-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Z4c68pFdmQw3CpEa8+ZKSi/w1FbALO+vayXJw2nB18ZzQrXWOgUcHxAhQggX8j0R CB79vyKayhz00Wigq19WYw== 0000950123-94-001425.txt : 19940902 0000950123-94-001425.hdr.sgml : 19940902 ACCESSION NUMBER: 0000950123-94-001425 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940826 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANOR CARE INC/NEW CENTRAL INDEX KEY: 0000354604 STANDARD INDUSTRIAL CLASSIFICATION: 8051 IRS NUMBER: 521200376 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08195 FILM NUMBER: 94546463 BUSINESS ADDRESS: STREET 1: 10750 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 BUSINESS PHONE: 3016819400 MAIL ADDRESS: STREET 1: 10750 COLUMBIA PIKE CITY: SILVER SPRING STATE: MD ZIP: 20901 FORMER COMPANY: FORMER CONFORMED NAME: MANOR CARE HOLDING CO DATE OF NAME CHANGE: 19810826 10-K 1 MANOR CARE, INC. FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended May 31, 1994 ------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ------------- to --------------- Commission File Number 1-8195 ------ MANOR CARE, INC. - - ------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 52-1200376 - - ------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10750 Columbia Pike, Silver Spring, Maryland 20901 - - ------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (301) 681-9400 ---------------------- Securities registered pursuant to Section l2(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered - - ----------------------------------------- ---------------------------- Common Stock, Par Value $.10 per share New York Stock Exchange Registrant's Guaranty of 4-3/4% Con- vertible Subordinated Debentures due September 1, 1997 issued by Cenco Incorporated New York Stock Exchange Registrant's Guaranty of 5% Convertible Subordinated Debentures due November 1, 1996 issued by Cenco Incorporated New York Stock Exchange - - ----------------------------------------- ---------------------------- Securities registered pursuant to Section 12(g) of the Act: 15-1/2% Subordinated Debentures due August 1, 2002 - - ------------------------------------------------------------------------- (Title of Class) 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates was $1,100,091,088 as of July 13, l994 based upon a closing price of $25.50 per share. The number of shares of Manor Care's Common Stock outstanding at May 31, 1994 was 62,358,992. DOCUMENTS INCORPORATED BY REFERENCE: PART I 1994 Annual Report to Stockholders PART II 1994 Annual Report to Stockholders PART III Proxy Statement dated August 10, l994 PART I ITEM 1. Business. General Manor Care, Inc. ("Manor Care"), a Delaware corporation organized in August 1981, is a holding company that conducts its business through the Manor Care Hotel Division ("Hotel Division") and three principal subsidiaries, Manor Healthcare Corp. ("Healthcare"), Vitalink Pharmacy Services, Inc. ("Vitalink") and Choice Hotels International, Inc. ("Choice"). Healthcare and its subsidiaries have been engaged since October 1968 in the business of developing, owning and managing nursing centers, which provide skilled nursing and convalescent care principally for residents over the age of 65. Healthcare owns approximately 82.3% of Vitalink, a public company that operates institutional pharmacies. Healthcare also owns and operates an acute care general hospital, rehabilitation centers, assisted living centers and nursing assistant training schools. Choice franchises the use of the "Quality," "Comfort," "Clarion," "Sleep," "Rodeway," "Econo Lodge" and "Friendship" trademarks and other related trademarks and services. The Hotel Division is engaged in the business of owning and operating hotels in the United States under the Choice trademarks. Other subsidiaries of Manor Care are engaged in owning, operating and franchising hotels in foreign countries. 2 3 In fiscal year 1994, Manor Care derived approximately 32% of its total revenues through Medicare and Medicaid programs; aside from the foregoing, Manor Care has no few or single customers upon whom it is dependent. Industry Segments The Business Segment Information set forth on page 24 of the Company's 1994 Annual Report is hereby incorporated by reference. Manor Healthcare Corp. - Healthcare Operations Manor Care, through Healthcare and its subsidiaries, owns, operates or manages 164 nursing centers (including 8 medical and physical rehabilitation centers), which provide high acuity services, skilled nursing care, intermediate nursing care, custodial care and assisted living, principally for residents over the age of 65. Manor Care and its subsidiaries also own and operate an acute care hospital, 17 pharmacies, 5 nursing assistant training schools and 4 assisted living centers. Nursing Center Operations Healthcare's nursing centers provide, in general, five types of services: -- High acuity services - for persons who require complex medical and physical rehabilitation services (patients who would otherwise be treated in an acute care hospital setting). -- Skilled nursing care - for persons who require 24-hour-a-day professional services of a registered nurse or a licensed practical nurse. -- Intermediate care - for persons needing less intensive nursing care than that provided to those requiring skilled care. -- Custodial care - for persons needing a minimum level of care. -- Assisted living - for persons needing some supervision and assistance with personal care. Services provided to all patients include the required type of nursing care, room and board, special diets, occupational, speech, physical and recreational therapy and other services that may be specified by the patient's physician, who directs the admission, treatment and discharge of that patient. Each high acuity, skilled and intermediate nursing center is under the direction of a state-licensed nursing center administrator supported by other professional personnel, such as a medical director, social worker, dietitian and recreation staff. Nursing departments in each such facility are under the supervision of a director of nurses who is state licensed. The nursing staffs are composed of other registered nurses and licensed 3 4 practical nurses, as well as nursing assistants. Staff size and composition vary depending on the size and location of each facility. Manor Care has developed a Quality Assurance Program to ensure that high standards of care are maintained in each center. The Quality Assurance Department is composed of a director, registered nurses, dietitians, nutrition specialists, an environmental services specialist and a recreational therapist. These staff specialists set corporate standards for delivery of care, direct the Quality Improvement Program, and provide consulting and educational services to the centers. Manor Care's nursing centers range in bed capacity from 60 to 240 beds, have an aggregate bed capacity of 22,252 beds, and achieved an occupancy rate of 89% during the 1994 fiscal year. Manor Care's nursing centers are located in 28 states: Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin. The nursing centers are modern structures generally of wall-bearing masonry with fire resistive or protective floor and roof suspension systems. The nursing centers have been designed generally to permit private and semi-private patient room accommodations, although a number of rooms at some facilities may be converted to accommodate up to four beds. Most facilities have individually controlled heating and air-conditioning units. Each nursing center contains a fully equipped kitchen, an isolation room, day room areas, administrative offices and most contain a physical therapy room. Many of Manor Care's centers have specialized wings for assisted living, Alzheimer's patients, individuals with catastrophic injuries, and persons desiring extra amenities and activities. Manor Care believes all of the nursing centers and the equipment contained therein are in good condition and are well maintained. Manor Care has created new divisions for specialized care. The MedBridge Medical and Physical Rehabilitation Division, through eight centers located in Illinois, Maryland, New Jersey and Pennsylvania, offers post-acute care for patients who no longer need intensive care provided by hospitals. One of these centers was constructed in 1994, and four were converted from skilled nursing centers. MedBridge units also operate within three skilled nursing centers. The Residential Alzheimer's Division will operate residential living facilities under the Arden Courts name for persons with early to mid-stage Alzheimer's who do not yet need nursing care. Three Arden Courts facilities in Maryland and Pennsylvania are currently under construction. Manor Care also operates four Springhouse Senior Residences in Florida, which are assisted living facilities designed for the frail elderly. There are also two former hotels currently being developed into Springhouse facilities and, in August, two more facilities were purchased. One new nursing center containing 120 beds opened during the last year in Pennsylvania. Additions totaling 147 beds to 6 existing centers were 4 5 completed during 1994. Manor Care currently has 5 new nursing centers with 376 beds under construction in Florida, Maryland, Ohio and Pennsylvania. Additions totaling 137 beds to 7 existing centers also are under construction. Three nursing centers in Pennsylvania were sold in July 1993 for $15,600,000. In May 1994, a subsidiary of Healthcare sold its 50% interest in a clinical laboratory in Pennsylvania for $3,500,000. Patients seeking the services of the nursing centers come from a variety of sources, and are principally referred by hospitals and physicians. Most of Manor Care's nursing centers participate in state Medicaid and in the federal Medicare program (see "Federal and State Assistance Programs"). However, Manor Care attempts to locate and operate its nursing centers in a manner designed to attract patients who pay directly to the facilities for services without benefit of any government assistance program ("private patients"). As a general rule, the profit margin is higher with private patients than with patients to whom services are rendered with government assistance programs. The following table sets forth certain information concerning revenues from government assistance programs for all of Manor Care's health care operations during fiscal year 1994: Contractual Net Gross Revenues Adjustment* Revenues -------------- ----------- ------------ Medicare $223,041,000 $ 65,439,000 $157,602,000 Medicaid 309,779,000 90,044,000 219,735,000 *Represents the estimated difference between private patient billing rates and amounts recoverable under government programs. The following table sets forth certain information concerning occupancy and revenues of Manor Care's nursing centers and hospital during fiscal year 1994: Nursing Centers Hospital ------------------ ------------------ % of % of % of % of Occupancy Revenues Occupancy Revenues --------- -------- --------- -------- Private patients 55% 63% 33% 48% Medicaid patients 35 22 16 20 Medicare patients 10 15 51 32 --- --- --- --- 100% 100% 100% 100% === === === === Hospital Operations Manor Care owns and operates Mesquite Community Hospital in Mesquite, Texas, which opened in l978. The hospital is licensed for l72 beds in 5 6 private rooms and is a modern, fully equipped, acute care facility that provides general medical, obstetrical and emergency services, as well as general and specialty surgery. It also is equipped for intensive/coronary care and ancillary diagnostic services such as nuclear medicine, sonography, angiography and CAT scanning. Physicians and dentists representing almost every specialty practice at the hospital, which is fully accredited by the Joint Commission for the Accreditation of Hospitals. Patients utilize the hospital's services primarily on the basis of referrals from doctors and clinics. The majority of the hospital's private patients are insured under private insurance plans, and payments under such plans (as well as Medicare and Medicaid) provide virtually all of the hospital's revenues. Pharmacy Operations Healthcare owns approximately 82.3% of Vitalink Pharmacy Services, Inc. ("Vitalink"), which owns and operates 17 pharmacies located in California, Colorado, Florida, Illinois, Indiana, Iowa, Maryland, New Jersey, Ohio, Oregon, Pennsylvania and Wisconsin. In August 1993, Vitalink acquired the stock of White, Mack and Wart, Inc., d/b/a Propac Pharmacy, which operates two institutional pharmacies located in Santa Rosa, California and Portland, Oregon. The purchase price was $3,769,000 plus the assumption of $2,100,000 of liabilities and a guarantee provision on stock options totalling $656,000. In January 1994, Vitalink acquired the institutional pharmacy business of Apothecary Services, Inc., located in Thornton, Colorado, for $3,448,000 in cash plus the assumption of $107,000 in liabilities and a contingent additional purchase price up to a maximum of $1,400,000 based on the achievement of certain future operating objectives. On January 31, 1994, Vitalink sold its retail pharmacy operation in Monticello, Illinois for $222,000. Vitalink operates institutional pharmacies, which provide, in general, three types of services: -- Customized filling of prescription and non-prescription medications for individual patients pursuant to physician orders delivered to nursing facilities. -- Consultant pharmacist services to help ensure quality patient care through monitoring and reporting on prescription drug therapy. -- Infusion therapy services, consisting of a product (nutrient, antibiotic, chemotherapy or other drugs or fluids) and its administration by tube, catheter or intravenously. Vitalink prepares and delivers the product, which is administered by nursing center staff. Pursuant to various master agreements, a portion of Vitalink's business is with Manor Care. As of May 31, 1994, Vitalink had contracts to serve 6 7 14,300 Manor Care beds and 25,100 beds not affiliated with Manor Care, resulting in revenues of $45,976,000 and $52,593,000, respectively, for fiscal 1994. Training School Operations Medical Aid Training Schools, Inc., a subsidiary of Healthcare, operates five nursing assistant training schools located in New York. The schools provide training for entry level nursing assistants for nursing facilities and home health care. Regulation Manor Care's healthcare facilities are subject to certain federal statutes and regulations and to regulatory licensing requirements by state and local authorities. All of Manor Care's facilities are currently so licensed. In addition, the facilities are subject to various local building codes and other ordinances. The Omnibus Budget Reconciliation Act that became effective in October 1990 imposed stringent patient assessment and care planning requirements. The impact of the Act on Manor Care has been minimal, because its requirements duplicate many of Manor Care's current in-house programs as well as various state requirements already in effect. It is anticipated that governmental regulation of the healthcare industry will become more comprehensive in the future. The extent of the impact of such increased regulation on Manor Care's operations and earnings cannot be predicted. State and local agencies survey all nursing centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government medical assistance programs. Such surveys include reviews of patient utilization of healthcare facilities and standards for patient care. Manor Care endeavors to maintain and operate its facilities in compliance with all such standards and conditions. Manor Care believes that at this time, none of its facilities is in violation of any applicable regulation which would threaten the operation of its business or materially affect the standard of care provided. Federal and State Assistance Programs Substantially all Manor Care's nursing centers and the Hospital are currently certified to receive benefits provided under the Federal Health Insurance for the Aged Act (commonly referred to as "Medicare"), and under programs administered by the various states to provide medical assistance to the "medically indigent" ("Medicaid"). Both initial and continuing qualification of a nursing center or hospital facility to participate in such programs depend upon many factors including, among other things, accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls. 7 8 Services under Medicare consist of nursing care, room and board, social services, physical and occupational therapies, drugs, biologicals, supplies, surgical, ancillary diagnostic and other necessary services of the type provided by extended care or acute care facilities. Under the Medicare program, the federal government pays the reasonable direct and indirect allowable costs (including depreciation and interest) of the services furnished. Under the various Medicaid programs, the federal government supplements funds provided by the participating states for medical assistance to "medically indigent" persons. The programs are ad- ministered by the applicable state welfare or social service agencies. Although Medicaid programs vary from state to state, typically they provide for the payment of certain expenses, up to established limits, at rates based generally on cost reimbursement principles. Funds received by Manor Care under Medicare and Medicaid are subject to audit with respect to the proper application of various payment formulas. Such audits can result in retroactive adjustments of revenue from these programs, resulting in either amounts due to the government agency from Manor Care or amounts due Manor Care from the government agency. Manor Care believes that its payment formulas have been properly applied and that any future adjustments will not have a material adverse impact on its financial position or results of operations. Both the Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy, intermediary determinations and governmental funding restrictions, all of which may materially increase or decrease the rate of program payments to healthcare facilities. Manor Care can give no assurance that payments under such programs will in the future remain at a level comparable to the present level or be sufficient to cover the operating and fixed costs allocable to such patients. Competition Manor Care's nursing centers compete on a local and regional basis with other long-term healthcare providers, some of which have greater financial resources or operate on a nonprofit basis. The degree of success with which Manor Care's nursing facilities compete varies from location to location and is dependent on a number of factors. Manor Care believes that the quality of care provided, reputation and physical appearance of facilities, and, in the case of private patients, charges for services, are significant competitive factors. Accordingly, it seeks to meet competition in each locality by establishing a reputation within the local medical communities for competent and competitive nursing center services. There is limited, if any, competition in price with respect to Medicaid and Medicare patients, since revenues for services to such patients are strictly controlled and based on fixed rates and cost reimbursement principles. 8 9 Manor Care's Hospital encounters competition in the Mesquite, Texas area where it competes for community and physician acceptance with other hospitals. Vitalink's pharmacies compete with other local distributors of pharmaceuticals. Hotel Division - Domestic Lodging Operations The Hotel Division operated 32 hotels containing a total of 5,602 rooms as of May 31, 1994. During 1994, the Hotel Division purchased 13 hotels containing over 1,900 rooms in Alabama, Arizona, Florida, Georgia, Missouri, North Carolina, Ohio and South Carolina for an aggregate purchase price of approximately $44,200,000. The hotels operate under the "Clarion," "Comfort," "Quality," "Sleep," "Econo Lodge" and "Rodeway" trade names and are located in Alabama, Arizona, California, Florida, Louisiana, Maryland, Missouri, North Carolina, Ohio, South Carolina, Texas, Utah and Virginia. All of the hotels are owned by Manor Care or its subsidiaries except two hotels located in California, which are leased. During 1994, lodging revenues and expenses included food and beverage sales of $5,001,000 and costs of sales of $4,335,000. QH Europe Partnership - Foreign Lodging Operations Quality Hotels Europe, Inc. and Choice Hotels International, Inc. ("Choice"), subsidiaries of Manor Care, formed QH Europe Partnership in 1994 to own, operate and franchise hotels in Europe. Partnership subsidiaries own three hotels in Germany and one in England containing 610 rooms, which operate under the "Comfort" or "Quality" trade names. During 1994, certain assets of Resthotel Primevere, a French hotel chain, were acquired for approximately $10,400,000. The assets consisted primarily of franchise rights to approximately 100 hotels, which now use the "Comfort" trade name. Also, as part of this acquisition, two operating hotels were acquired as well as the operating leases for six other hotels. Choice Hotels International, Inc. - Franchise Operations Manor Care owns 100% of the Preferred Stock and approximately 88.9% of the Common Stock of Choice, which franchises the use of the "Quality," "Comfort," "Clarion," "Sleep," "Econo Lodge," "Friendship" and "Rodeway" trademarks. Services provided to franchisees include national and regional meetings and periodic seminars to provide information on hotel operations and recent developments in the industry, training programs for franchisees and their employees, advertising and marketing, dissemination of directories of franchised locations, participation in a national reservations system and agreements with credit card companies. 9 10 Choice also offers its franchisees interior design and decorating services and purchasing services for hotel furniture, fixtures and supplies. During 1994, the revenues and expenses of Choice included hotel supplies sales of $15,876,000 and costs of sales of $12,067,000. The standard franchise agreement currently offered by Choice for Clarion Hotels (luxury), Quality Inns and Quality Suites (mid-priced), Comfort Inns and Comfort Suites (luxury-budget) and Sleep Inns (economy hotels with standardized design) provides for an initial fee of $300 per guest room with a $35,000 minimum ($40,000 for Comfort and $50,000 for Suites). In addition, franchisees are required to pay a continuing franchise fee of 4% of gross room revenues (3% for Clarion and 5% for Comfort) and assessments for reservations and marketing services at rates that may be changed to reflect inflation and actual costs incurred. The agreement normally is for a 20-year term. Choice sells Econo Lodge, Friendship Inn and Rodeway Inn franchises (the Economy Group) on terms similar to the above, with an initial fee of $250 per guest room ($25,000 minimum) for Econo Lodge and Rodeway and $200 per guest room ($15,000 minimum) for Friendship. Econo Lodges pay a 4% continuing franchise fee, and Friendship and Rodeway Inns pay 3%, with additional assessments for reservations and marketing. Choice supplies disclosure statements containing information for prospective franchisees in accordance with regulations of the Federal Trade Commission ("FTC"). In addition to the FTC regulations, certain states have requirements for registration of franchisors and disclosure requirements similar to the FTC regulations. In July 1993, Choice and an affiliate of Journey's End Corporation, a Canadian lodging management company, formed a corporation to franchise Choice brands in Canada. Choice owns 50% of the corporation. The arrangement also included the franchising of approximately 100 existing Journey's End hotels under the "Comfort" or "Quality" trade names. Choice has franchised hotels in more than 25 other foreign countries, including England, Ireland, Norway, France, Italy, Germany, India, New Zealand, Australia, Japan, Thailand and Mexico. As of May 31, 1994, the seven hotel chains comprised 2,605 open and operating hotels with 229,630 rooms, as set forth below: United States Foreign ------------------ ------------------ No. of No. of No. of No. of Hotels Rooms Hotels Rooms ------ ------- ------ ------- Franchised Only 2,256 197,428 305 25,557 Owned/Managed by Manor Care 32 5,602 12 1,043 ----- ------- --- ------ TOTALS 2,288 203,030 317 26,600 ===== ======= === ====== 10 11 Competition The above hotels compete with other hotels in nearby locations, some of which are affiliated with chains that are more widely known or offer different types of services. Demand for accommodations at both franchised and company-owned hotels is affected by such factors as the availability of accommodations in the local area and national and regional economic conditions. The operation of hotels may be seasonal, with a large percentage of revenues generated in the summer months. In the sale of franchises, Choice competes with many other hotel franchisors, some of which have greater financial resources and offer different fee structures and franchise services. However, Choice believes that its continued growth, innovative hotel brands and successful reservations and marketing services enhance its competitive position. Employees As of May 31, 1994, Manor Care employed approximately 25,500 full and part-time employees, 21,400 of whom were employed in healthcare operations, 3,200 of whom were employed in lodging and franchise operations, and the remainder in Manor Care's headquarters and other operations. From time to time, some of Manor Care's nursing centers and the Hospital experience shortages of professional nursing help which may require Manor Care to seek temporary employees through employment agencies ("contract employees") at an increased cost. Manor Care does not believe that such use of contract employees has had a material adverse effect on its financial position to date. A majority of the employees are covered by the federal minimum wage laws, and a few employees are represented by labor unions. Attempts have been made from time to time to unionize employees of certain other facilities. Manor Care believes that it enjoys a good relationship with its employees. Insurance Manor Care maintains property insurance on its healthcare and lodging facilities. Manor Care insures some of its liability exposures and self insures, either directly or indirectly through insurance arrangements requiring it to reimburse insurance carriers, some of its liability risks other than catastrophic exposures. Physicians and dentists practicing at the Hospital are responsible for their own professional liability insurance coverage. Manor Care insures its workers' compensation risks in some states and self insures in others. 11 12 ITEM 2. Properties. As of May 31, 1994, Manor Care owned, leased or managed 164 nursing and rehabilitation centers in 28 states and one acute care general hospital in Texas, as indicated below: Number Number of Property Of Units Operating Beds -------- -------- -------------- Nursing and Rehabilitation Centers: Owned 149 20,318 Leased 14 1,796 Managed 1 138 Acute Care Hospital 1 172 --- ------ TOTALS 165 22,424 === ====== As of May 31, 1994, Vitalink leased 17 pharmacies in 12 states and its corporate offices in Naperville, Illinois. As of May 31, 1994, Manor Care owned or leased 32 hotels containing 5,602 guest rooms located in 13 states and 12 hotels containing 1,043 rooms located in foreign countries. Manor Care also owned four assisted living centers. Manor Care owns its three headquarters buildings in Silver Spring, Maryland; a fourth building in Silver Spring that is used by employees and leased to third parties; a building in Phoenix, Arizona, that serves as Western Regional Office of Choice; and several undeveloped parcels. Manor Care also leases office space as needed to accommodate regional employees. Forty-eight (48) nursing centers and hotels have been pledged to secure related mortgage and capital lease obligations. ITEM 3. Legal Proceedings. - On June 23, 1988, Hudson Hotels Corp. filed suit against Choice in U.S. District Court, Western District of New York, alleging that Choice misappropriated trade secrets and used them to develop the Sleep Inn chain. Plaintiff sought an injunction and damages exceeding $20 million. In April 1990, plaintiff amended its complaint and sought profits derived from the use of "plaintiff's concept," $3 million for the concept and $5 million punitive damages. On September 25, 1992, a jury decided in favor of plaintiff and awarded damages of $2.5 million. Choice appealed to the U.S. Court of Appeals for the Second Circuit, arguing that plaintiff's concept was merely a non-novel idea not entitled to legal protection. On June 11, 1993, the Court of Appeals agreed with Choice and reversed the District Court judgment. - On March 11, 1987, Choice filed suit in U.S. District Court, Western District of New York, against Wintergarden Inn Associates and 12 13 Edward Bevilacqua for breach of the franchise agreement. Defendants filed a counterclaim alleging breach of contract, misrepresentation and violation of franchise laws and sought damages of $40 million. Choice's motion for summary judgment was granted in March 1993 and defendants' counterclaim has been dismissed. - On September 10, 1985, the U.S. Environmental Protection Agency sued Healthcare and other defendants in U.S. District Court, District of New Jersey, seeking clean-up costs at Lipari Landfill. A subsidiary that Healthcare acquired in its 1981 acquisition of Cenco Incorporated was alleged to have transported wastes to the landfill in the 1960's. The USEPA and the defendants have entered into a Consent Decree requiring the defendants to contribute approximately $52 million for certain clean-up costs. Healthcare's share of the settlement is approximately $2.6 million, most of which is covered by insurance. The USEPA is seeking additional funds from the defendants in connection with a future phase of the clean-up. - On October 30, 1989, the New Jersey Department of Environmental Protection sued Manor Care and other defendants in U.S. District Court, District of New Jersey, seeking clean-up costs at Kramer Landfill where the Cenco subsidiary allegedly transported wastes. On September 10, 1990, Transtech Industries, Inc. and other parties sued numerous defendants, including the Cenco subsidiary, in U.S. District Court, District of New Jersey, for contribution in connection with clean-up of Kin-Buc Landfill. The State of New Jersey also has issued administrative directives ordering numerous parties, including Manor Care as the alleged successor to the Cenco subsidiary, to contribute to the clean-up of various other landfills. - On November 19, 1990, Choice filed suit in U.S. District Court, District of South Carolina, against Franklin and Rebecca Gay, two former employees, for continuing to represent themselves as employees and for failing to discontinue the "Carriage House Inn" name, which they had sold to Choice. On January 31, 1991, defendants filed a counterclaim alleging breach of contract, fraud and unfair trade practices and seeking damages of $37.5 million. During trial in May 1993, the fraud claim was dismissed and certain evidentiary rulings further reduced defendants' claims. A mistrial was declared when the judge took emergency leave. To avoid the cost of a new trial, Choice settled with defendants in July 1993 for $135,000, which included unpaid sales commissions. Manor Care also is subject to other regulatory and legal actions, investigations or claims for damages that arise from time to time in the ordinary course of business. Manor Care is defending the claims against it and believes that these proceedings will not have a material adverse effect on its financial condition or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 1994. 13 14 EXECUTIVE OFFICERS OF MANOR CARE, INC. The names, ages, titles, present principal occupation, business addresses and other material occupations, positions, offices and employment of each of the executive officers of Manor Care, Inc. ("Manor Care") are set forth below. The business address of each of such executive officers is 10750 Columbia Pike, Silver Spring, Maryland 20901. Stewart Bainum, Jr. (48) Chairman of the Board of Manor Care and Manor Healthcare Corp. ("Healthcare") since March 1987; Chief Executive Officer of Manor Care since March 1987 and President since June 1989; Vice Chairman of the Board of Manor Care and subsidiaries from June 1982 to March 1987; Director of Manor Care since August 1981, of Healthcare since 1976 and of Choice Hotels International, Inc. and its predecessors ("Choice") since 1977; Chief Executive Officer of Healthcare since June 1989 and President from May 1990 to May 1991; Chairman of the Board of Choice from March 1987 to June 1990. Stewart Bainum. (75) Vice Chairman of the Board of Manor Care and subsidiaries since March 1987; Chairman of the Board of Manor Care from August 1981 to March 1987, Chief Executive Officer from July 1985 to March 1987, President from May 1982 to July 1985; Chairman of the Board of Healthcare from 1968 to March 1987 and a Director since 1968; Chairman of the Board of Choice from 1972 to March 1987 and a Director since 1963; Chairman of the Board of Realty Investment Company, Inc. since 1965. Donald J. Landry. (45) President of Manor Care Hotel Division since March 1992; various executive positions with Richfield Hotel Management, Inc. and its predecessors for more than 15 years, including President of MHM Corporation. Weldon Humphries. (57) Senior Vice President-Real Estate and Development of Manor Care since August 1981, of Choice since February 1981 and of Healthcare since December 1980. James A. MacCutcheon. (42) Senior Vice President-Finance and Treasurer of Manor Care since October 1987. James H. Rempe. (64) Senior Vice President, General Counsel and Secretary of Manor Care since August 1981, of Choice since February 1981 and of Healthcare since December 1980. Joseph Buckley. (46) Senior Vice President-Information Resources and Development of Manor Care since June 1990; Vice President-Information Resources from July 1989 to June 1990; Vice President-Real Estate from September 1983 to July 1989. Charles A. Shields. (50) Senior Vice President-Human Resources of Manor Care since September 1992; Vice President-Human Resources from October 1989 to September 1992; Vice President of Human Resources for divisions of Walt Disney Company from 1980 to October 1989. 14 15 Donald E. Feltman. (39) Vice President-Development of Manor Care since April 1993; previously employed for five years as Director of Development of Marriott Corporation's Senior Living Services Division. Larry R. Godla. (37) Vice President-Construction of Manor Care since March 1993; Director of Construction from January 1990 to March 1993; previously employed for more than five years by Spaulding and Slye Company, including as Vice President- Construction. Gary L. Henson. (40) Vice President-Information Resources since September 1993; Director of Information Resources from April 1993 to September 1993; Director of Data Processing Operations from April 1991 to April 1993; Director of Corporate Information Systems from December 1988 to April 1991; various other data processing positions from June 1982 to December 1988. Alan Marsh. (46) Vice President-Risk Management of Manor Care since September 1986; Vice President-Administration from November 1984 to September 1986. Charles A. Militana. (45) Vice President-Compensation and Benefits since September 1993; previously employed in various compensation and benefits positions by Arthur Andersen & Co. (1990-1993) and The Racal Corporation (1978-1990). Gregory D. Miller. (40) Vice President-Strategic Planning since May 1992; various planning and marketing positions at Marriott Corporation for more than five years, including Vice President-Planning and Business Development for Courtyard by Marriott. John M. Sabin. (39) Vice President-Finance and Assistant Treasurer since December 1993; Vice President, Corporate Mergers and Acquisitions at Marriott Corporation for more than five years. Margarita Schoendorfer. (45) Vice President-Controller of Manor Care since November 1990; Corporate Controller from April 1986 to November 1990; Assistant Corporate Controller from August 1981 to April 1986. Donald C. Tomasso. (49) President and Chief Operating Officer of Healthcare since May 1991 and Director of Healthcare since June 1991; previously employed by Marriott Corporation for more than five years, including as Executive Vice President/General Manager of the Roy Rogers Division. Robert C. Hazard, Jr. (59) Chairman of Choice since June 1990 and Chief Executive Officer and Director since December 1980; President from December 1980 to June 1990. Gerald W. Petitt. (48) President of Choice since June 1990 and Chief Operating Officer and Director since December 1980; Executive Vice President from December 1980 to June 1990. 15 16 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. The shares of Manor Care's Common Stock are listed and traded on the New York Stock Exchange. Information on the high and low sales prices of Manor Care's Common Stock during the past two years is included on page 24 of the 1994 Annual Report and is incorporated herein by reference. As of July 13, 1994, there were 3,174 record holders of Manor Care Common Stock. Information required on the frequency and amount of any dividends declared during the past two years with respect to such Common Stock is included on page 24 of the 1994 Annual Report and is incorporated herein by reference. Pages ----- ITEM 6. Selected Financial Data. The required information is included in the specified pages of the 1994 Annual Report and is incorporated herein by reference. 1 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The required information is included in the specified pages of the 1994 Annual Report and is incorporated herein by reference. 15,19 ITEM 8. Financial Statements and Supplementary Data. The required information is included in the specified pages of the 1994 Annual Report and is incorporated herein by reference. See 14, Item 14 for index to financial statements 16-18, and schedules. 20-24 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 16 17 PART III ITEM 10. Directors and Executive Officers of the Registrant. The required information on directors is included in the specified pages of the Proxy Statement dated August 10, 1994 and is incorporated herein by reference. 3,5 The required information on executive officers is set forth in Part I of this Form 10-K under an unnumbered item captioned "Executive Officers of Manor Care, Inc." ITEM 11. Executive Compensation. The required information is included in the specified pages of the Proxy Statement dated August 10, 1994 and is incorporated herein by reference. 7-13 ITEM 12. Security Ownership of Certain Beneficial Owners and Management. The required information is included in the specified pages of the Proxy Statement dated August 10, 1994 and is incorporated herein by reference. 3-4 ITEM 13. Certain Relationships and Related Transactions. Not applicable. 17 18 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements Included on the following pages of the 1994 Annual Report: Consolidated Statements of Income . . . . . . . . . . 14 Consolidated Balance Sheets . . . . . . . . . . . . . 16 Consolidated Statements of Stockholders' Equity . . . 17 Consolidated Statements of Cash Flows . . . . . . . . 18 Management's Report and Report of Independent Public Accountants . . . . . . . . . . 20 Notes to Consolidated Financial Statements. . . . . . 21-24 2. Financial Statement Schedules The following Report and Schedules are filed herewith on the pages indicated: Report of Independent Public Accountants on Schedules - Arthur Andersen & Co. 22 Schedules V - Property, Plant and Equipment 23 VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment 24 VIII - Valuation and Qualifying Accounts 25 X - Supplementary Income Statement Information 26 18 19 3. Exhibits 3.1 - Articles of Incorporation, as amended. Exhibit 3.1 to Form 10-K for the year ended May 31, 1987 is incorporated herein by reference. 3.2 - By-Laws, as amended. Exhibit 3.2 to Form 10-K for the year ended May 31, 1988 is incorporated herein by reference. 4.1 - Indenture dated as of November 15, 1992 covering 9-1/2% Senior Subordinated Notes due 2002 between Manor Care, Inc. and Chemical Bank. Exhibit 4.1 to Registration Statement No. 33-52734 is incorporated herein by reference. 10.1 - Supplemental Executive Retirement Plan. Exhibit l0.2 to Form l0-K for the year ended May 31, 1986 is incorporated herein by reference. 10.2 - Form of Executive Cash Incentive Plan. 10.3 - Employment Agreement dated November 12, 1980, as amended, between Quality Inns International, Inc. and Robert C. Hazard, Jr. Exhibit 10.4 to Form 10-K for the year ended May 31, 1986 is incorporated herein by reference. 10.4 - Employment Agreement dated November 12, 1980, as amended, between Quality Inns International, Inc. and Gerald W. Petitt. Exhibit 10.5 to Form 10-K for the year ended May 31, 1986 is incorporated herein by reference. 10.5 - Second Amendment to Employment Agreement dated as of May 30, 1990 between Quality Inns International, Inc. and Robert C. Hazard, Jr. Exhibit 10.11 to Form 10-K for the year ended May 31, 1990 is incorporated herein by reference. 10.6 - Second Amendment to Employment Agreement dated as of May 30, 1990 between Quality Inns International, Inc. and Gerald W. Petitt. Exhibit 10.12 to Form 10-K for the year ended May 31, 1990 is incorporated herein by reference. 10.7 - Shareholders Agreement dated as of November 12, 1980, as amended, among Manor Care, Inc., Robert C. Hazard, Jr. and Gerald W. Petitt. Exhibit 10.13 to Form 10-K for the year ended May 31, 1990 is incorporated herein by reference.
19 20 10.8 - Agreement dated as of February 11, 1994 between Choice Hotels International, Inc. and Frederick W. Mosser. Exhibit 10.1 to Form 10-Q for the quarter ended February 28, 1994 is incorporated herein by reference. 10.9 - Employment Agreement dated February 17, 1992 between Manor Care, Inc. and Donald J. Landry. Exhibit 10.15 to Form 10-K for the year ended May 31, 1992 is incorporated herein by reference. 10.10 - Directors Retirement Plan. Exhibit 10.16 to Form 10-K for the year ended May 31, 1992 is incorporated herein by reference. 10.11 - Key Executive Stock Option Plan of 1993. Annex A to the Proxy Statement dated August 20, 1993 is incorporated herein by reference. l3 - 1994 Annual Report to Stockholders (information incorporated by reference). 21 - Subsidiaries of the Registrant. 23 - Consent of Independent Public Accountants. 99 - Proxy Statement dated August 10, 1994.
(b) No report on Form 8-K was filed during the last quarter of the fiscal year ended May 31, 1994. 20 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 26, 1994 MANOR CARE, INC. By:/s/ James A. MacCutcheon ----------------------------------- James A. MacCutcheon Senior Vice President- Finance and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Stewart Bainum, Jr. Chairman, Director, August 26, 1994 - - ------------------------------ President and Chief Stewart Bainum, Jr. Executive Officer /s/ Stewart Bainum Vice Chairman August 26, 1994 - - ------------------------------ and Director Stewart Bainum /s/ Jack R. Anderson Director August 26, 1994 - - ------------------------------ Jack R. Anderson /s/ Regina E. Herzlinger Director August 26, 1994 - - ------------------------------ Regina E. Herzlinger /s/ William H. Longfield Director August 26, 1994 - - ------------------------------ William H. Longfield /s/ Frederic V. Malek Director August 26, 1994 - - ------------------------------ Frederic V. Malek /s/ Jerry E. Robertson Director August 26, 1994 - - ------------------------------ Jerry E. Robertson /s/ Margarita Schoendorfer Vice President- August 26, 1994 - - ------------------------------ Corporate Controller Margarita Schoendorfer
21 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO MANOR CARE, INC.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Manor Care, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated June 22, 1994. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index in Item 14(a)2 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen & Co. Washington, D.C., June 22, 1994 22 23 SCHEDULE V MANOR CARE, INC. PROPERTY, PLANT AND EQUIPMENT
OTHER BALANCE AT CHANGES BALANCE AT BEGINNING ADDITIONS RETIREMENTS DEBIT CLOSE OF CLASSIFICATION OF PERIOD AT COST OR SALES (CREDIT)(A) PERIOD - - -------------- ---------- -------- ----------- -------- ---------- (IN THOUSANDS OF DOLLARS) Year ended May 31, 1994 Land $ 80,944 $ 13,669 $ (2,118) $ 343 $ 92,838 Buildings and improvements 749,261 53,582 (18,717) 29,005 813,131 Capitalized leases 18,991 - - - 18,991 Furniture, fixtures and equipment 168,321 29,977 (15,730) 5,236 187,804 Facilities in progress 11,762 42,942 - (35,072) 19,632 --------- ------- ------- ------- --------- Total $1,029,279 $140,170 $(36,565) $ (488) $1,132,396 ========= ======= ======= ======= ========= Year ended May 31, 1993 Land $ 75,291 $ 3,750 $ (158) $ 2,061 $ 80,944 Buildings and improvements 678,956 34,378 (13,304) 49,231 749,261 Capitalized leases 18,991 - - - 18,991 Furniture, fixtures and equipment 156,069 25,908 (19,817) 6,161 168,321 Facilities in progress 22,025 52,536 - (62,799) 11,762 --------- ------- ------- ------- --------- Total $ 951,332 $116,572 $(33,279) $ (5,346) $1,029,279 ========= ======= ======= ======= ========= Year ended May 31, 1992 Land $ 75,506 $ 351 $ (307) $ (259) $ 75,291 Buildings and improvements 653,175 16,683 (3,788) 12,886 678,956 Capitalized leases 18,991 - - - 18,991 Furniture, fixtures and equipment 142,746 17 833 (6,117) 1,607 156,069 Facilities in progress 10,735 28,630 - (17,340) 22,025 --------- ------- ------- ------- --------- Total $ 901,153 $ 63,497 $(10,212) $ (3,106) $ 951,332 ========= ======= ======= ======= =========
(A) Other changes are primarily transfers from facilities in progress to land, buildings and improvements and furniture, fixtures and equipment. 23 24 SCHEDULE VI MANOR CARE, INC. ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
ADDITIONS OTHER BALANCE AT CHARGED TO CHANGES BALANCE AT BEGINNING PROFIT RETIREMENTS (DEBIT) CLOSE OF CLASSIFICATION OF PERIOD AND LOSS OR SALES CREDIT PERIOD - - -------------- ---------- ---------- ----------- ------- ---------- (IN THOUSANDS OF DOLLARS) Year ended May 31, 1994 Buildings and improvements $189,515 $ 33,552 $ (9,240) $ - $213,827 Furniture, fixtures and equipment 78,425 21,997 (14,434) - 85,988 Capitalized leases 7,593 638 - - 8,231 ------- ------- ------- ------ ------- Total $275,533 $ 56,187 $(23,674) $ - $308,046 ======= ======= ======= ====== ======= Year ended May 31, 1993 Buildings and improvements $168,226 $ 30,935 $ (9,646) $ - $189,515 Furniture, fixtures and equipment 77,187 19,984 (18,746) - 78,425 Capitalized leases 6,958 635 - - 7,593 ------- ------- ------- ------ ------- Total $252,371 $ 51,554 $(28,392) $ - $275,533 ======= ======= ======= ====== ======= Year ended May 31, 1992 Buildings and improvements $143,099 $ 28,818 $ (3,691) $ - $168,226 Furniture, fixtures and equipment 65,489 17,754 (6,056) - 77,187 Capitalized leases 6,364 594 - - 6,958 ------- ------- ------- ------ ------- Total $214,952 $ 47,166 $ (9,747) $ - $252,371 ======= ======= ======= ====== =======
24 25 SCHEDULE VIII MANOR CARE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING PROFIT END DESCRIPTION OF PERIOD AND LOSS OTHER WRITE-OFFS OF PERIOD - - ----------- ---------- ---------- ------- ---------- ---------- Year ended May 31, 1994 Allowance for doubtful accounts $16,501 $13,923 $3,434 (A) $ (9,427) $24,431 ====== ====== ===== ======= ====== Allowance for doubtful long- term notes receivable $ 315 $ - $ - $ (315) $ 0 ====== ====== ===== ======= ====== Year ended May 31, 1993 Allowance for doubtful accounts $18,349 $ 9,394 $ - $(11,242) $16,501 ====== ====== ===== ======= ====== Allowance for doubtful long- term notes receivable $ 315 $ - $ - $ - $ 315 ====== ====== ===== ======= ====== Year ended May 31, 1992 Allowance for doubtful accounts $15,016 $ 9,967 $2,249 (A) $ (8,883) $18,349 ====== ====== ===== ======= ====== Allowance for doubtful long- term notes receivable $ 315 $ - $ - $ - $ 315 ====== ====== ===== ======= ======
(A) Represents reserves of acquired companies and certain balance sheet reclassifications. 25 26 SCHEDULE X MANOR CARE, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION
1994 1993 1992 ------- ------- ------- (in thousands of dollars) Maintenance and repairs $10,230 $ 8,757 $ 7,437 Taxes, other than payroll and income taxes (primarily property taxes) $16,991 $15,086 $14,257 Advertising $37,332 $29,515 $31,206
26 27 EXHIBIT INDEX 3.1 - Articles of Incorporation, as amended. Exhibit 3.1 to Form 10-K for the year ended May 31, 1987 is incorporated herein by reference. 3.2 - By-Laws, as amended. Exhibit 3.2 to Form 10-K for the year ended May 31, 1988 is incorporated herein by reference. 4.1 - Indenture dated as of November 15, 1992 covering 9-1/2% Senior Subordinated Notes due 2002 between Manor Care, Inc. and Chemical Bank. Exhibit 4.1 to Registration Statement No. 33-52734 is incorporated herein by reference. 10.1 - Supplemental Executive Retirement Plan. Exhibit 10.2 to Form 10-K for the year ended May 31, 1986 is incorporated herein by reference. 10.2 - Form of Executive Cash Incentive Plan. 10.3 - Employment Agreement dated November 12, 1980, as amended, between Quality Inns International, Inc. and Robert C. Hazard, Jr. Exhibit 10.4 to Form 10-K for the year ended May 31, 1986 is incorporated herein by reference. 10.4 - Employment Agreement dated November 12, 1980, as amended, between Quality Inns International, Inc. and Gerald W. Petitt. Exhibit 10.5 to Form 10-K for the year ended May 31, 1986 is incorporated herein by reference. 10.5 - Second Amendment to Employment Agreement dated as of May 30, 1990 between Quality Inns International, Inc. and Robert C. Hazard, Jr. Exhibit 10.11 to Form 10-K for the year ended May 31, 1990 is incorporated herein by reference. 10.6 - Second Amendment to Employment Agreement dated as of May 30, 1990 between Quality Inns International, Inc. and Gerald W. Petitt. Exhibit 10.12 to Form 10-K for the year ended May 31, 1990 is incorporated herein by reference. 10.7 - Shareholders Agreement dated as of November 12, 1980, as amended, among Manor Care, Inc., Robert C. Hazard, Jr. and Gerald W. Petitt. Exhibit 10.13 to Form 10-K for the year ended May 31, 1990 is incorporated herein by reference. 28 EXHIBIT INDEX Continued 10.8 - Agreement dated as of February 11, 1994 between Choice Hotels International, Inc. and Frederick W. Mosser. Exhibit 10.1 to Form 10-Q for the quarter ended February 28, 1994 is incorporated herein by reference. 10.9 - Employment Agreement dated February 17, 1992 between Manor Care, Inc. and Donald J. Landry. Exhibit 10.15 to Form 10-K for the year ended May 31, 1992 is incorporated herein by reference. 10.10 - Directors Retirement Plan. Exhibit 10.16 to Form 10-K for the year ended May 31, 1992 is incorporated herein by reference. 10.11 - Key Executive Stock Option Plan of 1993. Annex A to the Proxy Statement dated August 20, 1993 is incorporated herein by reference. 13 - 1994 Annual Report to Stockholders (information incorporated by reference). 21 - Subsidiaries of the Registrant. 23 - Consent of Independent Public Accountants. 99 - Proxy Statement dated August 10, 1994. EX-10.2 2 EXECUTIVE CASH INCENTIVE PLAN 1 EXHIBIT 10.2 FY 1995 MANOR CARE, INC. EXECUTIVE CASH INCENTIVE PLAN I. NAME OF PLAN The name of the Plan is "The Manor Care, Inc. Executive Cash Incentive Plan," hereinafter referred to as the "Plan." II. EFFECTIVE DATE OF PLAN The effective date of this Plan shall be June 1, 1994. III. RESPONSIBILITIES A. Board of Directors Review and approve incentive compensation programs as recommended by the Compensation/Key Executive Stock Option Plan Committee. B. Compensation/Key Executive Stock Option Plan Committee 1. Ensure that the Company's Cash Incentive Plan is consistent with public policy and is in the Company's best interest. 2. Review and approve participants in the Plan. 3. Review and approve maximum incentive opportunity of participants. C. Chairman Review and recommend participants in the Plan. IV. ADMINISTRATION The Plan shall be administered by the Compensation/Key Executive Stock Option Plan Committee. Any decision of the Committee regarding the application and/or interpretation of the provisions of the Plan shall be final. The Committee, for purposes of administering the Plan, shall be composed of not less than three members of the Board of Directors, none of whom shall be a participant in the Plan. 2 V. ELIGIBILITY FOR PARTICIPATION 1. The following positions have been recommended by the Chairman and approved by the Committee as participants in the Plan with individual maximum incentive opportunities as listed below: Chairman.......................................60% Senior Vice President Finance..................50% Senior Vice President General Counsel..........50% Senior Vice President Information Resources and Development....................50% Senior Vice President Human Resources..........50% Vice President Risk Management.................35% Vice President Controller......................35% Vice President Information Resources...........35% Vice President Strategic Planning .............35% Vice President Development.....................35% Vice President Corporate Development...........35% Vice President Compensation & Benefits.........35% Vice President Finance & Asst Treasurer........35% Assistant Treasurer............................25% 2. Personnel must be employees of the Company at the beginning of the Plan year except that the Committee has the authority to make exceptions to include an executive joining the Company, or assuming a participating position, after the beginning of the Plan year. The salary of a participant joining the Plan after the beginning of the Plan year will be computed by multiplying his weekly salary by the number of weeks he actually participated in the Plan year. 3 VI. FUNDING FY 1995 08/24/94 MANOR CARE, INC. CHAIRMAN / CEO 60% BONUS MAXIMUM % OF SALARY EARNED AS BONUS
Weighted FY '95 % Salary Average % Salary ROBE Earned as Customer Satisfaction Earned as % Budget Targets Bonus Score Bonus - - ------------------------------------------------------------------------------------------------------------------------- 110% 19.0% 60.0% 70.8% 10.0% 109% 18.8% 57.5% 69.8% 9.3% 108% 18.6% 55.0% 68.8% 8.6% 107% 18.4% 50.2% 67.8% 7.9% 106% 18.2% 45.3% 66.8% 7.1% 105% 18.0% 40.4% 65.8% 6.4% 104% 17.8% 35.5% 64.8% 5.7% 103% 17.6% 30.6% 63.8% 5.0% 102% 17.4% 25.8% 101% 17.2% 20.9% 100% 17.0% 16.0% 99% 16.8% 13.0% 98% 16.6% 10.0% 97% 16.4% 7.0% 96% 16.2% 4.0% 95% 16.0% 2.0%
CLIFF: (ROBE) Return on Beginning Equity must equal or exceed 16.0% in 1995 for participant to receive a bonus payment. NOTES: RETURN ON BEGINNING EQUITY = NET INCOME BEFORE CAPITAL GAINS OR LOSSES AND EXTRAORDINARY ITEMS DIVIDED BY BEGINNING EQUITY WEIGHTED AVERAGE CUSTOMER SATISFACTION SCORE IS AS FOLLOWS: MANOR HEALTHCARE, CORP. 69%, VITALINK PHARMACY SERVICES, INC. 9%, MANOR CARE HOTELS 9%, AND CHOICE HOTELS INTERNATIONAL 13% WEIGHTED AVERAGE SCORE 63.8% = MHC (65%X 69%) + VIT (64% X 9%) + MCH (67% X 9%) + CHI (50% X 13%) 4 FY 1995 08/24/94 MANOR CARE, INC. SR. VICE PRESIDENT FINANCE SR. VICE PRESIDENT GENERAL COUNSEL SR. VICE PRESIDENT HUMAN RESOURCES SR. VICE PRESIDENT INFO RES/DEVELOPMENT 50% BONUS MAXIMUM % OF SALARY EARNED AS BONUS
Weighted FY '95 % Salary Average % Salary ROBE Earned as Customer Satisfaction Earned as % Budget Targets Bonus Score Bonus - - ------------------------------------------------------------------------------------------------------------------------- 110% 19.0% 50.0% 70.8% 10.0% 109% 18.8% 47.5% 69.8% 9.3% 108% 18.6% 45.0% 68.8% 8.6% 107% 18.4% 41.4% 67.8% 7.9% 106% 18.2% 37.8% 66.8% 7.1% 105% 18.0% 34.2% 65.8% 6.4% 104% 17.8% 30.5% 64.8% 5.7% 103% 17.6% 26.9% 63.8% 5.0% 102% 17.4% 23.3% 101% 17.2% 19.6% 100% 17.0% 16.0% 99% 16.8% 13.0% 98% 16.6% 10.0% 97% 16.4% 7.0% 96% 16.2% 4.0% 95% 16.0% 2.0%
CLIFF: (ROBE) Return on Beginning Equity must equal or exceed 16.0% in 1995 for participant to receive a bonus payment. NOTES: RETURN ON BEGINNING EQUITY = NET INCOME BEFORE CAPITAL GAINS OR LOSSES AND EXTRAORDINARY ITEMS DIVIDED BY BEGINNING EQUITY WEIGHTED AVERAGE CUSTOMER SATISFACTION SCORE IS AS FOLLOWS: MANOR HEALTHCARE, CORP. 69%, VITALINK PHARMACY SERVICES, INC. 9%, MANOR CARE HOTELS 9%, AND CHOICE HOTELS INTERNATIONAL 13% WEIGHTED AVERAGE SCORE 63.8% = MHC (65%X 69%) + VIT (64% X 9%) + MCH (67% X 9%) + CHI (50% X 13%) 5 FY 1995 08/24/94 MANOR CARE, INC. VICE PRESIDENT CONTROLLER VICE PRESIDENT DEVELOPMENT VICE PRESIDENT RISK MANAGEMENT VICE PRESIDENT STRATEGIC PLANNING VICE PRESIDENT INFORMATION RESOURCES VICE PRESIDENT CORPORATE DEVELOPMENT VICE PRESIDENT COMPENSATION AND BENEFITS VICE PRESIDENT FINANCE AND ASST TREASURER 35% BONUS MAXIMUM % OF SALARY EARNED AS BONUS
Weighted FY '95 % Salary Average % Salary ROBE Earned as Customer Satisfaction Earned as % Budget Targets Bonus Score Bonus - - ------------------------------------------------------------------------------------------------------------------------- 110% 19.0% 35.0% 70.8% 10.0% 109% 18.8% 32.5% 69.8% 9.3% 108% 18.6% 30.0% 68.8% 8.6% 107% 18.4% 28.3% 67.8% 7.9% 106% 18.2% 26.5% 66.8% 7.1% 105% 18.0% 24.8% 65.8% 6.4% 104% 17.8% 23.0% 64.8% 5.7% 103% 17.6% 21.3% 63.8% 5.0% 102% 17.4% 19.5% 101% 17.2% 17.8% 100% 17.0% 16.0% 99% 16.8% 13.0% 98% 16.6% 10.0% 97% 16.4% 7.0% 96% 16.2% 4.0% 95% 16.0% 2.0%
CLIFF: (ROBE) Return on Beginning Equity must equal or exceed 16.0% in 1995 for participant to receive a bonus payment. NOTES: RETURN ON BEGINNING EQUITY = NET INCOME BEFORE CAPITAL GAINS OR LOSSES AND EXTRAORDINARY ITEMS DIVIDED BY BEGINNING EQUITY WEIGHTED AVERAGE CUSTOMER SATISFACTION SCORE IS AS FOLLOWS: MANOR HEALTHCARE, CORP. 69%, VITALINK PHARMACY SERVICES, INC. 9%, MANOR CARE HOTELS 9%, AND CHOICE HOTELS INTERNATIONAL 13% WEIGHTED AVERAGE SCORE 63.8% = MHC (65%X 69%) + VIT (64% X 9%) + MCH (67% X 9%) + CHI (50% X 13%) 6 FY 1995 08/24/94 MANOR CARE, INC. ASSISTANT TREASURER 25% BONUS MAXIMUM % OF SALARY EARNED AS BONUS
Weighted FY '95 % Salary Average % Salary ROBE Earned as Customer Satisfaction Earned as % Budget Targets Bonus Score Bonus - - ------------------------------------------------------------------------------------------------------------------------- 110% 19.0% 25.0% 70.8% 10.0% 109% 18.8% 22.5% 69.8% 9.3% 108% 18.6% 20.0% 68.8% 8.6% 107% 18.4% 19.5% 67.8% 7.9% 106% 18.2% 19.0% 66.8% 7.1% 105% 18.0% 18.5% 65.8% 6.4% 104% 17.8% 18.0% 64.8% 5.7% 103% 17.6% 17.5% 63.8% 5.0% 102% 17.4% 17.0% 101% 17.2% 16.5% 100% 17.0% 16.0% 99% 16.8% 13.0% 98% 16.6% 10.0% 97% 16.4% 7.0% 96% 16.2% 4.0% 95% 16.0% 2.0%
CLIFF: (ROBE) Return on Beginning Equity must equal or exceed 16.0% in 1995 for participant to receive a bonus payment. NOTES: RETURN ON BEGINNING EQUITY = NET INCOME BEFORE CAPITAL GAINS OR LOSSES AND EXTRAORDINARY ITEMS DIVIDED BY BEGINNING EQUITY WEIGHTED AVERAGE CUSTOMER SATISFACTION SCORE IS AS FOLLOWS: MANOR HEALTHCARE, CORP. 69%, VITALINK PHARMACY SERVICES, INC. 9%, MANOR CARE HOTELS 9%, AND CHOICE HOTELS INTERNATIONAL 13% WEIGHTED AVERAGE SCORE 63.8% = MHC (65%X 69%) + VIT (64% X 9%) + MCH (67% X 9%) + CHI (50% X 13%) 7 VII. TIME OF PAYMENT Payment to participants shall be in cash following the first Board of Directors Meeting after the independent auditors have certified on the annual audit of the Company's accounts for such year. VIII. PAYMENT UPON TERMINATION OR TRANSFER OF EMPLOYMENT A. In order to receive any portion of an Incentive award, the participant must be employed at the time any portion of the award is paid as outlined in VII, except in cases of death, disability or retirement. B. In the event of the death, disability or retirement of a participant after the end of the fiscal year but before awards are paid, the award will be paid to the participant's beneficiary or as designated on the insurance card as otherwise designated by will in the case of death, or in full to the participant in the case of retirement. C. Participants who become disabled, die or retire during the fiscal year shall be entitled to a prorata share of his or her incentive award upon a review and approval by the Compensation/Key Executive Stock Option Plan Committee. D. In the event of the transfer of a participating employee during the fiscal year to another, non- participating position within the Company, the award for the year will be prorated to date of transfer. IX. OPTIONAL DEFERRAL OF INCENTIVE COMPENSATION A Participant may elect by written notice to defer payment on all or a portion of the incentive award for any year, subject to the following conditions: A. Such election shall be irrevocable and no election to defer any installment may be made later than May 31st of the fiscal year for which the incentive award is computed. B. The Company shall credit to a liability account (the "Deferred Compensation Account") established for this purpose amounts of money so deferred. C. There shall be credited to the Deferred Compensation Account an additional amount (i.e., in addition to the principal amounts credited to such account pursuant to paragraph A hereof) equal to 8 the weighted average interest which would have been earned on such average monthly principal amounts at the end of each month as if such amounts had earned the same rate of interest the Company earns on its other cash investments. Such interest will be compounded annually from the date such amounts were credited to the Deferred Compensation Account until paid out in its entirety. In no event will such interest rate be less than the average one-year Treasury Bill Rate. D. The Company will provide an annual statement of the Deferred Compensation Account to each participating employee showing amounts of salary deferred and additional amounts credited to his account in accordance with paragraph C. E. Upon the termination of employment of a participant, the Company shall pay such participant his Deferred Compensation Account in one lump sum payment as soon after his termination of employment as is administratively feasible unless such participant had previously made an election, at least sixty (60) days prior to the effective date of such termination of employment, to receive his Deferred Compensation Account in the form of installment payments. At least sixty (60) days prior to his termination of employment, a participant may make an irrevocable election to receive his Deferred Compensation Account in the form of installment payments over a period of time designated by the participant but in no event to exceed twenty (20) years. In the event that the installment method of payment is selected, the participant will further designate whether installment payments are to be made on a monthly, quarterly, semi-annual or annual basis. During the period of installment distributions, the Deferred Compensation Account will be credited with an earnings factor computed pursuant to the principles described in Paragraph C, above. In the event that a participant dies after having made an installment election but prior to the receipt of all installment payments, thereunder, the remaining payments will be made to the participant's beneficiary through the remaining duration of the elected installment period, unless the participant has provided in such installment election for a different form of payment to the participant's beneficiary in the event of the death of the participant, in which event such different form of payment shall be made to the participant's beneficiary. The computation of the amount of a lump sum payment or the amount of an installment 9 payment shall be made by reference to the balance of the Deferred Compensation Account as of the date of the distribution. Payments shall be contingent upon the participant not engaging in employment or business operations in a competing entity within 25 miles of his previous work location. F. Where the employee's death occurs prior to making his election, payments of compensation deferred shall be made in such manner determined by the beneficiary. G. If both the employee and his designated beneficiary should die, the total amount standing to his credit in the Deferred Compensation Account shall be determined as of the date of the death of the designated beneficiary (including any additional amounts credited to such Account pursuant to paragraph C) and shall be paid as promptly as possible in one lump sum to the estate of such designated beneficiary. H. Payments will be made to the employee or beneficiary after deducting taxes required by federal and/or state governments. I. An employee, with the consent of the Company, shall be permitted to withdraw at any time, in the case of a real emergency beyond the employee's control, that portion of the amount of his deferred compensation withheld by the employer limited to the amount necessary to meet such emergency situation and which, if not withdrawn, would otherwise cause undue hardship to the employee. J. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the employee, his designated beneficiary or any other person. Any compensation deferred under the provisions of this Plan shall continue for all purposes to be a part of the general funds of the Company. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. K. The right of the Company or any other person to the payment of deferred compensation or other benefits under this Plan shall not be assigned, transferred, pledged, or encumbered except by will or by the laws of descent and distribution. 10 L. Nothing contained herein shall be construed as conferring upon the employee the right to continue in the employ of the Company as an executive or in any other capacity. M. This paragraph IX shall be binding upon and inure to the benefit of the Company and its subsidiaries, its successors and assigns and the employee and his heirs, executors, administrators and legal representatives. N. In the event of a change of control of the Company, deferred compensation, including accrued interest, shall be immediately paid to the employee. A "change of control" shall mean (i) a merger or consolidation in which the Company is not the surviving corporation or (ii) the acquisition of twenty-five percent or more of the voting securities of the Company by a person, group, or entity or (iii) the sale of all or substantially all of the assets of the Company or (iv) individuals who were members of the Board immediately prior to a meeting of the stockholders of the Company involving a contest for the election of Directors do not constitute a majority of the Board immediately following such election, unless that election of such new Directors was recommended to the stockholders by management of the Company. X. PLAN TERMINATION/MODIFICATION This Plan shall continue in effect until such time as it may be cancelled or otherwise terminated by the Board. The Board reserves the right to amend, alter or modify this Plan. EX-13 3 1994 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 Manor Care, Inc. and Subsidiaries Financial Highlights (REVENUES BAR GRAPH) (NET INCOME FROM OPERATIONS PER SHARE* BAR GRAPH)
Years Ended May 31 (In thousands of dollars, except per share data) 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Total revenues $1,163,072 $1,009,675 $ 916,224 $ 815,469 $ 708,734 Income before non-recurring items* 77,184 62,383 47,850 32,083 26,678 Net income 78,362 59,364 62,452 32,083 26,678 ---------- ---------- ---------- ---------- ---------- Average shares outstanding** 60,524 57,316 57,308 57,212 57,774 ---------- ---------- ---------- ---------- ---------- Per share data: Income before non-recurring items* $ 1.27 $ 1.09 $ .83 $ .56 $ .46 Non-recurring items* .02 (.05) .26 - - Net income per common share** 1.29 1.04 1.09 .56 .46 Dividends per common share** .09 .09 .09 .09 .09 Market price range: High** 29.25 26.63 19.00 15.17 11.92 Low** 17.50 15.63 11.75 6.83 8.17 ---------- ---------- ---------- ---------- ---------- Cash provided by operating activities $ 175,397 $ 125,030 $ 159,591 $ 99,847 $ 93,039 Investments in property and equipment 90,871 90,364 63,497 64,325 81,400 ---------- ---------- ---------- ---------- ---------- Total assets $1,186,525 $1,106,506 $1,015,289 $ 944,391 $ 867,853 Long-term debt 276,935 380,438 373,989 456,409 419,060 Stockholders' equity 533,815 361,994 304,982 244,951 221,644 ---------- ---------- ---------- ---------- ----------
* Non-recurring items consist of net gain on sale of property and impact of change in tax rate in 1994, net gain on sale of stock by subsidiary in 1992 and extraordinary items in 1993 and 1992. ** Retroactively adjusted for three-for-two stock split in March 1992. One 2 Manor Care, Inc. and Subsidiaries Consolidated Statements of Income
Years Ended May 31 (in thousands, except per share data) 1994 1993 1992 ---- ---- ---- REVENUES Healthcare $ 923,308 $ 830,968 $ 755,999 Lodging 239,764 178,707 160,225 ---------- ---------- ---------- Total revenues 1,163,072 1,009,675 916,224 ---------- ---------- ---------- EXPENSES Healthcare 696,199 627,733 575,054 Lodging 175,400 128,988 113,851 Depreciation and amortization 66,540 60,999 56,986 General corporate 67,445 57,891 52,694 ---------- ---------- ---------- Total expenses 1,005,584 875,611 798,585 ---------- ---------- ---------- INCOME FROM OPERATIONS 157,488 134,064 117,639 ---------- ---------- ---------- OTHER INCOME AND (EXPENSES) Interest income and other 2,677 3,889 3,094 Gain on sale of property 7,978 - - Gain on sale of stock by a subsidiary - - 30,077 Interest expense (31,281) (37,070) (44,092) ---------- ---------- ---------- Total other (expenses), net (20,626) (33,181) (10,921) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 136,862 100,883 106,718 INCOME TAXES 58,500 38,500 40,100 ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 78,362 62,383 66,618 EXTRAORDINARY ITEM (DEBT REDEMPTION, NET OF INCOME TAXES OF $1,851 AND $2,446, RESPECTIVELY) - (3,019) (4,166) ---------- ---------- ---------- NET INCOME $ 78,362 $ 59,364 $ 62,452 ========== ========== ========== AVERAGE SHARES OUTSTANDING 60,524 57,316 57,308 ========== ========== ========== INCOME PER SHARE OF COMMON STOCK Income before extraordinary item $ 1.29 $ 1.09 $ 1.16 Extraordinary item (debt redemption) - (.05) (.07) ---------- ---------- ---------- Net income per share of common stock $ 1.29 $ 1.04 $ 1.09 ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. Fourteen 3 Manor Care, Inc. and Subsidiaries Management's Review of Operating Results HEALTHCARE OPERATIONS Healthcare revenues increased 11% to $923.3 million in fiscal year 1994 compared to an increase of 10% in fiscal year 1993. The increase in revenues was due to higher occupancy and increased private and third-party payor rates as well as added capacity in the Company's 82% owned institution pharmacy subsidiary. The strong occupancy level in the nursing facilities (an increase of approximately 2.5% over last year) and higher third-party payor rates reflect an increase in value-added services geared toward residents with special needs and higher levels of acuity. Healthcare operating expenses increased 11% to $696.2 million in fiscal year 1994 compared to an increase of 9% in fiscal year 1993. Increases in expenses were attributed to the increase in census, labor costs, the higher level of acuity of the residents as well as increased capacity in the pharmacy subsidiary. The Company actively controls costs and has generally been successful at maintaining overall costs, other than labor, at a rate consistent with the general rate of inflation. Programs designed to effectively manage human resources through improved recruiting and training have helped to moderate overall wage rate increases during fiscal years 1994 and 1993. LODGING OPERATIONS Lodging revenues increased 34% to $239.8 million in 1994 while operating expenses increased 36%. This compares to increases in revenues and expenses of 12% and 13%, respectively, in 1993. The growth in both revenues and expenses was largely due to the increase in the number of hotels the Company owns and operates as well as the improved operating performance of hotels in the Company's franchise system. Operating margins were negatively impacted as a result of renovations to many of the recently acquired hotels and the opening of four newly constructed hotels in Europe in the last eighteen months. The number of hotels owned or leased and operated by the Company has increased from 23 to 44 during fiscal year 1994, principally as a result of the acquisition at distressed prices of properties in select markets. The Company's franchise subsidiary accounted for 69% and 77% of lodging revenues in fiscal 1994 and 1993, respectively, with the balance contributed by the owned or leased hotels. OTHER INFORMATION Depreciation and amortization increased 9% in fiscal year 1994 to $66.5 million. In fiscal year 1993, depreciation and amortization increased 7%. The increases in both years were due primarily to acquisitions in the lodging segment. General corporate expenses represented 6% of revenues in fiscal years 1994 and 1993. General corporate expenses include all indirect operating expenses as well as risk management, information systems, treasury, accounting, legal and other administrative support for each of the Company's subsidiaries. Interest expense decreased 16% in fiscal year 1994 to $31.3 million due primarily to the redemption of $99.0 million of 6 3/8% debentures in October 1993. Interest expense decreased 16% in fiscal year 1993 to $37.1 million due primarily to the redemption of $60.0 million in 11 3/8% debentures in May 1992. Fifteen 4 Manor Care, Inc. and Subsidiaries Consolidated Balance Sheets
May 31 (in thousands of dollars, except share data) 1994 1993 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 60,487 $ 80,844 Receivables (net of allowances of $24,431 and $16,501) 84,766 82,820 Inventories 12,954 13,489 Current deferred income tax benefit 12,317 6,381 Other 12,828 10,725 ---------- ---------- Total current assets 183,352 194,259 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST, NET OF DEPRECIATION 824,350 753,746 ---------- ---------- LODGING FRANCHISE RIGHTS, NET OF AMORTIZATION 64,454 67,343 ---------- ---------- OTHER ASSETS 114,369 91,158 ---------- ---------- $1,186,525 $1,106,506 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 5,869 $ 45,338 Accounts payable 50,231 44,504 Accrued expenses 97,597 85,377 Income taxes payable 12,681 5,254 ---------- ---------- Total current liabilities 166,378 180,473 ---------- ---------- MORTGAGES AND OTHER LONG-TERM DEBT 119,333 124,838 ---------- ---------- SUBORDINATED LONG-TERM DEBT 157,602 255,600 ---------- ---------- DEFERRED INCOME TAXES ($137,916 AND $125,647) AND OTHER 209,397 183,601 ---------- ---------- STOCKHOLDERS' EQUITY Common stock $.10 par, 80,000,000 shares authorized; 65,436,734 and 60,470,832 shares issued 6,545 6,047 Contributed capital 167,316 68,471 Retained earnings 402,520 329,532 Cumulative translation adjustment (31) 352 Treasury stock, 2,986,492 and 2,980,576 shares, at cost (42,535) (42,408) ---------- ---------- Total stockholders' equity 533,815 361,994 ---------- ---------- $1,186,525 $1,106,506 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. Sixteen 5 Manor Care, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Cumulative Common Stock Contributed Retained Translation (in thousands of dollars, except share data) Shares Amount Capital Earnings Adjustment ------ ------ ------- -------- ---------- Balance, May 31, 1991 41,030,772 $ 4,103 $ 64,243 $ 217,846 $ (335) Net income - - - 62,452 - Exercise of stock options 197,248 20 3,673 - - Cash dividends - - - (5,031) - Stock split, three-for-two effective March 27, 1992 19,135,568 1,913 (1,927) - - Other - - 863 (3) (305) ---------- ------- --------- --------- ------ Balance, May 31, 1992 60,363,588 6,036 66,852 275,264 (640) Net income - - - 59,364 - Exercise of stock options 107,244 11 1,457 - - Cash dividends - - - (5,096) - Other - - 162 - 992 ---------- ------- --------- --------- ------ Balance, May 31, 1993 60,470,832 6,047 68,471 329,532 352 Net income - - - 78,362 - Exercise of stock options 222,380 23 2,186 - - Cash dividends - - - (5,374) - Debenture conversion 4,743,522 475 96,432 - - Other - - 227 - (383) ---------- ------- --------- --------- ------ Balance, May 31, 1994 65,436,734 $ 6,545 $ 167,316 $ 402,520 $ (31) ========== ======= ========= ========= ======
The accompanying notes are an integral part of these consolidated statements. Seventeen 6 Manor Care, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Years Ended May 31 (in thousands of dollars) 1994 1993 1992 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 78,362 $ 59,364 $ 62,452 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 66,540 60,999 56,986 Amortization of debt discount, including extraordinary loss in 1992 1,014 940 5,320 Provision for bad debts 13,923 9,394 9,966 Increase in deferred taxes 6,333 7,500 19,963 Gain on sale of facilities (7,978) - - Gain on sale of stock by subsidiary - - (30,077) Changes in assets and liabilities (excluding sold facilities and acquisitions): Change in receivables (15,206) (16,110) (5,182) Change in inventories and other current assets (927) (57) (3,947) Change in accounts payable and accrued expenses 15,831 (4,442) 20,741 Change in income taxes payable 7,427 719 4,175 Change in other liabilities 10,078 6,723 19,194 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 175,397 125,030 159,591 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property and equipment (90,871) (90,364) (63,497) Acquisition of operating hotels (44,200) (25,115) - Acquisition of a hotel chain (10,400) - - Acquisition of operating pharmacies (7,217) (29,188) - Investment in a health care business (10,000) - - Purchase of minority interest - - (18,482) Proceeds from the sale of property 22,830 - - Other items, net (3,338) 6,296 (881) --------- --------- --------- NET CASH UTILIZED BY INVESTING ACTIVITIES (143,196) (138,371) (82,860) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 5,079 167,727 18,064 Principal payments of debt (54,472) (153,015) (76,771) Proceeds from exercise of stock options 2,209 1,468 3,693 Purchases of common stock for treasury - - (1,988) Proceeds from sale of stock by subsidiary - - 38,130 Dividends paid (5,374) (5,096) (5,031) --------- --------- --------- NET CASH (UTILIZED) PROVIDED BY FINANCING ACTIVITIES (52,558) 11,084 (23,903) --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (20,357) (2,257) 52,828 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 80,844 83,101 30,273 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 60,487 $ 80,844 $ 83,101 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. Eighteen 7 Manor Care, Inc. and Subsidiaries Management's Review of Financial Position and Cash Flows WORKING CAPITAL The Company's working capital ratio at both May 31, 1994 and May 31, 1993 was 1.1. The Company attempts to minimize its investment in net current assets, and believes that the maintenance of minimal working capital is an appropriate objective given the stability of the Company's operating cash flows and the depth of its financial resources. PROPERTY During fiscal year 1994, additions to property and equipment amounted to $90.9 million. Additions included routine capital expenditures and specialty product conversions, plus three hotels which are being converted to assisted living facilities, one of which opened in May 1994. An additional $44.2 million was spent to acquire 13 operating hotels and $10.4 million was spent to acquire Resthotel Primevere, a franchise lodging chain operating primarily in France. An investment of $10.0 million was made in a physician practice management business and $7.2 million was spent to purchase two pharmacies servicing 7,400 institutional beds. LONG-TERM DEBT Long-term debt was $276.9 million at May 31, 1994 compared to $380.4 million at May 31, 1993. In October 1993, the Company redeemed $99.0 million of 6 3/8% Convertible Subordinated Debentures due 2011. At the election of the bondholders, $96.9 million of the debentures were converted into common stock. In November 1992, the Company issued $150 million of 9 1/2% Senior Subordinated Notes due 2002. In January 1993, proceeds of this offering were used to redeem $125.0 million of 11 3/8% Senior Subordinated Notes due 1998. The Company's long-term debt to equity ratio was .5 to 1 at May 31, 1994, compared to 1.1 to 1 at May 31, 1993. In evaluating leverage and debt capacity, the Company considers cash flow and interest coverage. The Company's consolidated cash flow coverage ratio, as defined by the Company's bank agreements, was 4.16 to 1 for fiscal 1994. The Company's bank agreements require a minimum cash flow coverage of 1.75 to 1. The current portion of debt as of May 31, 1994 amounts to $5.9 million. STOCKHOLDERS' EQUITY Stockholders' equity increased from $362.0 million at May 31, 1993 to $533.8 million at May 31, 1994. This increase was primarily due to the conversion of $96.9 million of subordinated debentures into common stock and net income of $78.4 million, reduced by dividend payments amounting to $5.4 million. LIQUIDITY AND CAPITAL RESOURCES Adequate capital resources, including strong operating cash flows, are maintained to support ongoing operations and fulfill projected requirements for debt service and capital expenditures. In June 1993, the Company restated and extended its agreement with seven banks for a $100.0 million revolving credit facility. That facility was repriced on more favorable terms and extended to expire in June 1999. In December 1992, the Company entered into an agreement with a group of seven banks for a three-year, $65.0 million, multi-currency revolving credit facility to be used to fund international development and acquisition programs. At May 31, 1994, bank lines totaled $210.0 million of which $164.8 million remained unused. The Company maintains adequate debt capacity as evidenced by Standard & Poor's assignment of an investment grade BBB- to the Company's senior debt. The Company's ratio of senior debt to equity plus subordinated debt is .2 to 1. Furthermore, a significant portion of the Company's property and equipment remains unencumbered. Nineteen 8 MANAGEMENT'S REPORT The Company has developed and maintains internal control systems designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management authorization. Control systems are supported by written policies and are regularly evaluated by the Company's internal auditors. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which require that business judgments be applied. While management is responsible for the preparation of financial statements, the Company's outside auditors have examined the financial statements as described in their report. The Audit Committee of the Company's Board of Directors is comprised of two external directors. This Committee meets periodically with management, the internal auditors and the external auditors. The Committee reviews the Company's annual financial statements in advance of their release and monitors and reviews the audit programs conducted by both the Company's internal audit department and the external auditors. Audit Committee meetings are designed to facilitate any private communications with the Committee desired by either the internal or external auditors. /S/ STEWART BAINUM, JR. - - ----------------------- Stewart Bainum, Jr. CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER /S/ JAMES A. MacCUTCHEON - - ------------------------ James A. MacCutcheon SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Manor Care, Inc.: We have audited the accompanying consolidated balance sheets of MANOR CARE, INC., (a Delaware Corporation) and subsidiaries as of May 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above (appearing on pages 14, 16, 17, 18 and 21-24) present fairly, in all material respects, the financial position of MANOR CARE, INC., and subsidiaries as of May 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1994, in conformity with generally accepted accounting principles. Arthur Andersen & Co. WASHINGTON, D.C. JUNE 22, 1994 Twenty 9 Manor Care, Inc. and Subsidiaries Notes to Consolidated Financial Statements SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Manor Care, Inc. and its subsidiaries (the "Company"). All significant intercompany transactions have been eliminated. CASH The Company considers all highly liquid securities purchased with a maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT The components of property and equipment at May 31 were:
(in thousands of dollars) 1994 1993 ---- ---- Land $ 92,838 $ 80,944 Building and improvements 813,131 749,261 Capitalized leases 18,991 18,991 Furniture, fixtures and equipment 187,804 168,321 Facilities in progress 19,632 11,762 ---------- ---------- 1,132,396 1,029,279 Less: Accumulated depreciation (308,046) (275,533) ---------- ---------- $ 824,350 $ 753,746 ========== ==========
Depreciation has been computed for financial reporting purposes using the straight-line method. A summary of the ranges of estimated useful lives upon which depreciation rates have been based follows: Building and improvements 10-40 years Furniture, fixtures and equipment 3-20 years Accumulated depreciation includes $8,231,000 at May 31, 1994 and $7,593,000 at May 31, 1993 relating to capitalized leases. Capitalized leases are amortized on a straight-line basis over the lesser of the lease term or the remaining useful lives of the leased properties. CAPITALIZATION POLICIES Maintenance, repairs and minor replacements are charged to expense. Major renovations and replacements are capitalized to appropriate property and equipment accounts. Upon sale or retirement of property, the cost and related accumulated depreciation are eliminated from the accounts and the related gain or loss is taken into income. Construction overhead and costs incurred to ready a project for its intended use are capitalized for major development projects and are amortized over the lives of the related assets. Pre-opening marketing, personnel recruitment and training costs related to facilities under construction are deferred until construction is completed and then amortized over two years. The Company capitalizes interest on borrowings applicable to facilities in progress. Interest has been capitalized as follows:1994, $748,000; 1993, $2,621,000; 1992, $789,000. LODGING FRANCHISE RIGHTS Franchise rights are recorded at their estimated fair values at the date acquired and amortized over an average life of twenty-six years. SELF-INSURANCE PROGRAMS The Company self-insures for certain levels of general liability and workers' compensation coverage. Estimated costs of workers' compensation self-insurance programs are accrued at present values based on actuarial projections for known and anticipated claims. NET INCOME PER COMMON SHARE Net income per common share has been computed based on the weighted average number of shares of common stock outstanding. The effect of outstanding and unexercised stock options on the computation is insignificant. INCOME TAXES The income tax provisions for fiscal years 1994 and 1993 were accounted for under Statement of Financial Accounting Standards No. 109. Included in the 1994 tax provision was a charge of $3,600,000 due to the impact on prior periods of a change in the rates. In fiscal year 1993, the Company adopted Statement of Financial Accounting Standards No. 109. This adoption did not have a material effect on the Company's financial statements. The income tax provision for fiscal year 1992 was accounted for under Statement of Financial Accounting Standards No. 96. Income tax provisions were as follows:
(in thousands of dollars) 1994 1993 1992 ---- ---- ---- Current tax expense: Federal $44,367 $23,382 $19,009 State 10,823 7,604 4,051 Deferred tax expense: Federal 4,131 7,696 14,528 State (821) (182) 2,512 ------- ------- ------- $58,500 $38,500 $40,100 ======= ======= =======
Deferred tax assets (liabilities) are comprised of the following at May 31:
(in thousands of dollars) 1994 1993 1992 ---- ---- ---- Depreciation and amortization $ (86,138) $ (75,127) $ (73,504) Purchased tax benefits (47,506) (47,689) (47,991) Gain on stock issuance (11,895) (11,616) (11,616) Other (5,084) (6,386) (6,541) --------- --------- --------- Gross deferred tax liabilities (150,623) (140,818) (139,652) --------- --------- --------- Gross deferred tax assets 25,024 21,552 27,886 --------- --------- --------- Net deferred tax $(125,599) $(119,266) $(111,766) ========= ========= =========
Twenty One 10 A reconciliation of income tax expense at the statutory rate to income tax expense included in the consolidated statements of income follows:
(in thousands of dollars) 1994 1993 1992 ---- ---- ---- Federal income tax rate 35% 34% 34% ------- ------- ------- Federal taxes at statutory rate $47,902 $34,300 $36,284 State income taxes, net of Federal tax benefit 6,501 4,899 4,331 Effect of tax rate change 3,600 - - Tax credits (910) (726) (1,007) Other 1,407 27 492 ------- ------- ------- Income tax expense $58,500 $38,500 $40,100 ======= ======= ======= Income taxes paid $48,005 $27,746 $13,539 ======= ======= =======
ACCRUED EXPENSES Accrued expenses at May 31, 1994 and 1993 were as follows:
(in thousands of dollars) 1994 1993 ---- ---- Payroll $52,906 $47,222 Taxes, other than income 11,503 9,911 Insurance 8,681 8,097 Interest 1,207 4,302 Other 23,300 15,845 ------- ------- $97,597 $85,377 ======= =======
LONG-TERM DEBT Maturities of long-term debt at May 31, 1994, were as follows:
Fiscal Year (in thousands of dollars) ------------------------------------- 1995 $ 5,869 1996 65,986 1997 8,585 1998 16,499 1999 6,153 2000 to 2024 179,712 -------- $282,804 ========
Long-term debt, consisting of mortgages, capital leases and subordinated debt, was net of discount of $2,357,000 and $4,114,000 at May 31, 1994 and 1993, respectively. Amortization of discount was $1,014,000 in 1994, $940,000 in 1993 and $5,320,000 in 1992, including the write-off associated with debt redemptions. During fiscal 1994 interest rates on subordinated debt ranged from 4.5% to 9.5%; interest rates on mortgages and other long-term debt ranged from 3.6% to 13.8%. In October 1993, the Company redeemed the $99,000,000 of 6 3/8% Convertible Subordinated Debentures due 2011. Approximately $3,000,000 were redeemed for cash, at a premium, while the remaining debentures were converted into common stock at $20.31 per share which resulted in 4,743,522 shares being issued. In November 1992, the Company issued $150,000,000 of 9 1/2% Senior Subordinated Notes due 2002. The notes are redeemable at the option of the Company at a premium after November 15, 1997 and at par after November 15, 2000. In January 1993, the proceeds were used, in part, to redeem the Company's $125,000,000 of 11 3/8% Senior Subordinated Notes. The early redemption resulted in an extraordinary after-tax charge of $3,019,000. In May 1992, the Company redeemed the $60,000,000 of 11 3/8% Senior Subordinated Debentures due 2003. The early redemption resulted in an extraordinary after-tax charge of $4,166,000. In June 1993, the Company restated and extended the $100,000,000 revolving credit facility provided by a group of seven banks. Borrowings under the facility are, at the option of the Company, at the Base Rate, Certificate of Deposit rates or Eurodollar rates, as defined. In addition, when requested by the Company, participating banks may bid for loan participation at lower rates than those contractually provided by the facility. The facility requires the Company to pay fees of 1/8 of 1% on the entire co mmitment and 3/16 of 1% on the unused portion of the commitment. Revolving borrowings outstanding under this facility convert to a term loan in June 1996 and are payable over three years in equal semi-annual payments of principal. At May 31, 1994, there were no outstanding revolving borrowings. In December 1992, the Company entered into an agreement with a group of seven banks for a three year, $65,000,000, multi-currency revolving credit facility to be used to fund international development and acquisition programs. The facility requires the Company to pay fees on the same basis as the revolving credit facility. The facility will mature in December 1995. At May 31, 1994, the outstanding borrowings amounted to $45.2 million. Compensating balances of $902,000 are required by certain debt agreements. In addition, various debt agreements impose certain restrictions regarding financial ratios and payment of dividends. At May 31, 1994, approximately $109,000,000 of retained earnings were not available for cash dividends and owned property with a net book value of $147,000,000 was pledged or mortgaged. LEASES The Company operates certain property and equipment under leases, some with purchase options, that expire at various dates through 2051. Future minimum lease payments are as follows:
Operating Capitalized (in thousands of dollars) Leases Leases --------- ----------- 1995 $ 4,703 $ 1,451 1996 3,561 1,471 1997 3,679 1,449 1998 3,058 1,449 1999 2,855 1,178 Thereafter 17,469 4,391 ------- ------- Total minimum lease payments $35,325 11,389 ======= Less: Amount representing interest 3,962 ------- Present value of lease payments 7,427 Less: Current portion 611 ------- Lease obligations included in long-term debt $ 6,816 =======
Rental expense under noncancelable operating leases was $5,169,000 in 1994, $4,711,000 in 1993 and $4,434,000 in 1992. Twenty Two 11 CAPITAL STOCK There are 5,000,000 shares of authorized but unissued preferred stock with a par value of $1.00 per share. The rights of the preferred shares will be determined by the Board of Directors when the shares are issued. There are 80,000,000 authorized shares of $.10 par value common stock. During fiscal 1992, prior to the three-for-two split in March 1992, the Company acquired 100,561 shares of its common stock for a total cost of $1,988,000. In September 1993, the stockholders approved the Company's Key Executive Stock Option Plan of 1993 and authorized 2,000,000 shares of common stock to be granted to key executive officers and key employees until August 31, 2003, at which date the plan will expire. During the current period, 436,500 options were granted and will become exercisable from 1995 to 2001 and expire in December 2003. Under the Company's 1969 stock option plan, as amended and extended, stockholders authorized 5,223,437 shares of common stock to be granted to key executive employees until September 30, 1993. At May 31, 1994, options for the purchase of an aggregate of 3,068,750 shares were outstanding at prices equal to the market value of the stock at date of grant. During the current period, 40,000 options were granted to executive officers and key employees. Options totaling 903,508 are presently exercisable and 2,165,242 will become exercisable from 1995 to 2002 and will expire at various dates to September 2003. Option activity under both the 1969 and 1993 plans adjusted for prior stock splits, dividends and previously granted non-qualified options was as follows:
Number of Shares Average Option Price Options 1994 1993 1992 1994 1993 1992 ---- ---- ---- ---- ---- ---- Granted 476,500 444,000 597,750 $22.42 $20.97 $14.00 Exercised 222,380 107,244 286,873 $ 9.93 $10.14 $11.21 Cancelled 149,700 206,700 112,749 $ 7.38 $12.66 $ 9.06 Outstanding at May 31 3,505,250 3,400,830 3,270,774 $14.26 $12.27 $10.48 Available for grant at May 31 1,563,500 52,696 -
ACQUISITIONS AND DIVESTITURES During fiscal year 1994, the Company purchased thirteen operating hotels containing over 1,900 rooms for approximately $44,200,000. An additional $10,400,000 was spent to acquire a hotel chain (Resthotel Primevere) operating primarily in France. In December 1993, the Company invested $10,000,000 in a minority interest in a physicians practice management business. The Company also sold three nursing homes for $15,630,000 and a hotel for $7,200,000. The after tax gain recognized from these sales was $4,778,000. During fiscal year 1994, the Company's 82% owned institutional pharmacy subsidiary, Vitalink Pharmacy Services, Inc., purchased two pharmacies based in Oregon and in Colorado which service over 7,400 institutional beds for a total of $7,200,000. During fiscal year 1993, the Company purchased seven operating hotels containing a total of 1,306 rooms for approximately $25,000,000 and sold two nursing facilities for $5,200,000. The realized gain from the sale was immaterial. During fiscal year 1993, Vitalink Pharmacy Services, Inc., purchased a pharmacy located in Baltimore, Maryland, servicing 2,600 institutional beds and a pharmacy business in New Jersey, servicing over 9,100 institutional beds, for approximately $29,200,000. In March 1992 the Company's institutional pharmacy subsidiary, Vitalink Pharmacy Services, Inc., sold 18% of its common stock in an initial public offering. The proceeds from this offering amounted to approximately $38,000,000, which was used to grow Vitalink through acquisitions and the development of new pharmacies. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a number of lawsuits arising in the ordinary course of business. In the opinion of management and counsel to the Company, the ultimate outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Revenues recorded under Federal and state medical assistance programs are subject to adjustment upon audit by appropriate government agencies. For fiscal 1994, 1993 and 1992 these revenues amounted to $377,337,000; $337,047,000; and $295,662,000, respectively. In the opinion of management, any difference between revenues recorded and final determination will not be significant. As of May 31, 1994, the Company was contingently liable for notes amounting to $4,250,000 and for lease obligations amounting to $2,169,000. These notes and leases were assumed by purchasers and are secured by the related properties or rights thereto. As of May 31, 1994, the Company had contractual commitments of $15,520,000 relating to its internal construction program. PENSION, PROFIT SHARING AND INCENTIVE PLANS The Company has various pension and profit sharing plans, and contributes to certain union welfare plans. The provision for these plans amounted to $10,280,000 in 1994; $8,355,000 in 1993; and $7,669,000 in 1992. All vested benefits under retirement plans are funded or accrued. Included in the Company's various retirement plans is a defined benefit pension plan covering substantially all of its employees. The benefits are based on service credit for each year of participation after January 1, 1992. In addition, there is a prior benefit equal to the accrued benefit at December 31, 1991 for a predecessor plan. Service cost benefits earned during fiscal years 1994 and 1993 approximated the Plan's annual costs of $3,100,000 and $2,500,000, respectively. As of February 28, 1994 and 1993 Plan assets of approximately $8,300,000 and $6,600,000 compared to vested benefit obligations of $9,000,000 and $7,000,000, respectively. Projected benefit obligations were not significantly different from accumulated benefit obligations of $11,100,000 and $8,600,000 as of the same dates. Liabilities recorded on the Company's balance sheets as of May 31, 1994 and 1993 were $2,850,000 and $1,800,000, respectively. Projected benefit obligations were determined for both years using an assumed discount rate of 8%, an assumed rate of return on plan assets of 8.25% and an assumed compensation increase of 4.5%. The Company also has various incentive compensation plans for certain personnel. Incentive compensation accrued was $6,262,000 in 1994; $4,545,000 in 1993; and $3,753,000 in 1992. Twenty Three 12 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is required to disclose the fair value of its financial instruments in accordance with Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments." Fair values of material balances were determined by using market rates currently available. The balance sheet carrying amounts of cash, cash equivalents and receivables approximate fair value due to the short-term nature of these items. Mortgages and other long-term debt consist of bank loans, mortgages and capital leases. Interest rates on bank loans adjust frequently based on current market rates; accordingly, the carrying amount of bank loans is equivalent to fair value. Fair values for mortgages and capital leases were determined by discounting future cash flows using the Company's current market rate for secured debt. Fair value of subordinated debt was determined by pricing the debt at quoted market prices.
Carrying Estimated Balances at May 31, 1994 Amount Value -------- --------- (in thousands of dollars) Assets Cash & cash equivalents $ 60,487 $ 60,487 Receivables, net $ 84,766 $ 84,766 Liabilities (including current portion) Mortgages and other long-term debt $125,202 $124,541 Subordinated long-term debt $157,602 $160,995
BUSINESS SEGMENT INFORMATION Revenues by principal business segment are included in the Consolidated Statements of Income. Income from operations, depreciation and amortization, identifiable assets and capital expenditures by principal business segment follows:
Fiscal Year Ended May 31, 1994 1993 1992 ---- ---- ---- (in thousands of dollars) Income from Operations Healthcare $ 126,818 $ 112,320 $ 95,998 Lodging 33,247 23,946 24,232 Corporate and other (2,577) (2,202) (2,591) ---------- ---------- ---------- $ 157,488 $ 134,064 $ 117,639 ========== ========== ========== Depreciation and Amortization Healthcare $ 44,138 $ 41,227 $ 39,299 Lodging 17,187 14,253 12,580 Corporate and other 5,215 5,519 5,107 ---------- ---------- ---------- $ 66,540 $ 60,999 $ 56,986 ========== ========== ========== Identifiable Assets Healthcare $ 798,113 $ 755,259 $ 741,986 Lodging 289,841 237,425 180,625 Corporate and other 98,571 113,822 92,678 ---------- ---------- ---------- $1,186,525 $1,106,506 $1,015,289 ========== ========== ========== Capital Expenditures Healthcare $ 66,032 $ 41,346 $ 40,316 Lodging 67,171 68,599 20,815 Corporate and other 6,967 6,627 2,366 ---------- ---------- ---------- $ 140,170 $ 116,572 $ 63,497 ========== ========== ==========
SUMMARY OF QUARTERLY RESULTS (Unaudited)
Income Quarters from Net Per Ended Revenues Operations Income Share* -------- ---------- ------ ------ (in thousands of dollars, except per share data) FISCAL 1993 - - ----------- August $ 245,427 $ 34,470 $15,958 $ .28 November 253,680 35,992 17,276 .30 February 244,945 27,641 8,827 .15 May 265,623 35,961 17,303 .30 ---------- -------- ------- -------- $1,009,675 $134,064 $59,364 $ 1.04** ========== ======== ======= ======== FISCAL 1994 - - ----------- August $ 284,628 $ 39,032 $19,762 $ .34 November 284,625 41,583 20,241 .34 February 284,071 33,323 15,651 .25 May 309,748 43,550 22,708 .36 ---------- -------- ------- -------- $1,163,072 $157,488 $78,362 $ 1.29 ========== ======== ======= ========
* February 1993 includes an extraordinary item (debt redemption). **Does not add due to rounding. QUARTERLY MARKET PRICE RANGE OF COMMON STOCK AND DIVIDENDS PAID (Unaudited)
Cash Dividends Market Price Per Share* Paid Per Share* ------------------------------------------------------- Quarters Ended High Low Amount Date ---- --- ------ ---- Fiscal 1992 - - ----------- August $16.00 $11.75 $.022 8/27/91 November 16.00 12.33 .022 11/27/91 February 19.00 13.42 .022 2/27/92 May 17.63 14.75 .022 5/27/92 Fiscal 1993 - - ----------- August $21.25 $15.63 $.022 8/27/92 November 24.50 17.75 .022 11/27/92 February 26.63 19.00 .022 2/26/93 May 22.38 18.63 .022 5/27/93 Fiscal 1994 - - ----------- August $24.00 $17.50 $.022 8/27/93 November 23.25 19.38 .022 11/26/93 February 28.00 20.88 .022 2/25/94 May 29.25 23.25 .022 5/27/94
*Retroactively adjusted for three-for-two stock split on March 27, 1992. Twenty Four EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 MANOR CARE, INC. SUBSIDIARIES OF THE COMPANY The following list sets forth the principal subsidiaries of the Company and the place of their incorporation. Except as otherwise noted, all of these subsidiaries are directly or indirectly wholly-owned by the Company. 1. Manor Healthcare Corp., a Delaware corporation - includes 50 active omitted subsidiaries operating in the United States. 2. Four Seasons Nursing Centers, Inc., a Delaware corporation. 3. Vitalink Pharmacy Services, Inc., a Delaware corporation, of which the Company owns approximately 82.3% of the Common Stock - includes 2 active omitted subsidiaries operating in the United States. 4. Community Hospital of Mesquite, Inc., a Texas corporation. 5. Medical Aid Training Schools, Inc., a Delaware corporation. 6. Choice Hotels International, Inc., a Delaware corporation, of which the Company owns l00% of the Preferred Stock and approximately 88.9% of the Common Stock - includes 4 active omitted subsidiaries operating in foreign countries and 2 active omitted subsidiaries operating in the United States. 7. Quality Hotels Europe, Inc., a Delaware corporation. 8. QH Europe Partnership, a Maryland partnership - includes 4 active omitted subsidiaries operating in foreign countries. 9. Boulevard Motel Corp., a Maryland corporation - includes 7 active omitted subsidiaries operating in the United States. 10. Comfort California, Inc., a California corporation. 11. Sunburst Hotel Corp., a Texas corporation. 12. Cactus Hotel Corp., an Arizona corporation. 13. Gulf Hotel Corp., a Louisiana corporation. EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated June 22, 1994, included and incorporated by reference in Manor Care, Inc.'s Form 10-K for the year ended May 31, 1994, into the Company's previously filed Registration Statement File Nos. 2-80129, 2-73420, 33-9766, 33-20241, 33-27834, 33-36213, 2-78242, 33- 52734, 33-64680 and 33-67850. Arthur Andersen & Co. Washington, D.C., August 26, 1994 EX-99 6 PROXY STATEMENT DATED AUGUST 10, 1994 1 Notice of Annual Meeting and Proxy Statement ------------------------------ MANOR CARE, INC. ------------------------------ Annual Meeting of Stockholders September 9, 1994 2 MANOR CARE, INC. 10750 Columbia Pike Silver Spring, Maryland 20901 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD SEPTEMBER 9, 1994 NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Manor Care, Inc. (the "Company"), will be held at the Clarion Hotel, 1981 North Central Expressway, Richardson, Texas, on September 9, 1994, at 9:00 a.m., to consider and vote upon the following matters: 1. To elect a Board of Directors consisting of seven persons to serve until the next Annual Meeting of Stockholders of the Company and until their successors are duly elected and qualified. 2. To approve an amendment to the Company's Certificate of Incorporation to increase the authorized Common Stock from 80,000,000 shares to 160,000,000 shares. 3. To approve the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. 4. To transact such other business as may properly come before such meeting or any adjournment thereof. The close of business on July 13, 1994, has been fixed as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting or any adjournment thereof. Your management sincerely desires the presence in person of every stockholder able to attend the meeting; however, in order to be assured of the representation of the greatest number of stockholders either in person or by proxy, it is requested that you date and sign the accompanying proxy and return it as promptly as possible in the enclosed self-addressed envelope. No postage is required if mailed in the United States. If you attend the meeting in person, you may revoke your proxy at such meeting and cast your vote in person. If you receive more than one proxy because your shares are held in various names or accounts, each proxy should be completed and returned. By Order of the Board of Directors: James H. Rempe Secretary Silver Spring, Maryland August 10, 1994 3 MANOR CARE, INC. 10750 Columbia Pike Silver Spring, Maryland 20901 301-681-9400 PROXY STATEMENT ANNUAL MEETING OF STOCKHOLDERS September 9, 1994 INTRODUCTION The enclosed proxy is solicited by and on behalf of the Board of Directors of Manor Care, Inc. (the "Company"), a Delaware corporation, to be used at the 1994 Annual Meeting of Stockholders to be held on Friday, September 9, 1994, at 9:00 a.m., at the Clarion Hotel, 1981 North Central Expressway, Richardson, Texas, and at any and all adjournments thereof. All shares represented by proxies will be voted at the meeting in accordance with the specifications marked thereon, or if no specifications are made, proxies will be voted FOR all matters set forth in the attached Notice of Meeting and in the discretion of the proxy holder as to any other business which comes before the meeting. Any stockholder giving a proxy may revoke the same at any time prior to the voting of such proxy by giving written notice of revocation to the Secretary, by submitting a later dated proxy or by attending the meeting and voting in person. The Proxy Statement is first being mailed to stockholders on or about August 10, 1994. The Company's Annual Report (including certified financial statements) for the fiscal year ended May 31, 1994, is accompanying this Proxy Statement. The Annual Report is not a part of the proxy soliciting material. Except where the context requires otherwise, the term "Company" includes Manor Care, Inc. and its subsidiaries. VOTING AT THE MEETING The Board of Directors has fixed July 13, 1994, as the record date for determination of stockholders entitled to notice of and to vote at the Meeting. On that date, there were outstanding 62,359,897 shares of Common Stock, par value $.10 per share. Each such share of Common Stock is entitled to one vote. The presence in person or by proxy of the holders of a majority of the Company's outstanding shares of Common Stock will constitute a quorum. The affirmative vote of the holders of a majority of the Company's outstanding shares of Common Stock will be necessary for approval of the 1 4 amendment to the Company's Certificate of Incorporation to increase the authorized Common Stock from 80,000,000 shares to 160,000,000 shares and for approval of the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Purchase Plan. A plurality of the shares present and voting at the meeting, in person or by proxy, will be necessary for the election of directors and for the taking of all other action at the meeting. A stockholder who is present in person or by proxy at the Annual Meeting and who abstains from voting on any or all proposals will be included in the number of stockholders present at the meeting for the purpose of determining the presence of a quorum. However, an abstention with respect to any matter will not be counted either in favor of or against the particular matter not voted upon by the broker. Brokers who hold shares for the account of their clients may vote such shares either as directed by their clients or in their own discretion if permitted by the exchange or other organization of which they are members. Members of the New York Stock Exchange are permitted to vote their clients' proxies in their own discretion as to the election of directors but not as to the Company's proposals relating to the amendment to the Company's Certificate of Incorporation increasing the authorized number of shares of Common Stock and the approval of the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Purchase Plan. Shares held by a broker who does not receive instructions on these matters will not be voted. Proxies which are voted by brokers on some but not all of the proposals are referred to as "broker non-votes." Broker non-votes will be included in determining the presence of a quorum. However, a broker non-vote is not treated as being in favor of or against such matter. If any nominee for election to the Board of Directors named in this Proxy Statement shall become unavailable for election for any reason, the proxy will be voted for a substitute nominee selected by the Board of Directors, or the Board of Directors may elect not to fill the vacancy and reduce the number of directors. SOLICITATION OF PROXIES The cost of the proxy solicitations will be borne by the Company. In addition to the use of the mails, proxies may be solicited by the directors, officers and employees of the Company without additional compensation, by personal interview, telephone, telegram or otherwise. Arrangements may also be made with brokerage firms and other custodians, nominees and fiduciaries for the forwarding of soliciting material to the beneficial owners of Company Common Stock held of record by such persons, and the Company will reimburse such respective brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by them in connection therewith. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's reporting officers and directors, and persons who own more than ten percent of the Company's 2 5 Common Stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the "Commission"), the New York Stock Exchange and the Company. Based solely on the Company's review of the forms filed with the Commission and written representations from reporting persons that they were not required to file Form 5 for certain specified years, the Company believes that all of its reporting officers, directors and greater than ten percent beneficial owners complied with all filing requirements applicable to them during fiscal 1994 and during the period since June 1, 1994 to the date of this Proxy Statement, except that William H. Longfield, a director, Regina E. Herzlinger, a director, and Frederick W. Mosser, a former executive officer who left the Company's employ in March 1994, each inadvertently filed untimely one report for one transaction. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth as of July 13, 1994, the amount of the Company's Common Stock beneficially owned by each director and nominee, the chief executive officer and the four other most highly compensated executive officers and all officers and directors as a group. Stewart Bainum is the only person, to the knowledge of the Company, who owned beneficially more than 5% of the Company's Common Stock as of July 13, 1994. Stewart Bainum's address is 10750 Columbia Pike, Silver Spring, MD 20901.
Number of Shares Options Exercisable Percent Name of Beneficial Owner Beneficially Owned Within 60 Days Total of Class(1) ------------------------ ------------------ ------------------- ----- ----------- Stewart Bainum 17,663,669 (2) 0 17,663,669 (2) 28.3% Stewart Bainum, Jr. 1,371,645 (3) 432,000 1,803,645 (3) 2.9% Jack R. Anderson 30,000 0 30,000 * Regina E. Herzlinger 250 0 250 * William H. Longfield 2,500 0 2,500 * Frederic V. Malek 1,000 0 1,000 * Jerry E. Robertson, Ph. D. 13,500 0 13,500 * Donald C. Tomasso, Jr. 16,603 (4) 21,000 37,603 (4) * Robert C. Hazard, Jr. 1,612 (5) 43,500 45,112 (5) * Gerald W. Petitt 19,950 (6) 33,900 53,850 (6) * Donald J. Landry 64 (7) 10,500 10,564 (7) * All Directors and Officers as a Group (24 persons) 19,219,070 (8) 743,700 19,962,770 (8) 31.6%
- - -------------------------------------- (*) Less than 1% of class. (1) Percentages are based on 62,359,897 shares outstanding on the record date plus shares which would be issued assuming that the person exercises all options which are exercisable within 60 days. (2) Includes 3,567,869 shares held directly or indirectly by Realty Investment Company, Inc. and its subsidiaries ("Realty"), a real estate investment and management company owned by Mr. Bainum with his wife and their family, his pro-rata interests in 5,417,761 shares owned by Bainum Associates Limited Partnership, 1,679,628 shares owned by Mid Pines Associates Limited Partnership, 4,415,250 shares owned by MC Investments Limited Partnership, limited partnerships in which Mr. Bainum is a limited partner. Also includes 798,711 shares held 3 6 solely by his wife and her pro-rata interest in 1,679,628 shares owned by Mid Pines Associates Limited Partnership, a limited partnership in which his wife is a limited partner. Does not include 195,513 shares held by three adult children, in addition to shares owned beneficially by Stewart Bainum, Jr., whose interests are stated in the above table. (3) Includes his pro-rata interests in 5,417,761 shares owned by Bainum Associates Limited Partnership and in 4,415,250 shares owned by MC Investments Limited Partnership, in both of which Mr. Bainum, Jr. is managing general partner but does not have authority to vote such shares. Also includes his pro-rata interest in 1,679,628 shares owned by Mid Pines Associates Limited Partnership, in which Mr. Bainum, Jr. is managing general partner and has shared voting authority and his pro-rata interest in 3,567,869 shares owned by Realty, a corporation in which Mr. Bainum, Jr. owns approximately 21.3% of common stock. Also includes 432,000 shares which Mr. Bainum, Jr. has the right to acquire pursuant to presently exercisable stock options, and 940 shares and 94 shares, respectively, which Mr. Bainum, Jr. has the right to acquire upon termination of his employment with the Company pursuant to the terms of the Manor Care, Inc. Retirement Savings and Investment Plan described on page [11] (the "401(k) Plan") and the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan described on page [12] (the "Nonqualified Savings Plan"). Does not include 373,000 shares which Mr. Bainum, Jr. has the right to acquire upon exercise of stock options but which are not presently exercisable. (4) Includes 40 shares held in trust for minor children for which Mr. Tomasso is trustee. Beneficial ownership of such shares is disclaimed. Also includes 27 shares and 36 shares, respectively, which Mr. Tomasso has the right to acquire upon termination of his employment with the Company pursuant to the terms of the 401(k) Plan and the Nonqualified Savings Plan. (5) Includes 44 shares and 212 shares, respectively, which Mr. Hazard has the right to acquire upon termination of his employment with the Company pursuant to the terms of the 401(k) Plan and the Nonqualified Savings Plan. (6) Includes 8,661 shares held in trust for minor children for which Mr. Petitt is trustee. Beneficial ownership of such shares is disclaimed. (7) Includes 12 shares and 52 shares, respectively, which Mr. Landry has the right to acquire upon termination of his employment with the Company pursuant to the terms of the 401(k) Plan and the Nonqualified Savings Plan. (8) Includes a total of 3,796 shares and 575 shares, respectively, which the directors and officers included in the group have the right to acquire upon termination of their employment with the Company pursuant to the terms of the 401(k) Plan and the Nonqualified Savings Plan. NOMINATION AND ELECTION OF DIRECTORS The entire Board of Directors, which consists of seven (7) members, will be elected to serve until the next Annual Meeting of Stockholders of the Company and until their successors are duly elected and qualified. Stewart Bainum, Jr. is Stewart Bainum's son. Aside from the foregoing, no nominee has any family relationship with any other director or executive officer of the Company. The following table sets forth information with respect to each nominee for election as a Director of the Company. All of the nominees have previously been elected by the stockholders of the Company. 4 7
SERVED AS NAME AND AGE DIRECTOR SINCE POSITIONS WITH THE COMPANY; BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS - - ------------ -------------- -------------------------------------------------------------------- Stewart Bainum, Jr. (48) 1976 Chairman of the Board since March 1987; also President since June 1989; Vice Chairman from June 1982 to March 1987. Director: Vitalink Pharmacy Services, Inc. Stewart Bainum (75) 1968 Vice Chairman of the Board since March 1987; Chairman of the Board from 1968 to March 1987; President from December 1980 through October 1981, and May 1982 through July 1985; Chairman of the Board of Realty Investment Company, Inc. (private real estate investment company) since 1965. Director: Vitalink Pharmacy Services, Inc. Jack R. Anderson (69) 1980 President of Calver Corporation since May 1982. Director: FHP International Corporation, Horizon Mental Health Corporation, Medical Care America, Inc., Navistar International Corp. and United Dental Care, Inc. Regina E. Herzlinger (50) 1992 Nancy R. McPherson Professor of Business Administration, Harvard Business School, since 1971. Director: C. R. Bard, Inc., Deere & Company, Salick Health Care, Inc., and Schering-Plough Corporation. William H. Longfield (54) 1989 President and Chief Executive Officer of C. R. Bard, Inc. (medical equipment) since June 1994; President and Chief Operating Officer of C. R. Bard, Inc. from September 1991 to June 1994; Executive Vice President and Chief Operating Officer of C. R. Bard, Inc. from February 1989 to September 1991. Director: C. R. Bard, Inc. and United Dental Care, Inc. Frederic V. Malek (57) 1990 Chairman, Thayer Capital Partners since January 1993; Co- chairman of CB Commercial Real Estate Group, Inc. since April 1989; Campaign Manager, Bush-Quayle '92 Campaign from December 1991 to December 1992; Vice Chairman of NWA, Inc. (airlines) from June 1990 to December 1991; President of NWA, Inc. from September 1989 to June 1990. Director: American Management Systems, Inc., Automatic Data Processing Corp., FPL Group, Inc., ICF International, Inc., National Education Corp., Northwest Airlines and various Paine Webber mutual funds. Jerry E. Robertson, Ph.D (61) 1989 Retired; Executive Vice President of 3M Life Sciences Sector and Corporate Services from November 1984 to March 1994. Director: Allianz Life Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc., Haemonetics Corporation, Life Technologies, Inc., Project Hope and Steris Corporation.
STRUCTURE AND FUNCTIONING OF THE BOARD OF DIRECTORS The Board of Directors held five meetings during the fiscal year ended May 31, 1994. During such fiscal year, each incumbent attended 75% or more of the aggregate of (1) the total number of meetings of the Board of Directors and (2) the total number of meetings of all Committees on which such director served. The standing committees of the Board include the Audit Committee, the Finance Committee, the Compensation/Key Executive Stock Option Plan Committee and the Nominating Committee, the current members of which are as follows: Compensation/Key Executive Stock Option Plan Committee Finance Committee --------------------------- ----------------- Jerry E. Robertson, Chairman Stewart Bainum, Chairman Stewart Bainum Stewart Bainum, Jr. 5 8 William H. Longfield Jack R. Anderson Frederic V. Malek Audit Committee Nominating Committee --------------- -------------------- Jack R. Anderson, Chairman Jack R. Anderson, Chairman Regina E. Herzlinger Frederic V. Malek The Compensation/Key Executive Stock Option Plan Committee, which held two meetings during the 1994 fiscal year, administers the Company's stock option plans and grants stock options thereunder, reviews compensation of officers and key management employees, recommends development programs for employees such as training, bonus and incentive plans, pensions and retirement, and reviews other employee fringe benefit programs. The Finance Committee, which held two meetings during the 1994 fiscal year, reviews the financial affairs of the Company and recommends financial objectives, goals and programs to the Board of Directors and to management. The Audit Committee, which held two meetings during the 1994 fiscal year, reviews the scope and results of the annual audit, reviews and approves the services and related fees of the Company's independent public accountants, reviews the Company's internal accounting controls and reviews the Company's Internal Audit Department and its activities. The Nominating Committee, which held one meeting during the 1994 fiscal year, recommends to the Board of Directors the members to serve on the Board of Directors during the ensuing year. The Committee does not consider nominees recommended by stockholders. Directors who are full-time employees of the Company receive no separate remuneration for their services as directors. The remuneration of all non-employee directors is currently $12,650 per annum and $2,185 per diem for Board meetings attended and $1,610 per diem for Committee meetings attended, except where the Committee meeting is on the same day as a Board meeting. In addition, directors are also reimbursed for travel expenses and other out-of-pocket costs incurred in attending meetings. In September 1990, the Company adopted the Directors Retirement Plan. Pursuant to the Plan, a non-employee director who retires after serving at least ten years as such is entitled to an annual benefit for the remainder of his or her lifetime or five years, whichever is less, which equals 75% of the annual retainer payable to directors on the date of retirement plus 5% for each year served as a non-employee director in excess of ten years, but not to exceed 100% of the annual retainer payable to the director on the date of retirement. Unpaid benefits will be forfeited if such director becomes an owner, director, officer, employee or consultant either of a nursing home facility located within 25 miles of a Company nursing home facility or of a lodging facility located within 10 miles of a Company-owned or franchised lodging facility, provided that such other facility is, in the opinion of 6 9 the Board, in competition with the business of the Company. In June 1992, Stewart Bainum, a director, retired from full-time employment with the Company. Mr. Bainum is subject to a non-competition covenant similar to that described in the preceding paragraph. If Mr. Bainum provides services to the Company other than as Director or Vice Chairman, he is entitled to a consulting fee. Such fees during fiscal 1994 totalled $9,375. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth certain information concerning the annual and long term compensation for services in all capacities to the Company for the fiscal years ended May 31, 1994, 1993 and 1992, of the chief executive officer and the four other most highly compensated executive officers in the Company's employ at May 31, 1994. SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation ------------------------------------------- ----------------------------------------- Stock Option All Other Name and Principal Position Year Salary Bonus Other Shares(#) Compensation(1) - - --------------------------- ---- ------ ----- ---- ------------------ --------------- Stewart Bainum, Jr. (2) 1994 $457,867 $274,720 (3) 40,000 $ 14,150 Chairman, President and 1993 499,200 269,568 (3) 30,000 13,732 Chief Executive Officer 1992 462,500 249,750 (3) 45,000 6,693 Donald C. Tomasso 1994 316,187 173,903 (3) 35,000 3,538 President, 1993 292,600 160,930 (3) 45,000 1,973 Manor Healthcare Corp. 1992 255,846 140,715 (3) - - Robert C. Hazard, Jr. 1994 346,124 173,062 (3) - 14,150 Chairman and Chief Executive Officer, 1993 320,578 160,289 (3) - 13,732 Choice Hotels International, Inc. 1992 296,745 115,088 (3) - 6,967 Gerald W. Petitt 1994 283,193 141,596 (3) - 14,150 President and Chief Operating Officer, 1993 262,291 131,146 (3) - 13,732 Choice Hotels International, Inc. 1992 253,520 94,163 (3) - 6,967 Donald J. Landry (4) 1994 275,712 144,059 (3) 25,000 3,537 President, 1993 254,856 25,000 (3) 15,000 - Manor Care Hotel Division 1992 60,577 34,375 (3) 105,000 -
(1) Represents amounts contributed by the Company for fiscal 1994, 1993 and 1992 for the individuals named in the above Summary Compensation Table (the "Named Officers") under the 401(k) Plan and the Nonqualified Savings Plan, which provide retirement and other benefits to eligible employees, including the Named Officers. Amounts contributed in cash or stock by the Company during fiscal 1994 under the 401(k) Plan for the Named Officers were as follows: Mr. Bainum, $8,994; Mr. Tomasso, $1,539; Mr. Hazard, $2,456; Mr. Petitt, $3,617; and Mr. Landry, $676. Amounts contributed in cash or stock by the Company during fiscal 1994 under the Nonqualified Savings Plan for the Named Officers were as follows: Mr. Bainum, $5,156; Mr. Tomasso, $1,999; Mr. Hazard, $11,694; Mr. Petitt, $10,533; and Mr. Landry, $2,861. (2) Mr. Bainum took an unpaid leave of absence during April and May 1994 while he devoted a substantial portion of his time exploring the possibility of seeking an elective governmental position, resulting in a decrease in salary paid in fiscal 1994 compared to fiscal 1993. 7 10 (3) The value of perquisites and other compensation does not exceed the lesser of $50,000 or 10% of the amount of annual salary and bonus paid as to any of the Named Officers. (4) Mr. Landry was employed by the Company on March 1, 1992. The following tables set forth certain information at May 31, 1994 and for the fiscal year then ended concerning stock options granted to the Named Officers. None of such individuals exercised stock options during the 1994 fiscal year. All Common Stock figures and exercise prices have been adjusted to reflect stock dividends and stock splits effective in prior fiscal years. STOCK OPTION GRANTS IN FISCAL 1994
Potential Realizable Value at Assumed Annual Rate of Stock Price Appreciation for Option Individual Grants Term(1) ------------------------------------------------ --------------------------------------------- Percentage of Total Options Number of Granted to all Exercise Options Employees in Base Price Expiration Name Granted(2) Fiscal 1994 Per Share Date 5%(3) 10%(4) - - ---- ---------- ----------- --------- ---------- -------- ---------- Stewart Bainum, Jr. 40,000 8.4% $22.56 12/05/2003 $567,600 $1,438,000 Donald C. Tomasso 35,000 7.3% 22.56 12/05/2003 496,650 1,258,250 Robert C. Hazard, Jr. - - - - - - Gerald W. Petitt - - - - - - Donald J. Landry 25,000 5.2% 22.56 12/05/2003 354,750 898,750
- - -------------------- (1) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the Securities and Exchange Commission and therefore are not intended to forecast future possible appreciation, if any, of the Company's stock price. Since options are granted at market price, a zero percent gain in the stock price will result in no realizable value to the optionees. (2) The options granted to Messrs. Bainum, Tomasso and Landry vest at the rate of 10% per year commencing on the second through the fifth anniversary of the date of the stock option grant and 20% per year on the sixth through the eighth anniversaries. (3) A 5% per year appreciation in stock price from $22.56 per share yields $36.75. (4) A 10% per year appreciation in stock price from $22.56 per share yields $58.51. 8 11 FISCAL YEAR-END OPTION VALUES
Number of Unexercised Options at May 31, 1994 Value of Unexercised Exercisable Unexercisable In-The-Money ----------- ------------- Options at May 31, 1994 (1) # # Exercisable Unexercisable ----------------------------- ----------- ------------- Stewart Bainum, Jr. 432,000 373,000 $5,985,735 $4,851,965 Donald C. Tomasso 21,000 164,000 245,900 1,316,740 Robert C. Hazard, Jr. 43,500 69,000 689,640 1,150,260 Gerald W. Petitt 33,900 68,400 560,712 1,142,202 Donald J. Landry 0,500 134,500 100,695 1,061,555
- - -------------------- (1) The closing price of the Company's Common Stock as reported by the New York Stock Exchange on May 31, 1994, was $25.875. The value is calculated on the basis of the difference between the option exercise price and $25.875, multiplied by the number of shares of Common Stock underlying the option. EMPLOYMENT AGREEMENTS Under the terms of an employment agreement between Mr. Hazard and Choice Hotels International, Inc., a subsidiary of the Company ("CHI"), his annual salary is presently $374,134 with annual cost-of-living increases. The agreement, which extends through May 31, 1996, provides for an annual bonus based on performance of the Company of up to 12.5% of his base compensation and based on performance of CHI of up to 37.5% of his base compensation. Mr. Hazard, who is Chairman and Chief Executive Officer of CHI, owns approximately 5.6% of the Common Stock of CHI. Under the terms of an employment agreement between Mr. Petitt and CHI, his annual salary is presently $306,109 with annual cost-of-living increases. The agreement, which extends through May 31, 1996, provides for an annual bonus based on performance of the Company of up to 12.5% of his base compensation and based on performance of CHI of up to 37.5% of his base compensation. Mr. Petitt, who is President and Chief Operating Officer of CHI, owns approximately 5.6% of the Common Stock of CHI. On February 17, 1992, Donald J. Landry, President of the Manor Care Hotel Division, entered into an employment agreement with the Company, effective March 1, 1992, and expiring February 28, 1997. Under the terms of the agreement, Mr. Landry's annual salary is presently $283,500. The agreement provides for an annual bonus based on performance of the Manor Care Hotel Division of up to 55% of his base compensation. RETIREMENT PLANS In February 1985, the Board of Directors adopted the Supplemental Executive Retirement Plan (the "SERP"). Participants are selected by the Board and are at the level of Senior Vice President or 9 12 above. A total of eight officers, including all of the Named Officers, except for Mr. Tomasso and Mr. Landry, have been selected to participate in the SERP. Participants in the SERP will receive a monthly benefit for life based upon final average salary and years of service. Final average salary is the average of the monthly base salary, excluding bonuses or commissions, earned in a 60 month period out of the 120 months of employment, which produces the highest average, prior to the first occurring of the early retirement date or the normal retirement date. The normal retirement age is 65, and participants must have a minimum of 15 years of service. Participants may retire at age 60 and may elect to receive reduced benefits commencing prior to age 65, subject to Board approval. All of the Named Officers who are participants, except for Mr. Hazard, are age 55 or younger, so that none of their compensation reported above would be included in the final average salary calculation. Assuming that the following officers continue to be employed by the Company until they reach age 65, their credited years of service would be as follows: Current Years Years of Service Name of Individual of Service at Age 65 -------------------- ------------- ---------------- Stewart Bainum, Jr. 21.5 38 Robert C. Hazard, Jr. 13.5 19 Gerald W. Petitt 13.5 30 The table below sets forth estimated annual benefits payable upon retirement to persons in specified compensation and years of service classifications. These benefits are straight life annuity amounts, although participants have the option of selecting a joint and 50% survivor annuity or ten-year certain payments. The benefits are not subject to offset for Social Security and other amounts. Years of Service/Benefit as Percentage of Final Average Salary ---------------------------------------- 25 or Remuneration 15/15% 20/22.5% more/30% ------------ -------- ---------- ---------- $250,000 $37,500 $56,250 $ 75,000 300,000 45,000 67,500 90,000 350,000 52,500 78,750 105,000 400,000 60,000 90,000 120,000 450,000 67,500 101,250 135,000 500,000 75,000 112,500 150,000 Effective January 1, 1992, the Company established the Manor Care, Inc. Retirement Savings and Investment Plan (the "401(k) Plan"), a defined contribution retirement, savings and investment plan for its employees and the employees of its participating affiliated companies. The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and includes a cash or deferred arrangement intended to qualify under Section 401(k) of the Code. All employees over age 21 with at least one year of service and who have worked at least 10 13 1,000 hours during the year are eligible to participate. Employees may contribute to the 401(k) Plan on a pre-tax basis (up to the federal limit, $9,240 in 1994, subject to increases for inflation in subsequent years) up to 15% of the employee's salary. The Company will match contributions made by its employees subject to certain limitations. The amount of the match will be equal to a percentage of the amount of salary reduction contribution made on behalf of a participant during the plan year up to a dollar-for-dollar basis based upon a formula that involves the profits of the Company for the year and the number of years of service of the participant. In no event will the Company make a matching contribution which exceeds 6% of a participant's salary. Amounts contributed by the Company pursuant to the 401(k) Plan for the Named Officers are included in the Summary Compensation Table under the column headed "All Other Compensation". Effective January 1, 1992, the Company adopted the Manor Care, Inc. Nonqualified Retirement and Savings Investment Plan (the "Nonqualified Savings Plan"). Certain select highly compensated members of management of the Company are eligible to participate in the Plan. The Nonqualified Savings Plan mirrors the provisions of the 401(k) Plan, to the extent feasible, and is intended to provide the participants with a pre-tax savings vehicle to the extent that pre-tax savings are not permissible under the 401(k) Plan as a result of various governmental regulations, such as non- discrimination testing. All of the Named Officers have elected to participate in the Nonqualified Savings Plan. Amounts contributed by the Company under the Nonqualified Savings Plan for fiscal year 1994 for the Named Officers are included in the Summary Compensation Table under the column headed "All Other Compensation". The employer match under the 401(k) Plan and the Nonqualified Savings Plan is limited to a maximum aggregate of 6% of the annual salary of a participant. In December 1993, both plans were amended to allow participants the right to elect to receive the Company matching contribution either in Company stock or cash or a combination. Likewise, participant contributions under the two plans may not exceed the aggregate of 15% of the annual salary of a participant. Effective January 1, 1992, the Company adopted a non-contributory Cash Accumulation Retirement Plan (the "CARP") maintained by the Company for its employees and those employees of its participating affiliated companies. The CARP is intended to qualify under Section 401(a) of the Code. All employees over age 21 with at least one year's service and who have worked at least 1,000 hours during the year, are automatically members of the CARP. Each year the account of each employee is adjusted to reflect interest at a rate calculated in accordance with the CARP. Amounts accrued under the CARP become fully vested after five years of service. When the age and years of service of an employee totals 55 or more, the Company will increase the rate of benefit to the account of such employee. The annual benefit accrual made by the Company will be based on salary as follows: 11 14 Base Percentage Base Percentage If Age Plus Service If Age Plus Service Annual Salary Is Less Than 55 Is 55 or More ------------- ------------------- ---------------- First $12,000................... 3% 4% Next $6,000..................... 2% 3% Additional Salary up to $100,000 1% 2% COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE REPORT ON EXECUTIVE COMPENSATION The compensation philosophy of Manor Care, Inc. (the "Company") is to be competitive with the leading service companies and selected direct competitors in the marketplace, to attract, retain and motivate a highly qualified workforce, and to provide career opportunities. The Company uses various compensation surveys, primarily conducted and evaluated by independent consultants, to provide data to support the development of competitive compensation plans which reinforce this philosophy. Summary data on service companies of similar size participating in each survey are utilized as the basis for the evaluations. This is the same philosophy applied by the Compensation/Key Executive Stock Option Plan Committee of the Board of Directors (the "Committee") in determining compensation for the CEO and executive officers. In evaluating the CEO's performance, the Committee, in addition to financial performance, considers factors important to the Company such as ethical business conduct, progress against the Company's strategic plan objectives, management succession planning, customer service satisfaction and the general overall perception of the Company by financial leaders and customers. The Committee is responsible for setting and administering the policies which govern executive compensation and the stock based programs of the Company. The members of the Committee are Messrs. Robertson (Chairman), Bainum, Longfield and Malek. Mr. Bainum served as Chairman and CEO prior to March 1987. Compensation of the Company's officers is reviewed annually by the Committee. Changes proposed for these employees are evaluated and approved by the Committee on an individual basis. There are three components in the Company's executive compensation program: 1. Base salary 2. Cash bonus 3. Long-term incentive compensation (stock options) The Committee has determined that compensation for the CEO and other executive officers should be weighted in favor of more "pay at risk" or "variable pay." 12 15 BASE SALARY Base salary is the only component that is not variable. Scope and complexity of the position as well as external market factors are used to determine base salary levels. Salary changes are based on guidelines established for all employees using individual performance to determine the change. Mr. Bainum, Jr.'s base salary paid in fiscal 1994 is shown under the heading "Salary" in the Summary Compensation Table. CASH BONUS A cash bonus based on return on beginning equity or business unit profit is used to focus management's attention on profits and the effective use of Company assets. LONG-TERM INCENTIVE COMPENSATION (STOCK OPTIONS) Long-term compensation comprised of stock options has been established to: a. focus attention on the Company's and stockholders' long term goals; b. increase ownership and retention in the Company's stock. The Committee has granted stock options with a vesting schedule of up to eight years in order to retain management and focus optionees on the long term goals of the Company to be more closely aligned with the interests of stockholders. The Committee believes the Company has an overall compensation plan which fulfills current Company philosophy and, in addition, promotes increased shareholder value through performance-based compensation. IMPACT OF INTERNAL REVENUE CODE SECTION 162(M) The Omnibus Budget Reconciliation Act of 1993 disallows, effective January 1, 1994, a federal income tax deduction for compensation, other than certain performance-based compensation, in excess of $1 million annually paid by the Company to any currently serving officer named in the Summary Compensation Table. Stock option awards under the Key Executive Stock Option Plan of 1969, which expired in 1993, and under the Key Executive Stock Option Plan of 1993, which is scheduled to expire in 2003, qualify as performance-based compensation and are exempt from consideration for purposes of calculating the one million dollar limit. No individual named in the Summary Compensation Table is likely to receive compensation in fiscal 1995 which would exceed such amount. The Committee intends to monitor the Company's compensation programs with respect to such laws. COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE JERRY E. ROBERTSON, PH.D., CHAIRMAN STEWART BAINUM WILLIAM H. LONGFIELD FREDERIC V. MALEK 13 16 PERFORMANCE GRAPH-SHAREHOLDER RETURN The following graph compares the yearly percentage change in the cumulative total stockholder return on the Company's Common Stock against the cumulative total return on the S&P Composite-500 Stock Index and a peer group selected by the Company for the five fiscal years ended May 31, 1994 assuming reinvestment of dividends. COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG MANOR CARE, INC., S&P500 AND PEER GROUP [LINE GRAPH] Assumes $100 invested on June 1, 1989 in the Common Stock of Manor Care, Inc., the S&P500 Index and Peer Group Companies (weighted by market capitalization). Total return assumes reinvestment of dividends.
1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- Manor Care, Inc. 100 83 132 150 200 244 S&P500 100 117 130 143 160 166 Peer Group (Weighted Average) 100 71 132 118 155 222
The peer group consists of eleven other companies primarily involved in the Company's lines of business. Six of the companies are involved in ownership and operation of nursing homes: Beverly Enterprises, Inc., Geriatric and Medical Centers, Inc., Hillhaven Corp., Horizon Healthcare Corp., Integrated Health Services, Inc., and National Healthcorp, L.P. Three companies are involved in hotel franchising, management or ownership: Hospitality Franchise Systems, Inc., United Inns, Inc. and La 14 17 Quinta Motor Inns, Inc. Two companies are involved in the institutional pharmacy business: Omnicare, Inc. and Synetic, Inc. National Heritage, Inc. and Vari-Care, Inc., which were in the peer group last year, have been removed because of their acquisition by others during the year. PROPOSED INCREASE OF AUTHORIZED SHARES OF COMMON STOCK The authorized capital stock of the Company is 85,000,000 shares, consisting of 80,000,000 shares of Common Stock, of which 62,359,897 shares were issued and outstanding as of the Record Date, and 5,000,000 shares of Preferred Stock, of which no shares were outstanding. An additional 3,068,750 shares of Common Stock are reserved for issuance under the Company's Key Executive Stock Option Plan of 1969, which expired on September 30, 1993, and 2,000,000 shares are reserved for issuance under the Company's Key Executive Stock Option Plan of 1993, which was approved by the stockholders in September 1993 and which will expire on August 31, 2003. On June 23, 1994, the Board of Directors of the Company, at a regular meeting, unanimously adopted resolutions setting forth a proposed amendment to the Company's Certificate of Incorporation for the purpose of increasing the authorized shares of Common Stock from 80,000,000 shares to 160,000,000 shares (the "Amendment") and providing that the Amendment be submitted to a vote of the Company's stockholders. The favorable vote of a majority of the issued and outstanding shares entitled to vote thereon is required to amend the Certificate of Incorporation. The text of the Amendment is as follows: "RESOLVED, that ARTICLE FOURTH of the Certificate of Incorporation of Manor Care, Inc. shall be amended to read as follows: "FOURTH: The total number of shares of capital stock of all classifications which the Corporation shall have authority to issue is One Hundred Sixty-Five Million (165,000,000) shares, of which One Hundred Sixty Million (160,000,000) shares having a par value of Ten Cents ($.10) per share shall be of a class designated 'Common Stock' and Five Million (5,000,000) shares having a par value of One Dollar ($1.00) per share shall be of a class designated 'Preferred Stock.'" As of the record date, there are currently 12,571,353 shares available for issuance. Accordingly, if the Amendment becomes effective, based on the number of shares issued and outstanding or reserved for issuance pursuant to the Company's Stock Option Plans on the Record Date, the Company will have 92,571,353 authorized but unissued shares of Common Stock and 5,000,000 authorized but unissued shares of Preferred Stock uncommitted to any purpose. The Company has no present plans or understanding for issuing any uncommitted authorized but unissued shares of Common Stock and Preferred Stock. The Board of Directors believes it advisable to have these shares available for issuance from time to time for such purposes as stock splits or dividends, 15 18 financing, acquisitions or such other purposes as the Board may determine to be in the Company's interest. Approval of additional authorized shares at this time will eliminate the necessity of calling a special meeting of stockholders in the future to consider such an increase. Increases in the amount of authorized shares have been viewed in some instances as measures to prevent or delay corporate takeovers. For example, the Board of Directors has the authority to fix the rights, preferences and powers of any Preferred Stock issued, and could discourage a takeover by approving the issuance of shares at a certain time and with certain voting rights. At this time, the Company is not aware of any specific effort to accumulate its securities or to obtain control of the Company by means of a merger, tender, offer, solicitation in opposition to management, or otherwise. The Company's Certificate of Incorporation and By-Laws do not currently include provisions having an anti-takeover effect. The Company does not consider the proposed Amendment to be an anti-takeover device, nor does the Company currently intend to propose anti-takeover measures in the future. Issuance of any authorized shares normally will be made without stockholder approval. However, the New York Stock Exchange, which lists the Company's Common Stock, requires stockholder approval in some instances, including an acquisition where the present or potential issuance of Common Stock could result in an increase in outstanding shares of 18 1/2% or more. Current stockholders have no preemptive right to subscribe to any newly authorized shares. The management of the Company recommends a vote FOR the proposal to increase the number of authorized shares of Common Stock from 80,000,000 shares to 160,000,000 shares. Proxies received by the Board of Directors will be so voted unless the stockholders specify a contrary choice. Delaware law grants to dissenting stockholders no rights of appraisal or similar rights with respect to the proposal. PROPOSED APPROVAL OF MANOR CARE, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION AND DEFERRED COMPENSATION STOCK PURCHASE PLAN In September 1993, the Company's Stockholders approved the Manor Care, Inc. Key Executive Stock Option Plan of 1993 which permits the grant of up to 2,000,000 shares to executive officers and other key employees until August 31, 2003, when the plan will expire. The non-employee Directors on the Company's Board of Directors are not eligible to participate in the plan. On June 23, 1994, the Board of Directors of the Company unanimously approved the adoption of the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan (the "Plan"), and directed that the Plan be submitted for stockholder approval at the 16 19 Annual Meeting. The Plan shall become effective upon the affirmative vote of a majority of the shares of Common Stock issued and outstanding on the Record Date. No options will be granted under the Plan or other rights will accrue if the Plan is not approved by the stockholders of the Company. The purposes of the Plan are to build a proprietary interest among non-employee Directors serving on the Board of Directors, thereby securing for the Company's stockholders the benefits associated with stock ownership by those who will oversee the Company's future growth and success, and to make service on the Board of Directors more attractive to prospective directors. The management of the Company recommends a vote FOR the proposal to approve the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. Proxies received by the Board of Directors will be so voted unless stockholders specify a contrary choice. SUMMARY DESCRIPTION OF PLAN The following description of the Plan is qualified in its entirety by reference to the Manor Care, Inc. Non-Employee Stock Option and Deferred Compensation Plan, a copy of which is attached hereto as Exhibit A to this Proxy Statement. The amount of compensation that will accrue to the Non-Employee Directors pursuant to the Plan, if approved by the stockholders, is not currently determinable. PART A - STOCK OPTIONS ELIGIBILITY. Each member of the Board of Directors of the Company who is not an employee of the Company or any subsidiary of the Company ("Non-Employee Director"), will be eligible to receive a grant of stock options under Part A of the Plan. The eligibility status of such a Director will terminate as to future stock option grants at the time the individual ceases to be a Director, or the individual becomes an employee of the Company or any subsidiary of the Company. ADMINISTRATION. Part A of the Plan will be administered by the Board of Directors of the Company. The Board of Directors has full power to administer and interpret Part A of the Plan to carry out its purpose. It is expected that the Board of Directors will designate Company personnel to assist it in carrying out its responsibilities under Part A of the Plan. OPTIONS; EXERCISE PRICE. Each eligible Non-Employee Director under Part A of the Plan will automatically be granted an option to purchase 5,000 shares of Common Stock on September 8, 1994, and each Non-Employee Director subsequently elected to the Board of Directors will receive an option to purchase 5,000 shares of Common Stock on the date of his or her initial election. In addition, each eligible Non-Employee Director under Part A of the Plan will automatically be granted in subsequent calendar years an option to purchase 1,000 shares on the date of election of such director during the 17 20 term of Part A of the Plan. The maximum number of shares available for grant and issuance under Part A of the Plan is 150,000. All options under Part A of the Plan are granted at 100 percent of the fair market value of Common Stock on the relevant grant date. In the case of events such as stock dividend, stock splits, recapitalizations or other changes in the Company's capitalization, an automatic adjustment will be made to the number of unexercised shares, the number of shares to be granted in the future, and the aggregate number of shares which are available for option grants under Part A of the Plan. An option granted under Part A of the Plan may be evidenced by a written instrument describing the terms and conditions of the grant. Options granted under Part A of the Plan are not assignable or transferable by the eligible Non-Employee Director, other than by will or the laws of descent and distribution. During the Non-Employee Director's lifetime, an option is exercisable only by the Non-Employee Director. VESTING; EXERCISE OF OPTIONS. Each option granted under Part A of the Plan becomes exercisable as to one-third of the shares covered by the option commencing on each of the second through the fourth anniversary of the date of the grant. For example, with respect to the options granted on September 9, 1994, one-third of the shares covered by the grant are scheduled to become exercisable on September 9, 1996, an additional one-third of the shares covered by the grant are scheduled to become exercisable on September 9, 1997, and the remaining one-third of the shares covered by the grant are scheduled to become exercisable on September 9, 1998. If a Non-Employee Director retires after reaching age 65 and after having served on the Board for at least ten years prior to the date of retirement, the entire option becomes exercisable. Options may be exercised by the delivery of cash or shares of Common Stock, or any combination of such forms of payment. If the eligibility of a Non-Employee Director ceases for a reason other than death or retirement at age 65 following at least ten years' service on the Board of Directors, options which are not exercisable at that time are forfeited; any exercisable options must be exercised within one month from the date the Non-Employee Director loses eligible status. TERM OF PLAN AND OPTION. Unless terminated earlier by the Board of Directors, Part A of the Plan will terminate on September 9, 2004. Options granted prior to such termination date will continue to be exercisable in accordance with the terms of Part A of the Plan. Each option granted under Part A of the Plan will automatically expire five years from the date the option is granted and may be exercised only by the optionee during his or her lifetime, or, for up to 12 months following the death of the optionee, by the person acquiring the right by will or by the laws of descent and distribution to the extent the option was excercisable at the time of death. AMENDMENT AND TERMINATION OF PART A OF THE PLAN. Subject to certain exceptions set forth in Section Sixteen of the Plan, the Board of Directors may amend or 18 21 terminate Part A of the Plan at any time without stockholder approval, including amendments necessary to conform with Rule 16b-3 of the Securities Exchange Act of 1934 (the "Exchange Act"), unless the particular amendment or modification requires stockholder approval under Section 16 of the Exchange Act, the Internal Revenue Code of 1986, as amended (the "Code"), under the rules and regulations of the exchange or system on which the Common Stock is listed or reported, or pursuant to other applicable laws, rules or regulations. Currently, Rule 16b-3 under the Exchange Act requires stockholder approval of any amendments which would modify the Plan's eligibility requirements, increase the shares of Common Stock available under Part A of the Plan, or increase the benefits of the eligible Non-Employee Directors. FEDERAL INCOME TAX CONSEQUENCES. A Non-Employee Director who is granted a stock option under Part A of the Plan will not recognize taxable income at the time of the grant, but will generally recognize income upon the exercise of the stock option. The amount of income recognized upon the exercise of the stock option will be measured by the excess, if any, of the fair market value of the shares of Common Stock at the time of exercise over the exercise price. The Company will generally be entitled to a corresponding deduction for the amount of income recognized by the Non-Employee Director. The foregoing does not purport to be a complete summary of the federal income tax considerations that are relevant to stock options granted under Part A of the Plan. Additionally, the tax consequences under applicable state, local or foreign tax laws may not be the same as under the federal income tax laws. PART B - DEFERRED COMPENSATION STOCK PURCHASE ELIGIBILITY. Each Non-Employee Director will be eligible to participate in the deferred compensation stock purchase provisions under Part B of the Plan. ADMINISTRATION. Part B of the Plan will be administered by the Board of Directors of the Company. The Board of Directors has full power to administer and interpret Part B of the Plan to carry out its purpose. It is expected that the Board of Directors will designate Company personnel to assist it in carrying out its responsibilities under Part B of the Plan. DEFERRED COMPENSATION STOCK PURCHASE. Under Part B of the Plan, each eligible Non-Employee Director may elect, prior to May 31 of each fiscal year to defer a minimum of 25% of Board and committee fees earned during the ensuing fiscal year. The fees so deferred will be used to make open-market purchases of Company Common Stock within 15 days after December 1, February 28, and May 31 of such fiscal year. Pending such purchases, the funds will be credited to an Interest Deferred Account, which will be interest bearing. Stock which is so purchased shall be deposited in a Stock Deferred Account pending distribution in accordance with the Plan. 19 22 AMENDMENT AND TERMINATION OF PART B OF THE PLAN. The Board of Directors may terminate or amend Part B of the Plan at any time without further stockholder approval, except if the amendment involves a material increase of benefits accruing to participants, a material increase in the number of shares which may be purchased under Part B of the Plan, or a material modification to the eligibility requirements. Part B of the Plan will automatically expire on September 9, 2004. A maximum of 80,000 shares may be purchased under Part B of the Plan. DISTRIBUTION OF STOCK AND PAYMENT. On the termination of service of a participant, all stock in the Stock Deferred Account will be distributed to the director and all amounts remaining in the Interest Deferred Account shall be paid to the director, unless the director elects to receive the distribution of stock and payment of funds in the form of installment payments. FEDERAL INCOME TAX CONSEQUENCES. A Non-Employee Director who purchases stock under Part B of the Plan will not recognize taxable income under the federal income tax laws until distribution of the shares. The amount of income recognized by the participant will be measured by the fair market value of the shares of Common Stock at the time of distribution and the amounts paid from the Interest Deferred Account at the time of payment. The Company will generally be entitled to a corresponding deduction of the amount of income recognized by the Non-Employee Director. The foregoing does not purport to be a complete summary of the federal income tax considerations that are relevant to shares purchased under Part B of the Plan. Additionally, the tax consequences under applicable state, local or foreign tax laws may not be the same as under the federal income tax laws. RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen & Co. has been the Company's independent public accountants since June 1976. In the Spring of 1995, the Board of Directors will select the Company's independent public accountants to audit the accounts of the Company for the current fiscal year. Representatives of Arthur Andersen & Co. are expected to be present at the Meeting, and will have an opportunity, if they so desire, to make a statement and will be available to respond to appropriate questions. STOCKHOLDER PROPOSALS The Company's 1995 Annual Meeting is presently scheduled to be held on September 28, 1995. Stockholder proposals must be submitted to the Secretary no later than April 28, 1995, in order to be eligible for inclusion in the Company's proxy materials for such meeting. 20 23 OTHER BUSINESS As of the date of the Proxy Statement, management does not know of any business other than that mentioned above which will be presented for consideration. However, if any other matter should properly come before the Meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxies in accordance with their judgment on such matter. After the business session and a report to the stockholders on the progress of the Company, a discussion period will take place during which stockholders will have an opportunity to discuss matters of interest concerning the Company. - - ---------------------------- A COPY OF THE COMPANY'S 1994 FORM 10-K (EXCLUDING EXHIBITS) FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE MADE AVAILABLE TO STOCKHOLDERS, WITHOUT CHARGE, UPON WRITTEN REQUEST TO THE ASSISTANT TREASURER OF MANOR CARE, INC., 10750 COLUMBIA PIKE, SILVER SPRING, MARYLAND 20901. THE REPRODUCTION COST WILL BE CHARGED IF EXHIBITS ARE REQUESTED. 21 24 EXHIBIT A MANOR CARE, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION AND DEFERRED COMPENSATION STOCK PURCHASE PLAN Manor Care, Inc. has adopted and established a non-qualified stock option plan for Non-Employee Directors in accordance with the following terms and conditions. The plan also provides Non-Employee Directors the ability to elect to defer compensation and purchase stock with director fees. SECTION ONE DESIGNATION AND PURPOSE OF THE PLAN A. DESIGNATION. This Plan is designated the "Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan". B. PURPOSE. The purpose of this Plan is to secure for the Company and its stockholders the benefits of the incentive inherent in increased ownership of Company Stock by Non-Employee Directors. It is expected that such ownership will provide such Non-Employee Directors with a more direct stake in the future welfare of the Company and encourage them to remain directors of the Company. It is also expected that the Plan will encourage qualified persons to become directors of the Company. C. GOVERNING LAW. This Plan shall be interpreted and enforced in accordance with the laws of the State of Maryland, without reference to its conflict of laws principles. SECTION TWO DEFINITIONS As used in this Plan, the following terms mean: A. "BOARD" means the Board of Directors of the Company. B. "COMPANY" means Manor Care, Inc., including any present or future "subsidiary corporation" as such term is defined in Section 424(f) of the 1986 Internal Revenue Code, as amended. C. "NON-EMPLOYEE DIRECTOR" means a member of the Board of the Company who is not an employee of the Company or any of its subsidiaries. 22 25 D. "OPTION" means a non-qualified stock option granted to a Participant under this Plan. It also means any Option which remains after a Participant has exercised his Option with respect to part of the shares covered by an Option agreement. E. "PARTICIPANT" means any Non-Employee Director who is granted an Option as provided in this Plan. F. "PLAN" means this Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. G. "STOCK" and "COMPANY STOCK" mean the common stock of Manor Care, Inc. H. Wherever appropriate, words used in this Plan in the singular may mean the plural, the plural may mean the singular and the masculine may mean the feminine. PART A RULES RELATING TO STOCK OPTION PROGRAM SECTION THREE STOCK SUBJECT TO OPTION A. TOTAL NUMBER OF SHARES. The total number of shares of Stock which may be included in all Options granted to all Participants under this Part A is 150,000 shares. The total number of shares of Stock which may be granted may be increased by a resolution adopted by the Board and approved by the Company's stockholders. Such Stock may be either authorized and unissued Stock or reacquired Stock. B. EXPIRED OPTIONS. If any Option granted under this Part A (i) is unexercisable, or (ii) is terminated, or (iii) expires or is canceled for any other reason, in whole or in part, the shares (or remaining shares) of Stock subject to that particular Option shall again be available for grant under this Part A. SECTION FOUR ADMINISTRATION OF THIS PART A This Part A shall be administered by the Board. The Board shall have all the powers vested in it by the terms of this Part A, such powers to include authority (within the limitation described herein) to prescribe the form of the agreement embodying awards of Options made under this Part A. Subject to the provisions of this Part A, the Board shall have the power to construe this Part A, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for the administration of this Part A as it may deem desirable. Any decision of the Board in the administration of this Part A, as described herein, shall be final and conclusive. The Board may act only by a 23 26 majority of its members in office, except that the members thereof may authorize any one or more of their number or the Secretary or any other officer of the Company to execute and deliver documents on behalf of the Board. SECTION FIVE SELECTION OF PARTICIPANTS Each Non-Employee Director shall be eligible to receive an Option in accordance with Section Six. Each Option granted under this Part A shall be evidenced by an agreement in such form as the Board shall prescribe from time to time in accordance with this Part A and shall comply with the terms and conditions set forth in Sections Six and Seven. Such an agreement shall incorporate the provisions of this Part A by reference. SECTION SIX GRANT OF OPTIONS AND LIMITATIONS ON EXERCISE A. INITIAL GRANT FOR INCUMBENT MEMBERS OF THE BOARD. Each Non-Employee Director as of September 9, 1994 shall receive an Option (a "September 9, 1994 Option") to purchase for five years 5,000 shares of Stock, subject to the terms and conditions herein. B. INITIAL GRANT FOR NEW MEMBERS OF THE BOARD. Each Non-Employee Director who is not a recipient of a September 9, 1994 Option, upon the date of his initial election or appointment as a director of the Company, shall receive an Option to purchase for five years 5,000 shares of Stock, subject to the terms and conditions herein. C. ANNUAL GRANT. Annually upon election as a Non-Employee Director, commencing in the calendar year subsequent to the calendar year in which an initial grant was awarded the Non-Employee Director pursuant to Sections Six A or B above, each Non-Employee Director shall receive an Option to purchase for five years 1,000 shares of Stock, subject to the terms and conditions herein. D. VESTING. An Option to purchase Stock may be exercised only by a Participant during his lifetime. The Option is not exercisable for a period of two years from the date of grant. Thereafter, an Option becomes exercisable (a) to the extent of one-third of the total number of shares subject to the option following the expiration of two years from the date of grant; (b) to the extent of an additional one-third following the expiration of three years from the date of grant; and (c) to the extent of an additional one-third following the expiration of four years from the date of grant. An Option is cumulative and any portion of an Option not exercised at the time it becomes exercisable may be exercised at any time thereafter prior to its termination date. E. LIMITATION. In no event may an Option be exercised by anyone after the expiration of ten years from the date of grant. 24 27 F. BOARD RETIREMENT. A Participant who ceases to serve on the Board after reaching age 65 and who has been a member of the Board for at least ten years prior to the date of retirement shall be permitted to exercise his entire Option notwithstanding the limitations of Section Six D above. G. INSUFFICIENT NUMBER OF SHARES. In the event that the number of shares of Stock available for future grant under this Part A is insufficient to make all grants required to be made on any date, then all Participants entitled to a grant on such date shall share ratably in the number of shares of Stock which may be included in Options granted to Participants under this Part A. SECTION SEVEN OPTION PRICES A. DETERMINATION OF OPTION PRICE. The Option price for Stock shall be equal to 100% of the fair market value of the Stock on the date of grant. B. DETERMINATION OF FAIR MARKET VALUE. The fair market value of the Stock on the date of granting an Option shall be the mean of the high and low prices at which the Stock was sold on the market on such date. In the event no such sales of Stock occurred on such date, the fair market value of the Stock shall be determined by the mean of the high and low prices at which the Stock was sold on the market on the next preceding date for which the Stock was so sold. SECTION EIGHT EXERCISE OF OPTION A. METHOD OF EXERCISING AN OPTION. Subject to the terms of a particular Option, a Participant may exercise it in whole or in part by written notice to the Company's President or Secretary stating in such written notice the number of shares of Stock such Participant elects to purchase under his Option. B. NO OBLIGATION TO EXERCISE OPTION. A Participant is under no obligation to exercise an Option or any part thereof. C. PAYMENT FOR OPTION STOCK. Stock purchased pursuant to an Option agreement shall be paid in full at the time of purchase. Payment may be made (a) in cash, (b) by delivery to the Company of shares of Stock having an aggregate fair market value equal to the exercise price, or (c) a combination of (a) and (b). Upon receipt of payment and subject to paragraph E of this Section Eight, the Company shall, without transfer or issue tax to the Participant or other person entitled to exercise the Option, deliver to the Participant (or other person entitled to exercise the Option) a certificate or certificates for such shares. D. DELIVERY OF STOCK TO PARTICIPANT. The Company shall undertake and follow all necessary procedures to make prompt delivery of the number of shares of Stock which the Participant elects to purchase upon exercise of an Option granted under this Part A. Such delivery, however, may be 25 28 postponed, at the sole discretion of the Company, to enable the Company to comply with any applicable procedures, regulations or listing requirements of any government agency, stock exchange or regulatory authority. E. FAILURE TO ACCEPT DELIVERY OF STOCK. If a Participant refuses to pay for Stock which he has elected to purchase under his Option, in accordance with the terms of payment, which had previously been agreed upon, his Option shall thereupon, at the sole discretion of the Board, terminate, and such funds previously paid for unissued Stock shall be refunded. Stock which has been previously issued to the Participant and been fully paid for shall remain the property of the Participant and shall be unaffected by such termination. SECTION NINE NON-TRANSFERABILITY OF OPTIONS During a Participant's lifetime, an Option granted to him may be exercised only by him. It may not be sold, assigned, pledged or otherwise transferred except by will or by the laws of descent and distribution. No Option or any right thereunder shall be subject to execution, attachment or similar process. Upon any attempt by a Participant to so sell, assign, pledge or otherwise transfer any Option, or any right thereunder, contrary to the provisions hereof, the Option and all rights thereunder shall immediately become null and void. SECTION TEN PURCHASE FOR INVESTMENT A. WRITTEN AGREEMENT BY PARTICIPANTS. Unless a registration statement under the Securities Act of 1933 is then in effect with respect to the Stock a Participant receives upon exercise of his Option, a Participant shall acquire the Stock he receives upon exercise of his Option for investment and not for resale or distribution and he shall furnish the Company with a written statement to that effect when he exercises his Option and a reference to such investment warranty shall be inscribed on the Stock certificate(s). B. REGISTRATION REQUIREMENT. Each Option shall be subject to the requirement that, if at any time the Board determines that the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any state or Federal law is necessary or desirable as a condition of, or in connection with, the issuance of shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration or qualification shall have been effected or obtained (and the same shall have been free of any conditions not acceptable to the Board). SECTION ELEVEN CHANGES IN CAPITAL STRUCTURE In the event of a change in the capital structure of the Company, the number of shares specified in Section Three of this Part A, 26 29 the number of shares specified in Section Six of this Part A, the number of shares covered by each outstanding Option and the price per share shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock resulting from the splitting or consolidation of shares, or the payment of a stock dividend, or effected in any other manner without receipt of additional or further consideration by the Company. SECTION TWELVE CORPORATE REORGANIZATION OR DISSOLUTION A. In the event of the dissolution or liquidation of the Company, any Option granted under this Part A shall terminate as of a date to be fixed by the Board, provided that not less than 15 days written notice of the date so fixed shall be given to each Participant and each such Participant shall have the right during such period to exercise his Option as to all or any part of the Stock covered thereby including Stock as to which such Option would not otherwise be exercisable by reason of an insufficient lapse of time. B. In the event of a Reorganization (as hereinafter defined) in which the Company is not the surviving or acquiring company, or in which the Company is or becomes a wholly owned subsidiary of another company after the effective date of the Reorganization, then: 1) If there is no plan or agreement respecting the Reorganization ("Reorganization Agreement") or if the Reorganization Agreement does not specifically provide for the change, conversion, or exchange of the Stock under outstanding and unexercised Options for securities of another corporation, then the Board shall take such action, and the Options shall terminate, as provided in paragraph A of this Section Twelve, or 2) If there is a Reorganization Agreement and if the Reorganization Agreement specifically provides for the change, conversion, or exchange of the Stock under outstanding and unexercised Options for securities of another corporation, then the Board shall adjust the shares under such outstanding and unexercised Options (and shall adjust the shares remaining under this Part A which are then to be available for grant under this Part A, if the Reorganization Agreement makes specific provisions therefor) in a manner not inconsistent with the provisions of the Reorganization Agreement for the adjustment, change, conversion or exchange of such Options. The term "Reorganization" as used in this paragraph B of this Section Twelve shall mean any statutory merger, statutory consolidation, sale of all or substantially all of the assets of the Company, or sale, pursuant to an agreement with the Company, of securities of the Company pursuant to which the Company is or becomes a wholly owned subsidiary of another company after the effective date of the Reorganization. C. Adjustments and determinations under this Section Twelve shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 27 30 SECTION THIRTEEN TERMINATION OF SERVICE A. SEVERANCE. Subject to the provision of Paragraph B of this Section Thirteen, in the event a Participant ceases to be a Non-Employee Director, his Option terminates one month from the date of such cessation of service. Subject to the provisions of Paragraph F of Section Six, such Option shall be exercisable only to the extent the Participant was entitled to exercise the Option on the date of such cessation of service. B. DEATH. If a Participant dies prior to the full exercise of his Option, his Option to purchase Stock under such Option may be exercised to the extent, if any, that Participant would be entitled to exercise it at the date of Participant's death by the person to whom the Option shall pass by will or by the laws of descent and distribution within twelve months of Participant's death or the expiration of the term of the Option whichever date is sooner. SECTION FOURTEEN APPLICATION OF FUNDS All proceeds received by the Company from the exercise of Options shall be paid into its treasury and such proceeds shall be used for general corporate purposes. SECTION FIFTEEN PARTICIPANT'S RIGHTS AS A STOCKHOLDER A Participant has no rights as a stockholder with respect to any shares of Stock covered by his Option until the date a stock certificate is issued to him for such shares. Except as otherwise provided for in Section Eleven of this Part A, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. SECTION SIXTEEN AMENDMENT AND TERMINATION OF THIS PART A A. DISCRETION OF THE BOARD OF DIRECTORS. This Part A may be terminated or amended at any time and from time to time by the Board as the Board shall deem advisable including, but not limited to, amendments necessary to qualify for any exemption or to comply with applicable law or regulations; provided, however, that this Part A shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the regulations thereunder, or the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder; and provided, further, that except as provided in Section Eleven, the Board may not, without further approval by the stockholders of the Company, increase the maximum number of shares of Stock as to which Options may be granted under this Part A, increase the number of shares subject to an Option, reduce the minimum Option exercise price described in Section Seven, extend the period during which Options may be granted or exercised under this Part A or change the 28 31 class of persons eligible to receive Options under this Part A. No amendment of this Part A shall materially and adversely affect any right of any Participant with respect to any Option theretofore granted without such Participant's written consent. B. AUTOMATIC TERMINATION. This Part A shall terminate on September 9, 2004. Options may be granted under this Part A at any time and from time to time prior to this Part A's termination. Any Option outstanding at the time this Part A is terminated shall remain in effect until said Option is exercised or expires. PART B RULES RELATING TO DEFERRED COMPENSATION STOCK PURCHASE SECTION SEVENTEEN DEFERRAL OF FEES A Non-Employee Director may elect by written notice to defer payment on all or a portion of his fees (including Committee fees) for any year, subject to the following conditions: During the period of the active service (as hereinafter defined) of a Non-Employee Director, the Non-Employee Director agrees to serve the Company faithfully and, to the best of the ability of the Non-Employee Director, to perform such services and duties as shall be assigned to the Non-Employee Director by the Board. For purposes of this Part B, the period of the active service of the Non-Employee Director shall mean the period commencing with the date of election or appointment of the Non-Employee Director and expiring on the date on which occurs the termination of the service of the Non-Employee Director by reason of expiration of term or the date of resignation, removal or death of the Non-Employee Director, whichever shall occur first. Nothing contained herein shall be construed as conferring upon the Non-Employee Director the right to continue in the active service of the Company. SECTION EIGHTEEN ELECTION AND DEFERRED ACCOUNTS A. Prior to the thirty-first day of May of each year during the period of the active service of the Non-Employee Director, the Non-Employee Director may instruct the Company by delivery to it of written notice to withhold a specified percentage (not less than 25%) of any fees otherwise payable to the Non-Employee Director for services to be rendered in the following fiscal year (the "Deferred Amounts"). Such election shall be irrevocable with respect to such fiscal year. The Company shall establish a grantor "Rabbi Trust" and shall establish thereunder on behalf of the Non-Employee Director upon a deferral election a liability account which shall consist of a Stock Deferred Account and an Interest Deferred Account (each a "Deferred Account"). 29 32 B(i) Stock Deferred Account (a) An agent (the "Agent") shall be appointed by the Board or any individual or committee to which the Board has delegated authority to act with respect to the appointment of the Agent to perform the functions and have the responsibilities assigned to the Agent in this Section Eighteen with respect to the purchase of Stock. The Board or such individual or committee shall have the right to change the Agent at any time. Except as provided in Section 18B(i)(b), the Company shall pay the compensation and expenses of the Agent. (b) Deferred Amounts shall initially be deposited to the Interest Deferred Account (the "Initial Deferred Amounts"). For each fiscal year of the Company, the Agent shall cause all Initial Deferred Amounts to be applied to the open market purchase of whole shares of Stock within fifteen days after December 1, February 28 and May 31 of such fiscal year. The Agent shall have all authority to determine the times of such purchases, the prices at which such purchases are made, the manner of such purchases and the selection of brokers or dealers (which may include the Agent) to make such purchases. All brokerage fees and commissions with respect to such purchases shall be deducted from the Initial Deferred Amounts. The Agent shall credit each Stock Deferred Account with the number of whole shares of Stock equal to such account's Initial Deferred Amount applied by the Agent to the purchase of Stock divided by the average price per share purchased by the Agent. Initial Deferred Amounts representing a fraction of the purchase price of a share shall be credited to their respective Interest Deferred Account. Any shares of Stock held in a Stock Deferred Account shall be voted by the trustee of the "Rabbi Trust". (c) In the alternative, but only if and to the extent that the Company shall have instructed the Agent concurrent with or prior to the delivery to the Agent of the Initial Deferred Amounts, the Agent shall purchase whole shares of Stock directly from the Company and not in the open market. Each such purchase from the Company shall be at a price equal to the closing price of Stock on the market on the business day preceding the date such purchase is made. (d) During the period that such Stock Deferred Account is maintained, on each date on which the Company pays dividends on its Stock, the Interest Deferred Account shall be credited with an amount equivalent to the amount of dividends declared by the Company with respect to the Stock held in the Stock Deferred Account ("Dividend Equivalents"). (e) The total number of shares of Stock which may be purchased under this Part B is 80,000 shares. The total number of shares of Stock which may be purchased may be increased by a resolution adopted by the Board and approved by the Company's stockholders. Such Stock may be either authorized and unissued shares or reacquired shares. (f) In the event of a change in the capital structure of the Company, the number of shares of Stock specified in Section Eighteen of this Part B, and the number of shares of Stock entered in a Stock Deferred Account shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock resulting from the splitting or consolidation of shares, or the 30 33 payment of a stock dividend, or effected in any other manner without receipt of additional or further consideration by the Company. B(ii) Interest Deferred Account All additions to the Interest Deferred Account will be invested in short- to mid-term fixed-income investments selected by the Company from time to time. There shall be credited to the Interest Deferred Account all gains, losses and income attributable to such investments. SECTION NINETEEN ANNUAL STATEMENT The Company will provide an annual statement of the Deferred Accounts to each participant Non-Employee Director showing amounts of fees deferred and additional amounts credited to his Deferred Accounts in accordance with Section 18. SECTION TWENTY PAYMENT Upon the termination of active service of a Non-Employee Director, the Company shall pay such Non-Employee Director his Deferred Accounts in one lump sum payment as soon after his termination of active service as is administratively feasible unless such Non-Employee Director had previously made an election, at least sixty (60) days prior to the effective date of such termination of active service, to receive his Deferred Accounts in the form of installment payments. At least sixty (60) days prior to his termination of active service, a Non-Employee Director may make an irrevocable election to receive his Deferred Accounts in the form of installment payments over a period of time designated by the Non-Employee Director but in no event to exceed twenty (20) years. In the event that the installment method of payment is selected, the Non-Employee Director will further designate whether installment payments are to be made on a monthly, quarterly, semi-annual or annual basis. During the period of installment distributions, the Interest Deferred Account will be credited with an earnings factor computed pursuant to the principles described in Section 18 B(ii), above. In the event that a Non-Employee Director dies after having made an installment election but prior to the receipt of all installment payments thereunder, the remaining payments will be made to the beneficiary by the Non-Employee Director designated for purposes of this Part B through the remaining duration of the elected installment period, unless the Non-Employee Director has provided in such installment election for a different form of payment to the beneficiary of the Non-Employee Director in the event of the death of the Non-Employee Director, in which event such different form of payment shall be made to the beneficiary of the Non-Employee Director. The computation of the amount of a lump sum payment or the amount of an installment payment shall be made by reference to the balance of the Deferred Account as of the date of the distribution. 31 34 SECTION TWENTY-ONE DEATH OF NON-EMPLOYEE DIRECTOR Where the death of the Non-Employee Director occurs prior to making his election, payments of compensation deferred shall be made in such manner determined by the beneficiary. SECTION TWENTY-TWO DEATH OF NON-EMPLOYEE DIRECTOR AND BENEFICIARY If both the Non-Employee Director and his designated beneficiary should die, the total amount standing to the credit of the Non-Employee Director in the Deferred Accounts shall be determined as of the date of death of the designated beneficiary (including any additional amounts credited to such Account pursuant to Section Eighteen B(ii)) and shall be paid as promptly as possible in one lump sum to the estate of such designated beneficiary. SECTION TWENTY-THREE TAXES Payments will be made to the Non-Employee Director or beneficiary after deducting taxes required by federal and/or state governments, if any. SECTION TWENTY-FOUR ADMINISTRATION OF THIS PART B This Part B shall be administered by the Board, except as provided in Section 18. The Board shall have all the powers vested in it by the terms of Part B. Subject to the provisions of this Part B, the Board shall have the power to construe this Part B, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for the administration of this Part B as it may deem desirable. Any decision of the Board in the administration of this Part B, as described herein, shall be final and conclusive. The Board may act only by a majority of its members in office, except that members thereof may authorize any one or more of their number or the Secretary or any other officer of the Company to execute and deliver documents on behalf of the Board. SECTION TWENTY-FIVE UNSECURED GENERAL CREDITOR Nothing contained in this Part B and no action taken pursuant to the provisions of this Part B shall create or be construed to create a trust of any kind other than a grantor "Rabbi Trust", or a fiduciary relationship between the Company and the Non-Employee Director, his designated beneficiary or any other person. Any compensation deferred under the provisions of this Part B shall continue for all purposes to be a part of the general funds of the Company. To the extent that any 32 35 person acquires a right to receive payment from the Company under this Part B, such right shall be no greater than the right of any unsecured general creditor of the Company. SECTION TWENTY-SIX NO ASSIGNMENT The right of the Non-Employee Director or any other person to the payment of deferred compensation or other benefits under this Part B shall not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. SECTION TWENTY-SEVEN SUCCESSORS AND ASSIGNS This Part B shall be binding upon and inure to the benefit of the Company and its subsidiaries, its successors and assigns and the Non-Employee Director and his heirs, executors, administrators and legal representatives. SECTION TWENTY-EIGHT CHANGE OF CONTROL In the event of a change of control of the Company, the Company shall immediately pay the Non-Employee Director his Deferred Accounts, including accrued interest. A "change of control" shall mean (i) a merger or consolidation in which the Company is not the surviving corporation or (ii) the acquisition of twenty-five percent or more of the voting securities of the Company by a person, group or entity or (iii) the sale of all or substantially all of the assets of the Company or (iv) individuals who were members of the Board immediately prior to a meeting of the stockholders of the Company involving a contest for the election of Non-Employee Directors do not constitute a majority of the Board immediately following such election, unless that election of such new Non-Employee Directors was recommended to the stockholders by management of the Company. SECTION TWENTY-NINE AMENDMENT AND TERMINATION OF THIS PART B A. DISCRETION OF THE BOARD OF DIRECTORS. The Board of Directors may at any time terminate or amend this Part B. Except as herein provided, no such termination may affect Stock previously purchased. No amendment may be made without prior approval of the stockholders of the Company if such amendment would (a) materially increase the benefits accruing to participants under this Part B, (b) materially increase the number of shares which may be purchased under this Part B, or (c) materially modify the requirements as to eligibility for participation under this Part B. B. AUTOMATIC TERMINATION. This Part B shall terminate on September 9, 2004. 33 36 MANOR CARE, INC. This Proxy is Solicited on Behalf of the Board of Directors PROXY FOR ANNUAL MEETING SEPTEMBER 9, 1994 The undersigned hereby appoints JACK R. ANDERSON and FREDERIC V. MALEK, and each of them, the true and lawful attorneys and proxies, with full power of substitution, to attend the Annual Meeting of Stockholders of MANOR CARE, INC. to be held at the Clarion Hotel, 1981 North Central Expressway, Richardson, Texas, on Friday, September 9, 1994 at 9:00 a.m. and at any adjournment thereof, and to vote all shares of common stock held of record which the undersigned could vote, with all the powers the undersigned would possess if personally present at such meeting, as designated below. (1) Election of Directors: / / FOR all nominees listed below: / / WITHHOLD AUTHORITY to vote FOR all nominees listed below:
S. BAINUM, JR., S. BAINUM, J. R. ANDERSON, R. E. HERZLINGER, W. H. LONGFIELD, F. V. MALEK and J. E. ROBERTSON, Ph.D. (Instructions: to withhold authority to vote for any individual nominee, write that nominee's name in the space provided below.) ----------------------------------------------------------------- (2) Approval of Amendment to the Company's Certificate of Incorporation increasing the authorized common stock from 80,000,000 shares to 160,000,000 shares. / / FOR / / AGAINST / / ABSTAIN (3) Approval of the Manor Care, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan. / / FOR / / AGAINST / / ABSTAIN (4) In their discretion, upon such other business as may properly come before the meeting. (Continued and to be signed on the reverse side) 37 The Board of Directors recommends a vote FOR items (1), (2) and (3). This proxy, when properly executed, will be used in the manner directed herein by the undersigned stockholder. If not otherwise specified, the shares represented by this proxy will be voted FOR items (1), (2) and (3), and for and in accordance with the discretion of the persons named as proxies as to such other matters as may properly come before the meeting, or at any and all adjournments thereof. Dated -------------------------------------------, 1994 ------------------------------------------------------- Signature -------------------------------------------------------- Signature (Signature should agree exactly with the name or names appearing above. Joint owners should both sign. In signing as attorney, administrator, executor, guardian or trustee, please set forth your full title. If the signer is a corporation, please sign the full corporate name by a duly authorized officer.) -----END PRIVACY-ENHANCED MESSAGE-----