
such audits can result in retroactive adjustments to revenues. The Company is
reimbursed under the Medicare program for its direct costs plus an allocation of
indirect costs up to a regional limit. The costs of care for Medicare patients
receiving specialty medical services is often expected to exceed the regional
reimbursement limits. The Company in such cases files for routine cost limit
("RCL") exceptions in an attempt to recover such additional costs. There can be
no assurance that the Company will be able to recover such excess costs under
pending or future exception requests. In addition, on-going efforts by third
party payors to contain healthcare costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing could
affect the Company's future revenues and profitability. Most recently, the
Balanced Budget Act requires the establishment of a prospective payment system
("PPS") for Medicare skilled nursing facilities under which facilities will be
paid a federal per diem rate for virtually all covered nursing facility services
in lieu of the current cost-based reimbursement rate. This change will reward
efficient providers and penalize those that are inefficient. The law contains
numerous other provisions that will adversely affect payments to providers. See
 
                                       50
   53
 
"Risk Factors -- Potential Adverse Effect of Balanced Budget Act of 1997 and
Other Health Care Reforms," "-- Reimbursement by Third Party Payors," and "--
Risks Associated with Reimbursement Process."
 
     On September 30, 1997, the Company announced its intent to purchase Arbor
through a cash purchase tender offer valued at approximately $320 million plus
assumed debt of approximately $109 million. After giving effect to the
Acquisition, the Company operates a total of 194 nursing facilities (20,985
operational beds) and 38 assisted living and retirement facilities (1,480
operational units) located in 15 states. In addition, the Acquisition augmented
the Company's provision of institutional pharmacy supplies and services and
rehabilitative therapy services. Substantially all of the Company's existing
long-term debt and bank lines of credit was refinanced in conjunction with the
Acquisition.
 
     The following is a summary of other acquisitions and expansion through
construction made by the Company during the nine months ended September 30, 1997
and the years ended December 31, 1996 and 1995 as part of its growth strategy:
 
ACQUISITIONS
 
- -   The Company acquired nine nursing facilities (890 operational beds), of
     which two were previously leased, for $41.7 million during the first nine
     months of 1997. Five of such facilities were acquired from Medi-Management
     for a purchase price of approximately $24 million and the assumption of
     $9.2 million of debt. The Company also acquired the assets of seven medical
     specialty services related businesses for a total of $9.3 million during
     such period.
 
- -   The Company acquired four nursing facilities (652 operational beds) at
     purchase prices totaling $23.5 million, which included two previously
     leased facilities, during 1996. The operating assets of an institutional
     pharmacy were also acquired for $0.4 million.
 
- -   The Company acquired five nursing facilities (534 operational beds) for
     $13.1 million during 1995, three of which had been operated under lease
     agreements, and a 60 percent partnership interest in an institutional
     pharmacy in Florida.
 
CONSTRUCTION
 
- -   The Company completed construction of one nursing facility (74 operational
     beds), two nursing facility additions (59 operational beds), seven assisted
     living facilities (330 units), one assisted living facility addition (10
     units) and five therapy additions through the first nine months of 1997.
 
- -   The Company completed construction of three nursing facility additions (90
     operational beds), six assisted living facilities (189 units) and twenty
     therapy additions during 1996.
 
- -   The Company completed construction of one nursing facility (60 operational
     beds), two nursing facility additions (111 operational beds), five assisted
     living facilities (127 units) and seventeen therapy additions during 1995.
 
     The Company sold one nursing facility (179 operational beds) for $2.0
million and two nursing facilities (371 operational beds) for $6.5 million
during the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively. The prices for the facilities approximated their net book
value. It also ceased operations at one of its leased facilities during 1996.
 
                                       51
   54
 
RESULTS OF OPERATIONS
 
     The following table sets forth details of revenues and earnings as a
percentage of total revenues:
 


                                                       NINE MONTHS
                                                          ENDED
                                                      SEPTEMBER 30        YEAR ENDED DECEMBER 31
                                                     ---------------     -------------------------
                                                     1997      1996      1996      1995      1994
                                                     -----     -----     -----     -----     -----
                                                                              
Revenues
  Routine Care and Assisted Living...............     62.3%     64.4%     63.9%     66.7%     70.7%
  Medical Specialty Services.....................     36.6      34.8      35.2      32.4      28.3
  Other..........................................      1.1       0.8       0.9       0.9       1.0
                                                     -----     -----     -----     -----     -----
                                                     100.0     100.0     100.0     100.0     100.0
Operating and administrative costs...............     86.0      86.8      86.2      87.7      87.9
Property costs...................................      4.8       4.7       4.7       4.7       4.8
Interest, net....................................      2.1       2.3       2.2       2.0       2.0
Earnings before taxes............................      7.1       6.2       6.9       5.6       5.3
Income taxes.....................................      2.7       2.5       2.7       2.2       2.1
Net earnings.....................................      4.3%      3.7%      4.1%      3.4%      3.3%

 
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
 
REVENUES
 
     Revenues in the nine months ended September 30, 1997 were $663.4 million,
representing an increase of $49.3 million (8.0%) from $614.1 million in the nine
months ended September 30, 1996. The majority of the Company's revenue was
derived from routine skilled nursing facility revenues (60.5%). The increase in
revenues of $49.3 million included increases in routine care and assisted living
revenues of $18.3 million, medical specialty services revenues of $29.1 million
and other revenues of $1.9 million.
 
     The increase in routine care and assisted living facility revenues of $18.3
million included a net decrease of $7.1 million resulting from divestitures,
partially offset by the opening of a newly constructed facility and the
acquisition of five facilities effective June 1, 1997 and two facilities
effective September 1, 1997. The remaining increase in such revenues of $25.4
million (6.4%) was realized from facilities which the Company operated during
each of 1997 and 1996 ("same facilities"). Same facility revenues increased
between periods due to rate increases and the increased recognition of Medicare
program RCL exception amounts. An increased level of RCL revenues totalling $3.2
million was recognized during the nine months ended September 30, 1997
pertaining to prior years as the result of the Company attaining a level of
intermediary approval experience sufficient to enable it to reasonably estimate
the amount of exception request dollars subsequently approved. The amounts
recorded were at the actual amounts approved or 70% of filed amounts which
approximates the Company's most recent approval experience. The Company also
began in 1997 to recognize estimated RCL exception request amounts on a current
year basis. Approximately $2.4 million of estimated 1997 exception request
amounts have been recorded during the nine months ended September 30, 1997.
Partially offsetting the aforementioned increases was a decline in occupancy
between periods. Total occupancy, defined as patient days for nursing facilities
and units occupied for assisted living facilities, declined 0.9%. The lower
census between years is partially due to one less day in 1997 versus 1996 as a
result of the leap year effect in 1996. The one less day accounted for a 0.4%
decline in total occupancy. Occupancy percentages based on beds/units in
operation were 88.5% in 1997 and 88.9% in 1996.
 
     The increase in medical specialty services revenues of $29.1 million
(13.6%) included $4.4 million from acquisitions during the nine months ended
September 30, 1997, net of divestitures. The remaining increase of $24.7 million
is due to a number of factors. Restorative therapy revenues increased $14.1
million due to the increased utilization of such services by patients and as a
result of the Company's ability to provide such services as a result of the
completion of 25 therapy addition construction projects in 1996 and the first
nine
 
                                       52
   55
 
months of 1997. Pharmacy revenues increased approximately $10.4 million due to
price and product mix changes.
 
     Pharmacy operations serviced an average of 30,204 nursing facility beds
during the nine months ended September 30, 1997 compared to 30,676 nursing
facility beds in the comparable period of 1996. Pharmacy operations were
servicing approximately 30,300 nursing facility beds at September 30, 1997. The
termination of a contract with a chain of nursing facilities resulted in the
decrease in beds serviced at September 30, 1997.
 
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
 
   
     Operating and general and administrative costs increased $37.8 million or
7.1% between periods. The increase included decreases in costs relating to
divestitures, net of acquisitions and a newly constructed facility, of
approximately $4.9 million in the nine months ended September 30, 1997. The
remaining increase in operating and general and administrative costs of $42.7
million (8.1%) included wage-related increased costs of $28.2 million. The
increase in wage-related costs included an increase of $33.4 million to attract
and retain qualified personnel offset by a decrease in workmen's compensation
costs of $5.2 million due to lower premiums as the result of a change in
insurance carriers, favorable experience and loss prevention efforts. Remaining
increases, excluding wage-related costs, were increased medical specialty
services costs of $8.2 million, principally for therapy and pharmacy related
services and products which corresponds to the increase in such revenues and
higher patient acuity levels, and $6.3 million related to other routine care and
general and administrative costs.
    
 
PROPERTY COSTS
 
     Property costs, representing depreciation, amortization and lease costs,
increased $3.1 million (11.0%) to $31.7 million in the nine months ended
September 30, 1997 compared with the nine months ended September 30, 1996. The
increase is principally due to the overall increase in the number of facilities
operated by the Company and the construction of additions to the Company's
facilities.
 
INTEREST
 
     Net interest expense decreased $0.4 million to $13.6 million in the nine
months ended September 30, 1997 compared to $14.0 million in the comparable
period in 1996. The effect of an increase in the average debt level to $253.4
million during the first nine months of 1997 from $234.1 million during the
first nine months of 1996 was offset by a decrease in the weighted average
interest rate of all non-current liabilities to approximately 7.78% in the first
nine months of 1997 compared to approximately 8.40% in the first nine months of
1996. Net interest expense was also affected by more favorable investment
earnings in the first nine months of 1997 compared to the first nine months of
1996.
 
INCOME TAXES
 
     Income taxes in the nine months ended September 30, 1997 increased to $18.0
million from $15.4 million in the comparable period in 1996 as the result of
increased pre-tax earnings. The Company's effective tax rates were 38.0% in the
first nine months of 1997 and 40.0% in the first nine months of 1996.
 
NET EARNINGS
 
   
     Net earnings in the first nine months of 1997 were $28.6 million, an
increase of $5.8 million (25.2%) over net earnings of $22.8 million in the nine
months ended September 30, 1996.
    
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
REVENUES
 
     Revenues in 1996 were $824.3 million, representing an increase of $77.2
million (10.3%) from $747.1 million in 1995. The majority of the Company's
revenue was derived from routine skilled nursing facility revenues (62.2%). The
increase in revenues of $77.2 million included increases in routine care and
 
                                       53
   56
 
assisted living revenues of $28.3 million, medical specialty services revenue of
$48.2 million and other revenues of $0.7 million.
 
     The increase in routine care and assisted living facility revenues of $28.3
million included an increase of $17.5 million resulting from acquisitions, net
of divestitures, and the opening of newly constructed facilities. The remaining
increase in such revenues of $10.8 million (2.2%) was realized from same
facilities. Same facility revenues increased between years due to rate
increases. Partially offsetting the rate increases was a decline in occupancy.
Total occupancy declined 2.5% between years. Occupancy percentages based on
beds/units in operation were 88.8% and 89.3% in 1996 and 1995, respectively. The
lower census between years is due to several factors. Certain of the Company's
markets experienced the impact of alternative settings, such as assisted living
facilities or home healthcare services, for previously longer stay but less
medically needy residents. A decline in census in the state of Washington due to
the state's efforts to find alternative sources of placement for nursing
facility residents negatively impacted total census by 1.3%. Reported census
also decreased 0.5% as a result of extended evacuations at two facilities during
1996 due to a train derailment and a flood. Census was also negatively impacted
by a continuing higher proportion of residents which require shorter stays as
part of a rehabilitation condition. The shorter average length of stays creates
more turnover in facilities leaving gaps in occupied beds and the requirement
for more intensive marketing.
 
     The increase in medical specialty service revenues of $48.2 million (19.9%)
between years included $5.5 million resulting from the acquisition of two
institutional pharmacy operations during 1996 and $6.2 million resulting from
acquisitions and the opening of newly constructed nursing facilities during 1996
and 1995. The remaining increase of $36.5 million is due to the increased
utilization of restorative therapy services by patients and as a result of the
Company's ability to provide such services. This ability results from the
completion of 37 therapy addition construction projects in 1996 and 1995.
 
     Pharmacy operations serviced an average of 30,784 nursing facility beds in
1996 compared to 27,745 nursing facility beds in 1995. Pharmacy operations were
servicing in excess of 31,000 nursing facility beds at December 31, 1996.
 
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
 
   
     Operating and general and administrative costs increased $55.3 million or
8.4% from 1995; however, such costs as a percentage of revenues declined for the
third consecutive year. The increase included increases in costs relating to
acquisitions, net of divestitures and newly constructed facilities of
approximately $23.9 million in 1996. The remaining increase in operating and
general and administrative costs of $31.4 million (4.8%) included wage-related
increased costs of $13.9 million. The increase in wage-related costs included an
increase of $25.5 million to attract and retain qualified personnel offset by a
decrease in workmen's compensation costs of $11.6 million due to favorable
experience under its retroactively rated insurance coverage plans resulting from
loss prevention efforts and lower premiums for such coverage in certain of the
states in which the Company operates. Remaining increases, excluding
wage-related costs, were increased medical specialty services costs of $14.2
million, principally for therapy and pharmacy related services and products
which corresponds to the increase in such revenues and higher patient acuity
levels, and $3.3 million related to other routine care and general and
administrative costs.
    
 
PROPERTY COSTS
 
     Property costs, representing depreciation, amortization and lease costs,
increased $3.6 million (10.3%) to $38.5 million in 1996 compared with 1995. The
increase is principally due to the increase in the number of facilities
operating by the Company through acquisitions and construction and the
construction of therapy additions.
 
INTEREST
 
     Net interest expense increased $3.7 million to $18.5 million in 1996
compared to 1995 due to acquisitions and capital project expenditures. The
average debt level throughout 1996 was approximately $233.4 million
 
                                       54
   57
 
compared with approximately $184.5 million in 1995. The weighted average
interest rate of long-term debt at December 31, 1996 was approximately 7.56%.
 
INCOME TAXES
 
     Income taxes in 1996 increased to $22.5 million from $16.8 million in 1995
as the result of increased pre-tax earnings. The Company's effective tax rates
were 39.6% in 1996 and 39.5% in 1995.
 
NET EARNINGS
 
     Net earnings in 1996 were $34.0 million, an increase of $8.5 million (33%)
over 1995 net earnings of $25.5 million.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
REVENUES
 
     Revenues in 1995 were $747.1 million, representing an increase of $82.1
million (12.4%) from $665.0 million in 1994. The majority of the Company's
revenue was derived from routine skilled nursing facility revenues (65.4%). The
increase in revenues of $82.1 million included increases in routine care and
assisted living revenues of $27.8 million, medical specialty services revenues
of $53.9 million and other revenues of $0.4 million.
 
     The increase in routine care and assisted living facility revenues of $27.8
million included a net increase of $8.1 million resulting from the acquisition
of ten nursing facilities and the opening of eight new assisted living
facilities during 1994 and 1995, partially offset by divestitures. The remaining
increase in such revenues of $19.7 million (4.2%) was realized from same
facilities. Same facility revenues increased $31.6 million between periods due
to rate increases. Partially offsetting the aforementioned increase was a
decline in occupancy. Total occupancy declined 2.7% between periods. The lower
census between years is primarily due to an increase in the number of patients
which require shorter stays as part of a subacute care rehabilitation condition
and the impacts of alternative patient care settings. Occupancy percentages
based on beds/units in operation were 89.5% in 1995 and 91.5% in 1994.
 
     The increase in medical specialty services revenues of $53.9 million
(28.6%) between periods included $9.0 million from acquisitions during 1995 and
1994, net of divestitures in 1995 and 1994. The remaining increase of $44.9
million is due to a number of factors. Restorative therapy revenues increased
$32.4 million due to the increased utilization of such services by patients and
as a result of the Company's ability to provide such services as a result of the
completion of a number of therapy addition construction projects in 1995 and
1994. Pharmacy revenues increased approximately $9.5 million due to price and
product mix changes ($7.9 million) and an increase in the average number of beds
serviced between years from 25,000 in 1994 to 28,000 in 1995 ($1.6 million). The
remaining $3.0 million increase is primarily due to growth in other ancillary
revenues to nursing facility residents.
 
     Pharmacy operations were servicing approximately 30,600 nursing facility
beds at December 31, 1995.
 
OPERATING AND GENERAL AND ADMINISTRATIVE COSTS
 
     Operating and general and administrative costs increased $70.4 million or
12.0% between years. The increase included increases in costs relating to
acquisitions and new construction net of divestitures of approximately $13.2
million in 1995. The remaining increase in operating and general and
administrative costs of $57.2 million (9.8%) included wage-related increased
costs of $17.1 million. The increase in wage-related costs included an increase
of $21.1 million to attract and retain qualified personnel offset by a decrease
in workmen's compensation costs of $4.0 million due to favorable actuarial
adjustments on prior policy years and improved claim experience. Remaining
increases, excluding wage-related costs, were increased medical specialty
services costs of $32.6 million, principally for therapy and pharmacy related
services and products, and $7.5 million related to other routine care and
general and administrative costs.
 
                                       55
   58
 
PROPERTY COSTS
 
     Property costs, representing depreciation, amortization and lease costs,
increased $2.9 million (8.9%) to $34.9 million in 1995 compared with 1994. The
increase is principally due to the overall increase in the number of facilities
operated by the Company and the construction of bed and therapy additions to the
Company's facilities.
 
INTEREST
 
     Net interest expense increased $1.7 million to $14.8 million in 1995
compared to $13.1 million in 1994 due primarily to the acquisition of nursing
facilities. The average debt level throughout 1995 was approximately $184.5
million compared with approximately $169.2 million in 1994. The weighted average
interest rate of all long-term debt at December 31, 1995 was approximately 8.1%.
 
INCOME TAXES
 
     Income taxes in 1995 increased to $16.8 million from $13.9 million in 1994
as a result of increased pre-tax earnings. The Company's effective tax rate was
39.5% in 1995 compared to 39.0% in 1994.
 
NET EARNINGS
 
     Net earnings in 1995 were $25.5 million, an increase of $3.8 million
(17.6%) over 1994 net earnings of $21.7 million.
 
ARBOR
 
     Arbor provides subacute care services and basic health services for a
variety of patients at its Arbor Centers. Arbor also provides institutional
pharmacy services to both the Arbor Centers and non-affiliated facilities and
their residents.
 
     Subacute care revenues increased from $38.6 million in 1992 to $113.1
million in 1996. Included in subacute care revenues are all room and board,
nursing, therapies, and medical supplies for subacute patients and pharmacy
charges for all Arbor patients. Arbor is primarily reimbursed for the care of
subacute patients by Medicare, managed care payors and commercial insurance.
Rates received vary by payor type. Arbor directs its marketing efforts to
attract patients reimbursed by managed care providers (principally HMOs and
PPOs), commercial insurers and Medicare. Subacute care beds increased from 551
in 1992 to 1,196 in 1996.
 
     Arbor includes in basic health care revenues all room and board, nursing,
therapies and medical supplies for its geriatric, chronic care and assisted
living patients. Arbor receives payment for basic health care services primarily
from Medicaid and private pay sources. Revenues from basic care patients
increased from $56.0 million in 1992 to $84.0 million in 1996. Basic care
revenues have not increased as much as subacute care revenues because (i) rates
for subacute patients are considerably higher than for basic care patients; and
(ii) Arbor has converted existing basic care beds to subacute care beds. Basic
care beds increased from 1,938 in 1992 to 2,382 in 1996.
 
     Arbor includes in pharmacy and other revenues those institutional pharmacy
and related ancillary sales made to non-affiliated facilities and their
residents, outpatient rehabilitation clinic revenue and, prior to June 1, 1995,
the revenue from management of one Arbor Center not owned by Arbor.
 
     Operating expenses primarily include the costs incurred by the Arbor
Centers, pharmacies and, prior to June 1, 1995, costs of providing management
services. General corporate expenses are for the supervisory staff needed to
handle the general affairs of Arbor and to support its operations. Center
ownership costs include operating lease rentals, net interest expense, and
depreciation and amortization expense. Operating, general corporate and
ownership costs increased since 1992 as Arbor increased the number of Arbor
Centers, acquired pharmacies and expanded subacute care services.
 
     Arbor's pharmacy division consists of four institutional pharmacies and
related services. The pharmacy division services approximately 22,500
non-affiliated beds and approximately 3,500 of its own beds in Florida,
 
                                       56
   59
 
Ohio and Indiana. Pharmacy sales to Arbor's subacute and basic care patients are
included in subacute care revenue. Pharmacy sales to non-affiliated facilities
and their residents are included in pharmacy and other revenue. Sales to Arbor's
Centers for resale to their Medicare Part A, Veterans Administration and certain
other patients constitute intercompany transactions and are eliminated in
consolidation.
 
     During 1996 Arbor developed and opened a 36-bed subacute unit addition to
an existing Arbor Center in February, a 79-bed Arbor Center in April, a 116-bed
Arbor Center in August, and a 120-bed Arbor Center in late December. Arbor
acquired two businesses that provide medical supplies and Medicare billing
services and purchased a 100-bed Arbor Center previously operated under a lease
agreement effective June, 1996 and September, 1996, respectively. During 1997,
Arbor acquired the net assets of three Comprehensive Rehabilitation Outpatient
Facilities ("CORFs") and opened two satellite locations which provide general,
job-related injury and geriatric rehabilitation to the northeastern Pennsylvania
and St. Augustine, Florida markets. Effective September 15, 1997, Arbor acquired
seven Rehabilitation Centers in the Jacksonville, Florida area. As at September
30, 1997, Arbor's five CORFs and seven Rehabilitation Centers serviced over
7,000 patients annually. As of September 30, 1997, Arbor operated 3,696 beds in
its 31 Arbor Centers located in five states. Refer to Note 3 of the Notes to
Arbor Unaudited Interim Consolidated Financial Statements.
 
     Ongoing efforts by third party payors to contain health care costs by
limiting reimbursement rates, increasing case management review and negotiating
reduced contract pricing affect Arbor's revenues and profitability. During 1996,
Arbor introduced a plan to improve operating margins, reduce operating costs and
increase referrals from managed care organizations.
 
     During the year ended December 31, 1996, Arbor introduced a plan to improve
operating margins, reduce operating costs and increase referrals from managed
care organizations, with a view to minimizing the effect of or potentially
maximizing the benefits from future changes anticipated in the Medicare payment
system and the expansion of managed care business. As anticipated, as operating
costs were reduced, Medicare revenues, which are cost-based, declined. The lower
operating costs reduced the growth rate of Medicare revenues in Mature Arbor
Centers (as defined below) during 1996. The effects of cost reductions are more
apparent in Mature Arbor Centers. Arbor began to focus its marketing efforts on
increasing revenues from managed care payors, which traditionally have provided
higher operating margins than Medicare. As a result, managed care and insurance
subacute revenues increased 21.3% from 1995 and represented 20.8% of subacute
care revenue in 1996 as compared to 19.2% in 1995.
 
                                       57
   60
 
RESULTS OF OPERATIONS
 
     The following table sets forth for the periods indicated the percentage of
net revenues represented by certain items reflected in Arbor's consolidated
statements of income.
 


                                                        NINE MONTHS
                                                           ENDED               YEAR ENDED
                                                        SEPTEMBER 30           DECEMBER 31
                                                       --------------    -----------------------
                                                       1997     1996     1996     1995     1994
                                                       -----    -----    -----    -----    -----
                                                                            
Net revenues
  Subacute care.....................................    52.2%    51.5%    51.7%    52.5%    52.2%
  Basic care........................................    35.3     38.9     38.4     39.5     41.3
  Pharmacy and other................................    12.5      9.6      9.9      8.0      6.5
                                                       -----    -----    -----    -----    -----
Total net revenues..................................   100.0    100.0    100.0    100.0    100.0
                                                       -----    -----    -----    -----    -----
Expenses
  Operating.........................................    78.2     78.9     78.2     79.1     79.5
  General corporate.................................     4.5      4.4      4.4      4.7      4.6
  Operating lease rental............................     1.8      2.1      2.0      2.2      2.6
  Interest..........................................     3.4      3.2      3.3      3.0      2.9
  Depreciation and amortization.....................     4.4      4.1      4.1      3.8      3.6
  Net other expense.................................     0.0      0.2      0.2       --       --
                                                       -----    -----    -----    -----    -----
Total expenses......................................    92.3     92.9     92.2     92.8     93.2
                                                       -----    -----    -----    -----    -----
Income before income taxes..........................     7.7      7.1      7.8      7.2      6.8
Income taxes........................................     3.0      2.8      3.1      2.8      2.5
                                                       -----    -----    -----    -----    -----
Net income..........................................     4.7%     4.3%     4.7%     4.4%     4.3%
                                                       =====    =====    =====    =====    =====

 
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
 
     Total net revenues for the nine months ended September 30, 1997 of $181.2
million increased $20.1 million, or 12.5%, from the nine months ended September
30, 1996. Internal growth generated 76% of the increase and the balance resulted
from 1996 and 1997 acquisitions. Revenues from Start-Up Centers (developed Arbor
Centers which have been in operation for less than 24 months as of the period
reported) provided 87% of the internal growth. Total occupancy increased to
90.8% from 89.2% in the comparable period of the prior year due to improved
occupancy in both Mature (Arbor Centers in operation for 24 months or more in
the period being reported upon) and Start-Up Centers. Subacute care revenues
increased $11.7 million, or 14.0%, due to more beds and improved occupancy
($17.4 million) partially offset by lower average rates ($5.7 million). The
decrease in subacute rates is due to changes in payor mix and the Company's
cost-reduction efforts, as described below. Managed care patients accounted for
19.2% of the total subacute patients serviced compared to 12.8% for the nine
months ended September 30, 1996. Basic care revenues increased $1.2 million, or
1.9%, due to more beds and improved occupancy ($1.9 million) offset by decreased
rates resulting from lower operating costs ($0.7 million). Pharmacy and other,
primarily outpatient, revenues increased $7.3 million, or 47.4%, due to the 1996
and 1997 acquisitions ($4.6 million) and increased sales volume ($2.7 million).
 
     Operating expenses for the nine months ended September 30, 1997 of $141.6
million increased $14.6 million, or 11.5%, over the comparable period in 1996.
As a percent of revenue, operating costs decreased to 78.2% from 78.9% for the
comparable period in the prior year. Approximately 97% of the increase in
operating costs was due to Start-Up Centers and 1996 and 1997 acquisitions. The
remainder of the net increase was due to an increase in pharmacy operating costs
offset by a decrease in Mature Center costs. Compensation expenses for Arbor
Center staff of $65.4 million increased by $6.0 million, or 10.1%. Start-Up
Centers accounted for $5.4 million of the increase. The cost of providing
therapies, pharmaceuticals and medical supplies ("Ancillary Services") increased
$5.8 million due to Start-Up Centers, the 1996 and 1997 acquisitions and costs
associated with increased pharmacy sales offset in part by reduced costs at
Mature Centers. Mature Center Ancillary Services costs decreased 9.3% when
compared to the same period in the
 
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prior year as a result of Arbor's efforts in converting therapy to in-house
programs rather than purchasing from contract therapy providers. All other costs
in Mature and Start-Up Centers increased $2.8 million.
 
     General corporate expenses increased $1.0 million, or 13.4%, due to costs
incurred to support internal growth and pursue strategic acquisitions.
 
     Ownership costs increased $2.3 million, or 15.0%, primarily due to Start-Up
Centers and the 1997 acquisitions.
 
     Net income increased by $1.6 million, or 23%, primarily as a result of the
foregoing factors.
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Total net revenues for the year ended December 31, 1996 of $218.8 million
increased $26.6 million, or 13.9%, from the year ended December 31, 1995.
Approximately 64.3% of the revenue increase during 1996 resulted from internal
growth and 35.7% from acquisitions made during 1995 and 1996. Internal revenue
growth came from Start-Up Arbor Centers. Subacute care revenues (which accounted
for 51.7% of total revenues) increased $12.2 million due to added beds and
improved occupancy. Basic care revenues increased $8.1 million ($2.8 million
from higher rates, $3.3 million from added beds and higher occupancy and $2.0
million from the Arbor Center acquired in May, 1995). Pharmacy and other
revenues increased $6.3 million, primarily due to the acquisition of an
institutional pharmacy on June 30, 1995.
 
     Operating expenses for the year ended December 31, 1996 of $171.2 million
increased $19.2 million, or 12.7%, over the comparable period in 1995. However,
as a percent of revenue, operating costs decreased to 78.2% from 79.1% for the
comparable period in 1995, due primarily to the initial implementation of the
margin-driven strategy in Mature Arbor Centers and the effect of the pharmacy
acquisition made during 1995. Increased costs were due to the Start-Up Arbor
Centers and the 1995 acquisition while operating costs in Mature Arbor Centers
decreased 3.4% from 1995. Compensation expenses for Arbor Center staff of $78.1
million increased by $6.9 million, or 9.7%, over the comparable period in 1995.
The Start-Up Arbor Centers and the Arbor Center acquired in May, 1995 accounted
for $8.5 million of the increase in Arbor Center personnel compensation
expenses. These expenses in Mature Arbor Centers decreased by $1.6 million due
to the partial implementation of standardized staffing models. The cost of
providing Ancillary Services increased operating expenses by $8.6 million,
primarily due to the Start-Up Arbor Centers and the institutional pharmacy
acquired in 1995. Ancillary Services expenses in Mature Arbor Centers decreased
by $2.1 million primarily as a result of providing more therapy services
in-house rather than by contract. The net effect of other cost increases and
decreases reflected an overall net increase of $3.7 million primarily resulting
from the Start-Up Arbor Centers and the acquisition of one Arbor Center in May,
1995.
 
     General corporate expenses for the year ended December 31, 1996 of $9.7
million increased $0.7 million, or 7.7%, over the comparable period in 1995.
This change was primarily caused by expenses for additional administrative
personnel and other related expenses needed to support the growing business.
 
     Arbor Center ownership costs for the year ended December 31, 1996 of $20.5
million increased $2.9 million, or 16.6%, over the year ended December 31, 1995.
The increase in ownership costs is due to the Start-Up Arbor Centers and the
acquisition of one Arbor Center and an institutional pharmacy in 1995.
 
     Net income increased by $1.8 million, or 21.0%, from the comparable period
in 1995, primarily as a result of the foregoing factors, notwithstanding an
increase in the effective income tax rate from 38.6% to 39.7%.
 
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
     Total net revenues for the year ended December 31, 1995 of $192.2 million
increased $33.4 million, or 21.0%, from the year ended December 31, 1994.
Approximately 76.9% of the revenue increase during 1995 resulted from internal
growth and 23.1% resulted from acquisitions made during 1995. Internal revenue
growth resulted from Mature Operations (Arbor Centers and pharmacies in
operation for 24 months or more in the period being reported upon), which
accounted for approximately 34.5% of the revenue growth, and Start-Up Arbor
Centers which provided approximately 42.4% of the increase in revenue. Subacute
care revenues
 
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(which accounted for 52.5% of total revenues) increased $18.1 million ($6.0
million from higher rates and $12.1 million from added beds and improved
occupancy). Basic care revenues increased $10.3 million ($3.4 million from
higher rates and $6.9 million from added beds and improved occupancy) and
pharmacy and other revenues increased $5.0 million, primarily due to the June
30, 1995 institutional pharmacy acquisition. Mature Operations provided $7.5
million of the subacute care revenue increase ($5.0 million due to higher rates)
and $3.7 million of the basic care revenue increase ($2.9 million due to higher
rates). The remaining revenue growth came from four Start-Up Arbor Centers and
the acquisition of one Arbor Center in May, 1995.
 
     Operating expenses for the year ended December 31, 1995 of $151.9 million
increased $25.7 million, or 20.3%, over the comparable period in 1994. The
increased costs were primarily due to increased occupancy and utilization of
Ancillary Services in Mature Arbor Centers, the increased occupancy of four
Start-Up Arbor Centers, the acquisition of one Arbor Center in May, 1995, and
the June 30, 1995 institutional pharmacy acquisition. Arbor Center personnel
compensation expenses of $71.2 million increased by $9.0 million, or 14.4%, over
the comparable period in 1994. The increased occupancy of four Start-Up Arbor
Centers and the acquisition of one Arbor Center in May, 1995 accounted for $6.6
million of the increase in Arbor Center personnel compensation expenses, while
routine wage increases accounted for the remaining $2.4 million increase. The
cost of providing additional Ancillary Services increased operating expenses by
$15.0 million, while the net effect of other cost increases and decreases
reflected an overall net increase of $1.7 million primarily resulting from four
Start-Up Arbor Centers and the acquisition of one Arbor Center in May, 1995. As
a percent of revenue, operating costs decreased to 79.1% from 79.5% for the
comparable period in 1994, due primarily to the effect of the pharmacy
acquisition made during the year and increased occupancy at Start-Up Arbor
Centers.
 
     General corporate expenses for the year ended December 31, 1995 of $9.0
million increased $1.6 million, or 22.3%, over the comparable period in 1994.
This change was primarily caused by expenses for additional administrative
personnel and other related expenses needed to support the growing business.
 
     Arbor Center ownership costs for the year ended December 31, 1995 of $17.6
million increased $3.2 million, or 22.5%, over the year ended December 31, 1994.
The increase in ownership costs is due primarily to four Start-Up Arbor Centers
and the acquisition of one Arbor Center and an institutional pharmacy in 1995.
 
     Net income increased by $1.5 million, or 22.4%, from the comparable period
in 1994, primarily as a result of the foregoing factors, notwithstanding an
increase in the effective income tax rate from 36.3% to 38.6% primarily as a
result of the discontinuance of the targeted jobs tax credit in 1995.
 
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
 
     The Company had cash and cash equivalents of $14.9 million at September 30,
1997 and $18.7 million at December 31, 1996.
 
     Cash flow generated from operations before working capital changes was
$61.1 million for the nine months ended September 30, 1997 compared with $54.5
million in the comparable period of 1996. Cash flow generated from operations
before working capital changes for the full year of 1996 was $77.4 million
compared with $58.6 million in 1995 and $48.0 million in 1994. The increase in
cash flow from operations before working capital changes is the result of
improvement in operating earnings.
 
     The Company experienced an increase in working capital at September 30,
1997, excluding cash and borrowings included in current liabilities, of $14.8
million. The increase in working capital requirements is principally due to the
growth of accounts receivable. Accounts receivable at September 30, 1997 were
$172.4 million compared to $153.5 million at December 31, 1996, representing an
increase of $18.9 million. The increase in accounts receivable includes
increases within the nursing facility operations of $10.4 million and an
increase within the Company's UPC Health Network medical specialty services
operations of $8.5 million. Third-party payor settlement receivables increased
$10.1 million and billed patient care and other receivables increased $0.3
million within the nursing facility operations. The increase in settlement
receivables
 
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of $10.1 million between periods includes $6.5 million due to an increase in
Medicare RCL exception approvals expected, $1.3 million related to the timing of
reimbursement for current year estimated Medicare costs versus the level of
interim reimbursements received, and the growth of Medicaid program settlements
expected of $2.3 million. This increase in billed patient care receivables of
$0.3 million included an increase of $5.5 million due to increases in revenues
for billed services. This increase in revenues includes, in addition to rate and
medical specialty services volume increases, growth resulting from acquisitions
during the period. The increase in billed patient care receivables was
substantially offset by a decrease of $5.2 million principally due to
improvement in the collection of such receivables and the timing of the receipt
of remittance between periods. The increase in UPC Health Network receivables of
$8.5 million between periods includes $6.2 million due to growth in its product
lines with the remaining increase of $2.3 million resulting from acquisitions.
The Company's reserve for doubtful accounts increased $2.7 million between
periods to $12.1 million due to the overall growth in the amount of receivable
balances outstanding.
 
     Property and equipment increased $61.5 million from December 31, 1996 to a
total of $447.6 million at September 30, 1997. The increase is the result of:
acquisitions of $43.5 million and capital expenditures and asset transfers of
$44.9 million, partially offset by depreciation expense of $23.7 million and
asset disposals of $3.2 million, including $2.0 million from the sale of a
nursing facility. Property and equipment capital expenditures during the nine
months ended September 30, 1997 included approximately $19.7 million related to
the construction of new facilities and bed and therapy unit additions to
existing facilities. The Company had under construction at September 30, 1997
one nursing facility, one nursing facility addition, four assisted living
facilities, one assisted living unit addition and two therapy unit additions at
a total cost of $20.9 million, of which $6.0 million was incurred prior to
September 30, 1997.
 
     The Company in the first nine months of 1997 financed a portion of its
acquisitions in the first nine months of 1997 through bank financing as well as
the assumption of existing debt of the seller. The Company obtained $11.1
million of bank financing in the form of a five year term note with interest at
a floating rate equal to LIBOR plus 1.375%. Existing debt assumed in connection
with acquisitions totaled $14.7 million.
 
     Total borrowings, including bank indebtedness, notes payable and both
current and long-term maturities of debt, totaled $305.8 million at September
30, 1997 for an increase of $44.1 million from December 31, 1996. The increase
is attributable to the growth in property and equipment due to acquisitions and
capital expenditures. The weighted average interest rate of all long-term debt
was 7.43% at September 30, 1997 and such debt had maturities ranging from 1997
to 2015. Certain debt agreements of the Company include covenants with respect
to the payment of dividends and reduction of capital. As of September 30, 1997,
$42.7 million was freely distributable under such covenants.
 
     The Company had a $75 million revolving credit agreement and a $10 million
uncommitted line of credit with various banks at September 30, 1997. Borrowing
availability under these lines of credit totaled $16.1 million at September 30,
1997.
 
POST-MERGER LIQUIDITY AND CAPITAL RESOURCES
 
   
     The Company substantially increased its indebtedness and interest expense
as a result of the borrowings under the New Credit Facilities and the
Acquisition. The Company arranged for New Credit Facilities totalling $800
million to finance the Acquisition and to refinance existing indebtedness of
both Arbor and the Company. The New Credit Facilities consist of a $200 million
Revolving Credit Facility, a $200 million Tranche A Term Loan Facility, a $200
million Tranche B Term Loan Facility and a $200 million Tranche C Loan Facility.
The Revolving Credit Facility and the Tranche A Term Loan Facility have a term
of six years. The Tranche B Term Loan Facility has a term of seven years. The
Tranche C Loan Facility was utilized to complete the Acquisition and was repaid
upon completion of the offering of the Outstanding Notes. At the time of closing
the Acquisition, Extendicare contributed an additional $44.6 million of equity
to the Company. On a pro forma basis, at September 30, 1997, after giving effect
to the Acquisition and borrowings under the New Credit Facilities, the Company
would have had $723.4 million in indebtedness (including current maturities).
The Company will have mandatory debt payments of approximately $28.9 million in
1998. See "Description of Certain Indebtedness."
    
 
                                       61
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     The principal source of liquidity for the Company is cash flow from
operations and approximately $108.2 million (net of letters of credit in the
amount of $32 million) in additional borrowing availability under the Revolving
Credit Facility. The Company contemplates incurring capital expenditures
(excluding any acquisitions) on a combined basis of approximately $26.3 million
for the last three months of 1997 and approximately $104.7 million in 1998. The
capital expenditures proposed in 1998 include approximately $70 million related
to the construction of new facilities and facility additions. Plans are to
complete and open four assisted living facilities (200 units) and four nursing
facilities (380 beds) in 1998. Funds allocated for capital expenditures in 1998
include amounts to commence construction on an additional nursing facility and
seven assisted living facilities. The Company believes that internally generated
cash flow, together with borrowings under the Revolving Credit Facility, will be
sufficient to meet the Company's operational cash requirements, to fund its
capital expenditure program and to service debt obligations.
    
 
                                       62
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                                    BUSINESS
 
GENERAL
 
   
     The Company is one of the largest providers of long-term care and related
medical specialty services in the United States. Through its geographically
clustered facilities, the Company offers a continuum of healthcare services,
including skilled nursing care, assisted living care and related medical
specialty services, such as subacute care and rehabilitative therapy,
institutional pharmacy supplies and services and medical equipment, supplies and
services. On September 30, 1997, the Company announced an agreement to acquire
Arbor Health Care Company, a prominent regionally based provider of long-term
care and related medical specialty services focused on providing subacute
medical services. The Acquisition enhances and complements the Company's
presence in the Ohio and Florida markets and solidifies the Company's position,
on a combined basis, as one of the top ten operators of long-term care
facilities in the United States in terms of both number of beds and revenues,
with 194 skilled nursing facilities (20,985 beds) and 38 assisted living and
retirement facilities (1,480 units) located in 15 states. On a pro forma
combined basis at September 30, 1997, the Company would have owned approximately
85% of its facilities, enhancing its credit quality and financial flexibility.
In addition, on a pro forma combined basis for the nine months ended September
30, 1997, the Company would have generated revenues and earnings from operations
of $854.7 million and $35.7 million, respectively, with occupancy rates
averaging approximately 88% and a strong quality mix of approximately 64%.
    
 
EHSI OVERVIEW
 
   
     The Company provides high quality long-term care and related medical
specialty services through a total of 201 long-term care facilities with a total
resident capacity of 18,769 in 13 states as of September 30, 1997. The Company
has been able to achieve strong occupancy rates, a favorable payor mix and
sustained growth in total and same facility revenues throughout its network of
long-term care facilities. The Company had an average occupancy rate of
approximately 88% in its nursing facilities and in its assisted living and
retirement facilities for the nine months ended September 30, 1997. In addition,
the Company has improved its quality mix from 53% in 1992 to 64% for the nine
months ended September 30, 1997, primarily as the result of successful efforts
to shift its patient mix to higher acuity patients requiring subacute care
services. Payment coverage for such services is provided principally by the
Medicare program. In addition, since 1992, the Company has increased its
resident capacity by 12.6%. As a result of these factors, the Company's revenues
have increased to $824.3 million in 1996 from $534.8 million in 1992, and the
Company's earnings from operations have increased to $57.0 million in 1996 from
$25.1 million in 1992. For the last twelve months, the Company generated
revenues and earnings from operations of $873.7 million and $65.7 million,
respectively.
    
 
     The Company's long-term care services include skilled nursing care,
assisted living care and related support services traditionally provided in
long-term care facilities. The Company's medical specialty services provide (i)
subacute care and rehabilitative therapy, (ii) pharmacy supplies and services,
and (iii) medical equipment, supplies and services to all its long-term care
facilities, as well as to non-affiliated long-term care facilities.
 
ARBOR OVERVIEW
 
     Arbor provides subacute medical services and traditional long-term care
services through its network of 31 licensed nursing centers (the "Arbor
Centers") and 3,696 beds as of September 30, 1997. The Arbor Centers are located
in five states, with approximately 89% of its bed capacity located in Florida
and Ohio. At September 30, 1997, Arbor had three facilities under construction,
totaling 276 beds, that are scheduled to open over the next 12 months. In
addition, at such date, Arbor held three certificate of need ("CON") approvals
for 275 beds in Florida, along with two additional CON approvals for 240 beds
that have been appealed by other providers and therefore are not yet final.
 
     The Arbor Centers are designed to provide subacute and basic health care
services to diverse but related types of patients. Arbor Centers are generally
located in markets that require both services, with some Arbor
 
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Centers allocating up to 50% of total bed capacity to subacute care. Arbor also
operates four institutional pharmacies which have experienced significant growth
in the last three years.
 
     Subacute Services.  Arbor's subacute units provide treatment programs
     appropriate for medically stable patients who may require medical
     rehabilitation, ventilator weaning and respiratory therapy, and complex
     medical services such as cardiac recovery, infusion therapy, and wound
     care. Such units concentrate on medically complex patients with high acuity
     medical needs requiring greater skills and services than those associated
     with the more general subacute population. Arbor's principal focus is on
     developing higher revenue and higher margin specialized subacute units,
     targeting predominantly commercial insurance and managed care organizations
     (health maintenance organizations ("HMOs"), preferred provider
     organizations ("PPOs") and indemnity insurers), which currently are the
     most profitable payor sources. As of September 30, 1997, Arbor operated 30
     subacute units, totaling 1,209 beds, within its 31 Arbor Centers.
 
     Basic Health Care Services.  Arbor's basic health care services primarily
     consist of general and restorative ("G&R") nursing care to patients with
     chronic illnesses, diminished physical function, impaired cognition or
     behavioral problems. Arbor's G&R nursing units also provide a step-down in
     medical intensity for geriatric subacute patients who cannot be discharged
     to their homes and need lower intensity nursing for extended periods of
     time. Similarly, geriatric patients in G&R units who develop a need for
     rehabilitative or higher intensity services can be transferred to a
     subacute unit within the same Arbor Center. Arbor also operates assisted
     living units in five of its Arbor Centers.
 
     Other Services.  Arbor's pharmacy division consists of four institutional
     pharmacies and related services. The pharmacy division services
     approximately 26,000 beds (22,500 of which are not affiliated with Arbor)
     in three states. As of January 1, 1997, Arbor began providing outpatient
     rehabilitation services with the acquisition of 10 outpatient
     rehabilitation facilities in Pennsylvania and Florida and has subsequently
     opened two additional outpatient rehabilitation facilities. These are
     specialized facilities organized to deliver comprehensive, case managed,
     interdisciplinary rehabilitation services under physician directive,
     including physical therapy, occupational therapy, speech therapy,
     psychological services and social work. Utilizing the same clinical models
     that are currently used in Arbor's inpatient subacute units, the Company
     believes these facilities will provide the cost advantages that allow Arbor
     to offer low-cost rehabilitation services to managed care organizations.
 
   
     Arbor provides subacute care in its primary Ohio and Florida markets
through a strategy of utilizing its skilled nursing facilities as a platform for
providing care to high acuity patients at low costs. At September 30, 1997,
approximately 62% of Arbor's revenue was generated from subacute care (including
pharmacy). Since 1992, Arbor has increased its occupancy from 88% to 91% for the
nine months ended September 30, 1997. Furthermore, Arbor has been effective at
increasing its quality mix from 62% in 1992 to 68% for the nine months ended
September 30, 1997 as a result of a high Medicare component, reflecting its
presence in subacute care. Arbor's focus on quality mix and high occupancy
levels has resulted in an increase in revenues to $218.8 million in 1996 from
$106.3 million in 1992, and an increase in income from operations to $17.4
million in 1996 from $5.2 million in 1992. For the last twelve months, Arbor
generated revenues and income from operations of $238.9 million and $19.8
million, respectively.
    
 
INDUSTRY OVERVIEW
 
   
     According to industry sources, long-term care spending was estimated at
approximately $120 billion in 1996, or approximately 11% of total national
health expenditures, with nursing facilities accounting for $84 billion of this
total. Approximately 1.7 million people reside in nursing facilities, while
another 5.6 million elderly persons require care and services in their homes or
in community-based settings. It is estimated that the number of elderly persons
requiring long-term care services will grow from approximately 7.3 million in
1995 to over 9 million in the year 2005. Of these totals, one-third or more are
expected to be comprised of nursing facility residents while the others are
expected to receive care in home or community-based settings. As home healthcare
and subacute care services become more accepted and demographics shift toward an
aging population with increased long-term care needs, it is estimated that
long-term care expenditures
    
 
                                       64
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(defined as nursing facility expenditures plus home care expenditures) will grow
to $250 billion by the year 2005, representing 14% of total national health
expenditures.
 
   
     The long-term care and post-acute care industries include rehabilitation
hospitals and facilities, skilled nursing facilities, assisted living
facilities, intermediate care facilities, and home health services. Each of
these segments has experienced rapid growth in the last ten years. The number of
rehabilitation hospitals has grown 152% since 1986, while rehabilitation units
within acute care hospitals have grown 83% since 1986. While the number of
freestanding nursing facilities has remained flat over the last ten years
(17,100 in 1986 vs. 17,400 in 1996), hospital-based skilled nursing facilities
have increased from 1,145 in 1990 to 2,088 in 1996 (an 80% increase). Home
health agencies have grown even more rapidly over the last five years. Between
1990 and 1995 the number of home health agencies grew 60% from 11,765 to 18,874.
    
 
     In addition to an aging population, the long-term care industry is changing
as a result of several fundamental factors which the Company believes that it is
well positioned to capitalize on, including the following:
 
SUPPLY/DEMAND IMBALANCE
 
     Acquisition and construction of additional skilled nursing facilities are
subject to certain restrictions on supply including government-legislated
moratoriums on new capacity or licensing restrictions limiting the growth of
services. Such restrictions on supply, coupled with an aging population, is
causing a decline in the availability of long-term beds per person 85 years of
age or older. Additionally, advances in medical technology are enabling the
treatment of certain medical conditions outside the hospital setting. As a
result, patients requiring a higher degree of monitoring, more intensive and
specialized medical care, 24-hour per day nursing care, and a comprehensive
array of rehabilitative therapies are increasing, resulting in a need for
long-term care. The Company believes that such specialty care can be provided at
a significantly lower cost than in traditional acute care and rehabilitation
hospitals.
 
COST CONTAINMENT PRESSURES
 
     As the number of people over age 65 continues to grow and as advances in
medicine and technology continue to increase life expectancies, healthcare costs
are expected to rise faster than the availability of resources from
government-sponsored healthcare programs. In response to such rising costs,
governmental and private pay sources in the United States have adopted cost
containment measures that encourage reduced length of stays in acute care
hospitals. As a result, average acute care hospital stays have been shortened,
and many patients are discharged despite a continuing need for nursing or
specialty healthcare services. This trend has increased demand for long-term
care, home healthcare, outpatient facilities, hospices and assisted living
facilities. In addition, long-term care companies with an integrated network and
a broad range of services will be in a good position to contract with managed
care companies and other payors. Furthermore, following changes in the
reimbursement to long-term care companies (i.e., development of PPS for skilled
nursing and tightened reimbursement levels as a result of increased managed care
penetration), information systems to understand clinical and financial data will
be critical for managed care contracting and internal cost management.
 
CHANGING FAMILY DYNAMICS
 
     As a result of the growing number of two-income families, many people are
not able to care for elderly parents in their homes. Two-income families are,
however, better able to provide financial support for elderly parents to receive
the care they need in a nursing or assisted living facility.
 
BUSINESS STRATEGY
 
   
     The Company has experienced significant growth in revenues over the last
four years. The Company seeks to continue this growth through a strategy based
on its ongoing commitment to the provision of high-quality healthcare services
while positioning itself to take advantage of the changing healthcare
environment. The Company geographically clusters its long-term care facilities
and services in order to offer its customers a
    
 
                                       65
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broad range of long-term care and ancillary services and improve operating
efficiencies. The Company seeks to implement its strategy by:
 
EXPANDING NURSING FACILITY OPERATIONS
 
     The Company is actively expanding its nursing facility operations through
the selective acquisition and construction of nursing facilities. Consistent
with its emphasis on geographical clustering, the Company prefers to expand in
areas which are in close proximity to its existing facilities, where (i)
management is already in place and has expertise relating to the regulatory and
reimbursement environments, (ii) it can participate as an active member of the
nursing facility association in the state, and (iii) its reputation is
established. In addition, ancillary services and those of the Company's UPC
Health Network can be provided from regional offices. In establishing new state
or regional clusters, the Company considers local demographic, regulatory and
reimbursement environments of a particular state or region.
 
     As a result of CON licensing restrictions, growth of nursing facilities is
expected to be primarily through acquisition. From 1991 to September 30, 1997,
EHSI acquired 32 (11 previously leased) nursing facilities and has constructed
nine nursing facilities or nursing facility additions. The Company had under
construction, at September 30, 1997, one nursing facility addition (resident
capacity of 20) scheduled for completion in 1997, one nursing facility (resident
capacity of 120) scheduled for completion in 1998 and has approved the
construction of one nursing facility (resident capacity of approximately 40)
with expected completion in 1999.
 
DEVELOPING ASSISTED LIVING AND RETIREMENT FACILITIES
 
     The Company will continue its active development and operation of assisted
living and retirement facilities. The Company generally locates its assisted
living and retirement facilities adjacent or in close proximity to its nursing
facilities, enabling the Company to utilize existing personnel, management
systems and land, as well as to take advantage of its established reputation.
Assisted living facilities allow the Company to serve its communities better by
providing a continuum of service that meets a wider variety of needs. In
addition, assisted living and retirement facilities generate revenues with a
higher private pay component than revenues from nursing facilities, thereby
improving operating margins. Since 1991, the Company has acquired one and
completed the construction of 23 assisted living facilities (resident capacity
of 862). The Company had under construction at September 30, 1997 an additional
four assisted living facilities and one assisted living unit addition (resident
capacity of 208) and has approved the construction of seven additional assisted
living facilities (resident capacity of approximately 322) through 1998.
 
INCREASING SUBACUTE CARE AND REHABILITATIVE THERAPY CAPABILITIES
 
     The Company's subacute and rehabilitative therapy services increase the
proportion of the Company's revenues derived from Medicare, managed care, and
private payors. The Company's acquisition of Arbor is consistent with its plans
to expand its subacute care and rehabilitative capabilities. Arbor has
particular regional strengths in marketing subacute care to managed care groups
which the Company will extend to its subacute beds in other regions. A wide
range of rehabilitative equipment and services is provided in units on the same
site as nursing facilities. Since 1991, the Company completed the construction
of 57 expanded therapy units and had under construction at September 30, 1997 an
additional two such units for completion in 1997. The Company has further
approved the construction of three such units through 1998. The Company's 86
expanded therapy units include 55 units that have begun to provide service to
clients on an outpatient basis. Both the Company and Arbor have acquired
freestanding outpatient rehabilitative therapy units to provide services to the
general community.
 
EXPANDING THE UPC HEALTH NETWORK
 
     The Company believes that considerable opportunity exists to expand its
provision of pharmacy and medical services and supplies through the UPC Health
Network. This business is primarily regional and is principally service driven.
The Company believes that by providing a broad range of well executed services
and support, it will be able to increase the volume of business with other
non-affiliated nursing facilities. As
 
                                       66
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nursing facilities expand their range of delivered services, this will provide
additional opportunities for the UPC Health Network.
 
FOCUSING ON SMALLER URBAN COMMUNITIES
 
     The Company intends to maintain its geographic focus on smaller urban
communities. The Company believes that it has established a reputation as a
community-oriented long-term care provider and has developed experience in
serving and marketing to smaller urban communities. The Company also believes
that operating in such communities results in a more stable workforce.
 
EMPHASIZING OWNERSHIP OF ASSETS
 
     Unlike a number of other long-term care providers, the Company owns rather
than leases a substantial majority of its properties. See "-- Properties." The
Company believes ownership of such properties increases the Company's
flexibility in utilizing facilities, constructing additions for ancillary
services such as subacute care or rehabilitative therapy and adding assisted
living and retirement facilities adjacent to nursing facilities. In addition,
ownership of facilities enables the Company to control costs without regard to
escalating lease payments.
 
THE ARBOR ACQUISITION
 
   
     Consistent with the Company's strategy, the Company acquired Arbor for an
aggregate purchase price of $430.1 million (exclusive of transaction costs and
fees), including the assumption of $109.7 million of Arbor's debt. The
Acquisition solidifies the Company's position as one of the top ten operators of
long-term care facilities in the United States and enhances and complements the
Company's presence in Florida and Ohio. In addition, the Acquisition provides
the Company with eight approved CONs for 791 new beds, 80 of which are in Ohio
(which currently has a moratorium on new CONs). The Company estimates that 431
of the 791 beds will be constructed in 1998, representing four new facilities
and one facility addition. Two of the approved CONs for an aggregate of 240 new
beds have been appealed by other providers and therefore are not yet final. The
Company intends to build such additional facilities upon resolution of such
appeals in the Company's favor. The Acquisition will also provide the Company
and Arbor with increased access to managed care contracts, cross selling
opportunities for their pharmacy businesses and an extension of their group
purchasing services. Furthermore, given Arbor's size and the geographic overlap
with the Company, annual cost savings are anticipated to be achieved in staff
related areas, corporate general and administrative functions and pharmacy
overhead.
    
 
OPERATIONS
 
LONG-TERM CARE SERVICES
 
     Nursing Care.  Nursing facilities provide a broad range of long-term
geriatric and subacute care and rehabilitative therapy services, including
skilled nursing care and ancillary services, to persons who do not require the
more extensive and specialized services and supervision of a hospital. The
nursing facilities employ registered nurses, licensed practical nurses,
therapists, certified nursing assistants and qualified healthcare aides who
provide care as prescribed by each resident's attending physician and a full
range of personal support. All nursing facilities provide daily dietary
services, social services and recreational activities, as well as basic services
such as housekeeping and laundry.
 
     The Company is continuing to expand the number and size of its nursing
facilities subject to the restrictions of state CON licensing. As of September
30, 1997, the Company operated 163 nursing facilities with 17,289 licensed beds
providing care in 13 states and Arbor operated 31 Arbor Centers with 3,696
licensed beds providing care in five states. See "-- Properties."
 
     Assisted Living and Retirement Facilities.  In its assisted living
facilities, the Company provides homelike accommodation, meals and assistance in
the activities of daily living to seniors who require some help, but not the
level of nursing care provided in a nursing facility. An assisted living
facility enhances the
 
                                       67
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value of an existing nursing facility in those situations where the two
facilities operate side by side, and allows the Company to better serve the
communities in which it operates by providing a broader continuum of service.
All of the Company's assisted living facilities are within close proximity to
its nursing facilities. As of September 30, 1997, the Company operated 38
assisted living facilities with resident capacity of 1,480 units and Arbor
operated assisted living units in five of its Arbor Centers with resident
capacity of 185.
 
     Due to the rapidly increasing segment of the U.S. population seeking
assisted living accommodation and the relative immaturity of the assisted living
market in the United States, the Company expects strong demand for these
services in the foreseeable future and intends to continue with its aggressive
construction program. The Company completed construction of and opened seven
assisted living facilities and one addition, with a total of 340 units, in the
first nine months of 1997, and had under construction at September 30, 1997 an
additional four assisted living facilities and one addition (capacity of 208
units).
 
     Management Services.  The Company also applies its operating expertise
through the management of nursing and assisted living facilities for others.
During 1996, the Company increased its facilities under management by eight. At
September 30, 1997, there were eight nursing facilities and five assisted living
facilities under management providing care to 1,120 residents.
 
MEDICAL SPECIALTY SERVICES
 
     The Company also provides, through its network of 27 regional service
centers that comprise the UPC Health Network, a continuum of healthcare
services, programs and products to institutions and individuals of all ages.
 
     Subacute Care and Rehabilitative Therapy.  The UPC Health Network provides
patient-centered, outcome-oriented subacute care and rehabilitative therapy
services to residents in its long-term care facilities and to other
non-affiliated facilities. Patients requiring subacute care are medically
stable, yet require specialized therapy and other services that are more
intensive than traditional nursing facility care, but less than acute hospital
care. These services may include wound care and respiratory, infusion and
intravenous therapies. The Company provides rehabilitative therapy services on
an inpatient and outpatient basis to clients who require, for example, physical
or occupational therapy, or speech-language pathology. The Company's subacute
and rehabilitation teams seek to return each patient to maximum functional
independence with many patients typically being discharged within 30 to 90 days.
 
     The U.S. healthcare system is applying pressure on acute and managed care
providers to discharge patients more rapidly to less intensive and low-cost care
environments. Subacute per diem rates are potentially 30% to 60% lower than
rates for similar services provided in acute care hospitals. This savings is
achieved in a less institutional setting than typically provided by a hospital.
The strong interdisciplinary approach to patient services, in conjunction with
the support services that the patient and family receive, are important in
optimizing clinical outcomes and level of satisfaction. In response to this
market trend, all of the Company's nursing facilities have expanded their
ability to provide patient-centered, outcome-oriented subacute and
rehabilitative care.
 
     As of September 30, 1997, 86 of EHSI's nursing facilities operated expanded
therapy units, comprising 1,500 to 5,000 square feet of therapy space, 55 of
which were providing outpatient care. During 1996, 18 expanded therapy units
were added through construction and conversion of existing space. As of
September 30, 1997, Arbor operated 30 subacute units, totaling 1,209 beds,
within its 31 Arbor Centers. As of September 30, 1997, approximately 66 percent
of the therapists providing services in EHSI's therapy units were contracted for
by EHSI from third parties, compared with 80 percent at the end of 1995. The
Company expects that the percentage of therapy services provided by contract
therapists will continue to decline as it seeks to reduce its operating costs in
order to position itself for PPS.
 
     Institutional Pharmacy.  The Company provides pharmacy supplies and
services to more than 30,000 beds in nursing facilities, assisted living
facilities and other healthcare institutions through 11 locations in eight
states. The number of beds serviced by the Company's pharmacy operations
increased to 30,300 at September 30, 1997 from 15,000 at the end of 1992. These
include unit-dose medication distribution,
 
                                       68
   71
 
   
computerized patient documentation, full-service consultants and on-call
service. Of the 30,300 beds serviced by the Company, 16,000 are not affiliated
with the Company. Each regional service location is staffed with licensed,
registered pharmacists and quality control staff who are responsible for the
maintenance of effective operations and compliance with regulations. The
Acquisition includes Arbor's four institutional pharmacies and related services
division servicing approximately 26,000 beds, including approximately 3,500 of
its own beds.
    
 
     Medical Services and Supplies.  The UPC Health Network's retail and home
health operation distributes durable medical equipment and supplies, such as
wheelchairs, hospital beds, oxygen and diabetic supplies. It also provides a
wide range of services such as intravenous therapy products and respiratory,
oxygen and enteral therapies to hospitals, long-term care facilities and
individuals at home through 27 locations in 11 states. The UPC Health Network
operates a home health agency in southeastern Wisconsin that includes skilled
nursing and home healthcare services, as well as in-home physical, occupational
and speech therapy programs. The operation employs trained and experienced home
health nurses, nurses' aides and therapists.
 
     Group Purchasing Services.  UHF Purchasing Group, a division of the UPC
Health Network, provides purchasing services throughout the United States to
over 1,150 nursing facilities. Its program offers group purchasing of a complete
line of food, supplies and capital equipment at volume pricing from a wide range
of vendors.
 
QUALITY OF CARE
 
     The focus of the Company's commitment to excellence is its belief in
treating residents with dignity and respect through the implementation of
rigorous standards that management and staff at all levels constantly assess and
update. A Vice-President of Quality Management leads a department which is
primarily responsible for establishing and auditing care and service delivery
systems and standards for the nursing facilities and assisted living facilities.
This department is also responsible for developing systems, programs and
standards for all professional disciplines and services provided to users of the
Company's services, including nursing, dietary, social services, activities,
ethical practices, mental health services, behavior management, quality
validation and continuous quality improvement. Training of employees at all
levels is an integral part of the Company's on-going efforts to improve and
maintain its quality. Each new nursing facility administrator or director of
nursing is required to attend two weeks of Company-provided training to ensure
that he or she has an understanding of all aspects of nursing facility
operations, including clinical, management and business operations. The Company
conducts additional training for these individuals and all other staff on a
regional or local basis.
 
MARKETING
 
     Most of the Company's long-term care facilities are located in smaller
urban communities. The Company focuses its marketing efforts predominantly at
the local level. The Company believes that the selection of a long-term care
facility is strongly influenced by word of mouth advertising and referrals from
physicians, hospital discharge planners, community leaders, neighbors and family
members. The administrator of each long-term care facility is therefore a key
element of the Company's marketing strategy. Each administrator is responsible
for developing relationships with potential referral sources. The Company sets
overall marketing strategy and provides marketing direction and support to each
of its administrators with training and promotional materials.
 
MANAGEMENT AND FINANCIAL AND COST CONTROLS
 
     The Company believes that strong management is essential to its success.
The members of its board of directors have served the Company on average more
than 15 years while its senior officers have an average 22 years experience in
the healthcare industry and 17 years of service with the Company.
 
     Centralized accounting systems record each nursing facility results with
costs by category broken down on a cost per patient day basis all with
comparisons to budgets. Senior operating and financial management monitor costs
on a monthly basis.
 
                                       69
   72
 
SOURCES OF REVENUE
 
     The Company derives its revenue from Medicare, Medicaid and private pay
sources. The following table sets forth the allocation among these three payor
sources for the Company, Arbor and on a pro forma basis as if the Acquisition
had occurred at the beginning of each period presented:
 


                                                              NINE MONTHS     YEAR ENDED DECEMBER
                                                                 ENDED                31,
                                                             SEPTEMBER 30,    --------------------
                                                                 1997         1996    1995    1994
                                                             -------------    ----    ----    ----
                                                                                  
Payment Source:
Private pay
  EHSI....................................................        33%         32%     33%     35%
  Arbor...................................................         36          34      33      35
  Pro forma...............................................         33          32      33      35
Medicare
  EHSI....................................................        31%         30%     26%     22%
  Arbor...................................................         32          34      36      34
  Pro forma...............................................         31          30      28      24
Medicaid
  EHSI....................................................        36%         38%     41%     43%
  Arbor...................................................         32          32      31      31
  Pro forma...............................................         36          38      39      41

 
     Private Pay.  The Company classifies payments from individuals who pay
directly for services without governmental assistance as private pay revenue.
The private-pay classification also includes revenues from commercial insurers,
HMOs, PPOs and other charge-based payment sources as well as revenue from HMO
Medicare risk plans. Blue Cross and Veterans Administration payments are
included in private pay and are made pursuant to renewable contracts with these
payors.
 
     Medicare.  Medicare is a health insurance program funded and administered
by the federal government primarily for individuals entitled to Social Security
who are age 65 or older. Medicare covers the first 20 days of stay in an SNF in
full, and the next 80 days above a daily coinsurance amount, after the
individual has qualified by a three-day hospital stay. The Medicare program
consists of two parts: Medicare Part A and Medicare Part B. Medicare Part A
covers inpatient services for hospitals, nursing facilities, and certain other
healthcare providers, and patients requiring daily professional skilled nursing
and other rehabilitative care. Medicare Part B covers services for suppliers of
certain medical items, outpatient services, and doctor's services. Payment for
Medicare Part A is made through either the traditional fee-for-services model,
or through a Medicare risk HMO ("Medicare Risk HMO") payment-per-enrollee
payment model. Currently, the Company's nursing facilities provide service to
Medicare through the traditional fee-for-service model. The Company's nursing
facilities receive interim payments during the year for each facility's expected
reimbursable costs under Part A, and for some programs delivered under Part B.
Reimbursement is based on the submission of a year end cost report which
reconciles interim payments made to final amounts to be paid. Under Part B, the
Company's nursing facilities and UPC Health Network bill carriers and
intermediaries based on reasonable charges, or a fixed fee schedule for
Medicare-covered services and products.
 
     The Balanced Budget Act, signed into law on August 5, 1997, makes numerous
changes to the Medicare and Medicaid programs which could potentially affect the
Company. With respect to the Medicare program, the new law requires the
establishment of a PPS for SNF services, under which facilities will be paid a
federal per diem rate for virtually all covered services. The federal per diem
rate will be uniform for all facilities, except for an adjustment based upon
regional wage differentials. The PPS will be phased in over three cost reporting
periods, starting with cost reporting periods beginning on or after July 1,
1998. The Balanced Budget Act also institutes consolidated billing for SNF
services, under which payments for non-physician Part B services for
beneficiaries no longer eligible for Part A SNF 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
 
                                       70
   73
 
contracting or consulting arrangement, effective for items or services furnished
on or after July 1, 1998. The law also contains provisions affecting outpatient
rehabilitation agencies and providers, including a 10 percent reduction in
operating and capital costs for 1998, a fee schedule for therapy services
beginning in 1999, and the application of per beneficiary therapy caps currently
applicable to independent therapists to all outpatient rehabilitation services,
beginning in 1999. Other provisions limit Medicare payments for certain drugs
and biologicals, durable medical equipment, parenteral and enteral nutrition
("PEN") nutrients and supplies. In addition, future payment to Medicare risk
plans will continue to be based upon a per-enrollee basis, and be based on a
combination of regional and federal factors. PSOs will be able to contract
directly with HCFA for Medicare risk contracts and receive payment on a
capitated basis. It is expected that PSOs will be created and will become active
competitors with HMOs in many regions. See "Risk Factors -- Potential Adverse
Effects of Balanced Budget Act of 1997 and Other Health Care Reforms" and "Risk
Factors -- Reimbursement by Third Party Payors."
 
     Medicaid.  Medicaid is a state-administered program financed by state funds
and matching federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Medicaid reimbursement formulas are
established by each state with the approval of the federal government in
accordance with federal guidelines. All of the states in which the Company
operates currently use cost-based reimbursement systems which generally may be
categorized as prospective or retrospective in nature. Under a prospective
system, per diem rates are established based upon the historical cost of
providing services during a prior year, adjusted to reflect factors such as
inflation and any additional services which are required to be performed. Many
of the prospective payment systems under which the Company operates contain an
acuity measurement system which adjusts rates based on the care needs of the
patient. Retrospective systems operate much like the Medicare program. Nursing
facilities are paid on an interim basis for services provided, subject to
adjustments based on allowable costs, which are generally submitted on an annual
basis. Additional payment to a nursing facility by the state or repayment from a
nursing facility to the state can result from the submission of cost reports and
their ultimate settlement. The majority of the states in which the Company
operates nursing facilities use prospective systems.
 
     The Balanced Budget Act repealed the federal payment standard (known as the
Boren Amendment), which required state Medicaid programs to pay rates that were
reasonable and adequate to meet the costs which must be incurred by efficiently
and economically operated nursing facilities. As a result, for Medicaid services
provided on or after October 1, 1997, states have considerable flexibility in
establishing payment rates. The Company is not able to predict whether any
states will adopt changes in their Medicaid reimbursement systems, or, if
adopted and implemented, what effect such initiatives would have on the Company.
Nevertheless, there can be no assurance that such changes in Medicaid
reimbursement to nursing facilities will not have an adverse effect on the
Company. The Balanced Budget Act also allows states to mandate enrollment in
managed care systems without seeking approval from the Secretary of HHS for
waivers from certain Medicaid requirements as long as certain standards are met.
Although historically these managed care programs have exempted institutional
care, no assurance can be given that these waiver projects ultimately will not
change the reimbursement system for long-term care facilities from
fee-for-service to managed care negotiated or capitated rates or otherwise
affect the levels of payment to the Company.
 
     Funds received by the Company under Medicare and Medicaid are subject to
audit with respect to proper application of various payment formulas. Such
audits can result in retroactive adjustments to revenue. The Company believes
that the payment formulas applicable to it have been properly applied and that
any future adjustments will not have a material impact on its operations.
 
PROPERTIES
 
     At September 30, 1997, the Company and Arbor operated 232 long-term care
facilities, serving 22,465 residents in 15 states. Of such facilities, 187 were
owned, 32 were leased, 13 were managed, and 28 of the leased properties had
purchase options and/or rights of first refusal.
 
                                       71
   74
 
     The following table lists by state, on a combined basis, the nursing
facilities, assisted living and retirement facilities and hospitals owned,
leased or managed by the Company and Arbor at September 30, 1997:
 


                                            OWNED                 LEASED(1)                MANAGED                  TOTAL
                                    ---------------------   ---------------------   ---------------------   ---------------------
                                                 RESIDENT                RESIDENT                RESIDENT                RESIDENT
                                    FACILITIES   CAPACITY   FACILITIES   CAPACITY   FACILITIES   CAPACITY   FACILITIES   CAPACITY
                                    ----------   --------   ----------   --------   ----------   --------   ----------   --------
                                                                                                 
Florida...........................       33        3,513        --            --        --            --         33        3,513
Ohio..............................       21        2,136        10         1,152         1            70         32        3,358
Pennsylvania......................       21        2,225        --            --        11           810         32        3,035
Wisconsin.........................       30        2,380        --            --        --            --         30        2,380
Indiana...........................       16        1,514         4           462         1           240         21        2,216
Texas.............................        7          828        13         1,022        --            --         20        1,850
Washington........................       16        1,529         3           294        --            --         19        1,823
Kentucky..........................       18        1,511        --            --        --            --         18        1,511
Minnesota.........................       11        1,424        --            --        --            --         11        1,424
Oregon............................        5          335         2           135        --            --          7          470
Arkansas..........................        4          281        --            --        --            --          4          281
Idaho.............................        2          232        --            --        --            --          2          232
Maryland..........................        1          132        --            --        --            --          1          132
Delaware..........................        1          120        --            --        --            --          1          120
West Virginia.....................        1          120        --            --        --            --          1          120
                                                                --                      --
                                        ---       ------                   -----                   -----        ---       ------
Total.............................      187       18,280        32         3,065        13         1,120        232       22,465
                                        ===       ======        ==         =====        ==         =====        ===       ======

 
- ---------------
 
(1) The average remaining life of the leases, including renewal options
    exercisable solely by the Company or Arbor, as the case may be, is 11 years.
 
     The UPC Health Network provides institutional pharmacy services through 11
additional leased locations in eight states as follows: Florida - 1; Indiana -
1; Kentucky - 1; Minnesota - 1; Pennsylvania - 2; Texas - 1; Washington - 2; and
Wisconsin - 2. Arbor provides institutional pharmacy services through two leased
locations in Florida, one leased location in Ohio and one leased location in
Michigan.
 
     The Company had under construction at September 30, 1997, and also has
approved construction of, the following facilities and additions:
 


                                                              ASSISTED LIVING                                NURSING FACILITY
                                                                FACILITIES           NURSING FACILITY            ADDITIONS
                                                EXPANDED   ---------------------   ---------------------   ---------------------
                                                THERAPY      NO. OF     RESIDENT     NO. OF     RESIDENT     NO. OF     RESIDENT
                                                 UNITS     FACILITIES   CAPACITY   FACILITIES   CAPACITY   FACILITIES   CAPACITY
                                                --------   ----------   --------   ----------   --------   ----------   --------
                                                                                                   
Under construction at September 30, 1997
  EHSI........................................  2....           4          208          1          120          1          20
  Arbor.......................................     --          --           --          3          276         --          --
Additional construction approved
  EHSI........................................  3....           7          322          1           40         --          --
  Arbor.......................................     --          --           --          4          468          1          47
                                                    -          --                       -                       -          --
                                                                           ---                     ---
Total.........................................      5          11          530          9          904          2          67
                                                    =          ==          ===          =          ===          =          ==

 
COMPETITION
 
     The long-term care industry in the United States is highly competitive with
companies offering a variety of similar services. The Company faces competition
locally and regionally from other healthcare providers, including for-profit and
not-for-profit organizations, home health agencies, institutional pharmacies,
medical supplies and services agencies, and rehabilitative therapy providers.
Significant competitive factors affecting the placement of residents in nursing
and assisted living facilities include quality of care, services offered,
reputation, physical appearance, location and, in the case of private-pay
residents, cost of the services. Since there is little price competition with
respect to Medicaid and Medicare residents, the range of services provided by
the Company's nursing facilities and their locations affect a facility's
competitive position in its market. The Company's pharmacy and medical services
and supplies operation and its group purchasing operation compete with other
similar operations ranging from small local operators to companies which are
national in scope and distribution capability. The Company focuses its marketing
efforts on the medical and healthcare communities in each location it serves.
 
                                       72
   75
 
     The Company also competes with other providers in the acquisition and
development of additional facilities. Other competitors may accept a lower rate
of return and therefore present significant price competition. Also, tax-exempt
not-for-profit organizations may finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to the
Company.
 
GOVERNMENT REGULATION
 
     General Regulatory Requirements.  Nursing facilities, assisted living
facilities and other healthcare businesses, including institutional pharmacy
operations, are subject to annual licensure and other regulatory requirements of
state and local authorities. In addition, in order for a nursing facility to be
approved for payment under the Medicare and Medicaid programs, it must meet the
requirements for participation of the Social Security Act and the regulations
thereunder. The requirements for nursing facilities licensure and participation
in Medicare and Medicaid generally prescribe standards relating to provision of
services, resident rights, physical environment and administration. Nursing and
assisted living facilities are generally subject to unannounced annual
inspections by state or local authorities for purposes of relicensure and
nursing facilities for purposes of recertification under Medicare and Medicaid.
 
     OBRA-1987.  In 1987, the United States Congress passed the Omnibus Budget
Reconciliation Act which included extensive revisions to the Medicare and
Medicaid statutory requirements for nursing facilities. The provisions prescribe
an outcome-oriented approach to the provision of services and require that each
resident receive the necessary care and services to attain or maintain the
highest practicable physical, mental and psychosocial well-being in accordance
with the resident's individualized assessment and plan of care. The rules also
established requirements for survey, certification and enforcement procedures.
HCFA promulgated regulations, effective July 1, 1995, to implement the survey,
certification and enforcement procedures. The survey process is intended to
review the actual provision of care and services, with an emphasis on resident
outcomes to determine whether the care provided meets the assessed needs of the
individual residents. Surveys are generally conducted on an unannounced annual
basis by state survey agencies. Remedies are assessed for deficiencies based
upon the scope and severity of the cited deficiencies. The regulations specify
that the remedies are intended to motivate facilities to return to compliance
and to facilitate the removal of chronically poor performing facilities from the
program. Remedies range from directed plans of correction, directed in-service
training and state monitoring for minor deficiencies; denial of Medicare or
Medicaid reimbursement for existing residents or new admissions and civil money
penalties up to $3,000 per day for deficiencies that do not constitute immediate
jeopardy to resident health and safety; and appointment of temporary management,
termination from the program and civil money penalties of up to $10,000 for one
or more deficiencies that constitute immediate jeopardy to resident health or
safety. The regulations allow state survey agencies to identify alternative
remedies that must be approved by HCFA prior to implementation.
 
     Effective with the implementation of the regulation, promulgated in July
1995, HCFA created a new concept that allows facilities with acceptable
regulatory histories to have an opportunity to correct their deficiencies by a
"date certain" and not impose sanctions unless they do not return to compliance.
Facilities with deficiencies constituting immediate jeopardy to resident health
and safety and those that are classified as poor performing facilities are not
given an opportunity to correct their deficiencies prior to the assessment of
remedies. From time to time, the Company receives notices from federal and state
regulatory agencies relating to alleged deficiencies for failure to comply with
all components of the regulations. While the Company does not always agree with
the positions taken by the agencies, the Company reviews such notices and takes
corrective action when appropriate. Due to the fact that the new regulatory
process provides the Company with limited appeal rights, many alleged
deficiencies are acknowledged even if the Company is not in agreement with the
allegation.
 
     The July 1995 regulation mandates that facilities which are not in
substantial compliance and do not correct deficiencies within a certain time
frame must be terminated from the Medicare and/or Medicaid programs. Generally,
the facility has no more than six months from deficiency identification to
correct the deficiency, but has a shorter time frame when immediate jeopardy to
the health or safety of the residents is alleged by the survey agency. While the
Company endeavors to comply with all applicable regulatory requirements, from
time to time certain of the Company's nursing facilities have been subject to
various
 
                                       73
   76
 
remedies as a result of deficiencies alleged by HCFA or state survey agencies.
While in certain instances denial of certification or licensure revocation
actions have been threatened, no such actions are currently pending. There can
be no assurance that the Company will not be subject to such remedies in the
future.
 
     Of the Company's nursing facilities surveyed to date under the new
regulation and for which a determination has been rendered, approximately 99
percent were found to be in substantial compliance at the initial or follow up
survey visit. The Company believes that this performance is comparable to the
performance of other similar multifacility corporations. The Company expects
that those of its facilities not in substantial compliance will ultimately
achieve this objective. The Company is unable to predict its compliance outcome
in the future and could be adversely affected if a substantial portion of its
facilities were determined not to be in compliance with applicable regulations.
The Company believes that it has appropriate systems and mechanisms in place to
monitor care and service delivery. The industry as a whole has raised with HCFA
its serious concern that the new survey, certification and enforcement process
does not appropriately measure performance against applicable requirements and
that the process is being applied inconsistently among survey sites. Fundamental
to the concern is the change in how surveyors perceive a deficient practice.
Prior to July 1995, a deficiency would be identified only if a pattern of less
than acceptable performance was observed. Under the present regulation, any lack
of perfection produces an alleged deficiency.
 
     Restrictions on Acquisitions, Construction and Additions.  The Company's
acquisition and construction of additional facilities are subject to state
regulation. All of the states in which the Company and Arbor currently operate
(other than Idaho) have adopted CON and other laws designed to regulate
expansion which generally require that a state agency approve certain
acquisitions or physical plant changes and determine that a need exists prior to
the addition of beds or services, the implementation of the changes or the
occurrence of certain capital expenditures. In certain states, such laws have
resulted in the prohibition, restriction or delay in the issuance of CONs.
 
     Regulation of Certain Transactions.  Federal law provides for exclusion of
practitioners, providers and related persons from participation in most federal
healthcare programs, including the Medicare and Medicaid programs, if the
individual or entity has been convicted of a criminal offense related to the
delivery of an item or service under these programs or if the individual or
entity has been convicted, under state or federal law, of a criminal offense
relating to neglect or abuse of residents in connection with the delivery of a
healthcare item or service. Further, individuals or entities may be, but are not
required to be, excluded from such programs under certain circumstances,
including but not limited to the following: conviction related to fraud;
conviction relating to obstruction of an investigation; conviction relating to a
controlled substance; licensure revocation or suspension; exclusion or
suspension from state or federal healthcare programs; filing claims for
excessive charges or unnecessary services or failure to furnish medically
necessary services; and ownership or control by an individual who has been
excluded from the Medicaid and/or Medicare programs, against whom a civil
monetary penalty related to the Medicaid and/or Medicare programs has been
assessed, or who has been convicted of the crimes described in this paragraph.
The illegal remuneration provisions of the Social Security Act make it a felony
to solicit, receive, offer to pay or pay any kickback, bribe or rebate in return
for referring a resident for any item or service, or in return for purchasing,
leasing, ordering or arranging for any good, facility, service or item, for
which payment may be made under the federal healthcare programs. A violation of
the illegal remuneration statute may result in the imposition of criminal
penalties, including imprisonment for up to five years, the imposition of a fine
of up to $25,000 or both. A civil action to exclude a provider from the Medicaid
and/or Medicare programs may also be brought. The recently enacted Balanced
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
federal 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). There are also
 
                                       74
   77
 
other civil and criminal statutes applicable to the long-term care industry,
such as those governing false claims. The Company has contractual relationships
with some healthcare providers. Some states in which the Company operates also
have laws that govern financial arrangements between healthcare providers. The
Company believes that it is in compliance and that its practices are not in
violation of the foregoing statutes or regulations. The Company cannot
reasonably predict whether enforcement activities will increase at the federal
or state level or the effect of any such increase on its business.
 
     In the summer of 1995, a major anti-fraud demonstration project, "Operation
Restore Trust" ("ORT") was announced by the OIG. A primary purpose for the
project is to scrutinize the activities of health care providers who are
reimbursed under the Medicare and Medicaid programs. Initial investigative
efforts have focused on skilled nursing facilities, home health and hospice
agencies, and durable medical equipment suppliers in Texas, Florida, New York,
Illinois and California. On May 20, 1997, HHS announced that Operation Restore
Trust will be expanded during the next two years to include 12 additional states
(Arizona, Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey,
Ohio, Pennsylvania, Tennessee, Virginia and Washington), as well as several
other types of health care services. 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, suit for civil penalties, and/or Medicare,
Medicaid or federal healthcare program exclusion. One of Arbor's facilities was
recently the subject of an ORT investigation, which resulted in a finding that
approximately $113,000 of charges for therapy services were inadequately
documented. Following this investigation, Arbor has adopted measures to
strengthen its documentation relating to reimbursable services. While the
Company does not believe that it is the target of any such investigation under
Operation Restore Trust, there can be no assurance that substantial amounts will
not be expended by the Company to cooperate with any such investigation or to
defend allegations arising therefrom. If it were found that any of the Company's
practices failed to comply with the anti-fraud provisions, the Company could be
materially adversely affected.
 
     Cross Disqualification and Delicensure.  In certain circumstances,
conviction of abusive or fraudulent behavior with respect to one facility may
subject other facilities under common control or ownership to disqualification
from participation in Medicaid or Medicare programs. Executive Order 12549
prohibits any corporation or facility from participating in federal contracts if
it or its "principals" have been debarred, suspended or are ineligible, or have
been voluntarily excluded, from participation in federal contracts. A principal
has been defined as an officer, director, owner, partner, key employee or other
person with primary management or supervisory responsibilities. In addition,
some state regulations provide that all facilities under common control or
ownership licensed within a state are subject to delicensure if any one or more
of such facilities are delicensed.
 
     Environmental Laws and Regulations.  Certain federal and state laws govern
the handling and disposal of medical, infectious and hazardous waste. Failure to
comply with those laws or the regulations promulgated thereunder could subject
an entity covered by these laws to fines, criminal penalties and other
enforcement actions. The Company has developed policies with respect to the
handling and disposal of medical, infectious and hazardous waste to assure
compliance by each of its facilities with those laws and regulations. The
Company believes that it is in material compliance with applicable laws and
regulations governing these requirements.
 
     Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on the Company with regard to
protecting employees from exposure to blood borne pathogens. The Company
believes that it has policies and procedures in place to preclude actions by
this regulatory body.
 
     See also "-- Sources of Revenue" for a description of The Balanced Budget
Act.
 
EMPLOYEES
 
     As of September 30, 1997, the Company employed approximately 20,300 people,
including approximately 4,300 registered and licensed practical nurses, 8,000
nursing assistants, 800 therapists, 139 pharmacists, 6,400 dietary, domestic,
maintenance and other staff, and 650 administrative employees who work at
corporate
 
                                       75
   78
 
offices and facilities. There are approximately 42 collective bargaining
agreements (six of which expire within 12 months of November 30, 1997) among
nine unions covering approximately 2,200 employees. The Company believes that
its relationship with its employees is good.
 
     As of September 30, 1997, Arbor employed approximately 4,500 people,
approximately 4,360 of whom are employed in the Arbor Centers and institutional
pharmacies. Arbor's corporate staff consists of approximately 140 people, the
majority of whom are located at Arbor's headquarters in Lima, Ohio. Certain of
Arbor's employees in one Arbor Center in Ohio are covered by a collective
bargaining contract. The Company believes that Arbor has good relationships with
its employees.
 
   
RELATED PARTY TRANSACTIONS
    
 
   
     The Company is an indirect wholly owned subsidiary of Extendicare and
insures certain risks, including comprehensive general liability, property
coverage and excess workers compensation/employer's liability insurance, with an
affiliated insurance subsidiary of Extendicare. Expenses of approximately $2.6
million, $8.4 million, $21.4 million and $25.3 million were recorded by the
Company for this purpose in the nine months ended September 30, 1997 and the
fiscal years ended December 31, 1996, 1995 and 1994, respectively.
    
 
   
     At September 30, 1997 and each of December 31, 1996 and 1995, the Company
had a non-interest bearing payable to an affiliate of Extendicare in the amount
of approximately $3.5 million with no specific due date.
    
 
   
YEAR 2000 ISSUE
    
 
   
     The Company has conducted a review of its computer systems and its
third-party systems to identify those systems that could be affected by the
"Year 2000" issue. The Year 2000 issue is the result of computer systems being
written using two digits rather than four to define the applicable year. Any of
the Company's programs or programs of third-party providers that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. If not corrected, Year 2000 issues could result in a major
system failure or modifications and material costs to the Company. As a result
of the Company's review of its proprietary systems, the Company has implemented
a plan and begun the programming necessary to enable such systems to properly
recognize the year 2000 in such applications. The Company's results of its
reviews of third-party software has identified those systems with the Year 2000
issue. The Company has received assurances from such third-party software
providers that plans are in process to make necessary modifications to achieve
compliance with year 2000 processing requirements or to convert systems to
systems which will be compliant with the year 2000 requirement. The Company
presently believes that, with modifications to existing software and converting
to new software, the Year 2000 issue will not pose significant operational
problems to the Company's computer systems as so modified and converted, nor
will compliance with the Year 2000 issue result in material costs to the
Company. However, if such modifications and conversions are not completed
timely, the Year 2000 issue may have a material impact on the operations of the
Company.
    
 
                                       76
   79
 
                                   MANAGEMENT
 
KEY EXECUTIVE OFFICERS
 
     Set forth below are the names, ages and positions of certain key executive
officers of Extendicare as of September 30, 1997:
 


               NAME                   AGE                         POSITION
- -----------------------------------   ---    --------------------------------------------------
                                       
Dr. Joy Durfee Calkin..............   59     President and Chief Executive Officer
J. Wesley Carter...................   57     Chief Operating Officer
Stephen F. Dineley.................   46     Vice President, Finance and Chief Financial
                                             Officer
Melvin A. Rhinelander..............   47     Senior Vice-President, Corporate Services and
                                             Secretary
Barry L. Stephens..................   58     Senior Vice-President, Finance

 
DIRECTORS AND EXECUTIVE OFFICERS
 
     Set forth below are the names, ages and positions of the directors and
executive officers of the Company as of September 30, 1997:
 


               NAME                   AGE                         POSITION
- -----------------------------------   ---    --------------------------------------------------
                                       
Frederick Bernard Ladly............   67     Director and Chairman
J. Wesley Carter...................   57     Chief Executive Officer, President and Director
Robert J. Abramowski...............   47     Vice President, Finance, Chief Financial Officer,
                                             Treasurer and Assistant Secretary
Leland M. Austin, Jr...............   54     Executive Vice President, Operations, Assistant
                                             Secretary and Director
Richard Leslie Bertrand............   48     Senior Vice President, Reimbursement Services,
                                             Assistant Secretary and Director
Roch Carter........................   58     General Counsel and Assistant Secretary
Ronald P. Knox.....................   53     Senior Vice President, Operations
Hugh S. McManus....................   56     Vice President, Administration and Legal Services
                                             and Assistant Secretary
Melvin A. Rhinelander..............   47     Secretary
L. William Wagner..................   49     Vice President, Human Resources

 
     The respective terms of office of the directors of the Company are for
three years and until their respective successors are elected. All executive
officers of Extendicare and the Company serve at the discretion of the
respective boards of directors of such corporations.
 
     DR. JOY DURFEE CALKIN joined Extendicare in 1995 as a member of the Board
of Directors. In August 1997, Dr. Calkin was appointed President and Chief
Executive Officer of Extendicare. Prior to her appointment with Extendicare, Dr.
Calkin was Vice President and Provost of the University of Calgary. She was also
a professor in the Faculty of Nursing, specializing in health systems management
and design as well as pediatric nursing. Dr. Calkin received her Ph.D in Health
Services Administration and is widely published in the healthcare field. Dr.
Calkin has over 28 years of healthcare experience.
 
     J. WESLEY CARTER joined Extendicare in 1973 as Senior Vice President of
Finance. In 1978, Mr. Carter was appointed President and Chief Operating Officer
of the U.S. operations for the Company. Mr. Carter left Extendicare in 1981 to
take on the position of President at Manley Insurance Brokers Inc. In December
1994, Mr. Carter returned to Extendicare in his current capacity as Chief
Operating Officer. Mr. Carter was appointed President and Chief Executive
Officer of EHSI in September 1997. Mr. Carter has been a director of the Company
since 1994.
 
     STEPHEN F. DINELEY joined Extendicare on September 1, 1997. Mr. Dineley has
23 years of accounting and finance experience and for the past 13 years has been
a partner with KPMG. While in public accounting, Mr. Dineley had extensive
experience with the healthcare industry and publicly-held clients.
 
                                       77
   80
 
     MELVIN A. RHINELANDER has been with Extendicare for 20 years. He currently
holds the positions of Senior Vice-President, Corporate Services and Secretary
for Extendicare. In addition, he serves as Vice President and Secretary of
Extendicare (Canada) Inc. Mr. Rhinelander has been Secretary of the Company
since 1989.
 
     BARRY L. STEPHENS has been with Extendicare for 12 years. He is currently
Senior Vice-President, Finance of Extendicare. Prior to September 1, 1997, Mr.
Stephens was Vice-President, Finance, Chief Financial Officer and Secretary.
Prior to July 1985, Mr. Stephens was a partner of Thorne Riddell, chartered
accountants, for 10 years.
 
     FREDERICK B. LADLY was, prior to August 1997, Chief Executive Officer of
Extendicare and President and Chief Executive Officer of Extendicare prior to
January 1996. He has been Chairman of Extendicare (Canada) Inc. since December
1994, Vice-Chairman of Crown Life Insurance Company since May 1994 and was
President and Chief Executive Officer of Extendicare (Canada) Inc. prior to
December 1994. Mr. Ladly has been a director of the Company since 1989.
 
     ROBERT J. ABRAMOWSKI joined EHSI in 1983 as Vice President and Controller.
In 1991, Mr. Abramowski was appointed Vice President of Finance and Chief
Financial Officer. Prior to joining EHSI, Mr. Abramowski was a member of the
Audit Division of Arthur Andersen & Co., an international public accounting
firm, for 11 years. While in public accounting, he worked extensively with the
healthcare industry and publicly-held clients.
 
     LELAND M. AUSTIN, JR. joined EHSI in 1984 as Senior Vice President of
Operations. In 1985, he was appointed Executive Vice President of Operations.
Prior to joining EHSI he worked at Lutheran Hospitals where he held the
positions of Senior Vice President of Finance and Treasurer. Mr. Austin has 18
years of healthcare experience in hospitals, nursing homes and other related
healthcare businesses. Mr. Austin has been a director of the Company since 1989.
 
     RICHARD LESLIE BERTRAND joined EHSI in 1995 as Senior Vice-President. Mr.
Bertrand has been with Extendicare in various financial capacities, including
Senior Vice President, since 1976. Mr. Bertrand has been a director of the
Company since 1989.
 
     ROCH CARTER joined EHSI in 1974 as Legal Counsel. In 1985 he was appointed
General Counsel. Mr. Carter was formerly an attorney with the United States
Attorney's office in Milwaukee. Mr. Carter was also an attorney with the City of
Milwaukee and was in practice with Young and McManus, S.C. Mr. Carter has over
24 years experience in healthcare law and practice.
 
     RONALD P. KNOX joined EHSI in 1982 with the acquisition of American Medical
Affiliates, as Associate Vice President of Eastern Field Operations. Mr. Knox
became Senior Vice President of Field Operations in 1985 and was promoted to
Vice President of EHSI in 1987. He was named Senior Vice President of Operations
in January of 1989. Prior to that, Mr. Knox served as the Assistant Vice
President of operations for American Medical Affiliates from 1972 until 1982.
Mr. Knox has 18 years of facility management experience and seven years of labor
relations/negotiation experience.
 
     HUGH MCMANUS has served as Vice President of Administration and Legal
Services for EHSI since July 1992. Prior to that, he was a law partner of Young
and McManus, S.C., and the Vice-President, Administration and an officer of
Zilber, Ltd. He also held the position of adjunct professor of law at Marquette
University Law School from 1982 to 1992. Mr. McManus has over 22 years
experience in healthcare law and practice.
 
     L. WILLIAM WAGNER joined EHSI in 1987 as Vice President of Human Resources.
Prior to that he served as Vice President of Human Resources for ARA Living
Centers and Director of Personnel for General Foods Corp. Mr Wagner has 15 years
of experience in healthcare and over 20 years of human resources experience.
 
                                       78
   81
                             EXECUTIVE COMPENSATION
 
  COMPENSATION OF NAMED EXECUTIVE OFFICERS
 
   
     The Summary Compensation Table details compensation information for the
fiscal year ended December 31, 1997 for the Chief Executive Officer and the four
most highly compensated executive officers of EHSI (together, the "Named
Executive Officers").
    
                           SUMMARY COMPENSATION TABLE
 
   


     =================================================================================================================
                                                                                          LONG-TERM
                                                                                         COMPENSATION
                                                   ANNUAL COMPENSATION                ------------------
                                    -------------------------------------------------     SECURITIES
               NAME AND                                                OTHER ANNUAL       UNDERLYING        ALL OTHER
          PRINCIPAL POSITION             SALARY           BONUS        COMPENSATION    OPTIONS GRANTED    COMPENSATION
         WITH THE CORPORATION          ($)   (1)        ($)   (2)           ($)              (#)            ($)   (3)
- -----------------------------------------------------------------------------------------------------------------
                                                                                                       
  J. W. Carter(4)                     Cdn. 267,000/     Cdn. 165,000     --                  55,000         Cdn. 8,964
  President and Chief Executive              72,915
  Officer
- -----------------------------------------------------------------------------------------------------------------
  G.W. Smith(5)                             400,000          192,500     --                  60,000             64,400
  President and Chief Operating
  Officer
- -----------------------------------------------------------------------------------------------------------------
  R. L. Bertrand                            202,000           76,560     --                  20,000             33,815
  Senior Vice President,
  Reimbursement Services
- -----------------------------------------------------------------------------------------------------------------
  R. J. Abramowski                          202,000           76,560     --                  20,000             32,995
  Vice President, Finance, and
  Chief Financial Officer
- -----------------------------------------------------------------------------------------------------------------
  L. M. Austin                              230,000           83,080     --                  30,000             38,130
  Executive Vice President,
  Operations
=================================================================================================================

    
 
(1) Includes base salary and any amounts employee has contributed to the
    Deferred Compensation Plan and 401(k) Plan.
 
   
(2) Reflects amounts paid in 1997 related to bonuses earned in 1996.
    
 
   
(3) Includes amounts the Company has contributed to the Deferred Compensation
    Plan, the 401(k) Plan, and the Executive Life Insurance Plan, except for Mr.
    Carter, where the amount includes life insurance premiums paid.
    
 
   
(4) Mr. Carter's compensation from January 1, 1997 to October 1997 was in
    Canadian dollars. Effective October 1997, with his appointment as President
    and Chief Executive Officer of EHSI, his compensation would be paid in U.S.
    dollars.
    
 
   
(5) Mr. Smith's employment with the Company terminated effective September 2,
    1997.
    
 
   
DEFERRED COMPENSATION PLAN
    
 
   
     The Company maintains a non-qualified, deferred compensation plan (the
"Deferred Compensation Plan") covering certain employees. The maximum amount of
annual compensation which may be deferred is 10% of such employee's base salary
(excluding any bonus). The Company matches (up to 50%) of the amount so
deferred, and the combined amount earns interest at the prime rate. The Company
amount, along with interest thereon, will vest in the employee over an eight
year period. Amounts deferred and vested matching amounts are payable upon the
occurrence of certain events (i.e., death, disability or termination). Amounts
deferred are not guaranteed, are "at risk", and subject to the ability of the
Company to subsequently make such payments. The deferred compensation account is
a book reserve, and the Company's obligations are unfunded and unsecured.
    
 
STOCK OPTION PLANS
 
     Extendicare's Stock Option Plan (the "Plan") provides for the granting,
from time to time, at the discretion of the Board of Directors of Extendicare
(the "Extendicare Board of Directors"), to certain directors, officers and
employees of the Extendicare group of companies, of options to purchase
Subordinate Voting Shares of Extendicare (the "Subordinate Voting Shares") for
cash. The Plan provides that the exercise price of any option granted shall not
be less than the closing price (or, if there is no closing price, the
 
                                       79
   82
 
   
simple average of the bid and ask price) for the Subordinate Voting Shares as
quoted on The Toronto Stock Exchange on the trading day prior to the date of
grant. It also permits options to be exercised for a period not to exceed either
five or ten years from the date of grant, as determined by the Extendicare Board
of Directors at the time the option is granted. The Plan contains provisions for
appropriate adjustments in the event of corporate reorganizations of
Extendicare.
    
 
   
     At December 31, 1997, a total of 4,890,100 Subordinate Voting Shares of
Extendicare were reserved under the Plan, of which 1,665,950 Subordinate Voting
Shares were under option and 3,224,150 were available for option.
    
 
   
     The following table sets forth certain information regarding stock options
granted during 1997 to the Named Executive Officers under the Plan. The Company
has never granted any stock appreciation rights (SAR). The table also indicates
the potential realizable value of each grant of options assuming that the market
price of the underlying security appreciates in value from the date of the grant
to the end of the option term at the following annualized rates:
    
 
   
       OPTIONS GRANTED IN LAST FISCAL YEAR AND POTENTIAL REALIZABLE VALUE
    
 
   


==================================================================================================
                                                                        POTENTIAL REALIZABLE
                                                                                VALUE
                                                                          AT ASSUMED ANNUAL
                                      INDIVIDUAL GRANTS                         RATES
                       ------------------------------------------------    OF STOCK PRICE
                                    % OF TOTAL                            APPRECIATION FOR
                       SECURITIES    OPTIONS      EXERCISE                     OPTION
                       UNDERLYING   GRANTED TO    OR BASE                      TERM(2)
                         OPTIONS   EMPLOYEES IN    PRICE     EXPIRATION ---------------------
          NAME         GRANTED (#) FISCAL YEAR  (CDN$/SH)(1)    DATE     5%(US$)   10%(US$)
- --------------------------------------------------------------------------------------------------
                                                                         
  J.W. Carter             55,000         7.3        17.90      2/24/02   190,143    420,166
- --------------------------------------------------------------------------------------------------
  G.W. Smith              60,000         8.0        17.90      2/24/02   207,428    458,363
- --------------------------------------------------------------------------------------------------
  R.L. Bertrand           20,000         2.7        17.90      2/24/02    69,143    152,788
- --------------------------------------------------------------------------------------------------
  R.J. Abramowski         20,000         2.7        17.90      2/24/02    69,143    152,788
- --------------------------------------------------------------------------------------------------
  L.M. Austin             30,000         4.0        17.90      2/24/02   103,714    229,181
==================================================================================================

    
 
   
(1) All options were granted pursuant to the Plan with an exercise price as
    quoted on The Toronto Stock Exchange in Canadian dollars.
    
 
   
(2) These columns show the hypothetical gains or "option spreads" of the options
    granted based on assumed annual compound stock appreciation rates of 5% and
    10% over the full five-year term of the option, converted to United States
    dollars using the inverse of the noon spot rate of exchange as quoted by the
    Bank of Canada of Cdn$1.00 = US$0.6991 on December 31, 1997. The 5% and 10%
    assumed rates of appreciation are mandated by the rules of the Securities
    and Exchange Commission and do not represent the Company's estimate or
    projection of future prices of Extendicare Subordinate Voting Shares.
    
 
                                       80
   83
 
   
     The following table outlines stock options exercised during 1997 and option
values at December 31, 1997 for the Named Executive Officers:
    
 
           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                             YEAR-END OPTION VALUES
 
   


=========================================================================================================
                                                                             VALUE OF UNEXERCISED
                                                  UNEXERCISED OPTIONS AT    IN-THE-MONEY OPTIONS AT
                           SECURITIES  AGGREGATE      FISCAL YEAR-END           FISCAL YEAR-END
                           ACQUIRED ON   VALUE              (#)                     ($)(1)
                            EXERCISE   REALIZED  ------------------------- -------------------------
            NAME               (#)        ($)    EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------
                                                                                
  J.W. Carter                     --         --     62,500       62,500      543,987      242,850
- ---------------------------------------------------------------------------------------------------------
  G.W. Smith                  35,000    374,719     55,000       85,000      453,192      176,348
- ---------------------------------------------------------------------------------------------------------
  R.L. Bertrand               20,000    207,174     10,000       30,000       43,694       66,065
- ---------------------------------------------------------------------------------------------------------
  R.J. Abramowski             15,000    157,482      7,500       27,500       32,770       55,142
- ---------------------------------------------------------------------------------------------------------
  L.M. Austin                 18,750    199,934      6,250       42,500       27,309       88,174
=========================================================================================================

    
 
   
(1) Based upon the December 31, 1997 closing stock price of the Subordinate
    Voting Shares, as reported on The Toronto Stock Exchange, of Cdn $19.50, and
    converted to the United States dollar using the inverse of the noon spot
    rate of exchange as quoted by the Bank of Canada Cdn$1.00 = US$0.6991 on
    December 31, 1997.
    
 
RETIREMENT AGREEMENTS
 
     J.W. Carter is covered by a retirement arrangement established by
Extendicare. The arrangement provides for a pension that will generate a benefit
at age 60 of 44% of Mr. Carter's best three consecutive years of basic salary
for employment with Extendicare. This benefit would increase by 2% for each
additional year of service with Extendicare over the age of 60. Retirement
benefits are payable as an annuity over the lifetime of the executive with a
portion continuing to be paid to the executive's spouse after the death of the
executive. The other Named Executive Officers are not participants in these
arrangements as they are participants in money purchase, 401K and deferred
compensation plans established for U.S. executives.
 
EMPLOYMENT CONTRACTS
 
   
     None of the Named Executive Officers has an employment agreement with EHSI.
Mr. Carter has an employment contract with Extendicare which provides for up to
eighteen months' notice, or an amount equal to the equivalent months' basic
salary in lieu of notice, for termination without cause.
    
 
                                       81
   84
 
                       DESCRIPTION OF OTHER INDEBTEDNESS
 
NEW CREDIT FACILITIES
 
     The Company entered into a credit agreement on November 26, 1997 (the "New
Credit Agreement") with NationsBank, N.A. (the "Agent") individually and as
agent, and certain lenders (the "Lenders"), which provided the Company with new
senior secured credit facilities of up to $800 million (the "New Credit
Facilities"), consisting of a six year revolving credit facility (the "Revolving
Credit Facility") under which up to an aggregate principal amount of $200
million is available for borrowing, a six year $200 million term loan (the
"Tranche A Term Loan"), a 7 year $200 million term loan (the "Tranche B Term
Loan"), and a six year loan of up to $200 million (the "Tranche C Loan"). The
Tranche C Loan was repaid with the proceeds of the offering of the Outstanding
Notes. Proceeds of the New Credit Facilities were used to complete the
Acquisition, to pay transaction costs related thereto, and to refinance certain
indebtedness of the Company and certain of its subsidiaries and of Arbor and
certain of its subsidiaries. The balance of the Revolving Credit Facility is
available for working capital and general corporate purposes.
 
     The following summaries of the material provisions of the New Credit
Agreement do not purport to be complete, and such provisions, including
definitions of certain terms, are qualified in their entirety by reference to
the New Credit Agreement. Capitalized terms used below and not defined in this
Prospectus have the meanings assigned to such terms in the New Credit Agreement.
 
GENERAL
 
     The Revolving Credit Facility matures on December 31, 2003, at which time
all outstanding borrowings will be due. Up to $50 million of the Revolving
Credit Facility is available for the issuance of standby letters of credit. The
Tranche A Term Loan matures on December 31, 2003, and the Tranche B Term Loan
matures on December 31, 2004, and are payable in quarterly installments
beginning on March 31, 1998 as set forth below. The Company is also required to
make mandatory prepayments of principal upon the occurrence of certain events,
such as certain asset sales and certain issuances of securities. The Company is
permitted to make voluntary prepayments at any time.
 
     The annual amortization schedule for principal on the Tranche A Term Loan
and the Tranche B Term Loan is as follows:
 


                                                      TRANCHE A             TRANCHE B
                                                     -----------           ------------
                                                                     
          Loan year 1............................    $25 million           $  2 million
          Loan year 2............................     30 million              2 million
          Loan year 3............................     30 million              2 million
          Loan year 4............................     35 million              2 million
          Loan year 5............................     40 million              2 million
          Loan year 6............................     40 million              2 million
          Loan year 7............................                           188 million

 
INTEREST RATE AND FEES
 
   
     Borrowings under the New Credit Facilities bear interest based on LIBOR
plus a margin or the Base Rate plus a margin. The applicable margin range for
the LIBOR based loans is from .75% to 2.00% and for the Base Rate Loans is from
0% to 1.00%. Applicable margins are based on achieving certain leverage ratios.
At the date of the Acquisition, the applicable rates for the Revolving Credit
Facility, Tranche A Term Loan and Tranche C Term Loan were LIBOR plus 1.75% or
Base Rate plus .75% and for the Tranche B Loan the applicable rate was LIBOR
plus 2.00% or Base Rate plus 1.00%.
    
 
     The New Credit Agreement provides that the Company will pay certain fees
and commissions to the Lenders, including a commitment fee and letter of credit
fees payable to the Lenders.
 
                                       82
   85
 
GUARANTEES AND SECURITY
 
     Borrowings and other obligations under the New Credit Agreement are
guaranteed on a senior secured basis by Extendicare Holdings, Inc., the direct
parent of EHSI, and all existing and future domestic subsidiaries of the
Company.
 
     Loans and other obligations under the New Credit Agreement and the
guarantees are secured by the pledge of stock of the Company and each of its
existing and future domestic subsidiaries.
 
COVENANTS; EVENTS OF DEFAULT
 
     The New Credit Agreement contains a number of customary covenants,
including, among other things, (i) prohibitions and/or limitations on the
incurrence of debt, liens, payment of dividends or distributions, redemptions of
capital stock, investments, transactions with affiliates, mergers, acquisitions
and asset dispositions and (ii) financial covenants including fixed charge
coverage, leverage, and net worth ratios. The New Credit Agreement also contains
customary events of default, including an event of default if a "change of
control" occurs.
 
CONDITIONS
 
     The New Credit Agreement contains a number of customary conditions to any
subsequent funding by the Lenders.
 
OTHER INDEBTEDNESS
 
   
     In addition to the indebtedness described above, upon closing of the
Financing Transactions and application of the proceeds therefrom, the Company
and Arbor had, on a consolidated basis, $52.7 million of other indebtedness
which will remain outstanding.
    
 
   
     As of September 30, 1997, the Company and Arbor had approximately $6.3
million in mortgage notes outstanding. Such mortgage notes paid interest at
rates ranging from approximately 7.25% to 12.45% per annum and were due in 2014.
The Company and Arbor also had $46.4 million of notes outstanding. Such notes
accrued interest at rates ranging from approximately 4.16% to 8.00% per annum
and are due in 2015. The mortgage notes and the notes contain certain financial
covenants, including maintenance of certain minimum financial ratios.
    
 
   
     In addition, as of September 30, 1997, the Company had outstanding a $32
million interest rate swap agreement with a financial institution. The swap
agreement effectively changes the Company's interest rate exposure on $32
million of floating rate indebtedness to a fixed rate of 4.155% per annum during
the period the agreement is in effect, which is through October 8, 2000. See
Note 10 of the Notes to EHSI Consolidated Financial Statements.
    
 
                                       83
   86
 
                            DESCRIPTION OF THE NOTES
 
GENERAL
 
   
     The Outstanding Notes were issued, and the Exchange Notes will be issued,
pursuant to an Indenture (the "Indenture") among the Company, as issuer, AHC
Acquisition Corp. and each of the Company's other existing Restricted
Subsidiaries organized within the United States (including Arbor and its
Restricted Subsidiaries), as Guarantors, and The Bank of Nova Scotia Trust
Company of New York, as trustee (the "Trustee"), a copy of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The terms of the Exchange Notes are identical in all material respects to the
terms of the Outstanding Notes except that the Exchange Notes have been
registered under the Securities Act and are issued free from any covenant
regarding registration and except that, if the Exchange Offer is not consummated
by April 16, 1998, the interest rate borne by the Outstanding Notes will
increase 0.5% per annum for the first 90 days following such date and will
increase by an additional 0.5% per annum beginning at each subsequent 90-day
period until the Exchange Offer is consummated; provided, however, that in no
event will the interest rate borne by the Outstanding Notes be increased by more
than 1.5% per annum. The Exchange Notes and the Outstanding Notes are treated as
one series of Notes under the Indenture and holders thereof are entitled to the
benefit of the Indenture. Accordingly, unless specifically stated to the
contrary, the following description applies equally to all Notes. The terms of
the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and Holders of
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. The
definitions of certain terms used in the following summary are set forth below
under the caption "Certain Definitions."
    
 
   
     The Notes are unsecured senior subordinated general obligations of the
Company. The Notes are fully and unconditionally guaranteed on a joint and
several, unsecured senior subordinated basis by AHC Acquisition Corp. and each
of the Company's other existing and future Restricted Subsidiaries organized
within the United States (each, a "Note Guarantee" and, collectively, the "Note
Guarantees") (excluding inactive subsidiaries as of the date of the Indenture
but including Arbor and its Restricted Subsidiaries) and each other Restricted
Subsidiary of the Company that guarantees the Company's obligations under the
New Credit Agreement. The Company will cause each future Restricted Subsidiary
of the Company that guarantees the Company's obligations under the New Credit
Agreement or any other Senior Indebtedness to enter into a supplemental
indenture providing for a Note Guarantee as required in the Indenture.
    
 
     The Company will be able to designate any Restricted Subsidiary of the
Company as an Unrestricted Subsidiary, subject to certain limitations. If so
designated, any such Unrestricted Subsidiary will not be considered a Restricted
Subsidiary of the Company for any purpose and accordingly will not be subject to
the restrictive covenants set forth in the Indenture, including, without
limitation, the restrictions on the incurrence of Indebtedness by Restricted
Subsidiaries of the Company described herein, nor shall any Unrestricted
Subsidiary be a Guarantor. See the definition of "Unrestricted Subsidiary."
 
     An Unrestricted Subsidiary shall continue to be an Unrestricted Subsidiary
only if it (a) has no Indebtedness other than Non-Recourse Debt; and (b) is a
Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results. If, at any time, any Unrestricted Subsidiary fails to meet
the foregoing requirements, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Unrestricted Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant).
 
                                       84
   87
 
PRINCIPAL, MATURITY AND INTEREST
 
     The Notes are obligations of the Company, limited in aggregate principal
amount to $200 million and will mature on December 15, 2007. The Indenture
provides for the issuance of up to $100 million aggregate principal amount of
additional Notes having identical terms and conditions to the Notes offered
hereby (the "Additional Notes"), subject to compliance with the covenants
contained in the Indenture. Any Additional Notes will be part of the same issue
as the Notes offered hereby and will vote on all matters with the Notes offered
hereby. For purposes of this "Description of the Notes," reference to the Notes
does not include Additional Notes. Interest on the Notes accrues at the rate of
9.35% per annum and is payable semiannually in arrears on June 15 and December
15, commencing on June 15, 1998, to Holders of record on the immediately
preceding May 31 and November 30. Interest on the Notes accrues from the most
recent date to which interest has been paid or, if no interest has been paid,
from December 2, 1997. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest on
the Notes is payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Notes;
provided that all payments with respect to Global Notes and Certificated
Exchange Notes (as such terms are defined below under the caption "Book Entry,
Delivery and Form") the Holders of which have given wire transfer instructions
to the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. Until
otherwise designated by the Company, the Company's office or agency in New York
will be in the office of the Trustee maintained for such purpose. The Notes will
be issued only in fully registered form, without coupons and in denominations of
$1,000 and integral multiples thereof.
 
NOTE GUARANTEES
 
     Under the Note Guarantees, each Guarantor will fully and unconditionally,
jointly and severally, guarantee the performance and punctual payment when due,
whether at stated maturity, by acceleration or otherwise, of all Obligations of
the Company under the Indenture and the Notes. Each of the Guarantors will agree
to pay, in addition to any amount stated above, any and all expenses (including
reasonable counsel fees and expenses) incurred by the Trustee in enforcing any
rights under the Note Guarantees. Each of the Note Guarantees is limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the relevant Guarantor without rendering such Note Guarantee as it relates to
such Guarantor voidable under applicable law relating to fraudulent conveyance
or fraudulent transfer or similar laws affecting the rights of creditors
generally. See "Risk Factors -- Fraudulent Conveyance Statutes."
 
     Each of the Note Guarantees is a continuing guarantee and shall (a) remain
in full force and effect until payment in full of all of the Company's
Obligations under the Indenture and the Notes or upon such Guarantor's no longer
being a Restricted Subsidiary of the Company and being released from its
guarantee of Indebtedness of the Company under the New Credit Agreement and (b)
inure to the benefit of and be enforceable by the Trustee, the Holders and their
successors, transferees and assigns. Each of the Note Guarantees is a guarantee
of payment and not of collection. Each of the Company's current Restricted
Subsidiaries organized within the United States (including Arbor and its
Restricted Subsidiaries) is a Guarantor.
 
SUBORDINATION
 
     The payment of principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
indefeasible payment in full in cash of Senior Indebtedness, which includes
borrowings under the New Credit Agreement, whether outstanding on the date of
the Indenture or thereafter incurred.
 
     Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities,
 
                                       85
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the holders of Senior Indebtedness will be entitled to receive indefeasible
payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Indebtedness are indefeasibly paid
in full in cash, any distribution to which the Holders of Notes would be
entitled shall be made to the holders of Senior Indebtedness (except that
Holders of Notes may receive securities that are subordinated at least to the
same extent as the Notes to Senior Indebtedness and to any securities issued in
exchange for Senior Indebtedness and Holders of Notes may recover payments made
from the trust described under the caption "Legal Defeasance and Covenant
Defeasance").
 
     The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities or from the trust described under the
caption "Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness which permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the Agent
Bank or the holders or the representative of the holders of any Designated
Senior Indebtedness. Payments on the Notes may and shall be resumed (a) in the
case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on which
the applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Indebtedness has been accelerated. No new period of payment
blockage may be commenced by a Payment Blockage Notice unless and until 360 days
have elapsed since the first day of the effectiveness of the immediately prior
Payment Blockage Notice. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall be, or
be made, the basis for a subsequent Payment Blockage Notice, unless such default
has been cured or waived for a period of not less than 90 days.
 
     The Indenture requires that the Company promptly notify holders of Senior
Indebtedness if payment of the Notes is accelerated because of any Event of
Default.
 
   
     As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of the Company, or
upon the occurrence of a Change of Control or an Asset Sale requiring repurchase
by the Company of any Notes, there may not be sufficient assets remaining to
satisfy the claims of the Holders after satisfying the claims of creditors of
the Company who are holders of Senior Indebtedness and claims of creditors of
the Company's Restricted Subsidiaries. See "Risk Factors -- Subordination of
Notes." On a pro forma basis, after giving effect to the Acquisition and the
Financing Transactions, including the application of the net proceeds from the
issuance of the Notes, the principal amount of Senior Indebtedness outstanding
at September 30, 1997 would have been approximately $523.4 million and the
Company would have had additional availability of $113.9 million for borrowings
under the New Credit Facilities, all of which would be Senior Indebtedness, if
borrowed. The terms of the Indenture permit the Company and its Restricted
Subsidiaries to incur additional Indebtedness, subject to certain limitations,
including Indebtedness that may be secured by Liens on property of the Company
and its Restricted Subsidiaries. See the discussion below under the captions
"Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock" and "Certain Covenants -- Liens."
    
 
SUBORDINATION OF NOTE GUARANTEES; RELEASE OF NOTE GUARANTEES
 
     The Note Guarantees are subordinated in right of payment, as set forth in
the Indenture, to the prior indefeasible payment in full in cash of Senior
Indebtedness of the Company and Senior Indebtedness of the relevant Guarantor,
which include guarantees by each Guarantor of Indebtedness of the Company under
the New Credit Agreement, whether outstanding on the date of the Indenture or
thereafter incurred.
 
     Upon any distribution to creditors of a Guarantor in a liquidation or
dissolution of such Guarantor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to such Guarantor or its
 
                                       86
   89
 
property, an assignment for the benefit of creditors or any marshaling of such
Guarantor's assets and liabilities, the holders of Senior Indebtedness of such
Guarantor will be entitled to receive indefeasible payment in full in cash of
all Obligations due in respect of such Senior Indebtedness (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Indebtedness of such Guarantor) before the Holders of Notes
will be entitled to receive any payment with respect to the relevant Note
Guarantee, and until all Obligations with respect to Senior Indebtedness of such
Guarantor and Senior Indebtedness of the Company are paid in full in cash, any
payment that would have been made under such Note Guarantee shall be made to the
holders of Senior Indebtedness of such Guarantor (except that Holders of Notes
may receive (i) Capital Stock of such Guarantor (other than Disqualified Stock)
and (ii) securities that are subordinated at least to the same extent as such
Note Guarantee to Senior Indebtedness of such Guarantor and to any securities
issued in exchange for Senior Indebtedness of such Guarantor).
 
     Such Guarantor also may not make any payment upon or in respect of its Note
Guarantee (except in such subordinated securities of such Guarantor) if (i) a
default in the payment of the principal of, premium, if any, or interest on
Designated Senior Indebtedness of the relevant Guarantor or Designated Senior
Indebtedness of the Company occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with respect
to Designated Senior Indebtedness of such Guarantor or Designated Senior
Indebtedness of the Company which permits holders of the Designated Senior
Indebtedness of such Guarantor or Designated Senior Indebtedness of the Company
as to which such default relates to accelerate its maturity and the Trustee
receives a Payment Blockage Notice from the holders or the representative of the
holders of any Designated Senior Indebtedness of such Guarantor or Designated
Senior Indebtedness of the Company. Any payments under any Note Guarantee may
and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in the case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured or
waived or 179 days after the date on which the applicable Payment Blockage
Notice is received, unless the maturity of any Designated Senior Indebtedness of
the relevant Guarantor has been accelerated. No new period of payment blockage
may be commenced by a Payment Blockage Notice unless and until 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice.
 
   
     As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of a Guarantor,
there may not be sufficient assets remaining to satisfy the claims of the
Holders with respect to the relevant Note Guarantee after satisfying the claims
of creditors of such Guarantor who are holders of Senior Indebtedness of such
Guarantor. As of September 30, 1997, on a pro forma basis after giving effect to
the Acquisition and the Financing Transactions, including the application of the
net proceeds from the issuance of the Notes, the Guarantors would have had
$506.8 million in the aggregate of outstanding Senior Indebtedness, $454.1
million of which consists of guarantees of the New Credit Agreement. The terms
of the Indenture permit Restricted Subsidiaries of the Company to incur
additional Indebtedness, subject to certain limitations, including Indebtedness
that may be secured by Liens on property of the Restricted Subsidiaries. See the
discussion below under the captions "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" and "Certain Covenants -- Liens."
    
 
     The Indenture provides that upon (i) a sale or other disposition to a
Person not an Affiliate of the Company of all or substantially all of the assets
of any Guarantor, by way of merger, consolidation or otherwise, or a sale or
other disposition to a Person not an Affiliate of the Company of all of the
Capital Stock of any Guarantor, by way of merger, consolidation or otherwise,
which transaction is carried out in accordance with the covenants described
below under the captions "Repurchase at the Option of Holders -- Asset Sales" or
"Certain Covenants -- Merger, Consolidation or Sale of Assets" or (ii) the
release of any Guarantor from its obligations as a guarantor under the New
Credit Agreement, so long as (a) no Default or Event of Default shall have
occurred and be continuing at the time of, or would occur after giving effect on
a pro forma basis to, such release, (b) the Company is permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described below
under the caption "Incurrence of Indebtedness and issuance of Preferred Stock"
on the date on which such release
 
                                       87
   90
 
occurs, and (c) the amount of Indebtedness outstanding under the New Credit
Agreement for at least 30 days prior to the time of such release is at least
$200 million, such Guarantor will be deemed automatically and unconditionally
released and discharged from all of its obligations under its Note Guarantee
without any further action on the part of the Trustee or any holder of the
Notes; provided that any such termination shall occur only to the extent that
all obligations of such Guarantor under all of its guarantees of, and under all
of its pledges of assets or other security interests which secure any
Indebtedness of the Company shall also terminate upon such sale, disposition or
release.
 
OPTIONAL REDEMPTION
 
     The Notes are not redeemable at the Company's option prior to December 15,
2002. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on December 15 of the years indicated below:
 


                                       YEAR                                PERCENTAGE
          ---------------------------------------------------------------  ----------
                                                                        
          December 15, 2002..............................................   104.675%
          December 15, 2003..............................................   103.117%
          December 15, 2004..............................................   101.558%
          December 15, 2005 and thereafter...............................    100.00%

 
     Notwithstanding the foregoing, at any time or from time to time prior to
December 15, 2000, the Company may redeem, on one or more occasions, up to 35%
of the sum of (i) the initial aggregate principal amount of the Notes and (ii)
the initial aggregate principal amount of any Additional Notes with the net
proceeds of one or more Equity Offerings at a redemption price equal to 109.35%
of the principal amount thereof, plus accrued interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on an interest payment date); provided that,
immediately after giving effect to such redemption, at least 65% of the sum of
(x) the initial aggregate principal amount of the Notes and (y) the initial
aggregate principal amount of any Additional Notes remains outstanding; provided
further that such redemptions shall occur within 60 days of the date of closing
of each Equity Offering.
 
     If less than all of the Notes are to be redeemed at any time, selection of
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 so listed, by such method as the
Trustee deems fair and appropriate; provided that no Notes of $1,000 or less
shall be redeemed in part. Notices 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
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 ceases to accrue on Notes or portions of them
called for redemption.
 
MANDATORY REDEMPTION
 
     The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
 
REPURCHASE AT THE OPTION OF HOLDERS
 
     CHANGE OF CONTROL
 
     Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes and Additional Notes, if
any, pursuant to the offer described below (the "Change of Control Offer") at
 
                                       88
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an offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon (the "Change of Control Purchase
Price") to the date of purchase (the "Change of Control Payment Date"). Within
30 days after the date of any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes and Additional Notes, if any,
pursuant to the procedures required by the Indenture and described in such
notice. The Change of Control Payment Date shall be a business day not less than
30 days nor more than 60 days after such notice is mailed.
 
     On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes and Additional Notes, if any, or
portions thereof properly tendered pursuant to the Change of Control Offer, (2)
deposit with the Paying Agent an amount equal to the Change of Control Purchase
Price in respect of all Notes and Additional Notes, if any, or portions thereof
so tendered and (3) deliver or cause to be delivered to the Trustee the Notes
and Additional Notes, if any, so tendered together with an officers' certificate
stating the aggregate principal amount of Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
Notes and Additional Notes, if any, so tendered the Change of Control Payment
for such Notes and Additional Notes, and the Trustee will promptly authenticate
and mail (or cause to be transferred by book entry) to each Holder a new Note
equal in principal amount to any unpurchased portion of the Notes surrendered,
if any; provided that each such new Note will be in a principal amount of $1,000
or an integral multiple thereof. The Indenture will provide that, prior to
complying with the provisions of this covenant, but in any event within 30 days
following a Change of Control, the Company will either repay all outstanding
Senior Indebtedness or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Indebtedness to permit the repurchase of
Notes and Additional Notes, if any, required by this covenant. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
 
     Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes and
Additional Notes, if any, to require that the Company repurchase or redeem the
Notes and Additional Notes in the event of a takeover, recapitalization or
similar restructuring. Although the existence of a Holder's right to require the
Company to repurchase the Notes and Additional Notes, if any, in respect of a
Change of Control may deter a third party from acquiring the Company in a
transaction that constitutes a Change of Control, the provisions of the
Indenture relating to a Change of Control in and of themselves may not afford
Holders of the Notes and Additional Notes, if any, protection in the event of a
highly leveraged transaction, reorganization, recapitalization, restructuring,
merger or similar transaction involving the Company that may adversely affect
Holders, if such transaction is not the type of transaction included within the
definition of a Change of Control.
 
     The New Credit Agreement provides that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes and Additional Notes, if any, the Company could seek the
consent of its lenders to the purchase of Notes and Additional Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes and Additional Notes, if any. In
such case, the Company's failure to purchase tendered Notes and Additional Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the New Credit Agreement. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Notes and Additional Notes.
 
     The meaning of the phrase "all or substantially all" as used in the
definition of "Change of Control" with respect to a sale of assets 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 the Company, and
therefore it may be unclear whether a Change of Control has occurred and whether
the Notes and Additional Notes, if any, are subject to a Change of Control
Offer.
 
                                       89
   92
 
     Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on its or their property, to make Restricted Payments and to make
Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Notes and Additional Notes, if any, and there
can be no assurance that the Company or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. In certain
circumstances, such restrictions and the restrictions on transactions with
Affiliates may make more difficult or discourage any leveraged buyout of the
Company or any of its Restricted Subsidiaries. While such restrictions cover a
variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the Indenture may not afford the Holders of Notes and
Additional Notes, if any, protection in all circumstances from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction.
 
     ASSET SALES
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, engage in an Asset
Sale unless (i) the Company (or such Restricted Subsidiary) 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 (evidenced in each case by a
resolution of the Board of Directors of such entity set forth in an officers'
certificate delivered to the Trustee) and (ii) at least 75% of the consideration
therefor received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents, provided that the principal amount of any Indebtedness
for money borrowed (as reflected on the Company's consolidated balance sheet) of
the Company or any Restricted Subsidiary that (x) is assumed by any transferee
of any such assets or other property in such Asset Sale or (y) with respect to
the sale or other disposition of all of the Capital Stock of any Restricted
Subsidiary, remains the liability of such Subsidiary subsequent to such sale or
other disposition, but only to the extent that such assumption, sale or other
disposition, as the case may be, is effected on a basis under which there is no
further recourse to the Company or any of its Restricted Subsidiaries with
respect to such liability, shall be deemed to be cash for purposes of this
provision.
 
     The Company may apply, and may permit its Restricted Subsidiaries to apply,
an amount equal to Net Proceeds of an Asset Sale, at its option, within 365 days
after the consummation of such an Asset Sale (a) to permanently reduce
Indebtedness under the New Credit Agreement (and to correspondingly reduce the
commitments, if any, with respect thereto) or to permanently reduce other Senior
Indebtedness of the Company or any Guarantor or (b) to acquire another business
or any substantial part of another business or other long-term assets, or to
make a capital expenditure, in each case, in, or used or useful in, the same or
a similar line of business as the Company or any of its Restricted Subsidiaries
was engaged in on the date of the Indenture or any reasonable extensions or
expansions thereof (including the Capital Stock of another Person engaged in
such business, provided such other Person is, or immediately after giving effect
to any such acquisition shall become, a Wholly Owned Restricted Subsidiary of
the Company). Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Senior Revolving Debt or otherwise invest such
Net Proceeds temporarily in Cash Equivalents. Any Net Proceeds from Asset Sales
that are not applied within 365 days after the consummation of an Asset Sale as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0
million, the Company will be required to make an offer to all Holders of Notes
and Additional Notes, if any (an "Asset Sale Offer"), to purchase, on a pro rata
basis, the principal amount of Notes and Additional Notes, if any, equal in
amount to the Excess Proceeds (and not just the amount thereof that exceeds
$15.0 million), at a purchase price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture. If the
aggregate principal amount of Notes and Additional Notes, if any, surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes and Additional Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero, subject to any subsequent Asset Sale.
 
                                       90
   93
 
     In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under the caption "Certain
Covenants -- Merger, Consolidation or Sale of Assets" below, the successor
corporation shall be deemed to have sold the properties and assets of the
Company and its Restricted Subsidiaries not so transferred for purposes of this
covenant, and shall comply with the provisions of this covenant with respect to
such deemed sale as if it were an Asset Sale. In addition, the fair market value
of such properties and assets of the Company or its Restricted Subsidiaries
deemed to be sold shall be deemed to be Net Proceeds for purposes of this
covenant.
 
     If at any time any non-cash consideration received by the Company or any
Restricted Subsidiary in connection with any Asset Sale is converted into or
sold or otherwise disposed of for cash, then such conversion or disposition
shall be deemed to constitute an Asset Sale hereunder and the Net Proceeds
thereof shall be applied in accordance with this covenant.
 
     The Company will comply with the requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes and Additional Notes, if any, as a result of a
Change of Control or an Asset Sale.
 
CERTAIN COVENANTS
 
     RESTRICTED PAYMENTS
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any distribution of any kind or character (whether in cash,
securities or other property) on account of any class of the Company's or any of
its Restricted Subsidiaries' Equity Interests or to holders thereof (including,
without limitation, any payment to stockholders of the Company in connection
with a merger or consolidation involving the Company), other than (a) dividends
or distributions payable solely in Equity Interests (other than Disqualified
Stock) of the Company or (b) dividends or distributions payable solely to the
Company or any Wholly Owned Restricted Subsidiary of the Company and, if such
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary of the
Company, payable simultaneously to its minority shareholders on a pro rata
basis; (ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company, any Restricted Subsidiary of the Company or any
Unrestricted Subsidiary or any other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Restricted
Subsidiary of the Company); (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness of the
Company or any Guarantor that is pari passu with or subordinated to the Notes or
the Guarantees prior to any scheduled repayment date, mandatory sinking fund
payment date or final maturity date (other than the Notes), except at final
maturity, other than through the purchase, redemption or acquisition by the
Company of Indebtedness of the Company or any of its Restricted Subsidiaries
through the issuance in exchange therefor of Equity Interests (other than
Disqualified Stock); or (iv) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
 
          (a) no Default or Event of Default shall have occurred and be
     continuing or would occur as a consequence thereof;
 
          (b) at the time of such Restricted Payment and after giving pro forma
     effect thereto as if such Restricted Payment had been made at the beginning
     of the applicable four-quarter period, the Company would have been
     permitted to incur at least $1.00 of additional Indebtedness pursuant to
     the Fixed Charge Coverage Ratio test set forth in the first paragraph of
     the covenant described below under the caption "-- Incurrence of
     Indebtedness and Issuance of Preferred Stock"; and
 
          (c) such Restricted Payment, together with the aggregate amount of all
     other Restricted Payments declared or made by the Company and its
     Restricted Subsidiaries on or after the date of the Indenture
 
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     (excluding Restricted Payments permitted by clauses (ii), (iii) and (iv) of
     the next succeeding paragraph), is less than the sum of (i) 50% of the
     Consolidated Net Income of the Company for the period (taken as one
     accounting period) from the beginning of the first fiscal quarter
     commencing after the date of the Indenture to the end of the Company's most
     recently ended fiscal quarter for which internal financial statements are
     available at the time of such Restricted Payment (or, if such Consolidated
     Net Income for such period is a deficit, less 100% of such deficit), plus
     (ii) 100% of the aggregate net cash proceeds received by the Company from
     the issue or sale after the date of the Indenture of Equity Interests of
     the Company or of debt securities of the Company that have been converted
     into such Equity Interests (other than Equity Interests (or convertible
     debt securities) sold to a Restricted Subsidiary of the Company or an
     Unrestricted Subsidiary and other than Disqualified Stock or debt
     securities that have been converted into Disqualified Stock) or from a
     contribution to the capital of the Company, plus (iii) an amount equal to
     the net reduction in Restricted Investments by the Company and its
     Restricted Subsidiaries, subsequent to the date of the Indenture, upon the
     disposition, liquidation or repayment (including by way of dividends)
     thereof, but only to the extent such amounts are not included in
     Consolidated Net Income and not to exceed in the case of any Restricted
     Investment, the amount of the Restricted Investment previously made by the
     Company and its Restricted Subsidiaries, plus (iv) $10 million.
 
     The foregoing clauses (b) and (c), however, will not prohibit (i) the
payment of any dividend on any class of Capital Stock of the Company or any
Restricted Subsidiary of the Company within 60 days after the date of
declaration thereof, if on the date on which such dividend was declared such
payment would have complied with the provisions of the Indenture; (ii) the
making of any Restricted Investment in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Restricted Subsidiary of the
Company or to any Unrestricted Subsidiary) of Equity Interests of the Company
(other than Disqualified Stock) or from a contribution to the capital of the
Company; provided that any net cash proceeds that are utilized for any such
Restricted Investment, and any Net Income resulting therefrom, shall be excluded
from clause (c) of the preceding paragraph; (iii) the redemption, repurchase,
retirement or other acquisition of any Equity Interests of the Company in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Restricted Subsidiary of the Company or to any Unrestricted
Restricted Subsidiary) of other Equity Interests of the Company (other than any
Disqualified Stock) or from a contribution to the capital of the Company;
provided that any net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition, and any Net Income resulting
therefrom, shall be excluded from clause (c) of the preceding paragraph; or (iv)
the defeasance, redemption or repurchase of pari passu or subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock) or from a contribution to the capital of the Company;
provided that any net cash proceeds that are utilized for any such defeasance,
redemption or repurchase, and any Net Income resulting therefrom, shall be
excluded from clause (c) of the preceding paragraph.
 
     The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an officers' certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment that itself or together
with Restricted Payments not previously reported pursuant to the requirements of
this sentence exceeds $1.0 million, the Company shall deliver to the Trustee an
officers' certificate stating that all such Restricted Payments are permitted
and setting forth the basis upon which the calculations required by the covenant
described under this caption were computed, which calculations may be based upon
the Company's latest available financial statements.
 
     INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, "incur") any Indebtedness
(including Acquired
 
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Indebtedness) and that the Company will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company and any Guarantor may incur
Indebtedness (including Acquired Indebtedness) and the Company may issue shares
of Disqualified Stock if: (i) the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been
equal to at least 2.25 to 1, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period; and (ii) no
Default or Event of Default shall have occurred and be continuing or would occur
as a consequence thereof.
 
     The foregoing limitations on the incurrence of Indebtedness will not apply
to:
 
    (i) the incurrence by the Company of Indebtedness under the New Credit
  Agreement (and the incurrence by the Guarantors of guarantees thereof) in an
  aggregate principal amount at any time outstanding (with letters of credit
  being deemed to have a principal amount equal to the maximum potential
  liability of the Company and its Restricted Subsidiaries thereunder) not to
  exceed $600 million (after giving effect to the repayment of the Tranche C
  Loan under the New Credit Agreement with the proceeds of the offering of the
  Outstanding Notes), less the aggregate amount of all Net Proceeds of Asset
  Sales applied to permanently reduce the outstanding amount or the commitments
  with respect to such Indebtedness pursuant to the covenant described above
  under the caption "-- Asset Sales";
 
    (ii) the incurrence by the Company and the Guarantors of Indebtedness
  represented by the Notes (other than the Additional Notes) and the Note
  Guarantees;
 
    (iii) the incurrence by the Company and the Guarantors of the Existing
  Indebtedness;
 
    (iv) the incurrence by the Company of Permitted Refinancing Indebtedness in
  exchange for, or the net proceeds of which are used to refund, refinance or
  replace any Indebtedness that is permitted to be incurred under clauses (ii)
  and (iii) above;
 
    (v) the incurrence by the Company or any of its Restricted Subsidiaries of
  intercompany Indebtedness between or among the Company and any of its Wholly
  Owned Restricted Subsidiaries or between or among any Wholly Owned Restricted
  Subsidiaries; provided that, in the case of Indebtedness of the Company, such
  obligations shall be unsecured and subordinated in all respects to the
  Company's obligations pursuant to the Notes; and provided, however, that (a)
  any subsequent issuance or transfer of Equity Interests that results in any
  such Indebtedness being held by a Person other than the Company or a Wholly
  Owned Restricted Subsidiary of the Company and (b) any sale or other transfer
  of any such Indebtedness to a Person that is not either the Company or a
  Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each
  case, to constitute an incurrence of such Indebtedness by the Company or such
  Restricted Subsidiary, as the case may be;
 
    (vi) the incurrence by the Company or any Guarantor of Hedging Obligations;
 
    (vii) the incurrence by the Company or any Guarantor of Indebtedness
  represented by Capital Lease Obligations, mortgage financings or Purchase
  Money Obligations, in each case incurred for the purpose of financing all or
  any part of the purchase price or cost of construction or improvement of
  property, plant or equipment used in the business of the Company or such
  Guarantor or any Permitted Refinancing Indebtedness thereof, in an aggregate
  principal amount not to exceed 3.5% of Consolidated Tangible Assets at any
  time outstanding;
 
    (viii) the incurrence by the Company and any Guarantor of Indebtedness
  represented by Guarantees of Indebtedness of such Guarantor or the Company, as
  applicable, permitted under the first paragraph of this covenant or clause
  (iv) of this covenant; and
 
    (ix) the incurrence by the Company and its Restricted Subsidiaries of
  Indebtedness (in addition to Indebtedness permitted by any other clause of
  this paragraph) in an aggregate principal amount at any time outstanding not
  to exceed $25 million.
 
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     For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness outstanding or to be incurred meets the criteria of
more than one of the types of Indebtedness described in the aforementioned
clauses, the Company, in its sole discretion, may classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
 
     LIENS
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any of its assets, now owned or hereafter
acquired, securing any Indebtedness other than Senior Indebtedness, unless the
Notes, in the case of the Company, or the Note Guarantees, in the case of the
Guarantors, are secured equally and ratably with such other Indebtedness;
provided that, if such Indebtedness is by its terms expressly subordinate to the
Notes or the Note Guarantees, the Lien securing such subordinate or junior
Indebtedness shall be subordinate and junior to the Lien securing the Notes or
the Note Guarantees with the same relative priority as such subordinated or
junior Indebtedness shall have with respect to the Notes or the Note Guarantees.
 
     DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries on its Capital Stock or with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any Indebtedness or
other obligation owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries,
(iii) sell, lease or transfer any of its properties or assets to the Company or
any of its Restricted Subsidiaries, or (iv) guarantee the obligations of the
Company evidenced by the Notes or any renewals, refinancings, replacements,
refundings or extensions thereof, except for such encumbrances or restrictions
existing under or by reason of (A) Existing Indebtedness as in effect on the
date of the Indenture, (B) the New Credit Agreement as in effect on the date of
the Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the New Credit Agreement as in effect on the date of the Indenture,
(C) the Indenture, the Notes and the Note Guarantees, (D) applicable law, (E)
any instrument governing Acquired Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Acquired Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (F) any
document or instrument governing Indebtedness incurred pursuant to clause (vii)
of the second paragraph under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," provided that any such restriction contained
therein relates only to the asset or assets constructed or acquired in
connection therewith, (G) any instrument that is a lease, license, conveyance or
contract or similar property or asset entered into or acquired in the ordinary
course of business and consistent with past practices that restricts in a
customary manner the subletting, assignment or transfer of any property, or (H)
Permitted Refinancing Indebtedness of Indebtedness described in Clauses (A), (B)
and (D) hereof, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
(I) secured Indebtedness otherwise permitted to be incurred pursuant to the
provisions described above under the caption "-- Liens" the terms of which limit
the right of the debtor to dispose of the assets securing such Indebtedness or
(J) any agreement entered into for the direct or indirect sale or disposition of
all or substantially all of the Capital Stock or assets of such Restricted
Subsidiary, provided that the transaction contemplated thereby shall be
consummated not later than 90 days after the date of such agreement.
 
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     LIMITATION ON LAYERING DEBT
 
     The Indenture provides that the Company and each Guarantor will not incur,
create, issue, assume, guarantee or otherwise become liable for any Indebtedness
or guarantee, as applicable, that is subordinate or junior in right of payment
to any Senior Indebtedness and senior in any respect in right of payment to the
Notes or such Guarantor's Note Guarantee, respectively.
 
     LINE OF BUSINESS
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, engage to any material extent in any business
other than the ownership, operation and management of Nursing Facilities and
Related Businesses.
 
     MERGER, CONSOLIDATION OR SALE OF ASSETS
 
     The Indenture provides that the Company will not, and the Company will not
permit any Restricted Subsidiary of the Company to, in a single transaction or
series of related transactions consolidate or merge with or into (other than the
consolidation or merger of a Wholly Owned Restricted Subsidiary of the Company
with another Wholly Owned Restricted Subsidiary of the Company or into the
Company) (whether or not the Company or such Restricted Subsidiary is the
surviving corporation), or directly and/or indirectly through its Restricted
Subsidiaries sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company and its
Restricted Subsidiaries (determined on a consolidated basis for the Company and
its Restricted Subsidiaries taken as a whole) in one or more related
transactions to, another corporation, Person or entity unless
 
          (i) either (a) the Company, in the case of a transaction involving the
     Company, or such Restricted Subsidiary, in the case of a transaction
     involving a Restricted Subsidiary of the Company, is the surviving
     corporation or (b) in the case of a transaction involving the Company or
     such Restricted Subsidiary, the entity or the Person formed by or surviving
     any such consolidation or merger (if other than the Company or such
     Restricted Subsidiary) or to which such sale, assignment, transfer, lease,
     conveyance or other disposition shall have been made is a corporation
     organized or existing under the laws of the United States of America, any
     state thereof or the District of Columbia and expressly assumes all the
     obligations of the Company under the Notes and the Indenture or such
     Restricted Subsidiary under the relevant Note Guarantee and the Indenture,
     as the case may be, pursuant to a supplemental indenture in a form
     reasonably satisfactory to the Trustee;
 
          (ii) immediately after such transaction no Default or Event of Default
     exists;
 
          (iii) in the case of a transaction involving the Company, the Company
     or, if other than the Company, the entity or Person formed by or surviving
     any such consolidation or merger, or to which such sale, assignment,
     transfer, lease, conveyance or other disposition shall have been made will,
     at the time of such transaction and after giving pro forma effect thereto
     as if such transaction had occurred at the beginning of the applicable
     four-quarter period, be permitted to incur at least $1.00 of additional
     Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
     the first paragraph of the covenant described above under the caption "--
     Incurrence of Indebtedness and Issuance of Preferred Stock";
 
          (iv) if, as a result of any such transaction, property or assets of
     the Company or a Guarantor would become subject to a Lien securing
     Indebtedness not permitted by the terms of the Indenture described above
     under the caption "-- Liens," the Company, any such Guarantor or the
     surviving entity, as the case may be, shall have secured the Notes and the
     relevant Note Guarantee, as required by such provisions; and
 
          (v) the Company shall have delivered to the Trustee an officers'
     certificate and, except in the case of a merger of a Restricted Subsidiary
     of the Company into the Company or into a Wholly Owned Restricted
     Subsidiary of the Company, an opinion of counsel, each stating that such
     consolidation, merger, conveyance, lease or disposition and any
     supplemental indenture with respect thereto, comply
 
                                       95
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     with all of the terms of this covenant and that all conditions precedent
     provided for in this provision relating to such transaction or series of
     transactions have been complied with.
 
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
 
     TRANSACTIONS WITH AFFILIATES
 
     The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, after the date of the
Indenture, in any one transaction or a series of related transactions, sell,
lease, transfer or otherwise dispose of any of its properties, assets or
services to, or make any payment to, or purchase any property, assets or
services from, or enter into or make any agreement, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), other than Exempt Affiliate Transactions, unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable arm's length transaction by the Company or such Restricted Subsidiary
with a Person that is not an Affiliate and (ii) the Company delivers to the
Trustee (a) with respect to any Affiliate Transaction entered into after the
date of the Indenture involving aggregate consideration in excess of $5.0
million, a resolution of the Board of Directors of the Company set forth in an
officers' certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors of the Company
or, if there are no disinterested members of the Board of Directors at the time,
a written opinion issued by an independent financial advisor of national
standing that such Affiliate Transaction is fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view and
(b) with respect to any Affiliate Transaction involving aggregate consideration
in excess of $10.0 million, a written opinion issued by an independent financial
advisor of national standing that such Affiliate Transaction is fair to the
Company or such Restricted Subsidiary, as the case may be, from a financial
point of view.
 
     LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
 
     The Company (a) will not permit any Restricted Subsidiary to issue any
Capital Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) and (b) will not, and will not permit any Restricted Subsidiary to,
transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any
Restricted Subsidiary to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); provided, however, that this covenant will not prohibit
(i) the sale or other disposition of all, but not less than all, of the issued
and outstanding Capital Stock of a Restricted Subsidiary owned by the Company
and its Restricted Subsidiaries in compliance with the other provisions of the
Indenture, or (ii) the ownership by directors of director's qualifying shares or
the ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law.
 
     The Company will not permit any Restricted Subsidiary to issue any
Preferred Stock.
 
     REPORTS
 
     The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes, and file with the Trustee, (a) prior to
the filing of a registration statement with respect to the Exchange Offer or a
Shelf Registration Statement, the information specified in Rule 144A(d)(4) under
the Securities Act and (b) after the filing of a registration statement with
respect to the Exchange Offer or a Shelf Registration Statement, within 15 days
after it is or would have been required to file such with the Commission (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's
 
                                       96
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Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the Commission, at any time after the Company files a
registration statement with respect to the Exchange Offer or a Shelf
Registration Statement, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company has
agreed that, for so long as any Notes remain outstanding, it will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information specified in Rule 144A(d)(4) under the Securities Act.
 
     EVENTS OF DEFAULT AND REMEDIES
 
     The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company to comply with the provisions
described under the captions "Repurchase at Option of Holders -- Change of
Control," "Repurchase at Option of Holders -- Asset Sales," "Certain Covenants
- -- Restricted Payments," "-- Incurrence of Indebtedness and Issuance of
Preferred Stock" or "-- Merger, Consolidation or Sale of Assets"; (iv) failure
by the Company to consummate the merger of AHC Acquisition Corp. with and into
Arbor Health Care Company not later than the 90th day after the Closing Date;
(v) failure by the Company to comply with any of its other agreements or
covenants in the Indenture or the Notes for 60 days after written notice by the
Trustee or Holders of at least 25% of the aggregate principal amount of the
Notes outstanding; (vi) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of such Indebtedness at final maturity thereof (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
as to which there has been a Payment Default or the maturity of which has been
so accelerated, exceeds in the aggregate $20 million; (vii) failure by the
Company or any of its Restricted Subsidiaries to pay final judgments (not fully
covered by insurance) which exceed in the aggregate $20 million, which judgments
are not paid, discharged or stayed for a period of 60 days; (viii) certain
events of bankruptcy, insolvency or reorganization with respect to the Company
or any of its Restricted Subsidiaries; and (ix) the Note Guarantee of any
Guarantor is held in any judicial proceeding to be unenforceable or invalid or
ceases for any reason to be in full force and effect (other than in accordance
with the terms of the Indenture) or any Guarantor or any Person acting on behalf
of any Guarantor denies or disaffirms such Guarantor's obligations under its
Note Guarantee (other than by reason of a release of such Guarantor from its
Note Guarantee in accordance with the terms of the Indenture).
 
     If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of all of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
After such acceleration, but before a judgment or decree based on acceleration,
the Holders of a majority in aggregate principal amount of outstanding Notes
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of principal, interest or premium
that have become due solely because of such acceleration, have been cured or
waived as provided in the Indenture. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or insolvency
with respect to the Company or any Restricted Subsidiary of the Company, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise
 
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of any trust or power. The Indenture provides that if a Default occurs and is
continuing, generally the Trustee must give notice of such Default to the
Holders within 90 days after the occurrence of such Default. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or premium, if any, or interest) if it determines that withholding
notice is in their interest.
 
     The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest or premium, or the principal of, any Note except a Payment Default
resulting from an acceleration that has been rescinded or in respect of a
provision that cannot be amended or waived without the consent of the Holder
affected. See "Amendment, Supplement and Waiver."
 
     The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon becoming aware of any Default
or Event of Default, the Company is required to deliver to the Trustee a
statement specifying such Default or Event of Default.
 
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
 
     No director, officer, employee, incorporator or stockholder of the Company,
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. No director, officer, employee,
incorporator or stockholder of any Guarantor, as such, shall have any liability
for any obligations of such Guarantor under its Note Guarantee 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 and the Note Guarantees. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
 
     At its option and at any time, the Company may elect to have all of the
obligations of the Company and the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due from the trust
referred to below, (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 payment and
money for security payments held in trust, (iii) the Company's obligations under
the Registration Rights Agreement, (iv) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection therewith
and (v) 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 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 Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including nonpayment, bankruptcy, receivership, rehabilitation 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 irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, U.S. 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 outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Notes are being defeased to maturity or to
a particular redemption date; (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
 
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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 of the
outstanding Notes 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 of the outstanding Notes 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 borrowing of funds to be 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 will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound; (vi) the Company must deliver to the Trustee
an officers' certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Notes over other creditors of the
Company or the Guarantors or with the intent of defeating, hindering, delaying
or defrauding creditors of the Company, the Guarantors or others; (vii) the
Company must have delivered an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (viii) the Company must deliver to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent relating to Legal Defeasance or Covenant
Defeasance, as the case may be, have been complied with.
 
TRANSFER AND EXCHANGE
 
     A Holder may transfer or exchange Notes in accordance with the Indenture.
The Trustee will act as paying agent and registrar for the Notes. The Company,
the Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents as well as
certifications, legal opinions and other information and the Company may require
a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
 
     The registered Holder of a Note will be treated as the owner of it for all
purposes.
 
AMENDMENT, SUPPLEMENT AND WAIVER
 
     Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for the
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for the Notes).
 
     Without the consent of each Holder affected, an amendment or waiver may
not: (i) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or premium on or
change the fixed maturity of any Note or alter the provisions with respect to
the redemption of the Notes (other than provisions relating to the covenants
described above under the caption "-- Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in
 
                                       99
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aggregate principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other than
that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of or premium, if any, or interest on the
Notes, (vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), (viii) modify the ranking or priority of
the Notes or the Note Guarantee of any Guarantor, (ix) release any Guarantor
from any of its obligations under its Note Guarantee or the Indenture other than
in accordance with the terms of the Indenture or (x) make any change in the
foregoing amendment and waiver provisions.
 
     Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of Certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
 
     Notwithstanding the foregoing, neither the Company nor the Trustee may
amend any provisions of the Indenture or the Notes concerning (i) the
subordination of the Notes and the Note Guarantees or (ii) legal defeasance or
convenant defeasance without, in either case, the prior written consent of the
Agent Bank, acting on behalf of the Lenders under the New Credit Agreement.
 
PAYMENTS FOR CONSENT
 
     Neither the Company nor any of its Restricted Subsidiaries shall, directly
or indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any terms or provisions of the Notes,
unless such consideration is offered to be paid or agreed to be paid to all
Holders of the Notes which so consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
 
CONCERNING THE TRUSTEE
 
     The Bank of Nova Scotia Trust Company of New York, will be the Trustee
under the Indenture. The Trustee's current address is One Liberty Plaza, 23rd
Floor, New York, New York 10006.
 
     The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not have been cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
 
ADDITIONAL INFORMATION
 
     Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Extendicare Health
Services, Inc., 105 W. Michigan Street, 9th Floor, Milwaukee, Wisconsin 53203,
Attention: Robert J. Abramowski, Vice President of Finance and Chief Financial
Officer.
 
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BOOK-ENTRY, DELIVERY AND FORM
 
     Except as set forth below, the Exchange Notes will be issued in the form of
a global note (the "Global Note"). The Global Note will be deposited with, or on
behalf of, the Depository and registered in the name of the Depository or its
nominee. Investors may hold their beneficial interests in the Global Note
directly through the Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the Depository.
 
     The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934 (the "Exchange Act"). The Depository was created to hold securities
of institutions that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in the
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. The Depository's participants include securities
brokers and dealers (which may include the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
 
     The Depository will credit, on its book-entry registration and transfer
system, the respective principal amounts of the Exchange Notes represented by
the Global Note to the accounts of participants. Ownership of beneficial
interests in the Global Note will be limited to participants or persons that may
hold interests through participants. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of those ownership interests will
be effected only through, records maintained by the Depository (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
 
     So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Exchange Notes
for all purposes of such Exchange Notes and the Indenture. Except as set forth
below, owners of beneficial interests in the Global Note will not be entitled to
have the Exchange Notes represented by the Global Note registered in their
names, will not receive or be entitled to receive physical delivery of
certificated Exchange Notes in definitive form and will not be considered to be
the owners or holders of any Exchange Notes under the Global Note. Accordingly,
each person owning a beneficial interest in the Global Note must rely on the
procedures of the Depository and, if such person is not a participant, on the
procedures of the participant through which such person owns its interests, to
exercise any right of a holder of Exchange Notes under the Global Note. The
Company understands that under existing industry practice, in the event an owner
of a beneficial interest in the Global Note desires to take any action that the
Depository, as the holder of the Global Note, is entitled to take, the
Depositary would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
 
     Payment of principal of and interest on Exchange Notes represented by the
Global Note registered in the name of and held by the Depository or its nominee
will be made to the Depository or its nominee, as the case may be, as the
registered owner and holder of the Global Note.
 
     The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payment in amounts proportionate to their respective
beneficial interests in the principal amount of the Global Note as shown on the
records of the Depository or its nominee. The Company also expects that payments
by participants to owners of beneficial interests in the Global Note held
through such participants will be governed by standing instructions and
customary practices and will be the responsibility of such participants. The
Company will not have any
 
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responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Note
for any Exchange Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for other aspects of the
relationship between the Depository and its participants or the relationship
between such participants and the owners of beneficial interests in the Global
Note owning through such participants.
 
     Unless and until it is exchanged in whole or in part for certificated
Exchange Notes in definitive form, the Global Note may not be transferred except
as a whole by the Depository to a nominee of such Depository or by a nominee of
such Depository to such Depository or another nominee of such Depository.
 
     Beneficial owners of Exchange Notes registered in the name of the
Depository or its nominee will be entitled to be issued, upon request, Exchange
Notes in definitive certificated form.
 
CERTIFICATED NOTES
 
     The Exchange Notes represented by the Global Note are exchangeable for
certificated Exchange Notes ("Certificated Exchange Notes") in definitive form
of like tenor as such Exchange Notes in denominations of $1,000 and integral
multiples thereof if (i) the Depository notifies the Company that it is
unwilling or unable to continue as Depository for the Global Note or if at any
time the Depository ceases to be a clearing agency registered under the Exchange
Act, (ii) the Company in its discretion at any time determines not to have any
of the Exchange Notes represented by the Global Note or (iii) a default
entitling the holders of the New Notes to accelerate the maturity thereof has
occurred and is continuing. Any Exchange Note that is exchangeable pursuant to
the preceding sentence is exchangeable for Certificated Exchange Notes issuable
in authorized denominations and registered in such names as the Depository shall
direct.
 
     Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers or interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
 
CERTAIN DEFINITIONS
 
     Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
 
     "Acquired Indebtedness" means, with respect to any specified Person, (i)
any Indebtedness or Disqualified Stock of any other Person existing at the time
such other Person is merged with or into or becomes a Restricted Subsidiary of
such specified Person, including, without limitation, Indebtedness incurred in
connection with, or in contemplation of, such other Person merging with or into
or becoming a Restricted Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person, and in either case for purposes of the Indenture, shall be deemed to be
incurred by such specified Person at the time such other Person is merged with
or into or becomes a Restricted Subsidiary of such specified Person or at the
time such asset is acquired by such specified Person, as the case may be.
 
     "Affiliate" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer of (a) such specified Person or (b) any Person described in
the preceding clause (i). 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.
 
     "Agent Bank" means NationsBank, N.A. and its successors under the New
Credit Agreement, in its capacity as agent.
 
                                       102
   105
 
     "Asset Sale" means with respect to any Person, the sale, lease, conveyance
or other disposition, by such Person of any of its assets (including, without
limitation, (w) a sale and leaseback, (x) the issuance, sale or other transfer
of any Equity Interests in any Restricted Subsidiary of the Company, (y) the
sale or transfer of Equity Interests in any Unrestricted Subsidiary and (z) the
receipt of proceeds of insurance paid on account of the loss of or damage to any
asset and awards of compensation for any asset taken by condemnation, eminent
domain or similar proceeding, and including the receipt of proceeds of business
interruption insurance), in each case, in one or a series of related
transactions, that have a fair market value in excess of $1,000,000 or for Net
Proceeds in excess of $1,000,000; provided that notwithstanding the foregoing,
the term "Asset Sale" shall not include: (a) the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of the
Company, in accordance with the terms of the covenant described under the
caption "Certain Covenants -- Merger, Consolidation or Sale of Assets," (b) the
sale or lease of equipment, inventory, accounts receivable or other assets in
the ordinary course of business consistent with past practice, (c) a transfer of
assets by the Company to a Wholly Owned Restricted Subsidiary of the Company or
by a Wholly Owned Restricted Subsidiary of the Company to the Company or to
another Wholly Owned Restricted Subsidiary of the Company, (d) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary of the Company to the
Company or to another Wholly Owned Restricted Subsidiary of the Company,
provided that the consideration paid by the Company or such Wholly Owned
Restricted Subsidiary of the Company for such Equity Interests shall be deemed
to be an Investment, (e) the sale or other disposition of cash or Cash
Equivalents, (f) a Restricted Payment that is permitted by the covenant
described above under the caption "-- Restricted Payments," (g) sales of
property or equipment that have become worn out, obsolete or damaged, or (h) the
designation of any Restricted Subsidiary as an Unrestricted Subsidiary or the
contribution to the capital of any Unrestricted Subsidiary in accordance with
the applicable provisions of the Indenture.
 
     "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 a balance sheet in accordance with
GAAP.
 
     "Capital Stock" means (i) in the case of a corporation, capital stock, (ii)
in the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of capital
stock, (iii) in the case of partnership, partnership interests (whether general
or limited) and (iv) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
 
     "Cash Equivalent" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than six months
from the date of acquisition, (b) U.S. dollar denominated (or foreign currency
fully hedged) time deposits, certificates of deposit, Eurodollar time deposits
or Eurodollar certificates of deposit of (i) any domestic commercial bank of
recognized standing having capital and surplus in excess of $500 million or (ii)
any bank whose short-term commercial paper rating from S&P is at least A-1 or
the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof
(any such bank being an "Approved Lender"), in each case with maturities of not
more than six months from the date of acquisition, and (c) commercial paper
issued by any Approved Lender (or by the parent company thereof) and maturing
within six months of the date of acquisition.
 
     "Change of Control" means such time as either:
 
          (i) any Person or group (within the meaning of Section 13(d) or 14(d)
     of the Exchange Act) other than the Permitted Holders that has become,
     directly or indirectly, the beneficial owner, by way of merger,
     consolidation or otherwise, of (A) 35% or more of the voting power of the
     Voting Stock of Extendicare on a fully-diluted basis and the Permitted
     Holders beneficially own, directly or indirectly, Voting Stock of
     Extendicare that represents a lesser percentage of the aggregate voting
     power of all classes of Voting Stock of Extendicare, voting together as a
     single class, than such person or group, or (B) 50% or more of the voting
     power of the Voting Stock of the Company on a fully diluted basis, after
     giving effect to the conversion and exercise of all outstanding warrants,
     options and other securities of the
 
                                       103
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     Company convertible or exercisable for Voting Stock of the Company (in each
     case, whether or not such securities are then currently convertible or
     exercisable); or
 
          (ii) the sale, lease or transfer to any Person or Group of all or
     substantially all of the assets of (A) the Company, other than in
     compliance with the terms of the covenant described above under the caption
     "Certain Covenants -- Merger, Consolidation or Sale of Assets," or (B)
     Extendicare, other than to the Permitted Holders;
 
          (iii) during any period of two consecutive calendar years, individuals
     who at the beginning of such period constituted the Board of Directors of
     Extendicare or the Company, together with any new members of such Board of
     Directors whose election by such Board of Directors or whose nomination for
     election by the stockholders of Extendicare or the Company, as applicable
     was approved by a vote of a majority of the members of such Board of
     Directors then still in office who either were directors at the beginning
     of such period or whose election or nomination for election was previously
     so approved, cease for any reason to constitute a majority of the directors
     of Extendicare or the Company then in office; or
 
          (iv) Extendicare or the Company consolidates or amalgamates with or
     merges with or into another Person or any Person consolidates or
     amalgamates with, or merges with or into, Extendicare or the Company (in
     the case of the Company, whether or not in compliance with the terms of the
     Indenture), in any such event pursuant to a transaction in which
     immediately after the consummation thereof Persons owning a majority of the
     Voting Stock of Extendicare or the Company, as applicable, immediately
     prior to such consummation shall cease to own a majority of the Voting
     Stock of Extendicare or the Company, as applicable, or the surviving entity
     if other than Extendicare or the Company.
 
     "Consolidated EBITDA" means, with respect to any Person for any period, the
sum of, without duplication, (i) the Consolidated Net Income of such Person and
its Restricted Subsidiaries for such period, plus (ii) the Fixed Charges for
such period, plus (iii) provision for taxes based on income or profits for such
period (to the extent such income or profits were included in computing
Consolidated Net Income for such period), plus (iv) consolidated depreciation,
amortization and other noncash charges of such Person and its Restricted
Subsidiaries required to be reflected as expenses on the books and records of
such Person, minus (v) cash payments with respect to any nonrecurring, noncash
charges previously added back pursuant to clause (iv), and excluding (vi) the
impact of foreign currency translations. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization and other noncash charges of, a Restricted Subsidiary of a Person
shall be added to Consolidated Net Income to compute Consolidated EBITDA only to
the extent (and in the same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to such Person by such Restricted Subsidiary
without prior approval (unless such approval has been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
 
     "Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions actually paid in cash to the referent Person or a Wholly Owned
Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(unless such approval has been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) solely for purposes of the
covenant entitled "Certain Covenants -- Restricted Payments," the Net Income of
any Person acquired in a pooling of interests transaction for any period prior
to the date of such acquisition shall be excluded and (iv) the cumulative effect
of a change in accounting principles shall be excluded.
 
                                       104
   107
 
     "Consolidated Tangible Assets" means, as of the date of determination, the
total assets, less goodwill and other intangibles (other than patents,
trademarks, copyrights, licenses and other intellectual property), shown on the
balance sheet of the Company and its Restricted Subsidiaries as of the most
recent date for which such a balance sheet is available, determined on a
consolidated basis in accordance with GAAP less all write-ups (other than
writeups in connection with acquisitions) subsequent to the date of the
Indenture in the book value of any asset (except any such intangible assets)
owned by the Company or any of its Restricted Subsidiaries. At September 30,
1997, on a pro forma basis giving effect to the Acquisition, the Consolidated
Tangible Assets of the Company were approximately $967 million.
 
     "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.
 
     "Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) any other Senior Indebtedness
permitted under the Indenture the principal amount of which is $50 million or
more and that has been designated by the Company as "Designated Senior
Indebtedness."
 
     "Disqualified Stock" means (a) with respect to any Person, Capital Stock of
such Person that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any event
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the Holder thereof, in whole or in
part, on or prior to the date which is one year after the date on which the
Notes mature and (b) with respect to any Restricted Subsidiary of such Person
(including with respect to any Restricted Subsidiary of the Company), any
Capital Stock other than any common stock with no preference, privileges, or
redemption or repayment provisions.
 
     "Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock), whether outstanding prior
to, on or after the date of the Indenture.
 
     "Equity Offering" means a public or private offering of Capital Stock
(other than Disqualified Stock) of the Company and shall be deemed to include,
without limitation, any capital contribution (whether or not against the
issuance of additional Capital Stock of the Company) by Extendicare or its
subsidiaries (other than the Company) to the Company.
 
     "Exempt Affiliate Transactions" means (a) transactions between or among the
Company and/or its Wholly Owned Restricted Subsidiaries, (b) advances to
officers of the Company or any Restricted Subsidiary of the Company in the
ordinary course of business to provide for the payment of reasonable expenses
incurred by such persons in the performance of their responsibilities to the
Company or such Restricted Subsidiary or in connection with any relocation, (c)
fees and compensation paid to and indemnity provided on behalf of directors,
officers or employees of the Company or any Restricted Subsidiary of the Company
in the ordinary course of business, (d) any employment agreement that is in
effect on the date of the Indenture in the ordinary course of business and any
such agreement entered into by the Company or a Restricted Subsidiary of the
Company after the date of the Indenture in the ordinary course of business of
the Company or such Restricted Subsidiary, (e) any Restricted Payment that is
not prohibited by the covenant set forth under the caption "Certain Covenants --
Restricted Payments" above (f) payment of premiums to and the receipt of
proceeds of insurance from, Laurier Indemnity Company and Laurier Indemnity
Company, Ltd. and (g) payments to or receipts from Extendicare Holdings, Inc.
pursuant to any tax sharing agreement entered into for the purpose of preparing
a consolidated tax return of Extendicare Holdings, Inc.
 
     "Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the New Credit Agreement)
in existence on the date of the Indenture, until such amounts are repaid.
 
     "Extendicare" means Extendicare Inc., the Company's indirect parent.
 
     "Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Restricted
Subsidiaries for such period to the Fixed Charges of
 
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such Person and its Restricted Subsidiaries for such period. In the event that
the Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
repays or redeems any Indebtedness (other than revolving credit borrowings) or
issues or redeems preferred stock subsequent to the commencement of the
four-quarter reference period for which the Fixed Charge Coverage Ratio is being
calculated but on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, guarantee, repayment or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period, and (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
 
     "Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period (net of any interest income)
including, without limitation, amortization of original issue discount, noncash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations, but excluding amortization of deferred
financing charges for such period, (ii) the consolidated interest expense of
such Person and its Restricted Subsidiaries that was capitalized during such
period, (iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and noncash dividend payments in the case of a Person that is
a Restricted Subsidiary) on any series of preferred stock of such Person payable
to a party other than the Company or a Wholly Owned Restricted Subsidiary,
multiplied by (b)a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, on a consolidated
basis and in accordance with GAAP.
 
     "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession of the United States that are applicable to the circumstances as of
the date of determination;
 
     "guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
 
     "Guarantor" means AHC Acquisition Corp., each other existing Restricted
Subsidiary of the Company organized within the United States, each Restricted
Subsidiary of the Company organized within the United States formed or acquired
(and each other Person that becomes a Restricted Subsidiary of the Company)
after the date of the Indenture and each other Restricted Subsidiary of the
Company organized within the United States that guarantees the Company's
obligations under the New Credit Agreement or any other Senior Indebtedness;
provided that Arbor Health Care Company and its Restricted Subsidiaries shall
not become Guarantors until the consummation of the Merger.
 
                                       106
   109
 
     "Hedging Obligations" means, with respect to any Person, the obligations of
such Person entered into in the ordinary course of business under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and other similar financial agreements or arrangements designed to
protect such Person against, or manage the exposure of such Person to,
fluctuations in interest rates, and (ii) forward exchange agreements, currency
swap, currency option and other similar financial agreements or arrangements
designed to protect such Person against, or manage the exposure of such Person
to, fluctuations in foreign currency exchange rates.
 
     "Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations, or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable
incurred in the ordinary course of business, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all Indebtedness of others secured by a Lien on
any asset of such Person (whether or not such Indebtedness is assumed by such
Person) and, to the extent not otherwise included, the guarantee by such Person
of any Indebtedness of any other Person.
 
     "Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or indirect
loans (including guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding advances to officers and employees of the type
specified in clause (b) of the definition of Exempt Affiliate Transactions),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP,
provided that an acquisition of assets, Equity Interests or other securities by
the Company or any of its Restricted Subsidiaries for consideration consisting
solely of Equity Interests (other than Disqualified Stock) of the Company or
Extendicare shall not be deemed to be an Investment, and provided further that
Investments shall not be deemed to include extensions of trade credit by the
Company or any of its Restricted Subsidiaries on commercially reasonable terms
in accordance with normal trade practices.
 
     "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
 
     "Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
 
     "Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
noncash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions), taxes paid or payable as a
result thereof, and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
 
     "New Credit Agreement" means that certain credit agreement, dated as of the
date of the Indenture, by and among the Company and NationsBank, N.A., as agent,
and the lenders parties thereto, including any
 
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related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
increased, renewed, refunded, replaced, restated or refinanced from time to
time.
 
     "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Restricted Subsidiary) would permit (upon notice,
lapse of time or both) any holder of any other Indebtedness of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
 
     "Nursing Facility" means a nursing facility, hospital, outpatient clinic,
assisted living center, long-term care facility, subacute care facility or
retirement facility that is used or useful in the provision of healthcare
services.
 
     "Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
 
     "Permitted Holders" means, as of the date of determination, Kingfield
Investments Limited and Scotia Investments Limited and their respective
Affiliates (in each case, so long as controlled by (i) in the case of Kingfield
Investments Limited, H. Michael Burns or his Permitted Transferees and (ii) in
the case of Scotia Investments Limited, members of the family of the late R. A.
Jodrey or his Permitted Transferees).
 
     "Permitted Investments" means (a) any Investments in the Company; (b) any
Investments in Cash Equivalents; (c) Investments made as a result of the receipt
of noncash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "Repurchase at
the Option of Holders -- Asset Sales"; (d) Investments outstanding as of the
date of the Indenture; (e) Investments in Wholly Owned Restricted Subsidiaries
of the Company and any entity that (i) is engaged in the same or a similar line
of business as the Company or any of its Restricted Subsidiaries was engaged in
on the date of the Indenture or any Related Businesses and (ii) as a result of
such Investment, becomes a Wholly Owned Restricted Subsidiary of the Company or
such entity is merged or consolidated with or into, or transfer or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company (or, if the Investment in the
entity is by means of a tender offer for Capital Stock of such entity, Capital
Stock is acquired in an amount sufficient under the laws of the jurisdiction of
incorporation of such entity to cause the subsequent merger of such entity with
the Company or a Wholly Owned Restricted Subsidiary, provided that such merger
is completed within 90 days of the completion of the tender offer); (f) Hedging
Obligations to the extent permitted under clause (vi) of the second paragraph of
the covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock"; (g) other Investments in any Person having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (g) that are at the time
outstanding, not to exceed $7.0 million; (h) loans and advances to employees
made in the ordinary course of business; (i) Investments in prepaid expenses,
negotiable instruments held for collection, and lease, utility and worker's
compensation, performance and other similar deposits; and (j) Investments made
in exchange for accounts receivable arising in the ordinary course of business
which have not been collected for 270 days and which are, in the good faith of
the Company and its Restricted Subsidiaries, substantially uncollectible.
 
     "Permitted Transferees" means, with respect to any Person: (i) the referent
Person's parents, spouse, siblings, children (natural or adopted), grandchildren
or other issue; (ii) trusts the primary beneficiaries of which are any of the
foregoing persons or any charitable organization designated by any of them,
which trusts are controlled, directly or indirectly, by the referent Person and
any of the persons under clauses (i) or (iv); (iii) corporations, partnerships,
limited liability companies and other persons if at least 80% of the economic
interest in any such person is owned by the Referent Person and any of the
persons under clause (i) or any
 
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charitable organization designated by any of them; and (iv) in the case of any
person in clause (i), the heirs, executors, administrators or personal
representatives upon the death of such person or upon the incompetency or
disability of such person for the purposes of the protection and management of
such individual's assets.
 
     "Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded plus the lesser of
the amount of any premium required to be paid in connection with such
refinancings pursuant to the terms of such indebtedness or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary of the Company that is the obligor
on the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
 
     "Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust unincorporated
organization or government or any agency or political subdivision thereof.
 
     "Preferred Stock" means, with respect to any person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated) of such person's preferred or preference stock, whether now
outstanding or issued after the Closing Date, and including, without limitation,
all classes and series of preferred or preference stock of such person.
 
     "Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
construction and/or acquisition of real or personal property to be used in the
business of such Person or any of its Subsidiaries in an amount that is not more
than 100% of the cost of such property, and incurred within 90 days after the
date of such construction or acquisition (excluding accounts payable to trade
creditors incurred in the ordinary course of business); provided, however, that
any Lien on such Indebtedness shall not extend to any property other than the
property so acquired or constructed.
 
     "Related Businesses" means the business conducted by the Company and its
Restricted Subsidiaries as of the date of the Indenture and any and all
healthcare service businesses that in the good faith judgment of the Board of
Directors of the Company are materially related businesses, which shall include
the operation of Nursing Facilities, long-term and specialty healthcare
services, skilled nursing care, subacute care, rehabilitation programs,
therapies, pharmaceutical services, participation in provider service
organizations, health care information services business, distribution of
medical supplies, geriatric care and home healthcare or other businesses which
provide ancillary services to residents in long-term and specialty healthcare
facilities.
 
     "Restricted Investment" means any Investment other than a Permitted
Investment.
 
     "Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary of the referent Person.
 
     "Senior Bank Debt" means the Obligations outstanding under the New Credit
Agreement.
 
     "Senior Indebtedness" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by the Company or any Guarantor under the
terms of the Indenture, unless the instrument under
 
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which such Indebtedness is incurred expressly provides that it is subordinated
in right of payment to any Indebtedness for money borrowed. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not include
(w) any liability for federal, state, local or other taxes owed or owing, (x)
any Indebtedness of the Company to any of its Restricted Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness to the extent that it
is incurred in violation of the Indenture.
 
     "Senior Revolving Debt" means revolving credit borrowings and letters of
credit under the New Credit Agreement and/or any successor facility or
facilities.
 
     "Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
 
     "Unrestricted Subsidiary" means (i) any Person that (a) at the time of
determination shall be designated an Unrestricted Subsidiary by the Board of
Directors of the Company in the manner provided below and (b) would, but for
such designation, be a Restricted Subsidiary of the Company and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Restricted Subsidiary of the Company to be an Unrestricted
Subsidiary unless at the time of designation, such Subsidiary or any Subsidiary
of such Subsidiary owns any Capital Stock or Indebtedness of, or owns or holds
any Lien on any property of, the Company or any Restricted Subsidiary of the
Company; provided, however, that the amount of the Investment by the Company or
any of its Restricted Subsidiaries in such Unrestricted Subsidiary would be
permitted under " -- Certain Covenants -- Restricted Payments" as a "Restricted
Payment" after giving effect to the designation; and provided further that any
Indebtedness incurred by any Unrestricted Subsidiary shall be Non-Recourse Debt.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, however, that immediately after giving
pro forma effect to such designation (1) the Company could incur $1.00 of
additional Indebtedness pursuant to the Consolidated Interest Coverage Ratio
test in " -- Certain Covenants -- Limitation on Indebtedness" and (2) no Default
or Event of Default shall have occurred and be continuing. Any such designation
by the Board of Directors of the Company shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect to
such designation and an officers' certificate certifying that such designation
complies with the foregoing provisions.
 
     "U.S. Government Obligations" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof; and (ii) depositary receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (i) above and held
by such bank for the account of the holder of such depositary receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depositary receipt.
 
     "Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
 
     "Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
 
                                       110
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payments at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
 
     "Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
 
                                       111
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                   CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
 
     The following is a summary of certain United States federal income tax
considerations to persons who acquired the Outstanding Notes on original
issuance for cash and who hold the Exchange Notes subsequent to the Exchange
Offer. It does not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), proposed, temporary and final Treasury
Regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now
in effect, all of which are subject to change (possibly with retroactive effect)
or different interpretations. This summary is not intended to be wholly
applicable to all categories of investors, some of which, such as dealers in
securities, banks, financial institutions, insurance companies and tax-exempt
organizations, may be subject to special rules. In addition, this summary is
limited to persons that will hold the Notes as a "capital asset" within the
meaning of Section 1221 of the Code. Further, this summary does not address the
effect of any applicable United States federal estate tax or any state, local or
other tax laws. ACCORDINGLY, INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED
STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL
AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN
TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
 
     The exchange of an Outstanding Note by a holder for an Exchange Note should
not constitute a taxable exchange and thus should not result in income, gain or
loss to holders of Notes who participate in the Exchange Offer or to the
Company. Such holders should have the same adjusted basis and holding period in
the Exchange Notes immediately after the exchange as the holders had in the
Outstanding Notes immediately prior to the exchange.
 
     As used herein, the term "United States Holder" means a beneficial owner of
the Outstanding Notes or Exchange Notes that is, for United States federal
income tax purposes (i) a citizen or resident of the United States, (ii) a
corporation or other entity created or organized under the laws of the United
States or any political subdivision thereof, (iii) an estate the income of which
its subject to federal income taxation regardless of its source, or (iv) a trust
subject to the primary supervision of a U.S. court and the control of one or
more U.S. fiduciaries. A "Foreign Holder" is any holder of Outstanding Notes or
Exchange Notes that is not a United States Holder.
 
UNITED STATES HOLDERS
 
STATED INTEREST
 
     A United States Holder of a Note will be required to include interest on a
Note in gross income for Federal income tax purposes in accordance with the
holder's method of tax accounting.
 
SALE, EXCHANGE OR REDEMPTION OF A NOTE
 
     Upon a taxable sale, exchange or redemption of a Note, a United States
Holder generally will recognize capital gain or loss equal to the difference
between the amount realized (other than any amount received attributable to
accrued interest on a Note that was not previously included in gross income,
which amount will be treated as interest income) and the holder's tax basis in
the Note. Such capital gain or loss will be long-term capital gain or loss if
the Holder's holding period in the Note is more than one year at the time of
such disposition. In general, in the case of a non-corporate United States
Holder, capital gains recognized on Notes held (i) one year or less will be
taxed at ordinary income tax rates, (ii) more than one year but 18 months or
less will be taxed at a maximum rate of 28% and (iii) more than 18 months will
be taxed at a maximum rate of 20%. In addition, holders should consult their own
tax advisers regarding the availability and effect of a certain tax election to
mark-to-market Notes held on January 1, 2001.
 
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   115
 
FOREIGN HOLDERS
 
     Payments of principal and interest on the Notes to a Foreign Holder
generally will not be subject to United States Federal withholding tax provided
that (a) the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (b) the holder is not a controlled foreign corporation that is related to
the Company through stock ownership and (c) either (1) the beneficial owner of
the Note, under penalties of perjury, provides the Company or its agent with its
name and address and certifies that it is not a United States person or (2) a
securities clearing organization, bank, or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"financial institution") certifies to the Company or its agent, under penalties
of perjury, that such a statement has been received from the beneficial owner by
it or another financial institution and furnishes to the Company or its agent a
copy thereof.
 
     A Foreign Holder that does not qualify for the exception from withholding
tax described above would generally be subject to the United States withholding
tax at a flat rate of 30% (or a lower applicable treaty rate) on payments of
interest, unless the Foreign Holder's income from the Notes is effectively
connected with a U.S. trade or business of the holder. A Foreign Holder
generally will be taxed in the same manner as a United States corporation or
resident with respect to such income if it is effectively connected with the
conduct of a trade or business in the United States. Such effectively connected
income received by a Foreign Holder which is a corporation may in certain
circumstances be subject to an additional "branch profits tax" at a 30% rate or,
if applicable, a lower treaty rate.
 
     A Foreign Holder generally will not be subject to United States Federal
income or withholding tax on gain realized on the sale, exchange or redemption
of the Notes unless (i) the holder is an individual who was present in the
United States for 183 days or more during the taxable year and certain other
requirements are met, or (ii) the gain is effectively connected with the conduct
of a trade or business of the holder in the United States.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
     In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note and payments of the proceeds
of the sale of a Note to certain noncorporate United States Holders, and a 31%
backup withholding tax may apply to such payment if the United States Holder (i)
fails to furnish or certify his correct taxpayer identification number ("TIN")
to the payor in the manner required, (ii) is notified by the IRS that he has
failed to report payments of interest or dividends properly or (iii) under
certain circumstances, fails to certify that he has not been notified by the IRS
that he is subject to backup withholding for failure to report interest or
dividend payments.
 
     The payment of interest on the Notes to Foreign Holders generally will not
be subject to information reporting and backup withholding if the Company (or
its paying agent) has received the certification described in (c) above under
the caption "Foreign Holders" and neither the Company nor its paying agent has
actual knowledge that the holder is a United States person. The proceeds paid to
a Foreign Holder upon the sale of a Note by or through a United States office of
a broker will be subject to information reporting and backup withholding unless
the holder provides the certification described in (c) above or otherwise
establishes an exception. The proceeds paid to a Foreign Holder upon the sale of
a Note by or through a foreign office of a broker generally will not be subject
to a backup withholding tax. However, such proceeds will be subject to
information reporting if the broker is (i) a United States person, (ii) a
"controlled foreign corporation" for United States federal income tax purposes,
or (iii) a foreign person 50% or more of whose gross income for certain periods
is effectively connected with the conduct of a trade or business in the United
States, unless the broker has documentary evidence in its files that the holder
is not a United States person and the broker has no knowledge to the contrary.
 
     Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
 
                                       113
   116
 
     The IRS recently issued Treasury Regulations, generally effective for
payments made after December 31, 1998, concerning the withholding of tax and
reporting for certain amounts paid to non-resident individuals and foreign
corporations. Among other things, these Treasury Regulations may require Foreign
Holders to furnish new certification of their foreign status after December 31,
1998. Prospective purchasers of Notes should consult their tax advisors
concerning the applicability and effect of such Treasury Regulations on an
investment in the Notes.
 
                              PLAN OF DISTRIBUTION
 
     The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Outstanding Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
 
     Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver this
Prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer who holds Outstanding Notes acquired for its own account as a
result of market-making activities or other trading activities (an "Exchanging
Dealer") in connection with resales of Exchange Notes received in exchange for
Outstanding Notes. For a period (the "Exchange Offer Registration Period") the
longer of (A) the period until consummation of the Exchange Offer and (B) two
years after the effectiveness of the Registration Statement (unless, in the case
of (B), all resales of Exchange Notes covered by the Registration Statement have
been made), the Company will make this Prospectus, as amended or supplemented,
available to any Exchanging Dealer for use in connection with any such resale;
provided, however, that the Company shall not be required to maintain the
effectiveness of the Registration Statement for more than 60 days following the
consummation of the Exchange Offer unless the Company has been notified in
writing on or prior to the 60th day following the consummation of the Exchange
Offer by one or more broker-dealers that such holder has received Exchange Notes
as to which it will be required to deliver this Prospectus upon resale. In
addition, until           , 1998, (90 days after the date of this Prospectus),
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
 
     The Company will not receive any proceeds from the exchange of Outstanding
Notes for Exchange Notes by broker-dealers. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, or at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through broker-dealers who may receive compensation in the form of commissions
or concessions from any such broker-dealer and/or the purchasers of any Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any person that
participates in the distribution of such Exchange Notes may be deemed an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such broker-dealers may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
 
     The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions or concessions of any broker-dealers and will indemnify
the holders of the Outstanding Notes (including Exchanging Dealers)
participating in the Exchange Offer against certain liabilities, including
liabilities under the Securities Act.
 
     By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of
notice from the Company of (i) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (ii) the receipt by the Company of any
notification with respect to the suspension of the qualification of the Notes
included therein for sale in any jurisdiction or the initiation or
 
                                       114
   117
 
threatening of any proceeding for such purpose; or (iii) the happening of any
event that requires the making of any changes in the Registration Statement or
this Prospectus so that, as of such date, the Registration Statement or this
Prospectus does not include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein (in the case of
this Prospectus, in light of the circumstances under which they were made) not
misleading (which notice the Company agrees to advise to any broker-dealer that
has provided in writing to the Company a telephone or facsimile number and
address for notices), such broker-dealer will suspend the use of this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to such broker-dealer or until it is advised is writing by the
Company that the use of this Prospectus may be resumed and has received copies
of any amendments or supplements thereto. If the Company gives any such notice
to suspend the use of the Prospectus, it will extend the Exchange Offer
Registration Period by the number of days during the period from and including
the date of the giving of such notice to and including the date when
broker-dealers shall have received (x) copies of the supplemented or amended
Prospectus necessary to permit resales of Exchange Notes or (y) the advice in
writing.
 
                                 LEGAL MATTERS
 
     Certain legal matters will be passed upon on behalf of the Company by
Skadden, Arps, Slate, Meagher & Flom LLP, Toronto, Ontario and New York, New
York.
 
                                    EXPERTS
 
     The consolidated financial statements of the Company included in this
Prospectus and in the Registration Statement as of December 31, 1996 and 1995
and for each of the years in the three-year period ended December 31, 1996 have
been included in the Prospectus herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere in the Prospectus and in the Registration
Statement, and upon the authority of said firm as experts in accounting and
auditing.
 
     The consolidated financial statements of Arbor Health Care Company at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
 
                                       115
   118
 
                         INDEX TO FINANCIAL STATEMENTS
 


                                                                                        PAGE
                                                                                       ------
                                                                                    
EXTENDICARE HEALTH SERVICES, INC.
  Independent Auditor's Report......................................................      F-2
  Consolidated Balance Sheets at December 31, 1996 and 1995.........................      F-3
  Consolidated Statements of Net Earnings for the Years Ended
     December 31, 1996, 1995 and 1994...............................................      F-4
  Consolidated Statements of Changes in Shareholder's Equity for the Years Ended
     December 31, 1996, 1995 and 1994...............................................      F-5
  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1996, 1995 and 1994...............................................      F-6
  Notes to Consolidated Financial Statements........................................      F-7
  Consolidated Balance Sheets at September 30, 1997 (unaudited) and December 31,
     1996...........................................................................     F-19
  Unaudited Consolidated Statements of Net Earnings for the Three and Nine Months
     Ended September 30, 1997 and 1996..............................................     F-20
  Unaudited Consolidated Statements of Changes in Shareholder's Equity for the Nine
     Months Ended September 30, 1997 and the Year Ended December 31, 1996...........     F-21
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended
     September 30, 1997 and 1996....................................................     F-22
  Notes to Unaudited Interim Consolidated Financial Statements......................     F-23
ARBOR HEALTH CARE COMPANY
  Report of Independent Auditors....................................................     F-26
  Consolidated Balance Sheets at December 31, 1996 and 1995.........................     F-27
  Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and
     1994...........................................................................     F-28
  Consolidated Statements of Stockholders' Equity for the Years Ended
     December 31, 1996, 1995 and 1994...............................................     F-29
  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1996, 1995 and 1994...............................................     F-30
  Notes to Consolidated Financial Statements........................................     F-31
  Consolidated Balance Sheets at September 30, 1997 (unaudited) and December 31,
     1996...........................................................................     F-40
  Unaudited Consolidated Statements of Income for the Three and Nine Months Ended
     September 30, 1997 and 1996....................................................     F-41
  Unaudited Consolidated Statements of Stockholders' Equity for the Nine Months
     Ended September 30, 1997 and the Year Ended December 31, 1996..................     F-42
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended
     September 30, 1997 and 1996....................................................     F-43
  Notes to Unaudited Interim Consolidated Financial Statements......................     F-44

 
                                       F-1
   119
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
  EXTENDICARE HEALTH SERVICES, INC.:
 
     We have audited the accompanying consolidated balance sheets of Extendicare
Health Services, Inc. (f/k/a United Health, Inc.) and subsidiaries (the Company)
as of December 31, 1996 and 1995, and the related consolidated statements of net
earnings, changes in shareholder's equity, and cash flows for the years ended
December 31, 1996, 1995 and 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated 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 Extendicare Health Services,
Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and cash flows for the years ended December 31, 1996, 1995 and 1994
in conformity with generally accepted accounting principles.
 
Milwaukee, Wisconsin                                       KPMG PEAT MARWICK LLP
February 3, 1997,
   
except for note 17 which is as of December 2, 1997.
    
 
   
                                       F-2
    
   120
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)
 


                                                                           1996         1995
                                                                         --------     --------
                                                                                
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents..........................................    $ 18,715     $ 11,704
  Accounts receivable, less allowance for uncollectible receivables
     of $9,303 and $7,196, respectively..............................     153,548      134,186
  Inventories........................................................       5,027        4,824
  Supplies and prepaid expenses......................................       3,770        3,807
  Deferred state income taxes........................................         910        1,337
  Debt service trust funds...........................................         709          663
  Due from shareholder --
     Deferred Federal income taxes...................................       5,594        7,704
                                                                          -------      -------
     Total current assets............................................     188,273      164,225
PROPERTY AND EQUIPMENT, NET..........................................     386,082      345,074
OTHER ASSETS.........................................................      17,496       16,335
                                                                          -------      -------
                                                                         $591,851..   $525,634
                                                                          =======      =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
  Bank indebtedness..................................................    $ 22,279     $ 19,136
  Notes payable......................................................       6,000        6,000
  Current maturities of long-term debt...............................      10,461       12,700
  Accounts payable...................................................      28,656       34,705
  Accrued liabilities................................................      55,777       52,060
  Income taxes payable...............................................         627        1,064
  Due to shareholder and affiliates..................................       3,981            5
                                                                          -------      -------
     Total current liabilities.......................................     127,781      125,670
LONG-TERM DEBT.......................................................     222,954      196,769
OTHER LONG-TERM LIABILITIES..........................................       9,139        8,772
DUE TO SHAREHOLDER AND AFFILIATES
  Deferred Federal income taxes......................................      21,857       18,570
  Other..............................................................       3,484        3,484
DEFERRED STATE INCOME TAXES..........................................       4,414        4,291
MINORITY INTEREST....................................................         701          565
SHAREHOLDER'S EQUITY:
  Common stock, $1.00 par value, 1,000 shares authorized, 947 shares
     issued and outstanding..........................................           1            1
  Additional paid-in capital.........................................     150,254      150,254
  Retained earnings..................................................      51,266       17,258
                                                                          -------      -------
     Total shareholder's equity......................................     201,521      167,513
                                                                          -------      -------
                                                                         $591,851..   $525,634
                                                                          =======      =======

 
   
   The accompanying notes are an integral part of these financial statements.
    
 
   
                                       F-3
    
   121
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                    CONSOLIDATED STATEMENTS OF NET EARNINGS
             FOR THE YEARS ENDING DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)
 


                                                               1996         1995         1994
                                                             --------     --------     --------
                                                                              
REVENUES:
  Routine care and assisted living.......................    $526,486     $498,140     $470,310
  Medical specialty......................................     290,515      242,339      188,419
  Other..................................................       7,346        6,649        6,265
                                                             --------     --------     --------
                                                              824,347      747,128      664,994
COSTS AND EXPENSES:
  Operating..............................................     677,159      626,405      559,744
  General and administrative.............................      33,262       28,672       24,944
  Lease costs............................................       8,756        9,005        8,920
  Depreciation and amortization..........................      29,703       25,872       23,092
  Interest, net..........................................      18,477       14,776       13,083
                                                             --------     --------     --------
                                                              767,357      704,730      629,783
                                                             --------     --------     --------
  Earnings from operations...............................      56,990       42,398       35,211
GAIN ON SALE OF PROPERTY AND EQUIPMENT...................          --           --          350
PROVISION FOR INCOME TAXES...............................      22,546       16,761       13,852
                                                             --------     --------     --------
  Earnings before minority interest......................      34,444       25,637       21,709
MINORITY INTEREST........................................        (436)        (116)          --
                                                             --------     --------     --------
  Net earnings...........................................    $ 34,008     $ 25,521     $ 21,709
                                                             ========     ========     ========
EARNINGS PER SHARE.......................................    $     36     $     27           23
                                                             ========     ========     ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................         947          947          947
                                                             ========     ========     ========

 
   
   The accompanying notes are an integral part of these financial statements.
    
 
   
                                       F-4
    
   122
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)
 


                                                         COMMON STOCK        ADDITIONAL     RETAINED
                                                       -----------------      PAID-IN       EARNINGS
                                                       SHARES     AMOUNT      CAPITAL       (DEFICIT)
                                                       ------     ------     ----------     ---------
                                                                                
BALANCE DECEMBER 31, 1993..........................      947       $  1       $ 150,254     $ (19,972)
  Cash dividends, $10.56 per share.................       --         --              --       (10,000)
  Net earnings.....................................       --         --              --        21,709
                                                                     --
                                                         ---                   --------       -------
BALANCE DECEMBER 31, 1994..........................      947       $  1         150,254        (8,263)
  Net earnings.....................................       --         --              --        25,521
                                                                     --
                                                         ---                   --------       -------
BALANCE DECEMBER 31, 1995..........................      947       $  1         150,254        17,258
  Net earnings.....................................       --         --              --        34,008
                                                                     --
                                                         ---                   --------       -------
BALANCE DECEMBER 31, 1996..........................      947       $  1       $ 150,254     $  51,266
                                                         ===         ==        ========       =======

 
   
   The accompanying notes are an integral part of these financial statements.
    
 
   
                                       F-5
    
   123
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)
 


                                                               1996         1995         1994
                                                             --------     --------     --------
                                                                              
OPERATING ACTIVITIES:
Net earnings.............................................    $ 34,008     $ 25,521     $ 21,709
Adjustments to reconcile net earnings to net cash
  provided from operating activities:
  Depreciation and amortization..........................      29,703       25,872       23,092
  Provision for uncollectible accounts receivable........       7,293        3,892        3,593
  Deferred income taxes..................................       5,947        3,209           --
  Gain on sales of property and equipment................          --           --         (350)
  Minority interest......................................         436          116           --
Changes in assets and liabilities:
  Accounts receivable....................................     (22,407)     (33,716)     (24,662)
  Inventories............................................        (149)        (344)        (431)
  Supplies and prepaid expenses..........................          57         (603)         120
  Debt service trust funds...............................         (46)          12           39
  Bank indebtedness......................................       3,143        3,846        8,105
  Accounts payable.......................................      (5,750)       7,515        3,674
  Accrued liabilities....................................      (2,044)      10,588       (2,079)
  Income taxes payable...................................        (437)         864          246
  Deferred income taxes..................................          --           --        3,735
  Current due to shareholder and affiliates..............       3,976         (156)        (108)
                                                             --------     --------     --------
  Cash provided from operating activities................      53,730       46,616       36,683
INVESTING ACTIVITIES:
  Collections of long-term notes receivable..............          --           --        7,856
  Payments for acquisitions..............................     (23,850)     (13,144)     (29,110)
  Payments for purchases of property and equipment.......     (53,581)     (56,469)     (35,271)
  Proceeds from sales of property and equipment..........       6,929          196        4,430
  Changes in other long-term assets......................      (1,487)      (1,208)        (504)
                                                             --------     --------     --------
  Cash used for investing activities.....................     (71,989)     (70,625)     (52,599)
FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt...............      62,141       50,089       21,469
  Payments of long-term debt.............................     (36,571)     (18,257)     (11,319)
  Proceeds from issuance of short-term borrowings........          --           --        8,194
  Payments of short-term borrowings......................          --       (2,194)          --
  Payments of dividends..................................          --           --      (10,000)
  Distribution of minority interest earnings.............        (300)          --           --
                                                             --------     --------     --------
  Cash provided from financing activities................      25,270       29,638        8,344
                                                             --------     --------     --------
Increase (decrease) in cash and cash equivalents.........       7,011        5,629       (7,572)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............      11,704        6,075       13,647
                                                             --------     --------     --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................    $ 18,715     $ 11,704     $  6,075
                                                             ========     ========     ========

 
   
   The accompanying notes are an integral part of these financial statements.
    
 
   
                                       F-6
    
   124
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (DOLLARS IN THOUSANDS)
 
1 -- CORPORATE NAME CHANGE
 
     Effective July 1, 1997, "Extendicare Health Services, Inc." (the "Company")
was adopted as the Company's name. The Company's name had been United Health,
Inc. prior to the change.
 
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount 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.
 
     The more significant accounting policies of the Company and its subsidiary
companies are as follows:
 
NATURE OF OPERATIONS
 
     The Company at December 31, 1996 operated 155 health care facilities with
16,644 operational beds that provide nursing, rehabilitative, sub-acute and
other specialized medical services in thirteen states. The Company also operated
31 assisted living facilities totaling 1,140 units in eight states which provide
varying levels of assistance in daily living activities to its residents. The
Company also provides patients with pharmaceutical and medical products as well
as technical medical support at home in such areas as infusion and respiratory
therapy, ventilator use and other home health services.
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include those of the Company and its
subsidiaries and partnerships in which the Company has a majority interest. All
significant intercompany accounts and transactions with subsidiaries have been
eliminated from the consolidated financial statements.
 
CASH EQUIVALENTS
 
     The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of the
consolidated statements of cash flows.
 
ACCOUNTS RECEIVABLE
 
     Accounts receivable are recorded at the net realizable value expected to be
received from Federal and state assistance programs, other third party payors or
from individual patients. Receivables from government agencies represent the
only concentrated group of credit risk for the Company.
 
     Management does not believe that there are any credit risks associated with
these government agencies other than possible funding delays. Accounts
receivable other than from government agencies consist of receivables from
various payors that are subject to differing economic conditions and do not
represent any concentrated credit risks to the Company. Furthermore, management
continually monitors and adjusts its reserves associated with these receivables.
 
INVENTORIES
 
   
     Inventories are stated at the lower of cost, using the LIFO (last-in,
first-out) method, or market.
    
 
   
                                       F-7
    
   125
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
PROPERTY AND EQUIPMENT
 
     Property and equipment are stated at cost less accumulated depreciation.
Provisions for depreciation are computed using the straight-line method at rates
based upon the following estimated useful lives:
 
                                         
Buildings.................................  varying periods not exceeding 40 years
Furniture and equipment...................  varying periods not exceeding 15 years
Leasehold improvements....................  the shorter of the term of the applicable
                                            leases or the useful life of the
                                            improvement


 
     Maintenance and repairs are charged to expense as incurred. When property
or equipment is retired or disposed of the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in earnings.
 
DEFERRED COSTS
 
     Direct loan origination costs are deferred and amortized over the life of
the related debt. The costs of acquiring leasehold rights are deferred and
amortized over the term of the lease including renewal options. These deferred
costs are stated at original cost less accumulated amortization.
 
GOODWILL
 
     Goodwill represents the cost of acquired net assets in excess of their fair
market values. Amortization of goodwill is computed using the straight-line
method over a period of forty years in connection with the acquisitions of
health care facilities and ten to fifteen years for other acquisitions.
 
LONG-LIVED ASSETS
 
     The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment based on estimates of undiscounted future cash flows. The
amount of any impairment is calculated by comparing the estimated fair market
value with the carrying value of the related asset. Management considers such
factors as current results, trends and future prospects, in addition to other
economic factors, in performing this analysis. Management believes that the
Company's long-lived assets are stated at recorded amounts that are not in
excess of their respective fair market values as of December 31, 1996.
 
LEASES
 
     Leases that substantially transfer all of the benefits and risks of
ownership of property to the Company are accounted for as capital leases. An
asset is recorded at the time a capital lease is entered into together with its
related long-term obligation to reflect its purchase and financing. Property and
equipment recorded under capital leases are depreciated on the same basis as
previously described. Rental payments under operating leases are expensed as
incurred.
 
REVENUES
 
   
     Revenues are recorded in the period in which services and products are
provided at established rates less contractual adjustments. Contractual
adjustments include differences between established billing rates and amounts
estimated by management as reimbursable under various cost reimbursement
formulas or contracts in effect.
    
 
                                       F-8
   126
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
   
     The Company derived approximately 68%, 67% and 65% of its revenues in 1996,
1995 and 1994, respectively, from services and products provided under various
Federal (Medicare) and state (Medicaid) medical assistance programs.
Reimbursement under these programs is based, in part, on cost reimbursement
principles and is subject to audit and retroactive adjustment. Estimation
differences between final settlements and amounts recorded in previous years are
reported as adjustments to revenues in the period such final settlements are
determined. Adjustments relating to prior years' estimated settlement amounts
increased revenues by $8,012, $2,593 and $495 in 1996, 1995 and 1994,
respectively.
    
 
   
     Accounts receivable at December 31, 1996 and 1995 include estimated
settlements from third party payors of $31,955 and $30,641, respectively.
    
 
     The Company's cost of care for its Medicare patients sometimes exceeds
regional reimbursement limits established by Medicare. The Company as of
December 31, 1996 had outstanding formal waiver requests for 35 cost reports
covering applicable facility costs through December 31, 1995. Action has not
been taken yet by the Health Care Financing Administration ("HCFA") on such
requests. The Company anticipates that additional waiver requests will be filed
with HCFA for selected facilities for 1996 once facility cost reports are
prepared subsequent to December 31, 1996. The Company as of December 31, 1996
has not recorded as revenue the excess amounts represented through the waiver
requests due to not having received intermediary approval of such requests and
having limited approval experience as to the actual dollar amounts of such
requests being subsequently approved and realized.
 
     Limitations on Medicare and Medicaid reimbursement for health care services
are continually proposed. Changes in applicable laws and regulations could have
an adverse effect on the levels of reimbursement from governmental, private, and
other sources.
 
INCOME TAXES
 
     The Company accounts for income taxes using an asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
 
3 -- NEW ACCOUNTING PRONOUNCEMENTS
 
     The Financial Accounting Standards Board ("FASB") has issued Statement No.
128, Earnings per Share, which is required to be adopted for financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
be excluded. The impact of Statement No. 128 on the calculation of earnings per
share is not expected to have any impact on the 1997 and prior years' financial
statements. In addition, the FASB has issued Statement No. 129 (Disclosure of
Information about Capital Structure), Statement No. 130 (Reporting Comprehensive
Income), and Statement No. 131 (Disclosures about Segments of an Enterprise and
Related Information), which are not anticipated to have a material effect on the
Company.
 
                                       F-9
   127
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
4 -- ACQUISITIONS AND DISPOSITIONS
 
     The Company acquired in 1996 for cash the property and equipment of four
nursing facilities, including two facilities which it had operated under lease
agreements, and the assets of an institutional pharmacy.
 
     The Company acquired in 1995 for cash the property and equipment of five
nursing facilities including three facilities which it had operated under lease
agreements. The Company also entered into a pharmacy partnership arrangement
during 1995 in which it is the majority owner.
 
     The Company acquired in 1994 the property and equipment of four nursing
facilities and one assisted living facility. The Company also acquired in 1994
all of the issued and outstanding stock of a company and its subsidiaries
engaged in operating five health care facilities. Certain operating assets of a
respiratory care services company were also acquired during 1994.
 
     The cost of the assets acquired in 1996, 1995 and 1994 was $23,850,
$13,144, and $32,155, respectively, and included the following:
 


                                                                 1996        1995        1994
                                                                -------     -------     -------
                                                                               
Consideration:
Cash........................................................    $23,850     $13,144     $29,110
Long-term debt assumed......................................         --          --       3,045
                                                                -------     -------     -------
                                                                $23,850     $13,144     $32,155
                                                                =======     =======     =======
Assets acquired:
  Net current assets
  (liabilities).............................................    $   198     $   (17)    $   867
  Property and equipment....................................     23,379      12,214      30,288
  Other net assets..........................................        273         947       1,000
                                                                -------     -------     -------
                                                                $23,850     $13,144     $32,155
                                                                =======     =======     =======

 
     Acquisitions in 1996, 1995 and 1994 have been accounted for using the
purchase method and, accordingly, the results of the acquired operations are
included in the accompanying financial statements since their dates of
acquisition. The pro forma unaudited results of operations for the years ended
December 31, 1996, 1995 and 1994, assuming the purchases had been consummated
January 1, 1994, are not materially different from the reported results of
operations.
 
     The Company in 1996 sold two health care facilities, ceased operation at
one of its leased facilities and reached agreement to sell a facility for which
the transaction was consummated in 1997. Sales proceeds of $6,550 were received
from the sale of assets relating to the facilities in 1996 and $2,000 in 1997.
No significant gain or loss was realized upon the disposal of the aforementioned
facilities.
 
     The Company in 1994 sold two health care facilities in a cash transaction
with sales proceeds totaling $4,185. A gain on sale of $350 was realized from
the sale of these facilities.
 
                                      F-10
   128
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
5 -- INVENTORIES
 
     Inventories consisted of the following at December 31:
 


                                                                              1996       1995
                                                                             ------     ------
                                                                                  
Pharmacy.................................................................    $3,978     $3,282
Medical supplies.........................................................     1,930      2,274
                                                                             ------     ------
                                                                              5,908      5,556
Excess of replacement cost over LIFO carrying value......................      (881)      (732)
                                                                             ------     ------
                                                                             $5,027     $4,824
                                                                             ======     ======

 
6 -- OTHER ASSETS
 
     Other assets, net of related amortization, if applicable, consisted of the
following at December 31:
 


                                                                            1996        1995
                                                                           -------     -------
                                                                                 
Goodwill...............................................................    $ 3,963     $ 3,951
Deferred financing costs...............................................      3,289       3,114
Debt service and capital expenditure trust funds.......................      2,444       2,362
Security deposits......................................................      2,024       1,509
Leasehold rights.......................................................      1,097       1,383
Other..................................................................      4,679       4,016
                                                                            ------      ------
                                                                           $17,496     $16,335
                                                                            ======      ======

 
     Accumulated amortization as of December 31, 1996 and 1995 was $4,062 and
$4,371, respectively.
 
7 -- PROPERTY AND EQUIPMENT
 
     Property and equipment less related accumulated depreciation and
amortization as of December 31 is as follows:
 


                                                                          1996         1995
                                                                        ---------    ---------
                                                                               
Land and land improvements...........................................   $  29,910    $  27,296
Buildings and improvements...........................................     394,195      353,566
Furniture and equipment..............................................      85,429       74,299
Leasehold improvements...............................................      17,438       12,838
Construction in progress.............................................      17,494       17,447
                                                                        ---------    ---------
                                                                          544,466      485,446
Less accumulated depreciation........................................     158,384      140,372
                                                                        ---------    ---------
                                                                        $ 386,082    $ 345,074
                                                                        =========    =========

 
                                      F-11
   129
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     Leases that meet the criteria of capital leases have been capitalized and
the related buildings and equipment have been included in the consolidated
balance sheets at December 31 as follows:
 


                                                                             1996       1995
                                                                            -------    -------
                                                                                 
Buildings and equipment..................................................   $ 1,977    $ 1,871
Less accumulated amortization............................................     1,499      1,470
                                                                            --------   --------
                                                                                  -          -
                                                                            $   478    $   401
                                                                            =========  =========

 
     Interest is capitalized in connection with the construction of facilities
and is amortized over the estimated useful life of the facilities. Interest
capitalized in 1996 and 1995 was $384 and $679, respectively.
 
8 -- BANK INDEBTEDNESS, NOTES PAYABLE AND LINES OF CREDIT
 
     Bank indebtedness consists of amounts outstanding under the Company's
control disbursement arrangements.
 
     The Company has an uncommitted line of credit with a bank in the amount of
$6,000. The uncommitted line of credit permits borrowings with maturities due no
later than April 30, 1997 with interest at competitive bid pricing. The Company
does not pay any fees for the uncommitted line and therefore the availability of
the line is at the discretion of the bank. The Company had notes payable of
$6,000 outstanding under the uncommitted line at December 31, 1996 at an
interest rate of 7.70%.
 
     The Company and its subsidiaries have a credit agreement with four banks to
provide up to $75,000 in aggregate borrowings including $25,000 on an unsecured
basis for working capital purposes and $50,000 on a partially secured basis for
the acquisition, expansion, or renovation of facilities and to refinance
existing long-term indebtedness. The credit facility at December 31, 1996 was
fully available for borrowing purposes. Borrowings outstanding under the credit
agreement at December 31, 1996 totaled $22,434 at a weighted average interest
rate of 7.85%.
 
     The credit agreement permits the Company to have its banks issue up to
$10,000 of letters of credit out of the secured portion of the agreement. The
Company had $6,365 of letters of credit outstanding at December 31, 1996.
 
     The credit agreement has an initial maturity date of April 30, 1999.
Amounts outstanding at the initial maturity date up to $50,000 the secured
portion of the credit agreement may, at the Company's option, be converted to a
five-year term loan. Such term loan would be repayable as to principal in
quarterly installments with a final payment of principal equal to 45% of the
initial term loan amount plus accrued interest for the five-year period.
 
     Interest on borrowings outstanding under the credit agreement may, at the
Company's option, be equal to (1) the prime rate; (2) fixed rates; or (3) LIBOR
plus 1.0% for working capital borrowings and LIBOR plus 1.25% for other
borrowings. The credit agreement also provides for bid pricing by each of the
participant banks. Interest on any subsequent term loans may be at (1) prime
rate plus .50%; (2) a fixed rate; or (3) LIBOR plus 1.5%.
 
     The Company pays a commitment fee on the unused portion of the credit
agreement at an annual rate of .25%.
 
                                      F-12
   130
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     Information concerning borrowings under lines of credit available for
working capital purposes during 1996 and 1995 is as follows:
 


                                                                         1996       1995
                                                                        -------    -------
                                                                             
    Maximum amount outstanding.......................................   $30,999    $30,999
    Average amount outstanding.......................................    21,016     21,224
    Weighted average interest rate on amounts outstanding during the
      year...........................................................     6.37%      7.02%

 
     The average amounts outstanding and the weighted average interest rates
were calculated using the weighted average amounts outstanding during each
month.
 
9 -- ACCRUED LIABILITIES
 
     Accrued liabilities consisted of the following at December 31:
 


                                                                           1996         1995
                                                                         ---------    ---------
                                                                                
Salaries and wages, fringe benefits and payroll taxes................      $31,840      $27,847
Medicaid program.....................................................        5,670        4,360
Real estate and other taxes..........................................        3,362        3,117
Workmen's compensation...............................................        2,876        7,564
Interest.............................................................        1,480        1,344
Other................................................................       10,549        7,828
                                                                           -------      -------
                                                                           $55,777      $52,060
                                                                           =======      =======

 
10 -- LONG-TERM DEBT
 
     Long-term debt consisted of the following at December 31:
 


                                                                           1996         1995
                                                                         --------     --------
                                                                                
Promissory notes payable, 7.43% to 10.75%, maturing through 2010.....    $137,053     $107,156
Industrial Development Bonds at variable interest rates ranging from
  4.15% to 9.75%, maturing through 2014..............................      41,275       41,910
Bank loans at variable interest rates ranging from 7.25 to 8.25%,
  maturing through 2000..............................................      19,988       20,079
Line of credit at variable interest rates............................      22,434       26,774
Mortgages, 6.9% to 10.0%, maturing through 2010......................      12,393       13,223
Other................................................................         272          327
                                                                         --------     --------
                                                                          233,415      209,469
Less current maturities..............................................      10,461       12,700
                                                                         --------     --------
                                                                         $222,954     $196,769
                                                                         ========     ========

 
                                      F-13
   131
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     Principal payments on long-term debt due within the next five years and
thereafter are as follows:
 
                                                                         
    1997......................................................................  $ 10,461
    1998......................................................................    28,675
    1999......................................................................     9,096
    2000......................................................................    12,615
    2001......................................................................     6,622
    After 2001................................................................   165,946
                                                                                --------
                                                                                $233,415
                                                                                ========

    
 
     Interest paid was $19,355, $16,629 and $13,901 in 1996, 1995 and 1994,
respectively.
 
     The Company is a party to an interest rate swap agreement with a bank to
reduce the impact of changes in interest rates on certain of its floating rate
long-term debt. The interest rate swap agreement matures in October 2000. The
agreement effectively changes the Company's interest rate exposure on $32,000 of
floating rate Industrial Development Bonds due in 2014 to a fixed rate of 4.155%
during the period the swap agreement is in effect. The differential between the
fixed rate and the variable rate interest to be paid or received will be accrued
as interest rates change and recognized over the life of the agreement. The
Company may be exposed to credit loss in the event of non-performance by the
bank under the swap agreement, but does not anticipate such non-performance.
 
     A substantial portion of the Company's property and equipment is mortgaged
or pledged as security under various debt agreements. The payment of dividends
and redemption of the Company's common stock are substantially restricted under
the Company's debt agreements.
 
     The debt agreements also require the maintenance of certain financial
ratios including maintenance of consolidated net working capital, capital funds
and funded debt to capital funds, all as defined.
 
11 -- LEASE COMMITMENTS
 
     The Company at December 31, 1996 was committed under non-cancelable
operating leases requiring future minimum rentals as follows:
 
                                                                       
      1997....................................................................  $ 7,371
      1998....................................................................    6,704
      1999....................................................................    6,310
      2000....................................................................    4,589
      2001....................................................................    2,964
      After 2001..............................................................   23,846
                                                                                --------
                                                                                $51,784
                                                                                ========

      
 
     Operating lease costs were $8,756, $9,005 and $8,920 for the years ended
1996, 1995 and 1994, respectively. These leases expire on various dates
extending to the year 2012 and in many cases contain renewal options.
 
12 -- COMMITMENTS AND CONTINGENCIES
 
     The Company as of December 31, 1996 had capital expenditure purchase
commitments outstanding of approximately $20,617.
 
                                      F-14
   132
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     The Company periodically is a defendant in actions brought against it in
connection with its operations. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company on the basis of information furnished by legal
counsel.
 
13 -- TRANSACTIONS WITH SHAREHOLDER AND AFFILIATES
 
     The Company is an indirect wholly-owned subsidiary of Extendicare Inc.
(Extendicare) a Canadian publicly-held Company. The following is a summary of
the Company's transactions with Extendicare or its affiliates in 1996, 1995 and
1994:
 
INSURANCE
 
     The Company insures certain risks with an affiliated insurance subsidiary
of Extendicare. The consolidated statements of net earnings for 1996, 1995 and
1994 include expenses of $8,383, $21,373, and $25,261, respectively, related to
the cost of these coverages.
 
     The Company experienced favorable actuarial adjustments for prior years
under its retroactively-rated workmen's compensation coverage in the amounts of
$9,878, $3,580 and $1,460 in 1996, 1995 and 1994, respectively.
 
OTHER PAYABLES
 
     The Company at December 31, 1996 and 1995 had a non-interest bearing
payable to an affiliated company of Extendicare of $3,484 with no specific due
date.
 
OTHER TRANSACTIONS
 
     The following is a summary of the Company's other transactions with its
shareholder and affiliated companies for 1996, 1995 and 1994:
 


                                                                  1996        1995       1994
                                                                --------     ------     ------
                                                                               
    Due to shareholder and affiliates at beginning of
      year..................................................     $    5      $ 161      $ 269
    Net charge (payment)....................................      3,976       (156)      (108) 
                                                                 ------      -----      -----
    Due to shareholder and affiliates at end of year........     $3,981      $   5      $ 161
                                                                 ======      =====      =====

 
     Net charges (payments) represent primarily charges (payments) from (to)
shareholder and affiliates for income taxes paid on behalf of (by) the Company.
 
14 -- EMPLOYEE BENEFIT PLANS
 
     The Company maintains a defined contribution retirement 401(K) savings
plan, which is made available to substantially all of the Company's employees.
The Company pays a matching contribution of 25% of every qualifying dollar
contributed by plan participants, net of any forfeitures. Expenses incurred by
the Company were $860, $763, and $705 in 1996, 1995 and 1994, respectively.
 
     The Company maintains a nonfunded deferred compensation plan offered to all
corporate employees, in which participants may defer up to 10% of their base
salary. The Company will match up to 50% of the amount deferred. The Company
also maintains a non-qualified deferred compensation plan covering certain
executive employees. Expenses incurred for Company contributions under such
plans were $887, $802 and $278 in 1996, 1995 and 1994, respectively. The
liability for the deferred compensation plans of $7,990 and $7,012 at December
31, 1996 and 1995, respectively, is included in other long-term liabilities.
 
                                      F-15
   133
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
15 -- INCOME TAXES
 
     The Company's results of operations are included in the consolidated
Federal tax return of its U.S. parent company. Accordingly, Federal current and
deferred income taxes payable are transferred to the Company's parent company.
The provisions for income taxes have been calculated as if the Company were a
separately taxed entity for each of the periods presented in the accompanying
financial statements.
 
     The provisions for income taxes for 1996, 1995 and 1994 consisted of the
following:
 


                                                                 1996        1995        1994
                                                                -------     -------     -------
                                                                               
Federal:
  Current...................................................    $13,325     $10,584     $ 7,914
  Deferred..................................................      5,342       3,436       3,527
                                                                -------     -------     -------
     Total Federal..........................................     18,667      14,020      11,441
State:
  Current...................................................      3,385       3,032       2,309
  Deferred..................................................        494        (291)        102
                                                                -------     -------     -------
     Total State............................................      3,879       2,741       2,411
                                                                -------     -------     -------
  Total.....................................................    $22,546     $16,761      13,852
                                                                =======     =======     =======

 
     The differences between the effective tax rates on earnings before
provision for income taxes and the United States Federal income tax rate are as
follows:
 


                                                                     1996      1995      1994
                                                                     -----     -----     -----
                                                                                
Statutory Federal income tax rate................................    35.0%     35.0%     35.0%
Increase (decrease) in tax rate resulting from:
  State income taxes, net of Federal income tax benefit..........     4.4       4.2       4.4
  Other, net.....................................................      .2        .3       (.5)
                                                                     ----      ----      ----
Effective tax rate...............................................    39.6%     39.5%     38.9%
                                                                     ====      ====      ====

 
     The components of the net state deferred tax assets and liabilities as of
December 31 are as follows:
 


                                                                              1996       1995
                                                                             ------     ------
                                                                                  
Deferred tax assets:
  Employee benefit accruals..............................................    $1,221     $1,537
  Accounts receivable reserves...........................................       481        406
  Other liabilities......................................................       230        136
                                                                             ------     ------
     Total deferred tax assets...........................................     1,932      2,079
Deferred tax liabilities:
  Depreciation...........................................................     4,768      4,415
  Miscellaneous..........................................................       668        618
                                                                             ------     ------
     Total deferred tax liabilities......................................     5,436      5,033
                                                                             ------     ------
  Net deferred tax liability.............................................    $3,504     $2,954
                                                                             ======     ======

 
     The Company paid state income taxes of $3,774, $2,364 and $1,964 in 1996,
1995 and 1994, respectively. The Company also made payments for Federal income
taxes to its U.S. parent of $9,311, $10,740 and $8,015 in 1996, 1995 and 1994,
respectively.
 
                                      F-16
   134
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. Management has considered
the scheduled reversal of deferred tax liabilities in making this assessment and
believes it is more likely than not, the Company will realize the benefits of
these deductible differences.
 
16 -- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
 
     The estimated fair values of the Company's financial instruments at
December 31 are as follows:
 


                                                           1996                        1995
                                                  -----------------------     -----------------------
                                                  CARRYING     ESTIMATED      CARRYING     ESTIMATED
                                                   VALUE       FAIR VALUE      VALUE       FAIR VALUE
                                                  --------     ----------     --------     ----------
                                                                               
Accounts receivable, less reserves............    $153,548      $ 151,797     $134,186      $ 133,179
Debt service and capital expenditure trust
  funds.......................................       3,153          3,161        3,025          3,047
Other assets..................................       5,505          5,505        4,499          4,508
Interest rate swap............................          --            (26)          --            (83)
Long-term debt:
  Practicable to estimate fair value..........     241,406        226,459      216,481        209,612
Not practicable to estimate fair value........       1,148             --        1,760             --
                                                  --------       --------     --------       --------
                                                   242,554        226,459      218,241        209,612
Long-term due to affiliate....................       3,484          3,484        3,484          3,484

 
     The carrying values of accounts receivable approximate fair values due to
their short maturities with the exception of certain settlement receivables from
third party payors which are anticipated to be collected beyond one year. The
fair value of these settlement receivables are estimated based on discounted
cash flows at management's estimated current borrowing rates.
 
     The fair value of debt service and capital expenditure trust funds is
estimated based on quoted market prices for the same or similar issues of the
underlying investments.
 
     Other financial instrument assets consist principally of investments valued
at quoted market rates.
 
     The fair value of the interest rate swap is based on its quoted market
price as provided by the financial institution which is the counterpart to the
swap.
 
     The fair value of long-term debt is estimated based on approximate
borrowing rates currently available to the Company for debt equal to the
existing debt maturities. For other long-term debt, principally refundable
escrows, it is not practicable of estimate fair value.
 
17 -- SUBSEQUENT EVENTS
 
     The Company, AHC Acquisition Corp., a wholly owned subsidiary of the
Company ("AHC Acquisition") and Arbor Health Care Company ("Arbor") were parties
to an agreement and plan of merger, dated as of September 29, 1997, pursuant to
which the parties agreed to proceed with a tender offer for all the issued and
outstanding common shares of Arbor (the "Tender Offer") for $45.00 per share and
the subsequent merger of AHC Acquisition with and into Arbor (the "Merger"),
with Arbor as the surviving corporation. The Tender Offer was commenced on
October 3, 1997, and expired on November 25, 1997. On November 26, 1997, the
Merger was consummated. The aggregate purchase price for all the outstanding
common shares of Arbor, and the payments to be made with respect to unexercised
options and warrants, was approximately
 
                                      F-17
   135
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                             (DOLLARS IN THOUSANDS)
 
   
$430,000 (exclusive of transaction costs and fees), including approximately
$110,000 of debt of Arbor. The acquisition of Arbor has been accounted for as a
purchase.
    
 
   
     On November 26, 1997, the Company entered into a credit agreement which
provided the Company with new senior secured credit facilities of up to $800,000
(the "New Credit Facilities"). On December 2, 1997, the Company issued $200,000
of 9.35% Senior Subordinated Notes Due 2007, the proceeds from which were used
to repay $200,000 of the New Credit Facilities. The Company previously received
an equity contribution from Extendicare of $44,600. The proceeds from the New
Credit Facilities and equity contribution were used to finance the acquisition
of Arbor and to refinance existing indebtedness of Arbor of approximately
$101,700 and of the Company of approximately $243,500 (including the existing
bank credit facility) and will be used to fund working capital, to finance
capital expenditures and for other general corporate purposes.
    
 
     During the period May 30, 1997 to September 1, 1997, the Company acquired
the property and equipment of nine nursing facilities (890 operational beds),
two of which had previously been leased by the Company. The facilities were
acquired at a total cost of approximately $41,746. The Company also acquired,
during the period January 1, 1997 to September 1, 1997, the assets of seven
medical specialty services related businesses for approximately $9,344.
 
                                      F-18
   136
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                    SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)
 


                                                                     SEPTEMBER 30,     DECEMBER 31,
                                                                         1997              1996
                                                                     -------------     ------------
                                                                                        (UNAUDITED)
                                                                                 
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents......................................      $  14,866         $ 18,715
  Accounts receivable, less allowance for uncollectible
     receivables of $12,058 and $9,303 respectively..............        172,429          153,548
  Inventories....................................................          7,055            5,027
  Supplies and prepaid expenses..................................          3,757            3,770
  Deferred state income taxes....................................          1,575              910
  Debt service trust funds.......................................            996              709
  Due from shareholder --
     Deferred Federal income taxes...............................          8,716            5,594
                                                                        --------         --------
  Total current assets...........................................        209,394          188,273
  PROPERTY AND EQUIPMENT, NET....................................        447,605          386,082
  OTHER ASSETS...................................................         26,474           17,496
                                                                        --------         --------
                                                                       $ 683,473         $591,851
                                                                        ========         ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
  Bank indebtedness..............................................      $  16,587         $ 22,279
  Notes payable..................................................         18,913            6,000
  Current maturities of long-term debt...........................         13,897           10,461
  Accounts payable...............................................         28,896           28,656
  Accrued liabilities............................................         67,912           55,777
  Income taxes payable...........................................            767              627
  Due to shareholder and affiliates..............................          1,658            3,981
                                                                        --------         --------
  Total current liabilities......................................        148,630          127,781
LONG-TERM DEBT...................................................        256,397          222,954
OTHER LONG-TERM LIABILITIES......................................         11,339            9,139
DUE TO SHAREHOLDER AND AFFILIATES
  Deferred Federal income taxes..................................         23,018           21,857
  Other..........................................................          3,484            3,484
DEFERRED STATE INCOME TAXES......................................          4,670            4,414
MINORITY INTERESTS...............................................          2,101              701
SHAREHOLDER'S EQUITY:
  Common stock, $1.00 par value, 1,000 shares authorized, 947
     shares issued and outstanding...............................              1                1
  Additional paid-in capital.....................................        153,937          150,254
  Retained earnings..............................................         79,896           51,266
                                                                        --------         --------
     Total shareholder's equity..................................        233,834          201,521
                                                                        --------         --------
                                                                       $ 683,473         $591,851
                                                                        ========         ========

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-19
   137
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                    CONSOLIDATED STATEMENTS OF NET EARNINGS
                             (DOLLARS IN THOUSANDS)
 


                                                   THREE MONTHS ENDED         NINE MONTHS ENDED
                                                      SEPTEMBER 30              SEPTEMBER 30
                                                  ---------------------     ---------------------
                                                    1997         1996         1997         1996
                                                  --------     --------     --------     --------
                                                                                      (UNAUDITED)
                                                                             
REVENUES:
  Routine care and assisted living............    $141,409..   $133,469     $413,633     $395,333
  Medical specialty...........................      81,419       73,304      243,001      213,928
  Other.......................................       2,386        1,928        6,799        4,844
                                                  --------     --------     --------     --------
                                                  225,214..     208,701      663,433      614,105
COSTS AND EXPENSES:
  Operating...................................     187,420      172,146      543,234      508,815
  General and administrative..................       9,036        7,916       27,648       24,239
  Lease costs.................................       2,560        2,135        7,132        6,560
  Depreciation and amortization...............       8,137        7,480       24,538       21,979
  Interest, net...............................       4,761        4,750       13,633       14,011
                                                  --------     --------     --------     --------
                                                  211,914..     194,427      616,185      575,604
                                                  --------     --------     --------     --------
  Earnings from operations....................      13,300       14,274       47,248       38,501
PROVISION FOR INCOME TAXES....................       4,887        5,720       17,957       15,409
                                                  --------     --------     --------     --------
  Earnings before minority interests..........       8,413        8,554       29,291       23,092
MINORITY INTERESTS............................        (259)         (87)        (661)        (233)
                                                  --------     --------     --------     --------
  Net earnings................................    $  8,154     $  8,467     $ 28,630     $ 22,859
                                                  ========     ========     ========     ========
EARNINGS PER SHARE............................    $      9     $      9     $     30     $     24
                                                  ========     ========     ========     ========
WEIGHTED AVERAGE SHARES OUTSTANDING...........         947          947          947          947
                                                  ========     ========     ========     ========

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-20
   138
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                      AND THE YEAR ENDED DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)
 


                                                     COMMON STOCK        ADDITIONAL
                                                   -----------------      PAID-IN       RETAINED
                                                   SHARES     AMOUNT      CAPITAL       EARNINGS
                                                   ------     ------     ----------     --------
                                                                            
BALANCE DECEMBER 31, 1995......................      947       $  1       $150,254      $17,258
  Net earnings.................................       --         --             --       34,008
                                                     ---        ---       --------      -------
BALANCE DECEMBER 31, 1996......................      947       $  1        150,254       51,266
  Contribution of assets from affiliate
     (unaudited)...............................       --         --          3,683           --
  Net earnings (unaudited).....................       --         --             --       28,630
                                                     ---        ---       --------      -------
BALANCE SEPTEMBER 30, 1997 (unaudited).........      947       $  1       $153,937      $79,896
                                                     ===        ===       ========      =======

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-21
   139
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)
 


                                                                           1997         1996
                                                                         --------     --------
                                                                                   (UNAUDITED)
                                                                                
OPERATING ACTIVITIES:
Net earnings.........................................................    $ 28,630     $ 22,859
Adjustments to reconcile net earnings to net cash provided from
  operating activity:
  Depreciation and amortization......................................      24,538       21,979
  Provision for uncollectible accounts receivable....................       6,178        4,703
  Deferred income taxes..............................................       1,045        4,752
  Minority interests.................................................         661          233
Changes in assets and liabilities:
  Accounts receivable................................................     (23,972)     (25,906)
  Inventories........................................................        (731)         472
  Supplies and prepaid expenses......................................         159          198
  Debt service trust funds...........................................        (286)        (139)
  Bank indebtedness..................................................      (5,693)       1,036
  Accounts payable...................................................        (475)      (3,593)
  Accrued liabilities................................................      11,903        4,079
  Income taxes payable...............................................         140         (663)
  Deferred income taxes..............................................          20           --
  Current due to shareholder and affiliates..........................      (5,654)       2,875
                                                                         --------     --------
     Cash provided from operating activities.........................      36,463       32,885
INVESTING ACTIVITIES:
  Payments for acquisitions..........................................     (36,085)     (23,850)
  Payments for purchases of property and equipment...................     (41,311)     (36,896)
  Proceeds from sales of property and equipment......................       3,182          308
  Changes in other long-term assets..................................      (3,276)      (1,225)
                                                                         --------     --------
     Cash used for investing activities..............................     (77,490)     (61,663)
FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt...........................      30,276       62,141
  Proceeds from issuance of short-term borrowings....................      12,913           --
  Payments of short-term borrowings..................................          --       (6,000)
  Payments of long-term debt.........................................      (5,931)     (23,143)
  Distribution of minority interest earnings.........................         (80)        (155)
                                                                         --------     --------
     Cash provided from financing activities.........................      37,178       32,843
                                                                         --------     --------
Increase (decrease) in cash and cash equivalents.....................      (3,849)       4,065
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................      18,715       11,704
                                                                         --------     --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................    $ 14,866     $ 15,769
                                                                         ========     ========

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-22
   140
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997
                                  (UNAUDITED)
                             (DOLLARS IN THOUSANDS)
 
1 -- ORGANIZATION AND BASIS OF PRESENTATION
 
     Extendicare Health Services, Inc. (the "Company") as of September 30, 1997
operated 163 health care facilities with 17,289 operational beds that provide
nursing, rehabilitative, sub-acute and other specialized medical services in
thirteen states. The Company also currently operates 38 assisted living
facilities totaling 1,480 units in 10 states which provide varying levels of
assistance in daily living activities to its residents. The Company, through its
UPC Health Network, provides patients in approximately 30,300 nursing facility
beds with pharmaceutical and medical products as well as technical medical
support at home in such areas as infusion and respiratory therapy, ventilator
use and other home health services.
 
     The financial information as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 is unaudited and has been prepared in
conformity with the accounting principles and practices as reflected in the
Company's audited annual financial statements. The unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of September
30, 1997 and the operating results and cash flows for the nine months ended
September 30, 1997 and 1996. Results for interim periods are not necessarily
indicative of those to be expected for the year.
 
     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 these estimates.
 
     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and for the year ended December 31, 1996, included herein.
 
2 -- NEW ACCOUNTING PRONOUNCEMENTS
 
     The Financial Accounting Standards Board ("FASB") has issued Statement No.
128, Earnings per Share, which is required to be adopted for financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
be excluded. The impact of Statement No. 128 on the calculation of earnings per
share is not expected to have any impact on the 1997 and prior years' financial
statements. In addition, the FASB has issued Statement No. 129 (Disclosure of
Information about Capital Structure), Statement No. 130 (Reporting Comprehensive
Income), and Statement No. 131 (Disclosures about Segments of an Enterprise and
Related Information), which are not anticipated to have a material effect on the
Company.
 
3 -- ACQUISITIONS
 
     The Company acquired during the nine months ended September 30, 1997 the
property and equipment of nine nursing facilities (890 operational beds), of
which two were previously leased by the Company. The facilities were acquired at
a total cost of approximately $41,746. The Company also acquired the assets of
seven medical specialty services related businesses for approximately $9,344.
 
                                      F-23
   141
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1997
                                  (UNAUDITED)
                             (DOLLARS IN THOUSANDS)
 
     The cost of the assets acquired during the first nine months of 1997
totaled $51,090 and included the following:
 
                                                                          
    Consideration:
      Cash.....................................................................  $36,085
      Long-term debt assumed...................................................   14,655
      Amount due to seller.....................................................      350
                                                                                 -------
                                                                                 $51,090
                                                                                 =======
    Assets Acquired:
      Net current assets.......................................................  $ 1,907
      Property and equipment...................................................   43,543
      Other net assets.........................................................    5,640
                                                                                 -------
                                                                                 $51,090
                                                                                 =======

    
 
     The above acquisitions have been accounted for using the purchase method
and, accordingly, the results of the acquired operations are included in the
accompanying financial statements since their dates of acquisitions.
 
     The Company during 1997 disposed of a facility with sales proceeds totaling
$2,000. There was no significant gain or loss on the disposal of this facility.
 
4 -- CONTRIBUTION OF ASSETS FROM AFFILIATE
 
     An affiliate of the Company during 1997 contributed net assets totaling
$3,683 to the Company as part of a restructuring program. The net assets consist
principally of land and a building held for sale.
 
5 -- COMMITMENTS AND CONTINGENCIES
 
     The Company as of September 30, 1997 had capital expenditures purchase
commitments outstanding of approximately $20,605.
 
     There are numerous legislative and executive initiatives at the federal and
state levels for comprehensive reforms affecting the payment for and
availability of health care services, including without limitation at the
federal level the implementation of a prospective payment system for the
Medicare Program. The Company is unable to predict the impact of health care
reform proposals on the Company; however, it is possible that such proposals
could have a material adverse effect on the Company. Any changes in
reimbursement levels under Medicaid and Medicare and any changes in applicable
government regulations could significantly affect the profitability of the
Company. Various cost containment measures adopted by governmental pay sources
have begun to limit the scope and amount of reimbursable health care expenses.
Additional measures, including measures that have already been proposed in
states in which the Company operates, may be adopted in the future as federal
and state governments attempt to control escalating health care costs. There can
be no assurance that recently enacted or currently proposed or future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company. In particular, changes to the Medicare reimbursement program that have
been enacted could materially adversely affect the Company's revenues derived
from medical specialty services.
 
                                      F-24
   142
 
                       EXTENDICARE HEALTH SERVICES, INC.
 
       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1997
                                  (UNAUDITED)
                             (DOLLARS IN THOUSANDS)
 
     The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of pending legal proceedings will not have a material effect on the
Company's consolidated financial statements.
 
6 -- SUBSEQUENT EVENTS
 
   
     The Company, AHC Acquisition Corp., a wholly owned subsidiary of the
Company ("AHC Acquisition") and Arbor Health Care Company ("Arbor") were parties
to an agreement and plan of merger, dated as of September 29, 1997 pursuant to
which the parties agreed to proceed with a tender offer for all of the issued
and outstanding common shares of Arbor (the "Tender Offer") for $45.00 per share
and the subsequent merger of AHC Acquisition with and into Arbor (the "Merger"),
with Arbor as the surviving corporation. The Tender Offer was commenced on
October 3, 1997, and expired on November 25, 1997. On November 26, 1997, the
Merger was consummated. The aggregate purchase price for all the outstanding
common shares of Arbor, and the payments to be made with respect to unexercised
options and warrants, was approximately $430,000 (exclusive of transaction costs
and fees), including approximately $110,000 of debt of Arbor. The acquisition of
Arbor has been accounted for as a purchase.
    
 
   
     On November 26, 1997, the Company entered into a credit agreement which
provided the Company with new senior secured credit facilities of up to $800,000
(the "New Credit Facilities"). On December 2, 1997, the Company issued $200,000
of 9.35% Senior Subordinated Notes Due 2007 (the "Outstanding Notes"), the
proceeds from which were used to repay $200,000 of the New Credit Facilities.
The Company previously received an equity contribution from Extendicare of
$44,600. The proceeds from the New Credit Facilities and equity contribution
were used to finance the acquisition of Arbor and to refinance existing
indebtedness of Arbor of approximately $101,700 and of the Company of
approximately $243,500 (including the existing bank credit facility) and will be
used to fund working capital, to finance capital expenditures and for other
general corporate purposes.
    
 
                                      F-25
   143
 
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
  ARBOR HEALTH CARE COMPANY
 
     We have audited the accompanying consolidated balance sheets of Arbor
Health Care Company and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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 consolidated financial position of Arbor Health
Care Company and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
 
                                                               ERNST & YOUNG LLP
Toledo, Ohio
February 7, 1997
 
                                      F-26
   144
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                     (IN THOUSANDS, EXCEPT FOR SHARE DATA)
 


                                                                              DECEMBER 31
                                                                         ---------------------
                                                                           1996         1995
                                                                         --------     --------
                                                                                
ASSETS
Current assets
  Cash and cash equivalents..........................................    $  5,761     $  6,394
  Accounts receivable, less allowances of $1,948 and $1,285,
     respectively....................................................      44,019       36,207
  Supply inventories.................................................       2,963        2,779
  Other current assets...............................................       3,503        2,986
  Deferred income taxes..............................................       1,972        1,320
                                                                         --------     --------
Total current assets.................................................      58,218       49,686
Property and equipment
  Land and improvements..............................................      25,337       19,966
  Buildings and improvements.........................................      95,017       73,845
  Equipment and furnishings..........................................      40,477       30,411
  Leasehold improvements.............................................       5,970        7,247
  Construction in process............................................       2,599       12,985
                                                                         --------     --------
                                                                          169,400      144,454
  Less allowances for depreciation and amortization..................      33,564       27,470
                                                                         --------     --------
Total property and equipment.........................................     135,836      116,984
Other assets
  Goodwill, less amortization of $926 and $281, respectively.........      13,034       10,483
  Deferred costs, less amortization of $3,475 and $3,242,
     respectively....................................................       2,205        1,438
  Sundry.............................................................         181          192
                                                                         --------     --------
Total other assets...................................................      15,420       12,113
                                                                         --------     --------
                                                                         $209,474     $178,783
                                                                         ========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Notes payable......................................................    $  4,526     $  4,496
  Accounts payable...................................................      11,121       15,889
  Accrued payroll and related items..................................      11,522       11,043
  Other liabilities..................................................      13,465        8,094
  Current maturities of long-term obligations........................       3,162        5,957
                                                                         --------     --------
Total current liabilities............................................      43,796       45,479
Long-term obligations, less current maturities.......................      94,643       74,741
Deferred income taxes................................................       5,019        2,935
Stockholders' equity
  Preferred stock, $.01 par value
     Authorized -- 2,000,000 shares, none issued or outstanding
  Series A Junior Participating Cumulative Preferred Stock, $.01 par
     value
     Authorized -- 10,000 shares, none issued or outstanding
  Common stock, $.03 par value
     Authorized -- 20,000,000 shares
     Issued and outstanding -- 6,904,054 and 6,891,992,
      respectively...................................................         207          207
  Additional paid-in capital.........................................      30,300       30,135
  Retained earnings..................................................      35,509       25,286
                                                                         --------     --------
Total stockholders' equity...........................................      66,016       55,628
                                                                         --------     --------
                                                                         $209,474     $178,783
                                                                         ========     ========

 
                             See accompanying notes
 
                                      F-27
   145
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 


                                                                    YEAR ENDED DECEMBER 31
                                                               --------------------------------
                                                                 1996        1995        1994
                                                               --------    --------    --------
                                                                              
Net revenues
  Subacute care.............................................   $113,123    $100,945    $ 82,874
  Basic care................................................     84,015      75,931      65,615
  Pharmacy and other........................................     21,639      15,282      10,302
                                                               --------    --------    --------
Total net revenues..........................................    218,777     192,158     158,791
Expenses
  Operating.................................................    171,170     151,922     126,249
  General corporate.........................................      9,680       8,992       7,353
  Operating lease rental....................................      4,450       4,301       4,062
  Interest..................................................      7,108       5,822       4,642
  Depreciation and amortization.............................      8,924       7,450       5,636
                                                               --------    --------    --------
Total expenses..............................................    201,332     178,487     147,942
Other expense (income)
  Loss on disposal of property..............................        766         248         231
  Interest and sundry.......................................       (272)       (332)       (215)
                                                               --------    --------    --------
Total other expense (income)................................        494         (84)         16
                                                               --------    --------    --------
Income before income taxes..................................     16,951      13,755      10,833
Income taxes................................................      6,728       5,303       3,930
                                                               --------    --------    --------
Net income..................................................   $ 10,223    $  8,452    $  6,903
                                                               ========    ========    ========
Net income per share........................................   $   1.47    $   1.23    $   1.01
                                                               ========    ========    ========
Weighted average shares outstanding.........................      6,969       6,881       6,842
                                                               ========    ========    ========

 
                             See accompanying notes
 
                                      F-28
   146
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (IN THOUSANDS, EXCEPT FOR SHARE DATA)
 


                                                                  ADDITIONAL
                                                        COMMON     PAID-IN      RETAINED
                                                        STOCK      CAPITAL      EARNINGS    TOTAL
                                                        ------    ----------    -------    -------
                                                                               
Balances at January 1, 1994..........................    $204      $ 29,548     $ 9,823    $39,575
Net income...........................................                             6,903      6,903
Stock options exercised -- 1,826 shares..............                     7                      7
                                                         ----       -------     -------    -------
Balances at December 31, 1994........................     204        29,555      16,726     46,485
Net income...........................................                             8,452      8,452
Issuance of 74,905 shares of common stock related to
  acquisitions.......................................       3           498         108        609
Stock options exercised -- 14,451 shares.............                    82                     82
                                                         ----       -------     -------    -------
Balances at December 31, 1995........................     207        30,135      25,286     55,628
Net income...........................................                            10,223     10,223
Stock options exercised -- 12,062 shares.............                   165                    165
                                                         ----       -------     -------    -------
Balances at December 31, 1996........................    $207      $ 30,300     $35,509    $66,016
                                                         ====       =======     =======    =======

 
                             See accompanying notes
 
                                      F-29
   147
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 


                                                                     YEAR ENDED DECEMBER 31
                                                                  -----------------------------
                                                                   1996       1995       1994
                                                                  -------    -------    -------
                                                                               
Operating activities
Net income.....................................................   $10,223    $ 8,452    $ 6,903
Adjustments to reconcile net income to net cash provided by
  operating activities
  Provision for depreciation...................................     7,504      6,397      5,056
  Amortization.................................................     1,718      1,296        902
  Provision for deferred income taxes..........................     1,432        464        102
  Provision for losses on accounts receivable..................     2,993      2,219      1,554
  Loss on disposal of property.................................       766        248        231
Changes in operating assets and liabilities
     Accounts receivable.......................................   (10,405)    (1,854)    (8,514)
     Supply inventories........................................       (41)      (404)      (416)
     Other current assets......................................      (537)    (1,175)    (1,236)
     Deferred costs............................................    (1,068)      (708)      (758)
     Accounts payable..........................................    (4,951)     4,416      1,223
     Accrued payroll and related items.........................       450      3,065      1,009
     Other liabilities.........................................     5,300         65        410
                                                                  -------    -------    -------
Net cash provided by operating activities......................    13,384     22,481      6,466
Investing activities
  Expenditures for property and equipment......................   (23,463)   (23,159)   (18,549)
  Cash paid to acquire businesses, net of cash received........    (6,753)   (11,686)
  Sundry and other.............................................        19        111        209
                                                                  -------    -------    -------
Net cash used in investing activities..........................   (30,197)   (34,734)   (18,340)
Financing activities
  Net borrowings (repayments) under line of credit agreements
     to finance development projects and acquisitions..........    (1,206)    19,196     12,759
  Net borrowings of working capital under line of credit
     agreements................................................        30      2,919        263
  Borrowings on long-term obligations..........................    27,000        107         54
  Repayments of long-term obligations..........................    (9,035)    (9,148)    (2,685)
  Deferred financing costs.....................................      (774)       (65)       (17)
  Issuance of stock............................................       165         83          7
                                                                  -------    -------    -------
Net cash provided by financing activities......................    16,180     13,092     10,381
                                                                  -------    -------    -------
Net increase (decrease) in cash and cash equivalents...........      (633)       839     (1,493)
Cash and cash equivalents at beginning of year.................     6,394      5,555      7,048
                                                                  -------    -------    -------
Cash and cash equivalents at end of year.......................   $ 5,761    $ 6,394    $ 5,555
                                                                  =======    =======    =======

 
                             See accompanying notes
 
                                      F-30
   148
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      THREE YEARS ENDED DECEMBER 31, 1996
 
1.  ACCOUNTING POLICIES
 
ORGANIZATION AND BASIS OF PRESENTATION
 
     Arbor Health Care Company ("Arbor") is a Delaware corporation organized on
April 4, 1985, and does business principally in Ohio and Florida. The
consolidated financial statements include the accounts of Arbor and its
subsidiaries, all of which are wholly owned (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
 
     The Company owns, operates, and develops nursing centers (the "Centers")
that provide subacute and basic health care services and operates three
institutional pharmacies. Subacute care generally is provided to patients who
have been discharged from an acute care hospital and require additional care in
specialized clinical programs before being discharged. The Company includes in
its subacute care revenues all room and board, nursing, therapies, and medical
supplies for its subacute patients and pharmacy charges for all its patients.
Basic care generally is provided to geriatric and chronic care patients
requiring routine nursing or assisted living services.
 
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers short-term investments consisting of highly liquid
debt instruments with a maturity of three months or less when purchased and
money market funds to be cash equivalents.
 
ACCOUNTS RECEIVABLE AND NET REVENUES
 
     Accounts receivable and subacute and basic care net revenues are recorded
when the related patient services are provided at established billing rates or
at amounts estimated by management to be reimbursable by Medicare, Medicaid and
other third-party payors under the provisions of reimbursement formulae in
effect. Final settlement of amounts earned is subject to review by appropriate
governmental authorities or their agents. In the opinion of management, adequate
provision has been made for any adjustments that may result from such reviews.
Differences between amounts accrued and final settlements, if any, are recorded
in operations in the year of settlement.
 
     Pharmacy and other revenues include amounts related to institutional
pharmacy sales made to non-related facilities and their residents and the
management of one Center through May, 1995.
 
     A significant portion of the Company's revenue is derived from patients
under the Medicaid and Medicare programs. For the years ended December 31, 1996,
1995, and 1994, the Company derived approximately 35%, 36%, and 34% of its
revenues from Medicare and approximately 32%, 30%, and 31% of its revenues from
Medicaid, respectively. There have been and the Company expects that there will
continue to be proposals to limit Medicare and Medicaid reimbursement for
long-term and rehabilitative care services. The Company cannot predict at this
time whether such proposals will be adopted or, if adopted and implemented, what
effect they will have on the Company.
 
SUPPLY INVENTORIES
 
     Supply inventories, consisting primarily of pharmaceutical and medical
supplies, are valued at the lower of cost (first-in, first-out) or market.
 
                                      F-31
   149
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
PROPERTY AND EQUIPMENT
 
     Property and equipment are stated at cost. Property includes costs of
acquiring, constructing or renovating Centers, other facilities and equipment.
The Company provides for depreciation and obsolescence at rates which are
sufficient to amortize the carrying amounts of such assets over their estimated
useful lives using the straight-line method.
 
GOODWILL
 
     Goodwill resulted from businesses acquired and is amortized on a
straight-line basis over twenty years. Contingent payments made in connection
with acquisitions are recorded as goodwill. The carrying value of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as determined based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill will be
reduced by the estimated shortfall of cash flows.
 
DEFERRED COSTS
 
     Deferred costs include the costs of obtaining financing and Center
preopening costs. Such costs are amortized by the straight-line method using the
following periods: financing costs over the term of the related debt and Center
preopening costs over twenty-four months.
 
FINANCIAL INSTRUMENTS
 
     The Company believes the carrying amount of cash and equivalents, accounts
receivable (net of allowances), other current assets, notes and accounts
payable, accrued payroll and other liabilities approximates fair value due to
the short maturity of those instruments.
 
     The fair value of the Company's long-term obligations is estimated based on
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities and carrying
value approximates fair value.
 
INCOME TAXES
 
     Income taxes are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." This statement requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax basis of assets and liabilities.
 
STOCK BASED COMPENSATION
 
     The Company grants stock options for a fixed number of shares to employees
and outside directors of the Company with an exercise price equal to the fair
value of the shares at the date of grant. As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company applies Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation expense for its options granted.
 
NET INCOME PER SHARE
 
     Net income per share is based on the weighted average shares of Common
Stock outstanding plus common stock equivalents from stock options, after giving
effect to the conversion of preferred stock.
 
RECLASSIFICATION
 
     Certain amounts in prior year financial statements have been reclassified
to conform with the 1996 presentation.
 
                                      F-32
   150
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
2.  ACQUISITIONS
 
     On September 19, 1996, the Company acquired Arbors at Waterville, a 100-bed
Center that it has operated under an operating lease agreement since 1989. The
Company financed a portion of the $5.8 million purchase with $4.6 million from
its acquisition/development lines of credit. Raymond James Financial, Inc.
("RJFI") owns two subsidiaries that are the controlling partners in a
partnership that is the general partner in a partnership that owned the center.
A director of the Company is an officer, director and major stockholder of RJFI.
Effective June 30, 1996, the Company acquired all of the outstanding stock of
Poly-Stat Supply Corporation and Poly-Stat Computer Applications, Inc. The
Poly-Stat businesses provide enteral feeding, urological, ostomy, tracheostomy,
surgical dressing and oxygen supplies and Medicare billing services to nursing
homes. The purchase price of approximately $1.2 million for the Poly-Stat
businesses included approximately $1.0 million in cash and $0.2 million in
promissory notes. In addition, the Company must make a $1.0 million contingent
payment if certain earnings targets are attained over the next five years.
 
     On May 31, 1995, the Company acquired substantially all of the assets of
the Arbors at Fairlawn ("Fairlawn") for approximately $6.7 million in cash and
assumed certain liabilities of $3.8 million. Fairlawn is a 150-bed nursing and
assisted living facility which the Company had operated under a management
agreement since its opening in 1986. A principal stockholder of the Company was
a principal stockholder in the corporate general partner of the partnership that
previously owned Fairlawn. On June 30, 1995, the Company acquired all of the
outstanding stock of The Druggist, Inc. ("Druggist") for approximately $10.5
million, including $.5 million in Common Stock (24,968 shares) and $4.8 million
in seller financing. The Druggist provides institutional pharmacy and
respiratory services to nursing homes and correctional facilities in Ohio.
Additional consideration of up to $2.5 million may be required for the Druggist
acquisition if certain earnings targets are attained through December 31, 1999.
 
     The Arbors at Waterville, Poly-Stat businesses, Fairlawn and Druggist
acquisitions have been accounted for as purchases, and results of operations are
included from the dates of acquisition. The 1996 purchase prices which included
approximately $6,753,000 paid in cash, seller-financed debt of approximately
$193,000 and debt assumed of approximately $157,000 were allocated primarily to
property and equipment ($5,006,000), goodwill ($1,834,000), and working capital
($263,000). The 1995 purchase prices which included approximately $11,686,000
paid in cash, seller-financed debt and common stock issued of $5,250,000 and
debt assumed of approximately $4,380,000 were allocated primarily to goodwill
($12,126,000), property and equipment ($8,618,000), and working capital
($572,000).
 
     The Company exchanged 49,937 shares of its Common Stock for all of the
outstanding shares of Alternacare Plus Enterprises, Inc. ("Alternacare") on June
30, 1995. Alternacare provides medical and enteral feeding supplies, and
Medicare billing services. This transaction was accounted for as an immaterial
pooling of interests; thus, prior years' financial statements of the Company
have not been restated and results of operations are included from the date of
acquisition.
 
     The pro forma unaudited results of operations for the years ended December
31, 1996 and 1995, assuming the purchases had been consummated as of January 1,
1995, are not materially different from the reported results of operations.
 
     On June 30, 1994 Arbor exchanged 428,571 shares of its Common Stock for all
of the outstanding shares of two related institutional pharmacy corporations,
Bay Geriatric Pharmacy, Inc. ("Bay") and Home Care Pharmacy, Inc. of Florida
("Home Care").These transactions have been accounted for as poolings of
interests, and the Company has included the accounts of Bay and Home Care in
consolidation as if they had always been subsidiaries.
 
     Effective January 1, 1997, the Company acquired substantially all of the
assets and assumed certain liabilities of Adult Services Unlimited, Inc.
("ASUI") and Health Poconos, Inc. ("HPI") for approximately
 
                                      F-33
   151
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
$3.2 million, including $1.7 million in seller financing. ASUI and HPI are
Comprehensive Outpatient Rehabilitation Facilities that provide general,
job-related injury and geriatric rehabilitation to the northeastern Pennsylvania
market. The acquisitions will be treated as purchases for accounting and
financial reporting purposes. The pro forma unaudited results of operations for
the year ended December 31, 1996, assuming the purchase had been consummated as
of January 1, 1996, are not materially different from the reported results of
operations.
 
3.  NOTES PAYABLE AND OTHER CURRENT LIABILITIES
 
     The Company has short-term working capital lines of credit of $4,650,000
with three banks. Interest rates range from London Interbank Offered Rates
("LIBOR") plus 1.50% to prime, and commitment fees of up to .25% are calculated
on any unused portion. There were borrowings under the lines at December 31,
1996 and 1995 of $4,525,766 and, $4,496,188 respectively, at a weighted average
interest rate of 8.08% and 8.34%, respectively.
 
     Accrued payroll and related items include $2,651,205 and $1,950,768 accrued
for wages and $2,336,065 and $2,928,871 accrued for workers compensation as of
December 31, 1996 and 1995, respectively. Other liabilities include $6,510,450
and $1,454,363 owed under various Medicare and Medicaid programs as of December
31, 1996 and 1995, respectively.
 
                                      F-34
   152
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
4.  LONG-TERM OBLIGATIONS
 
     Long-term obligations consist of the following:
 


                                                                               DECEMBER 31
                                                                           -------------------
                                                                            1996        1995
                                                                           -------     -------
                                                                             (IN THOUSANDS)
                                                                                 
Notes payable to banks
  Collateralized by real estate or leasehold improvements and/or
     equipment and/or accounts receivable, payable in monthly
     installments and lump sums ranging to July 2013
  Interest fixed from 7.16% to 10.75%..................................    $30,849     $20,702
  Interest variable from 6.74% to 9.25%................................     21,041       8,281
  Uncollateralized, payable in monthly installments to January 1998,
     interest at LIBOR plus 1.75%......................................        330         710
Acquisition/development credit facilities
  Collateralized by real estate and/or equipment.......................         --       4,829
  Uncollateralized, payable in monthly installments and lump sums to
     December 2003, interest from LIBOR plus 1.75% to LIBOR plus
     2.00%.............................................................     32,748      29,126
Notes payable to non-financial institutions, collateralized by real
  estate or leasehold improvements and/or equipment and/or accounts
  receivable, payable in monthly installments and lump sums to May
  2002, interest from 9.00% to 10.50%..................................      7,160       7,272
Note payable to stockholder, uncollateralized, payable in semi-annual
  installments and lump sums to July 2000, interest at 8.00%...........      4,425       4,750
Industrial development revenue bonds, collateralized by real estate and
  equipment and/or accounts receivable, payable in monthly installments
  and lump sums to May 1999, interest variable of 3.82%................        905       4,710
Other..................................................................        347         318
                                                                           -------     -------
                                                                            97,805      80,698
Less current maturities................................................      3,162       5,957
                                                                           -------     -------
                                                                           $94,643     $74,741
                                                                           =======     =======

 
     The Company has acquisition/development credit facilities with three banks
which provide for borrowings up to $43,750,000 and $42,500,000 at December 31,
1996 and 1995, respectively. Commitment fees of up to .25% are calculated on the
unused portion. Terms of the credit facilities provide that, at their option,
the banks may request a first mortgage and/or security interest in the property
financed. As of December 31, 1996 and 1995 commitments under these credit
facilities were $32,845,000 and $37,600,000 and outstanding balances were
$32,748,000, and $33,954,860, respectively.
 
     The Company has letter of credit facilities aggregating $4,233,131
available with four banks. Standby letters of credit of $2,635,021 were issued
and outstanding at December 31, 1996. Additionally, the Company has
collateralized Industrial Development Revenue Bonds with letters of credit of
$917,611. Outstanding letters of credit are subject to annual renewal and
issuance fees from 1.0% to 1.5%.
 
     Certain of the Company's borrowing agreements contain covenants which,
among other things, require the maintenance of minimum net worth and certain
financial ratios, and prohibit cash dividends in excess of $400,000 annually.
The Company is in compliance with all provisions of the agreements.
 
                                      F-35
   153
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
     Maturities of long-term obligations as of December 31, 1996 are as follows
(in thousands):
 
                                                                          
    1997.......................................................................  $ 3,162
    1998.......................................................................    3,631
    1999.......................................................................   19,713
    2000.......................................................................   18,588
    2001.......................................................................   12,259
    Thereafter.................................................................   40,452
                                                                                 -------
                                                                                 $97,805
                                                                                 =======

    
 
     Interest paid amounted to $8,188,000, $5,988,000, and $4,736,000, for the
years ended December 31, 1996, 1995, and 1994, respectively. Interest
capitalized amounted to $591,000, $631,000, and $348,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
 
5.  LEASES
 
     The Company operates certain Centers pursuant to the terms of operating
leases. Each of the operating leases contains one or more of the following
options: (a) the Company can, after the initial lease term, purchase the
property at the fair value of the property; or (b) the Company can, at the end
of the initial lease term, renew the lease (in some cases at the original terms
and in others at the fair rental value) ranging from one to five periods of five
to seven years. Certain of the leases require the Company to provide a letter of
credit to the lessor sufficient to cover from three months' to one year's lease
payments. Rental payments under operating leases are based on minimum rentals
plus contingent rentals derived from several factors, including the consumer
price index and increases in revenues. Operating lease rental expense included
contingent rentals of $623,545, $614,431, and $601,789 for the years ended
December 31, 1996, 1995, and 1994, respectively.
 
     Future minimum lease payments under operating leases as of December 31,
1996 are as follows (in thousands):
 


                                                                                 OPERATING
                                                                                  LEASES
                                                                                 ---------
                                                                              
    1997.....................................................................     $ 3,483
    1998.....................................................................       3,177
    1999.....................................................................       3,005
    2000.....................................................................       2,853
    2001.....................................................................         775
    Thereafter...............................................................          --
                                                                                  -------
    Total minimum lease payments.............................................     $13,293
                                                                                  =======

 
6.  STOCK OPTION PLANS
 
     In 1985 and 1995 the Company adopted stock option plans (the 1985 Plan and
1995 Plan) for key employees and directors. The 1995 Plan authorizes the
issuance of 332,197 shares of common stock, including 132,197 shares which were
previously reserved for issuance under the 1985 Plan. No further options may be
granted under the 1985 Plan. Options granted to eligible employees under the
plans may be incentive stock options under the provisions of the Internal
Revenue Code or nonstatutory options. Options granted to members of the Board of
Directors are nonstatutory options. The options which have been granted under
the plans provide that each employee option award will become exercisable in
five equal installments on the first
 
                                      F-36
   154
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
five anniversaries of the grant date. The options which have been granted to the
outside directors will become exercisable in three equal installments on the
first three anniversaries of the grant date. Options granted under the plans
expire no later than ten years after the grant date. At December 31, 1996, there
were 396,996 shares reserved for issuance under the plans.
 
     In 1996 the Company adopted a stock option plan (the 1996 Plan) for
non-employee directors. The 1996 Plan authorized the issuance of 42,000 shares
of common stock. Under the terms of the plan, in May, 1996 each of the Company's
five non-employee directors was granted an option to purchase 1,000 shares of
common stock. Additional options to purchase 1,000 shares of common stock
automatically will be granted to non-employee directors on the date of each
future annual meeting of stockholders. The non-statutory options become
exercisable in three equal installments on the first three anniversaries of the
grant date and expire ten years after the grant date. At December 31, 1996,
42,000 shares were reserved for issuance under the 1996 Plan.
 
     The effect on net income and net income per share had compensation expense
been computed in accordance with the fair value provisions of SFAS No. 123 is
immaterial for each of the years ended December 31, 1996 and 1995, however, the
effects on future years are not presently determinable.
 
     A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
 


                                                   1996                  1995                 1994
                                            -------------------   ------------------   ------------------
                                                       AVERAGE              AVERAGE              AVERAGE
                                             SHARES    EXERCISE   SHARES    EXERCISE   SHARES    EXERCISE
                                            --------   --------   -------   --------   -------   --------
                                                                               
Outstanding at January 1..................   281,528    $16.83    160,365    $14.80     51,962    $ 5.48
Granted...................................   134,000     20.25    200,000     17.31    111,667     18.81
Exercised.................................   (12,062)    13.63    (14,451)     5.75     (1,826)     3.60
Canceled..................................  (117,267)    17.27    (64,386)    15.73     (1,438)     4.43
                                            --------              -------              -------
Outstanding at December 31................   286,199     18.39    281,528     16.83    160,365     14.80
                                            ========              =======              =======
Exercisable at December 31................    55,999     15.15     27,602     12.28     24,260      5.89
                                            ========              =======              =======

 
7.  STOCKHOLDER RIGHTS AGREEMENT
 
     On November 14, 1996, the Company adopted a Stockholder Rights Agreement
(the "Agreement") under which each outstanding share of Company common stock
will carry with it the right to buy one one-thousandth (1/1000th) of a share of
a new series of junior participating cumulative preferred stock at an exercise
price of $100 per right, subject to antidilution adjustments. If a person or
group other than an exempt person acquires 15% or more of the Company's
outstanding voting stock or announces a tender or exchange offer that would
result in ownership of 15% or more of the Company's voting stock, then each
right will become exercisable (except by such acquiring person). An exempt
person includes the Company, any employee benefit plan of the Company and
persons who beneficially held 15% or more of the Company's common stock at the
time of adoption of the Agreement and their affiliates. Thereafter, in the event
of a merger or combination, sale of assets or earnings power, each right then
outstanding will entitle its holder to purchase for $100, subject to
antidilution adjustments, a number of the acquiring party's common stock having
a market value of twice that amount. The Company may redeem all rights for $0.01
per right at any time prior to the acquisition of 15% or more of the Company's
stock by a person or group. The rights will expire on November 14, 2006.
 
                                      F-37
   155
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
8.  INCOME TAXES
 
     The Company's income taxes consisted of the following:
 


                                                                       YEAR ENDED DECEMBER 31
                                                                     --------------------------
                                                                      1996      1995      1994
                                                                     ------    ------    ------
                                                                           (IN THOUSANDS)
                                                                                
Current provision:
  Federal.........................................................   $4,463    $4,052    $3,230
  State and local.................................................      833       787       598
                                                                     ------    ------    ------
                                                                      5,296     4,839     3,828
Deferred provision:
  Federal.........................................................    1,218       399        56
  State and local.................................................      214        65        46
                                                                     ------    ------    ------
                                                                      1,432       464       102
                                                                     ------    ------    ------
                                                                     $6,728    $5,303    $3,930
                                                                     ======    ======    ======

 
     Total income taxes differed from the amounts computed by applying the
federal income tax statutory rates to income before income taxes as a result of
the following:
 


                                                                       YEAR ENDED DECEMBER 31
                                                                     --------------------------
                                                                      1996      1995      1994
                                                                     ------    ------    ------
                                                                           (IN THOUSANDS)
                                                                                
Expected federal income tax expense...............................   $5,891    $4,677    $3,683
Increase (reduction) in income taxes:
  State and local income taxes, net of federal income tax
     benefit......................................................      683       562       425
  Tax credits.....................................................       (7)      (68)     (282)
  Other...........................................................      161       132       104
                                                                     ------    ------    ------
Total income tax expense..........................................   $6,728    $5,303    $3,930
                                                                     ======    ======    ======

 
     Significant components of the Company's deferred tax assets and liabilities
are as follows:
 


                                                                                DECEMBER 31
                                                                              ----------------
                                                                               1996      1995
                                                                              ------    ------
                                                                              (IN THOUSANDS)
                                                                                  
Deferred tax assets
  Accrued liabilities and reserves.........................................   $1,194    $  771
  Allowance for doubtful accounts..........................................      718       486
  Other....................................................................       60        63
                                                                              ------    ------
Total deferred tax assets..................................................   $1,972    $1,320
                                                                              ======    ======
Deferred tax liabilities
  Tax depreciation in excess of book depreciation..........................   $4,317    $2,519
  Other....................................................................      702       416
                                                                              ------    ------
Total deferred tax liabilities.............................................   $5,019    $2,935
                                                                              ======    ======

 
     Total income tax payments during the years ended December 31, 1996, 1995,
and 1994 were approximately $6,482,000, $5,615,000 and $3,494,000, respectively.
 
                                      F-38
   156
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                      THREE YEARS ENDED DECEMBER 31, 1996
 
9.  CONCENTRATION OF CREDIT RISK
 
     The Company has concentrations of credit risk in the following receivables:
 


                                                                               DECEMBER 31
                                                                            ------------------
                                                                             1996       1995
                                                                            -------    -------
                                                                              (IN THOUSANDS)
                                                                                 
Medicare program.........................................................   $11,979    $10,416
Medicaid programs........................................................   $ 9,142    $ 7,209

 
10.  EMPLOYEE BENEFIT PLANS
 
     The Company has defined contribution plans under Section 401(k) of the
Internal Revenue Code covering eligible employees. Employees may elect to defer
up to 17% of their gross pay and the Company makes matching contributions
subject to certain limitations. The Company's contributions to the plans
amounted to $514,609, $411,206, and $298,997, for the years ended December 31,
1996, 1995, and 1994, respectively.
 
     The Company offers health insurance benefits principally under a
self-insured plan but has purchased insurance to limit both individual and
aggregate claim exposure. Employees who were enrolled in the Company's health
insurance plan prior to retirement are eligible to elect to continue in the plan
for up to 36 months after retirement under COBRA. Claims paid on behalf of
individual retirees are limited by insurance and were not material in 1996,
1995, and 1994.
 
     The Company entered into agreements with certain key executives that
provide, in the event of termination of employment within one year of a change
of control of the Company, for termination payments including (a) cash severance
benefits based on current salary and in certain cases prior year bonus; (b)
acceleration of any unvested stock options; and (c) payment of COBRA insurance
premiums.
 
11.  QUARTERLY RESULTS OF OPERATION FOR YEARS ENDED DECEMBER 31, 1996 AND 1995
     (UNAUDITED)
 


                                                  TOTAL NET     OPERATING                    NET INCOME
                QUARTER ENDED                     REVENUES       MARGIN       NET INCOME     PER SHARE
- ----------------------------------------------    ---------     ---------     ----------     ----------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                 
December 31, 1996.............................     $57,699       $10,857        $3,267          $.47
September 30, 1996............................      55,961         9,670         2,690           .39
June 30, 1996.................................      52,641         8,677         2,243           .32
March 31, 1996................................      52,476         8,229         2,023           .29
December 31, 1995.............................      52,288         9,282         2,690           .39
September 30, 1995............................      49,602         8,445         2,299           .33
June 30, 1995.................................      46,700         7,133         1,838           .27
March 31, 1995................................     $43,568       $ 6,468        $1,625          $.24

 
     Operating margin represents earnings before depreciation and amortization,
interest, operating lease rentals and income taxes.
 
                                      F-39
   157
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                    CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                     (In thousands, except for share data)
 


                                                                     SEPTEMBER 30     DECEMBER 31
                                                                         1997            1996
                                                                     ------------     -----------
                                                                                       (NOTE 1)
                                                                                
ASSETS
Current assets
  Cash and cash equivalents........................................    $  6,781        $   5,761
  Accounts receivable, less allowances of $2,099 and $1,948,
     respectively..................................................      50,676           44,019
  Supply inventories...............................................       3,839            2,963
  Other current assets.............................................       3,620            3,503
  Deferred income taxes............................................       2,218            1,972
                                                                       --------         --------
Total current assets...............................................      67,134           58,218
Property and equipment
  Land and improvements............................................      25,418           25,337
  Buildings and improvements.......................................      95,825           95,017
  Equipment and furnishings........................................      44,119           40,477
  Leasehold improvements...........................................       7,524            5,970
  Construction in process..........................................      11,825            2,599
                                                                       --------         --------
                                                                        184,711          169,400
  Less allowances for depreciation and amortization................      40,108           33,564
                                                                       --------         --------
Total property and equipment.......................................     144,603          135,836
Other assets
  Goodwill, less amortization of $1,582 and $926, respectively.....      20,124           13,034
  Deferred costs, less amortization of $3,407 and $3,475,
     respectively..................................................       1,718            2,205
  Sundry...........................................................         316              181
                                                                       --------         --------
Total other assets.................................................      22,158           15,420
                                                                       --------         --------
                                                                       $233,895        $ 209,474
                                                                       ========         ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Notes payable....................................................    $     --        $   4,526
  Accounts payable.................................................      12,252           11,121
  Accrued payroll and related items................................      14,837           11,522
  Other liabilities................................................      16,780           13,465
  Current maturities of long-term obligations......................       4,940            3,162
                                                                       --------         --------
Total current liabilities..........................................      48,809           43,796
Long-term obligations, less current maturities.....................     103,720           94,643
Deferred income taxes..............................................       6,264            5,019
Stockholders' equity
  Preferred stock, $.01 par value, Authorized -- 2,000,000 shares
     None issued or outstanding....................................          --               --
  Series A Junior Participating Cumulative Preferred Stock, $.01
     par value
     Authorized -- 10,000 shares, None issued or outstanding.......          --               --
  Common stock, $.03 par value, Authorized -- 20,000,000 shares
     Issued and outstanding -- 6,937,427 and 6,904,054 shares,
      respectively.................................................         208              207
  Additional paid-in capital.......................................      30,827           30,300
  Retained earnings................................................      44,067           35,509
                                                                       --------         --------
Total stockholders' equity.........................................      75,102           66,016
                                                                       --------         --------
                                                                       $233,895        $ 209,474
                                                                       ========         ========

 
                             See accompanying notes
 
                                      F-40
   158
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 


                                                   THREE MONTHS ENDED         NINE MONTHS ENDED
                                                      SEPTEMBER 30              SEPTEMBER 30
                                                  ---------------------     ---------------------
                                                    1997         1996         1997         1996
                                                  --------     --------     --------     --------
                                                                             
Net revenues
  Subacute care...............................    $ 32,144     $ 29,165     $ 94,623     $ 82,971
  Basic care..................................      21,113       21,110       63,901       62,722
  Pharmacy and other..........................       8,118        5,686       22,680       15,385
                                                  --------     --------
Total net revenues............................      61,375       55,961      181,204      161,078
Expenses
  Operating...................................      47,624       43,578      141,614      127,011
  General corporate...........................       2,573        2,430        8,081        7,123
  Operating lease rental......................       1,150        1,157        3,292        3,410
  Net interest................................       2,022        1,884        6,106        5,161
  Depreciation and amortization...............       2,710        2,216        7,928        6,498
                                                  --------     --------
Total expenses................................      56,079       51,265      167,021      149,203
Other expense (income)
  Loss on disposal of property................          61          315          306          498
  Interest and sundry.........................         (62)         (32)        (174)        (130)
                                                  --------     --------
Total other expense (income)..................          (1)         283          132          368
                                                  --------     --------
Income before income taxes....................       5,297        4,413       14,051       11,507
Income taxes..................................       2,049        1,723        5,493        4,551
                                                  --------     --------
Net income....................................    $  3,248     $  2,690     $  8,558     $  6,956
                                                  ========     ========
Net income per share..........................    $   0.46     $   0.39     $   1.22     $   1.00
                                                  ========     ========
Weighted average shares outstanding...........       7,090        6,954        7,035        6,970
                                                  ========     ========

 
                             See accompanying notes
 
                                      F-41
   159
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
                     (IN THOUSANDS, EXCEPT FOR SHARE DATA)
 


                                                                  ADDITIONAL
                                                        COMMON     PAID-IN      RETAINED
                                                        STOCK      CAPITAL      EARNINGS     TOTAL
                                                        ------    ----------    --------    -------
                                                                                
Balances at January 1, 1996..........................    $207      $ 30,135     $ 25,286    $55,628
Net income...........................................                             10,223     10,223
Stock options exercised -- 12,062 shares.............                   165                     165
                                                        -----
                                                          ---
                                                                   --------     --------
Balances at December 31, 1996........................     207        30,300       35,509     66,016
Net income...........................................                              8,558      8,558
Stock options exercised -- 31,832 shares.............       1           483                     484
Employee Stock Purchase Plan -- 1,541 shares.........                    44                      44
                                                        -----
                                                          ---
                                                                   --------     --------
Balances at September 30, 1997.......................    $208      $ 30,827     $ 44,067    $75,102
                                                        ========   ========     ========

 
                             See accompanying notes
 
                                      F-42
   160
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)
 


                                                                            NINE MONTHS ENDED
                                                                               SEPTEMBER 30
                                                                            ------------------
                                                                             1997       1996
                                                                            -------    -------
                                                                                 
Operating activities
  Net income.............................................................   $ 8,558    $ 6,956
  Adjustments to reconcile net income to net cash provided by operating
     activities
     Provision for depreciation..........................................     6,670      5,432
     Amortization........................................................     1,435      1,304
     Provision for deferred income taxes.................................       999      1,534
     Provision for losses on accounts receivable.........................     2,285      1,447
     Loss on disposal of property........................................       305        498
     Changes in operating assets and liabilities
       Accounts receivable...............................................    (7,816)    (5,770)
       Supply inventories................................................      (668)       (71)
       Other current assets..............................................    (1,076)    (1,257)
       Deferred costs....................................................      (262)      (850)
       Accounts payable..................................................       874     (3,960)
       Accrued payroll and related items.................................     3,189      2,927
       Other liabilities (income tax payments of $3,857 and $4,766,
        respectively)....................................................     3,151      1,521
                                                                             ------     ------
Net cash provided by operating activities................................    17,644      9,711
Investing activities
  Expenditures for property and equipment................................   (14,010)   (18,417)
  Cash paid to acquire businesses, net of cash received..................    (5,514)    (6,775)
  Sundry and other.......................................................      (105)        38
                                                                             ------     ------
Net cash used in investing activities....................................   (19,629)   (25,154)
Financing activities
  Net repayments under line of credit agreements to finance development
     projects and acquisitions...........................................    (1,076)    (5,214)
  Net borrowings (repayments) of working capital under line of credit
     agreements..........................................................    (4,526)    (2,827)
  Borrowings on long-term obligations....................................    11,750     27,000
  Repayments of long-term obligations....................................    (3,603)    (6,014)
  Deferred financing costs...............................................       (68)      (759)
  Issuance of stock......................................................       528         64
                                                                             ------     ------
Net cash provided by financing activities................................     3,005     12,250
                                                                             ------     ------
Net increase (decrease) in cash and cash equivalents.....................     1,020     (3,193)
Cash and cash equivalents at beginning of period.........................     5,761      6,394
                                                                             ------     ------
Cash and cash equivalents at end of period...............................   $ 6,781    $ 3,201
                                                                             ======     ======

 
                             See accompanying notes
 
                                      F-43
   161
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                  (UNAUDITED)
 
1.  ORGANIZATION AND BASIS OF PRESENTATION
 
     The consolidated balance sheet of Arbor Health Care Company and
subsidiaries (the "Company") at December 31, 1996 has been derived from the
audited consolidated financial statements at that date. The consolidated balance
sheet of the Company at September 30, 1997, and the consolidated statements of
income and cash flows for the periods ended September 30, 1997 and 1996, have
been prepared by the Company, without audit, in accordance with 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 fairly present the financial position, results of operations and
cash flows at September 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 the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996. The results of operations and cash
flows for the period ended September 30, 1997 are not necessarily indicative of
the operating results or cash flows for the full year.
 
2.  NEW ACCOUNTING PRONOUNCEMENTS
 
     The Financial Accounting Standards Board ("FASB") has issued Statement No.
128, Earnings per Share, which is required to be adopted for financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options will
be excluded. The impact of Statement No. 128 on the calculation of earnings per
share is not expected to be material. In addition, the FASB has issued Statement
No. 129 (Disclosure of Information about Capital Structure), Statement No. 130
(Reporting Comprehensive Income), and Statement No. 131 (Disclosures about
Segments of an Enterprise and Related Information), which are not anticipated to
have a material effect on the Company.
 
3.  MERGER
 
     On September 29, 1997, the Company entered into a definitive merger
agreement with Extendicare Inc. ("Extendicare") pursuant to which Extendicare,
through an indirect wholly-owned United States subsidiary, commenced a tender
offer (the "Tender Offer") for any and all of the Company's outstanding shares
at a price of $45.00 per share in cash. Under the merger agreement, the Tender
Offer will be followed by a merger (the "Merger") in which shares of the Company
not purchased in the Tender Offer will be converted into the right to receive
cash in the amount of $45.00 per share.
 
     Extendicare's Tender Offer commenced on October 3, 1997 and expired on
November 25, 1997. Over 99% of the issued and outstanding common shares of the
Company were tendered pursuant to the Tender Offer. On November 26, 1997, the
Merger was consummated and the Company became an indirect subsidiary of
Extendicare. For additional information regarding the merger agreement, refer to
Extendicare's Schedule 14D-1 filed October 3, 1997, and amended on October 30,
1997; and the Company's Schedule 14D-9 filed October 6, 1997.
 
4.  ACQUISITIONS
 
     The Company acquired all of the assets of seven outpatient rehabilitation
centers in the Jacksonville, Florida area and one Comprehensive Outpatient
Rehabilitation Facility ("CORF") in St. Augustine, Florida effective September
1, 1997 and July 15, 1997, respectively. Effective August 1, 1997, the Company
acquired all of the outstanding stock of an institutional pharmacy in the
Detroit, Michigan area. The combined
 
                                      F-44
   162
 
                   ARBOR HEALTH CARE COMPANY AND SUBSIDIARIES
       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                  (UNAUDITED)
 
purchase price of these acquisitions was $5.4 million, including $1.4 million in
seller financing. Combined additional consideration of up to $1.5 million may be
required for the Jacksonville, Florida area rehabilitation centers and Detroit,
Michigan area pharmacy if certain earnings targets are attained through December
31, 1999 and December 31, 2001, respectively. The Company entered into an
operating lease agreement, effective September 1, 1997, for a 116-bed nursing
facility in Ohio. These acquisitions and the leased facility generated
approximately $10.6 million in combined 1996 revenues.
 
     Effective January 1, 1997, the Company acquired substantially all of the
assets and assumed certain liabilities of Adult Services Unlimited, Inc.
("ASUI") and Health Poconos, Inc. ("HPI") for approximately $3.2 million,
including $1.7 million in seller financing. ASUI and HPI are CORFs in the
northeastern Pennsylvania market. In 1996, the two facilities had combined
revenues of approximately $2.8 million.
 
     On September 19, 1996, the Company acquired Arbors at Waterville, a 100-bed
Center that it has operated under an operating lease agreement since 1989. The
Company financed a portion of the $5.8 million purchase with $4.6 million from
its acquisition/development lines of credit. Raymond James Financial, Inc.
("RJFI") owns two subsidiaries that are the controlling partners in a
partnership that is the general partner in a partnership that owned the Center.
A director of the Company is an officer, director and major stockholder of RJFI.
 
     Effective June 30, 1996, the Company acquired all of the outstanding stock
of Poly-Stat Supply Corporation and Poly-Stat Computer Applications, Inc. The
Poly-Stat businesses provide medical supplies and Medicare billing services to
nursing homes. The purchase price of approximately $1.2 million for the
Poly-Stat businesses included $1.0 million in cash and $0.2 million in
promissory notes. In addition, the Company must make a $1.0 million contingent
payment if certain earnings targets are attained through December 31, 2000.
 
     The 1997 and 1996 acquisitions have been accounted for as purchases and
results of operations are included from the dates of acquisition. The 1997
purchase prices which included approximately $5,578,000 paid in cash,
seller-financed debt of approximately $3,050,000 and debt assumed of
approximately $772,000 were allocated primarily to goodwill ($7,742,000),
working capital ($904,000) and property and equipment ($754,000). The 1996
purchase prices which included approximately $6,753,000 paid in cash,
seller-financed debt of approximately $193,000 and debt assumed of approximately
$157,000 were allocated primarily to property and equipment ($5,006,000),
goodwill ($1,834,000) and working capital ($263,000). The pro forma unaudited
results of operations for the nine months ended September 30, 1997 and 1996,
assuming the purchases had been consummated as of January 1, 1996, are not
materially different from the reported results of operations.
 
                                      F-45
   163
 
======================================================
 
    NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
                               ------------------
 
                               TABLE OF CONTENTS
 
   


                                        PAGE
                                       ------
                                    
Available Information..................      3
Summary................................      5
Risk Factors...........................     20
The Acquisition........................     31
Use of Proceeds........................     32
Exchange Offer.........................     33
Capitalization.........................     38
Unaudited Pro Forma Condensed
  Consolidated Financial Information...     39
Selected Financial and Operating
  Data.................................     46
Management's Discussion and Analysis...     50
Business...............................     63
Management.............................     77
Executive Compensation.................     79
Description of Other Indebtedness......     82
Description of the Notes...............     84
Certain Federal Income Tax
  Considerations.......................    112
Plan of Distribution...................    114
Legal Matters..........................    115
Experts................................    115
Index to Financial Statements..........    F-1

    
 
   
    UNTIL          , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
    
======================================================
======================================================
 
                                      LOGO
 
                                  $200,000,000
                        9.35% SENIOR SUBORDINATED NOTES
                                    DUE 2007
 
                   -----------------------------------------
                                   PROSPECTUS
                   -----------------------------------------
 
   
                                          , 1998
    
 
======================================================
   164
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 20.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Article VIII of the Company's By-Laws contains a provision, authorized by
Section 145 of the Delaware General Corporation Law which provides that the
Company shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Company) by reason of the fact that such person is or
was a director or officer of the Company) by reason of the fact that such person
is or was a director or officer of the Company, or is or was a director or
officer of the Company serving at the request of the Company as a director or
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that such person's conduct was unlawful. In addition, the
Company shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the Company to procure a judgment in its favor by reason of the fact
that such person is or was a director or officer of the Company, or is or was a
director or officer of the Company serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company; except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
 
     Article FIFTH of the Company's Restated Certificate of Incorporation
contains a provision, authorized by Section 102(b)(7) of the Delaware General
Corporation Law, which provides that no director shall be personally liable to
the Company or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. Any repeal or modification of Article FIFTH by the
stockholders of the Company shall not adversely affect any right or protection
of a director of the Company existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to such repeal or
modification.
 
     [A policy of directors' and officers' liability insurance is maintained by
the Company which insures directors and officers for losses as a result of
claims against the directors and officers of the Company in their capacity as
directors and officers and also reimburses the Company for payments made
pursuant to the indemnity provisions described above.]
 
                                      II-1
   165
 
ITEM 21.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a)  Exhibits
 
   


EXHIBIT NO.                                     DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
         
  *3.1      Certificate of Incorporation of Extendicare Health Services, Inc.
  *3.2      By-Laws of Extendicare Health Services, Inc.
  *4.1      Indenture, dated as of December 2, 1997, by and among the Company, the Guarantors
            and the Bank of Nova Scotia Trust Company of New York, as Trustee (Including forms
            of the Outstanding Notes and Exchange Notes).
  *4.2      Form of Outstanding Note (contained in Exhibit 4.1).
  *4.3      Form of Exchange Note (contained in Exhibit 4.1).
  *4.4      Registration Rights Agreement, dated as of December 2, 1997, by and among the
            Company, the Guarantors and the Initial Purchasers.
 **5.1      Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the legality of the
            securities being registered.
 *10.1      Credit Agreement dated as of November 26, 1997 among the Company, Extendicare
            Holdings, Inc. and the Subsidiary Guarantors (as defined therein) and NationsBank,
            N.A., as Agent, and the Lenders (as defined therein).
 *10.2      Agreement and Plan of Merger, dated as of September 29, 1997, by and among
            Extendicare Inc., AHC Acquisition Corp. and Arbor Health Care Company.
  12.1      Computation of Ratio of Earnings to Fixed Charges.
 *21.1      Subsidiaries of the Company.
**23.1      Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).
  23.2      Consent of KPMG Peat Marwick LLP.
  23.3      Consent of Ernst & Young LLP.
  24.1      Powers of Attorney for the Company (contained on the signature pages of this
            Registration Statement).
 *25.1      Statement of Eligibility of Trustee on Form T-1.
 *99.1      Form of Letter of Transmittal.
 *99.2      Form of Notice of Guaranteed Delivery.
 *99.3      Form of Letters to DTC Participants.
 *99.4      Form of Letter to Clients and Form of Instruction to Book-Entry Transfer
            Participant.

    
 
- ---------------
 
   
*  Previously filed
    
 
   
** To be filed by amendment
    
 
     (b) Financial Statement Schedules
 
     The following financial statement schedule of the Company is filed
herewith:
 
     II. Valuation and Qualifying Accounts
 
ITEM 22.  UNDERTAKINGS
 
     The undersigned registrant hereby undertakes:
 
     (a) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
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.
 
                                      II-2
   166
 
     (b) That, 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.
 
     (c) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
 
     (i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
 
     (ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
 
     (iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
 
     (d) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
 
     (e) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
 
     (f) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form
(including information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request), within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means; and to
arrange or provide for a facility in the United States for the purpose of
responding to such requests; and
 
     (g) To supply by means of a post-effective amendment all information
concerning a transaction and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registration pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a direct, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
                                      II-3
   167
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, Wisconsin, on
                    .
 
                                          EXTENDICARE HEALTH SERVICES, INC.
 
   
                                          By:        /s/ J. WESLEY CARTER
    
                                                     J. Wesley Carter
                                          President and Chief Executive Officer
 
                               POWERS OF ATTORNEY
 
     Each person whose signature appears below constitutes and appoints each of
J. Wesley Carter and Robert J. Abramowski his true and lawful attorney-in-fact
and agent, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all Amendments (including post-effective Amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
 
   


             SIGNATURES                                TITLE                         DATE
- -------------------------------------   ------------------------------------   -----------------
                                                                         
     /s/ FREDERICK BERNARD LADLY        Chairman and Director
- -------------------------------------
       Frederick Bernard Ladly
        /s/ J. WESLEY CARTER            Chief Executive Officer, President
- -------------------------------------   and Director (principal executive
          J. Wesley Carter              officer)
 
      /s/ ROBERT J. ABRAMOWSKI          Vice President-Finance, Chief
- -------------------------------------   Financial Officer, Treasurer and
        Robert J. Abramowski            Assistant Secretary (principal
                                        financial officer and principal
                                        accounting officer)
 
      /s/ LELAND M. AUSTIN, JR.         Director
- -------------------------------------
        Leland M. Austin, Jr.
 
     /s/ RICHARD LESLIE BERTRAND        Director
- -------------------------------------
       Richard Leslie Bertrand

    
 
                                      II-4
   168
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the following
registrants have duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee,
Wisconsin, on                     .
 
                                          ADULT SERVICES UNLIMITED, INC.
                                          ALTERNACARE PLUS ENTERPRISES, INC.
                                          ARBOR HEALTH CARE COMPANY
                                          ARBORS EAST, INC.
                                          ARBORS AT FT. WAYNE, INC.
                                          ARBORS AT TOLEDO, INC.
                                          BAY GERIATRIC PHARMACY, INC.
                                          COVENTRY CARE, INC.
                                          EDGEWOOD NURSING CENTER, INC.
                                          ELDER CREST, INC.
                                          EXTENDICARE GREAT TRAIL, INC.
                                          EXTENDICARE HEALTH FACILITIES, INC.
                                          EXTENDICARE HEALTH FACILITY HOLDINGS,
                                          INC.
                                          EXTENDICARE HOMES, INC.
                                          EXTENDICARE OF INDIANA, INC.
                                          FIR LANE TERRACE CONVALESCENT CENTER,
                                          INC.
                                          HAVEN CREST, INC.
                                          HEALTH POCONOS, INC.
                                          HOME CARE PHARMACY, INC. OF FLORIDA
                                          MARSHALL PROPERTIES, INC.
                                          MEADOW CREST, INC.
                                          NORTHERN HEALTH FACILITIES, INC.
                                          OAK HILL HOME OF REST AND CARE, INC.
                                          POLY-STAT COMPUTER APPLICATIONS, INC.
                                          POLY-STAT SUPPLY CORPORATION
                                          Q.D. PHARMACY, INC.
                                          THE DRUGGIST, INC.
                                          THE PROGRESSIVE STEP CORPORATION
                                          UNITED PROFESSIONAL COMPANIES, INC.
                                          UNITED PROFESSIONAL SERVICES, INC.
                                          UNITED REHABILITATION SERVICES, INC.
 
   
                                          By:  /s/ ROBERT J. ABRAMOWSKI
    
                                                     Robert J. Abramowski
                                                   Vice President-Finance,
                                                   Chief Financial Officer
                                                   and Assistant Secretary
 
                                      II-5
   169
 
                               POWERS OF ATTORNEY
 
     Each person whose signature appears below constitutes and appoints each of
J. Wesley Carter and Robert J. Abramowski his true and lawful attorney-in-fact
and agent, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all Amendments (including post-effective Amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
 
   


             SIGNATURES                                TITLE                         DATE
- -------------------------------------   ------------------------------------   -----------------
 
                                                                         
            /s/ J. WESLEY CARTER        President, Chief Executive Officer
                                        and Director (principal executive
- -------------------------------------   officer)
          J. Wesley Carter
 
         /s/ ROBERT J. ABRAMOWSKI       Vice President-Finance, Chief
- -------------------------------------   Financial Officer and Assistant
        Robert J. Abramowski            Secretary (principal financial
                                        officer and
                                        principal accounting officer)
         /s/ LELAND M. AUSTIN, JR.      Director
- -------------------------------------
        Leland M. Austin, Jr.
 
        /s/ MELVIN A. RHINELANDER       Director
- -------------------------------------
        Melvin A. Rhinelander

    
 
                                      II-6
   170
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
  EXTENDICARE HEALTH SERVICES, INC.
 
     Under date of February 3, 1997, except for footnote 16 which is as of
December 2, 1997, we reported on the consolidated balance sheets of Extendicare
Health Services, Inc. (f/k/a United Health, Inc.) and subsidiaries (the Company)
as of December 31, 1996 and 1995, and the related consolidated statements of net
earnings, changes in shareholder's equity, and cash flows for each of the years
in the three-year period ended December 31, 1996, which are included in the
prospectus and the registration statement. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
 
     In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
 
                                                           KPMG PEAT MARWICK LLP
 
Milwaukee, Wisconsin
December 2, 1997
 
                                       S-1
   171
 
               EXTENDICARE HEALTH SERVICES, INC. AND SUBSIDIARIES
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 


                                                                PROVISIONS       ACCOUNTS
                                                 BALANCE AT     FOR LOSSES      WRITTEN OFF     BALANCE AT
                                                 BEGINNING      ON ACCOUNTS       NET OF          END OF
        ALLOWANCE FOR DOUBTFUL ACCOUNTS          OF PERIOD      RECEIVABLE      RECOVERIES        PERIOD
- -----------------------------------------------  ----------     -----------     -----------     ----------
                                                                                    
Year ended December 31, 1994...................    $4,453         $ 3,593         $ 2,019         $6,027
Year ended December 31, 1995...................    $6,027         $ 3,892         $ 2,723         $7,196
Year ended December 31, 1996...................    $7,196         $ 7,293         $ 5,186         $9,303

 
                 See accompanying independent auditors' report.
 
                                       S-2
   172
 
                                 EXHIBIT INDEX
 
   


                                                                                     SEQUENTIALLY
EXHIBIT                                                                                NUMBERED
NUMBER                                 DESCRIPTION                                       PAGE
- -------  ------------------------------------------------------------------------    ------------
                                                                               
  *3.1   Certificate of Incorporation of Extendicare Health Services, Inc.
  *3.2   By-Laws of Extendicare Health Services, Inc.
  *4.1   Indenture, dated as of December 2, 1997, by and among the Company, the
         Guarantors and the Bank of Nova Scotia Trust Company of New York, as
         Trustee (Including forms of the Outstanding Notes and Exchange Notes).
  *4.2   Form of Outstanding Note (contained in Exhibit 4.1).
  *4.3   Form of Exchange Note (contained in Exhibit 4.1).
  *4.4   Registration Rights Agreement, dated as of December 2, 1997, by and
         among the Company, the Guarantors and the Initial Purchasers.
 **5.1   Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to the legality
         of the securities being registered.
 *10.1   Credit Agreement dated as of November 26, 1997 among the Company,
         Extendicare Holdings, Inc. and the Subsidiary Guarantors (as defined
         therein) and NationsBank, N.A., as Agent, and the Lenders (as defined
         therein).
 *10.2   Agreement and Plan of Merger, dated as of September 29, 1997, by and
         among Extendicare Inc., AHC Acquisition Corp. and Arbor Health Care
         Company.
  12.1   Computation of Ratio of Earnings to Fixed Charges.
 *21.1   Subsidiaries of the Company.
**23.1   Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit
         5.1).
  23.2   Consent of KPMG Peat Marwick LLP.
  23.3   Consent of Ernst & Young LLP.
  24.1   Powers of Attorney for the Company (contained on the signature pages of
         this Registration Statement).
 *25.1   Statement of Eligibility of Trustee on Form T-1.
 *99.1   Form of Letter of Transmittal.
 *99.2   Form of Notice of Guaranteed Delivery.
 *99.3   Form of Letters to DTC Participants.
 *99.4   Form of Letter to Clients and Form of Instruction to Book-Entry Transfer
         Participant.

    
 
- ---------------
 
   
 * Previously filed
    
 
   
** To be filed by amendment
    

EX-12.1

   1

                                                                  EXHIBIT 12.1

                       EXTENDICARE HEALTH SERVICES, INC.
                       RATIO OF EARNINGS TO FIXED CHARGES
                 (DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)



   

                                  NINE MONTHS ENDED        YEAR ENDED DECEMBER 31,
                                    SEPTEMBER 30,    ---------------------------------
 
                                         1997           1996        1995        1994
                                     ------------    ---------   ---------  ----------
                                                                 


Fixed charges
   Interest, net                         $ 13,633     $ 18,477    $ 14,776    $ 13,083
   add: interest income                     1,155        1,084       1,302       1,323
      capitalized interest                    539          384         679         222
      deferred financing charges              356          449         457         384
                                      -----------    ---------   ---------   ---------
   Interest on indebtedness                15,683       20,394      17,214      15,012
   Proportion of rents representative
   of the interest factors                  2,140        2,627       2,702       2,676
                                      -----------    ---------   ---------   ---------
                                         $ 17,823     $ 23,021    $ 19,916    $ 17,688
                                      ===========    =========   =========   =========
Earnings before income taxes,
minority interests and extraordinary
items                                    $ 47,248     $ 56,990    $ 42,398    $ 35,211
add: fixed charges above                   17,823       23,021      19,916      17,688
deduct: capitalized interest above           (539)        (384)       (679)       (222)
                                      -----------    ---------   ---------   ---------
Earnings for computation purposes        $ 64,532     $ 79,627    $ 61,635    $ 52,677
                                      ===========    =========   =========   =========

Ratio                                         3.6x         3.5x        3.1x        3.0x          
                                      ===========    =========   =========   =========
    

EX-23.2

   1
 
                                                                    EXHIBIT 23.2
 
                        CONSENT OF INDEPENDENT AUDITORS
 
     We consent to the use of our reports included herein and to the reference
to our firm under the heading "Summary Historical Financial Data" and "Experts"
in the prospectus.
 
                                                           KPMG PEAT MARWICK LLP
 
Milwaukee, Wisconsin
   
February 16, 1998
    

EX-23.3

   1
 
                                                                    EXHIBIT 23.3
 
   
                        CONSENT OF INDEPENDENT AUDITORS
    
 
   
     We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997, with respect to the financial
statements of Arbor Health Care Company included in the Amendment No. 1 to the
Registration Statement (Form S-4 No. 333-43544) and related Prospectus of
Extendicare Health Services, Inc. for the registration of $200,000,000 of its
9.35% Senior Subordinated Notes due 2007.
    
 
   
                                                               ERNST & YOUNG LLP
    
 
   
Toledo, Ohio
    
   
February 12, 1998