-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGKXslj6ECo2LB/TVwicarwyK1RgIaCeKrZTa2/o6F5aBtF+tGP5FLju76muEW97 JcegpCr/66usvM8Dm1Nlnw== 0000950152-00-002375.txt : 20000411 0000950152-00-002375.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950152-00-002375 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANOR CARE INC CENTRAL INDEX KEY: 0000878736 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 341687107 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10858 FILM NUMBER: 583461 BUSINESS ADDRESS: STREET 1: 333 N. SUMMIT STREET CITY: TOLEDO STATE: OH ZIP: 43604-2617 BUSINESS PHONE: 4192525500 MAIL ADDRESS: STREET 1: P.O. BOX 10086 CITY: TOLEDO STATE: OH ZIP: 43699-0086 FORMER COMPANY: FORMER CONFORMED NAME: HCR MANOR CARE INC DATE OF NAME CHANGE: 19981001 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH CARE & RETIREMENT CORP / DE DATE OF NAME CHANGE: 19930328 10-K405 1 MANOR CARE, INC. 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10858 MANOR CARE, INC. (Exact name of registrant as specified in its charter)
DELAWARE 34-1687107 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 333 N. SUMMIT STREET, TOLEDO, OHIO 43604-2617 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange Title of each class on which registered ---------------------------- ----------------------- COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of each class ------------------------------------- 7-1/2% SENIOR NOTES DUE JUNE 15, 2006 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 [ X ] (Cover page 1 of 2 pages) 2 Based on the closing price of $12.875 per share on March 9, 2000, the aggregate market value of the registrant's voting stock held by non-affiliates was $1,076,546,112. Solely for purposes of this computation, the registrant's directors and executive officers have been deemed to be affiliates. Such treatment is not intended to be, and should not be construed to be, an admission by the registrant or such directors and officers that all of such persons are "affiliates," as that term is defined under the Securities Act of 1934. The number of shares of Common Stock, $.01 par value, of Manor Care, Inc. outstanding as of March 9, 2000 was 102,280,552. DOCUMENTS INCORPORATED BY REFERENCE The following document is incorporated herein by reference in the Part indicated: Specific portions of the registrant's Proxy Statement for the Annual Shareholders' Meeting to be held May 2, 2000 are incorporated by reference in Part III. (Cover page 2 of 2 pages) 3 TABLE OF CONTENTS PART I Item 1. Business ................................................... 2 Item 2. Properties ................................................ 10 Item 3. Legal Proceedings ......................................... 11 Item 4. Submission of Matters to a Vote of Security Holders ....... 13 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters ....................................... 14 Item 6. Selected Financial Data ................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................... 16 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 28 Item 8. Financial Statements and Supplementary Data ............... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................... 60 PART III Item 10. Directors and Executive Officers of the Registrant ........ 60 Item 11. Executive Compensation .................................... 61 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 62 Item 13. Certain Relationships and Related Transactions ............ 62 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................................... 62 SIGNATURES ........................................................... 68 EXHIBITS ........................................................... E-1
1 4 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Manor Care, Inc., formerly known as HCR Manor Care, Inc., (the Company) is a provider of a range of health care services, including skilled nursing care, assisted living, subacute medical care, rehabilitation therapy, home health care and management services for subacute care, rehabilitation therapy, vision care and eye surgery. The most significant portion of the Company's business relates to long-term care, including skilled nursing care and assisted living, which is the Company's only reportable operating segment. See Note 19 to the consolidated financial statements for segment information. At December 31, 1999, the Company operated 301 skilled nursing facilities and 45 assisted living facilities in 32 states with more than 60 percent located in Ohio, Michigan, Illinois, Pennsylvania and Florida. Within some of the Company's centers, there are medical specialty units which provide subacute medical care, rehabilitation programs and/or Alzheimer's care programs. At December 31, 1999, the Company operated 82 outpatient rehabilitation clinics, an acute care hospital and 33 home health care offices. During the fourth quarter of 1998, the Company formed a strategic alliance with Alterra Healthcare Corporation (Alterra) to develop a broad-based network primarily dedicated to the care of patients suffering from Alzheimer's disease. Key provisions of the alliance included the sale of 26 centers and the lease of two centers to Alterra in 1999; creation of a joint venture to develop and construct up to $500 million of Alzheimer's dementia care assisted living facilities in the Company's core markets over the next three to five years; and the formation of a new company to provide a variety of ancillary services, including rehabilitation therapy and home and hospice care, to residents in Alterra centers. In 1999, the Company sold 26 centers to Alterra for $154.5 million and, as part of the development joint venture, contributed 20 facilities for $77.8 million. The Company announced on March 3, 2000 that in response to an expression of interest, a Special Committee of its Board of Directors was exploring various strategic alternatives, including a possible sale of the company. The Company expects to announce the results of this process in the near future. The Company emphasized that there can be no assurance that any transaction will result from this process. The executive offices of the Company are located at 333 N. Summit Street, Toledo, Ohio 43604-2617. The Company's telephone number is (419) 252-5500. 2 5 NARRATIVE DESCRIPTION OF BUSINESS Long Term Care Services The Company is a leading owner and operator of long-term care centers in the United States, with the majority of its skilled nursing facilities operating under the name ManorCare Health Services or Heartland Health Care Center. Skilled Nursing Centers. The Company's facilities have interdisciplinary teams of experienced professionals providing services prescribed by physicians. These include registered nurses, licensed practical nurses and certified nursing assistants, who provide individualized comprehensive nursing care around the clock. Quality of Life programs are designed to give the highest possible level of functional independence to residents. Licensed therapists provide physical, speech, respiratory and occupational therapy for patients recovering from strokes, heart attacks, orthopedic conditions, or other illnesses, injuries or disabilities. In addition, the centers provide first-class dietary services, social services, therapeutic recreational activities, housekeeping and laundry services. Many of the Company's centers are accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO). Assisted Living Services. The Company has a number of assisted living centers as well as units in its skilled nursing centers dedicated to providing personal care services and assistance with general activities of daily living such as dressing, bathing, meal preparation and medication management. A comprehensive resident assessment helps determine the appropriate package of services desired or required by each resident. The assisted living staff encourages residents to socialize and participate in a broad spectrum of activities. Specialty Services Subacute Medical and Rehabilitation Care. The Company's commitment to reducing the cost of quality health care is exemplified by its leadership in subacute programs designed to shorten or eliminate hospital stays. Working closely with patients, families and insurers, interdisciplinary teams develop comprehensive, individualized patient care plans that target the essential medical, functional and discharge planning objectives. Programs for medically complex patients cover post-coronary surgery care, oncology, intravenous pain management, peritoneal and hemo dialysis, and complex wound care needs. Rehabilitation programs promote recovery from major surgery, stroke, amputation, joint replacement, head injury, or general neurologic or orthopedic conditions. Alzheimer's Care. As the industry's recognized leader in Alzheimer's care, the Company provides innovative services and facilities for the care of Alzheimer's patients in early, middle and advanced stages of the disease. Specialized care and programming are provided by trained staff for persons with Alzheimer's or related disorders in freestanding facilities and in dedicated units within many of the Company's skilled nursing centers. 3 6 Health Care Services The Company provides rehabilitation therapy in skilled centers of its own and others, hospitals and in 82 outpatient clinics in Midwestern and Mid-Atlantic states and in Texas and Florida. The Company's home health care business specializes in all levels of home health, hospice care and rehabilitation therapy from 33 offices in six states. The Company owns and operates a 172 bed acute care hospital in Texas. The Company entered into long-term agreements that provide capital and management services to physician practices, specializing in vision care and refractive eye surgery. Management services are also provided to 39 subacute care and acute rehabilitation programs in hospitals and skilled nursing centers. Other Services The Company owns approximately 90 percent of the common stock of Heartland Medical Information Services, Inc., a start-up medical transcription company which converts medical dictation into electronically formatted patient records. Health care providers use the records in connection with patient care and other administrative purposes. Labor Labor costs account for approximately 65 percent of the Company's operating expenses, and the Company competes with other health care providers with respect to attracting and retaining qualified or skilled personnel. The Company also depends on the available labor pool of low-wage employees. A shortage of nurses or other trained personnel or general inflationary pressures may require the Company to enhance its wage and benefits package in order to compete. Although the Company does not currently have a staffing shortage nor does it foresee one given structural changes in the supply and demand for nurses, a shortage of nurses or other health care workers in the geographic areas in which the Company operates could adversely affect the ability of the Company to attract and retain qualified personnel and could increase its operating costs. Customers There are no individual customers or related group of customers which account for a significant portion of the Company's revenue. The Company does not expect that the loss of a single customer or group of related customers would have a material adverse effect. Certain classes of patients rely on a common source of funds for payment of the cost of their care. The following table reflects the allocation of such revenue sources among Medicare, Medicaid and private pay and other sources for the last three years for services related to skilled nursing, assisted living and rehabilitation operations.
1999 1998 1997 ---- ---- ---- Medicaid 33% 29% 27% Medicare 20% 22% 23% Private pay & other 47% 49% 50% ---- ---- ---- 100% 100% 100% ==== ==== ====
4 7 Private pay and other sources include commercial insurance, individual patients' own funds, managed care plans and the Veterans Administration. Although payment rates vary among these sources, such rates are largely determined by market forces and costs. The government reimbursement programs such as Medicare and Medicaid prescribe, by regulation, the billing methods and amounts which may be charged and reimbursed for the care of patients covered by such programs. On August 5, 1997, Congress enacted the Balanced Budget Act of 1997 (Budget Act), which seeks to achieve a balanced federal budget by, among other things, reducing federal spending on the Medicare and Medicaid programs. The law contains numerous changes affecting Medicare payments to skilled nursing facilities, home health agencies, hospices and therapy providers, among others. For cost reporting periods beginning prior to July 1, 1998, Medicare reimbursement for skilled nursing facilities operated on a retrospective payment system in which each facility received an interim payment during the year, which was later adjusted to reflect actual allowable direct and indirect costs of services based on the submission of a cost report at the end of each year. The Budget Act resulted in a shift to a prospective Medicare payment system (PPS) in which skilled nursing facilities are reimbursed at a per diem rate for specific covered services regardless of their actual cost. Specifically, the Budget Act provides that, over three cost reporting periods beginning on or after July 1, 1998, the Medicare program will phase in this prospective payment system. A similar prospective payment system is required to be established for home health services beginning October 1, 2000. The Budget Act also reduces payments to many providers and suppliers, including therapy providers and hospices, and gives states greater flexibility in the administration of their Medicaid programs by repealing the requirement that payment be reasonable and adequate to cover the costs of "efficiently and economically operated" nursing facilities. In November 1999, Congress passed the Medicare Balanced Budget Refinement Act (BBRA 99). The BBRA 99 redresses certain reductions in Medicare reimbursement resulting from the Budget Act. There are several provisions that will positively affect the Company primarily in the latter half of 2000. First, there is a temporary increase in the payment for certain high cost nursing home patients, for services provided from April 1, 2000 through September 30, 2000. This temporary increase may continue until such time as the Secretary of the Department of Health and Human Services implements a refined case mix system to better account for medically complex patients. Second, the federal per diem rates will be increased by an additional 4 percent per year for the 12 months ended September 30, 2001 and 2002. Third, for cost reporting periods beginning on or after January 1, 2000, skilled nursing facilities may waive the PPS transition period and elect to receive 100 percent of the federal per diem rate. Fourth, certain specific services or items (ambulance services in conjunction with renal dialysis, chemotherapy items and prosthetic devices) furnished on or after April 1, 2000 may be reimbursed in addition to the PPS per diem rate. Fifth, there is a two-year moratorium on the annual $1,500 therapy caps each for physical/speech therapy and occupational therapy beginning with services provided on or after January 1, 2000. Sixth, there is a delay in the reduction in the base payment level by 15 percent for the Company's home health business until October 2001. The government has indicated that once the home health prospective payment system is implemented, the 15 percent cut will not be necessary. However, Congress would still have to repeal the 15 percent payment reduction. There can be no assurance that additional federal, state 5 8 and local laws or regulations will not be imposed or expanded in a manner that would have a material adverse effect on the Company. Regulation and Licenses General. Health care is an area of extensive and frequent regulatory change. Various aspects of the Company's business are subject to regulation by the federal government and the states in which the Company operates. Skilled nursing facilities and assisted living facilities and other health care businesses, including home health agencies, are subject to annual licensure and other regulatory requirements. In particular, the operation of nursing facilities and the provision of health care services are subject to federal, state and local laws relating to the delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting, and compliance with building codes and environmental laws. Skilled nursing facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with various standards, their continued licensing under state law, certification under the Medicare and Medicaid programs and continued participation in the Veterans Administration program, and the ability to participate in other third-party programs. The Company is also subject to inspection regarding record keeping and inventory control. From time to time, the Company, like others in the health care industry, may receive notices from federal and state regulatory agencies relating to alleged deficiencies for failure to comply with applicable standards. Such notices may require the Company to take corrective action, and may impose civil money penalties and/or other operating restrictions on the Company. Failure of the skilled nursing facilities to comply with such directives or otherwise to be in substantial compliance with licensure and certification laws, rules and regulations could result in loss of certification as a Medicare and Medicaid provider and/or a loss of licensure. The Company's assisted living facilities are subject to varying degrees of regulation and licensing by local and state health and social service agencies and other regulatory authorities specific to their location. While regulations and licensing requirements often vary significantly from state to state, they typically address, among other things: personnel education, training and records; facility services, including administration of medication, assistance with supervision of medication management and limited nursing services; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities. Failure of the assisted living facilities to be in compliance with licensing requirements could result in loss of licensure. In most states, assisted living facilities also are subject to state or local building codes, fire codes and food service licensure or certification requirements. In addition, since the assisted living industry is relatively new, the manner and extent to which it is regulated at the federal and state levels are evolving. Changes in the laws or new interpretations of existing laws as applied to the skilled nursing facilities, the assisted living facilities or other components of the Company's health care businesses may have a significant impact on the Company's methods and costs of doing business. Licensing and Certification. The Company's success depends in part upon its ability to satisfy applicable regulations and requirements and to procure and maintain required licenses and Medicare and Medicaid certifications in rapidly changing regulatory environments. Any failure to satisfy applicable regulations or to procure or maintain a required license or certification could have 6 9 a material adverse effect on the Company. In addition, certain regulatory developments, such as revisions in the building code requirements for assisted living and skilled nursing facilities, mandatory increases in scope and quality of care to be offered to residents, and revisions in licensing and certification standards, could have a material adverse effect on the Company. Health Care Reforms. In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of health care services. Aspects of certain of these health care initiatives, such as reductions in funding of the Medicare and Medicaid programs; potential changes in reimbursement regulations by the Health Care Financing Administration; enhanced pressure to contain health care costs by Medicare, Medicaid and other payors; and greater state flexibility in the administration of Medicaid, could adversely affect the Company. Certificate of Need Laws. Many states have adopted Certificate of Need (CON) or similar laws which generally require that the appropriate state agency approves certain acquisitions and determines that a need exists for certain bed additions, new services and capital expenditures or other changes prior to beds and/or new services being added or capital expenditures being undertaken. To the extent that CON or other similar approvals are required for the expansion of the Company's operations, either through facility acquisitions or expansion or provision of new services or other changes, such expansion could be adversely affected by the failure or inability to obtain the necessary approvals, changes in the standards applicable to such approvals, and possible delays and expenses associated with obtaining such approvals. There can be no assurance that the Company will be able to obtain CON approval for all future projects requiring such approval. Anti-Remuneration Laws. The Company is also subject to federal and state laws which govern financial and other arrangements involving health care providers. These laws prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation or arrangement of, a particular provider for medical products and services. These laws include the federal "Stark Legislation" which prohibits, with limited exceptions, the referral of patients for certain designated health services, including home health services, physical therapy and occupational therapy, by a physician to an entity in which the physician has a financial interest. The January 1998 proposed rules to implement the Stark Legislation makes clear that the restrictions apply to referrals for designated health services provided in skilled nursing facilities. Certain exceptions are available for employment agreements, leases, in-office ancillary services and other physician arrangements. Although the Company has sought to comply in all respects with all applicable provisions of the Stark Legislation, final implementing regulations have not been issued, and there can be no assurance that its physician arrangements will be found to be in compliance with the Stark Legislation, as such law ultimately may be interpreted. In addition, the Company is subject to the federal "anti-kickback law" which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of patients, or the purchasing, leasing, ordering, or arranging for any goods, services or items for which payment can be made under Medicare, Medicaid or other federal health care programs. Possible sanctions for violation of the anti-kickback law include criminal penalties, civil money penalties and/or exclusion 7 10 from participation in Medicare, Medicaid or other federal health care programs. The federal government, private insurers and various state enforcement agencies have increased their scrutiny of providers' business practices and claims in an effort to identify and prosecute fraudulent and abusive practices. The federal government has issued fraud alerts concerning home health services, the provision of medical services and supplies to skilled nursing facilities, and arrangements between hospices and nursing facilities; accordingly, these areas may come under closer scrutiny by the government. In addition, the Department of Health and Human Services Office of Inspector General and the Department of Justice have from time to time established enforcement initiatives focusing on specific billing practices or other suspected areas of abuse. Current initiatives include the appropriateness of therapy services provided to Medicare beneficiaries residing in skilled nursing facilities, appropriate cost allocation between the Medicare-certified and non-certified portions of the facility, billing for ancillary supplies, resident assessments and quality of care. The Health Insurance Portability and Accountability Act of 1996 (HIPPA), which became effective January 1, 1997, expands the scope of certain fraud and abuse laws to include all health care services, whether or not they are reimbursed under a federal health care program, and creates new enforcement mechanisms to combat fraud and abuse. The Budget Act also expands numerous health care fraud provisions. Furthermore, many states restrict certain business relationships between physicians and other providers of health care services, and some have enacted laws similar to the federal Stark Legislation and the anti-kickback law. In addition, some states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state and have seldom been interpreted by the courts or regulatory agencies. Although the Company has sought to structure its business relationships and transactions in compliance with these federal and state anti-remuneration laws, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of, and business transactions by, the Company. Failure to comply with such laws can result in civil money penalties, exclusion from the Medicare, Medicaid and other federal health care programs, and criminal convictions. Related Party Rule. Prior to the implementation of the prospective payment system for skilled nursing facilities (i.e., for cost reporting periods beginning prior to July 1, 1998), the Medicare program limited certain allowable costs for items and services provided by companies that are associated or affiliated with, have control of, or are controlled by, a Medicare provider. Many state Medicaid programs have adopted the same rule in determining costs that will be included in the payment rates. The Medicare program may consider Vitalink Pharmacy Services, Inc. and In Home Health, Inc. to be related parties with subsidiaries of the Company which are Medicare providers, and may consider certain subsidiaries of the Company to be related parties with other Company subsidiaries which are Medicare providers. Consequently, unless a provider qualifies for the exception to the related party rule, the Medicare program will only reimburse the provider for the cost incurred by the related party in providing products or services, rather than the related party's charge. An organization can qualify for an exception from the related party rule by meeting the following criteria: 1) the entities are bona fide separate organizations; 2) a substantial 8 11 part of the supplying organization's business activity is conducted with non-related organizations and there is an open, competitive market for such services or products; 3) the services or products are commonly obtained by a provider from other organizations and are not a basic element of patient care ordinarily furnished directly to patients by the providers; and 4) the charge to the provider is in line with the charge for such services and products in the open market and no more than the charge made under comparable circumstances to others. The Company believes that, to the extent the related party rule applies to it and its subsidiaries, the operations of its subsidiaries would qualify for the exception to the related party rule. There can be no assurance that the interpretation and application of the related party rule and the exception thereto by governmental authorities will result in the Company qualifying for the exception. The application of the Medicare related party rule could materially affect allowable payments to the Company's skilled nursing facilities for pre-July 1, 1998 cost reports. False Claim Regulation. False claims are prohibited pursuant to criminal and civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Offenses for violation are felonies punishable by up to five years imprisonment and/or $25,000 fines. Criminal penalties may also be imposed pursuant to the Federal False Claim Act, 18 U.S.C. Section 287. In addition, under HIPPA, Congress enacted a criminal health care fraud statute for fraud involving a health care benefit program, which is defined to include both public and private payors. Civil provisions at 31 U.S.C. Section 3729 prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment. Penalties for violations are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. Also, the statute allows any individual to bring a suit, known as a qui tam action, alleging false or fraudulent Medicare or Medicaid claims or other violations of the statute and to potentially share in any amounts paid by the entity to the government in fines or settlement. Although the Company has sought to comply with such statutes, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of, and business transactions by, the Company. Competitive Conditions The Company's nursing facilities compete primarily on a local and regional basis with many long-term care providers, some of whom may own as few as a single nursing center. The ability of the Company to compete successfully varies from location to location depending on a number of factors, including the number of competing centers in the local market, the types of services available, quality of care, reputation, age and appearance of each center and the cost of care in each locality. In general, the Company seeks to compete in each market by establishing a reputation within the local community for quality and caring health services, attractive and comfortable facilities, and the provision of specialized health care. The Company also competes with a variety of other companies in providing assisted living services, rehabilitation therapy services and home health care services. Given the relatively low barriers to entry and continuing health care cost containment pressures in the assisted living industry, the 9 12 Company expects that the assisted living industry will become increasingly competitive in the future. Increased competition in the future could limit the Company's ability to attract and retain residents, to maintain or increase resident service fees, or to expand its business. Employees As of December 31, 1999, the Company had approximately 52,000 full- and part-time employees. Approximately 5,600 of the employees are salaried and the remainder are paid on an hourly basis. Approximately 1,900 of the employees are members of labor unions. ITEM 2. PROPERTIES The principal properties of the Company and its subsidiaries, which are of material importance to the conduct of their business, consist of 346 long-term care centers located in 32 states. The centers are predominately single-story structures with brick or stucco facades, dry wall partitions and attractive interior finishes. Common areas of the skilled nursing facilities include dining, therapy, personal care and activity rooms, and resident and visitor lounges, as well as administrative offices and employee lounges. The Company believes that all of its centers have been well maintained and are suitable for the conduct of its business. For the year ended December 31, 1999, approximately 86 percent of the beds were utilized. 10 13 The following table shows the number and location of centers and beds operated by the Company as of December 31, 1999.
Number of Centers -------------------- Assisted Skilled Living Number of Beds ------- ------ -------------- Pennsylvania 46 8 7,962 Florida 37 11 6,055 Ohio 43 4 5,876 Illinois 29 5 4,120 Michigan 26 1 3,490 Texas 19 2,999 Maryland 13 7 2,493 Wisconsin 11 1,395 California 9 1 1,388 Indiana 5 1 1,061 Virginia 6 1 978 West Virginia 7 940 South Carolina 7 911 Oklahoma 7 826 New Jersey 4 3 676 Washington 4 483 Kansas 3 466 New Mexico 3 455 Missouri 3 430 Iowa 4 406 Delaware 2 1 347 Colorado 2 300 Georgia 2 257 North Dakota 2 215 Tennessee 1 211 Kentucky 1 200 Nevada 1 180 Utah 1 140 Arizona 1 120 North Carolina 1 120 Connecticut 2 116 South Dakota 1 99 --- ---- ------ 301 45 45,715 === === ======
The Company owns 321 of these centers, leases 20, manages two and has partnerships in three centers. There are 45 assisted living facilities with a total of 4,019 beds. There are 19 properties subject to liens which encumber the properties in an aggregate amount of $59,330,000. The Company leases space for its corporate headquarters in Toledo, Ohio. The Company also leases space for its outpatient therapy clinics and home health care offices. In addition, the Company owns one hospital in Texas. ITEM 3. LEGAL PROCEEDINGS On May 7, 1999, Genesis Health Ventures, Inc. ("Genesis") filed suit in federal district court in Delaware against the Company, its wholly owned subsidiary, Manor Care of America, Inc. (formerly known as Manor Care, Inc. ("Manor Care")), its Chief Executive Officer, Paul A. Ormond, and its Chairman, Stewart Bainum, Jr. (collectively, the "Delaware Defendants"). The 11 14 complaint alleges that the Delaware Defendants fraudulently induced Genesis to acquire, in August 1998, all of the outstanding stock of Vitalink Pharmacy Services, Inc. ("Vitalink"), an approximately 50 percent owned subsidiary of Manor Care, and that such alleged conduct constituted violations of Section 10(b) of the Securities Exchange Act of 1934, common law fraudulent misrepresentation and negligent misrepresentation. The suit also alleges that the Company's ownership in a partnership known as Heartland Healthcare Services violates a non-compete provision signed by Manor Care. The suit seeks compensatory and punitive damages in excess of $100 million and preliminary and permanent injunctive relief enforcing the covenant not to compete. On June 10, 1999, Genesis filed an amended complaint that was substantively identical to the original complaint. On June 29, 1999, the Delaware Defendants moved to dismiss or, in the alternative, to stay the lawsuit in its entirety. That motion is presently pending before the court, and all matters have been stayed pending that motion. The Company intends to vigorously defend the lawsuit. Although the ultimate outcome of the case is uncertain, management believes that it is not likely to have a material adverse effect on the financial condition of the Company. On August 27, 1999, Manor Care filed a separate action against Genesis concerning its 1998 acquisition of Vitalink. Manor Care's lawsuit charges Genesis with violations of Section 11 and Section 12 of the Securities Act of 1933, based upon Genesis' misrepresentations and/or misleading omissions in connection with Genesis' issuance of approximately $293 million of Genesis Preferred Stock as consideration to Manor Care for its approximately 50 percent interest in Vitalink. Manor Care seeks, among other things, compensatory damages and rescission voiding Manor Care's purchase of the Genesis Preferred Stock and requiring Genesis to return to Manor Care the consideration that it paid at the time of the Vitalink sale. On November 23, 1999, Genesis moved to dismiss the lawsuit in its entirety. That motion is presently before the court, and all matters have been stayed pending that motion. Additionally, on May 7, 1999, Vitalink, now known as Neighborcare Pharmacy Services, Inc. ("Neighborcare"), instituted a lawsuit in the Circuit Court for Baltimore City, Maryland (the "Maryland Action") against the Company, Manor Care and ManorCare Health Services, Inc. ("MHS") (collectively, the "Maryland Defendants") seeking damages, preliminary and permanent injunctive relief, and a declaratory judgment related to allegations that the Maryland Defendants have improperly sought to terminate certain Master Service Agreements ("MSAs") between Vitalink and MHS. Neighborcare also instituted arbitration proceedings (the "Arbitration") against the Maryland Defendants, seeking substantially the same relief as sought in the Maryland Action with respect to one of the MSAs at issue in the Maryland Action and also certain additional permanent relief with respect to that contract. On May 13, 1999, Neighborcare and the Maryland Defendants agreed: (i) to consolidate the Maryland Action into the Arbitration; (ii) to dismiss the Maryland Action with prejudice as to jurisdiction and without prejudice as to the merits; and (iii) to stay termination of the agreements at issue until a decision can be reached in the Arbitration. Neighborcare has since dismissed the Maryland Action and consolidated certain of those claims into the Arbitration by filing an Amended Demand for Arbitration. On June 15, 1999, the Respondents answered the Amended Demand, denying the material allegations therein. The Respondents have also asserted a counterclaim thereto. On January 14, 2000, the Respondents moved to dismiss certain claims in the Amended Demand. That motion is presently pending. The Company intends to vigorously defend the Arbitration. Although the ultimate outcome of the Arbitration is uncertain, management believes that it is not likely to have a material adverse effect on the financial condition of the Company. 12 15 On July 26, 1999, Neighborcare filed an additional complaint in the Circuit Court for Baltimore County, Maryland against Omnicare, Inc. and Heartland Healthcare Services, Inc. (a partnership between subsidiaries of Omnicare, Inc. and the Company) seeking injunctive relief and compensatory and punitive damages. The complaint includes counts for tortious interference with Vitalink's purported contractual rights under the MSAs. On October 4, 1999, the defendants moved to dismiss or, in the alternative, to stay the lawsuit in its entirety. On November 12, 1999, the court stayed the matter pending the Arbitration. Although the ultimate outcome of the case is uncertain, management believes that it is not likely to have a material adverse effect on the financial condition of the Company. On December 22, 1999, Manor Care filed suit in federal court in Toledo, Ohio against Genesis; Cypress Group, L.L.C.; TPG Partners II, L.P.; and Nazem, Inc. The complaint alleges that the issuance by Genesis of its Series H and Series I Preferred Stock violated the terms of the Series G Preferred Stock and the terms of a rights agreement entered into between Genesis and Manor Care in connection with the Vitalink transaction. On February 29, 2000, the defendants moved to dismiss the case. That motion is presently pending. See the third and fourth paragraphs of the section "Commitments and Contingency" on page 26-27 under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 13 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock is listed under the symbol "HCR" on the New York Stock Exchange which is the principal market on which the stock is traded. The range of market prices by quarter in trading on the New York Stock Exchange for 1998 and 1999 is shown below.
Low High --- ---- 1998 First Quarter $36.4375 $47.8750 Second Quarter $35.9375 $45.0625 Third Quarter $23.5000 $43.1250 Fourth Quarter $23.5000 $35.0000 1999 First Quarter $21.9375 $33.5000 Second Quarter $22.0000 $30.2500 Third Quarter $15.6875 $24.7500 Fourth Quarter $12.7500 $21.2500
No cash dividends have been declared or paid on the common stock. The number of shareholders of record on January 31, 2000 was 3,867. Approximately 79% of the outstanding shares were registered in the name of Depository Trust Company, or CEDE, which held these shares on behalf of several hundred brokerage firms, banks and other financial institutions. The Company estimates that the shares attributed to these financial institutions represent the interests of more than 20,000 beneficial owners. 14 17 ITEM 6. SELECTED FINANCIAL DATA
SIX-YEAR FINANCIAL HISTORY 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- (In thousands, except per share and other data) Results of Operations Revenues $2,135,345 $2,209,087 $2,228,534 $2,022,710 $1,660,230 $1,474,497 Expenses: Operating 1,685,059 1,715,575 1,760,923 1,598,826 1,295,242 1,143,627 General and administrative 89,743 96,017 99,881 100,971 93,637 75,563 Depreciation and amortization 114,601 119,223 112,723 99,165 76,594 66,945 Provision for restructuring charge, merger expenses, asset impairment and other related charges 14,787 278,261 26,300 ---------- ---------- ---------- ---------- ---------- ---------- 1,904,190 2,209,076 1,973,527 1,825,262 1,465,473 1,286,135 ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations before other income (expenses) and income taxes 231,155 11 255,007 197,448 194,757 188,362 Other income (expenses): Interest expense (54,082) (46,587) (56,805) (47,799) (34,193) (36,662) Impairment of Genesis investment (274,120) Equity in earnings of affiliated companies 1,729 5,376 2,806 1,500 531 Net other income (expenses) (7,078) 16,635 23,289 11,353 8,019 1,985 Interest income from advances to discontinued lodging segment 16,058 20,314 15,492 10,665 ---------- ---------- ---------- ---------- ---------- ---------- Net other expenses (333,551) (24,576) (14,652) (14,632) (10,151) (24,012) ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes (102,396) (24,565) 240,355 182,816 184,606 164,350 Income taxes (47,238) 21,597 85,064 64,177 66,025 64,452 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations $ (55,158) $ (46,162) $ 155,291 $ 118,639 $ 118,581 $ 99,898 ========== ========== ========== ========== ========== ========== Earnings per share - Income (loss) from continuing operations: Basic $(0.51) $(.42) $1.44 $1.10 $1.08 $.92 Diluted $(0.51) $(.42) $1.40 $1.06 $1.06 $.90 Manor Care of America, Inc. dividends per share $.04 $.09 $.09 $.09 $.09 Financial Position Total assets $2,280,866 $2,722,727 $2,568,368 $2,382,038 $2,005,366 $1,744,917 Long-term debt 687,502 693,180 751,281 731,346 474,353 372,920 Shareholders' equity 980,037 1,199,168 1,163,029 994,690 999,303 878,316 Other Data (Unaudited) Number of skilled and assisted living facilities 346 360 335 323 306 293
The financial results represent the combined results of HCR and Manor Care for all periods presented. See Note 1 to the consolidated financial statements for discussion of the periods combined for 1998 and 1997. For 1996, 1995 and 1994, HCR's financial information for the years ended December 31, 1996, 1995 and 1994 were combined with Manor Care's financial information for the 12 months ended November 30, 1996, year ended May 31, 1995 and year ended May 31, 1994, respectively. The Company changed its method of accounting for its investment in In Home Health, Inc. (IHHI), effective January 1, 1998. See Note 2 to the consolidated financial statements for further discussion. Due to the deconsolidation of IHHI in 1998, the individual income statement line items are not comparative to prior years. However, there is no effect on income (loss) from continuing operations. IHHI's revenues of $109.7 million and $124.3 million for 1997 and 1996, respectively, and operating expenses of $125.6 million and $122.1 million for 1997 and 1996, respectively, continue to be included in the Company's financial results above. The Company invested in IHHI in October 1995, therefore, IHHI's results are not included in 1995 and 1994. The decrease in shareholders' equity in 1996 is the result of the $167.3 million dividend of the discontinued lodging segment. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - OVERVIEW On September 24, 1998, the shareholders of Health Care and Retirement Corporation (HCR) and the shareholders of the former Manor Care, Inc., now known as Manor Care of America, Inc. (Manor Care), separately approved the merger of Manor Care into a subsidiary of HCR, effective September 25, 1998. In accordance with the Amended and Restated Agreement and Plan of Merger (the Merger Agreement) dated June 10, 1998, each share of Manor Care common stock was converted into one share of HCR common stock for a total of approximately 63.9 million shares, and Manor Care stock options outstanding were converted into approximately 2.1 million shares of HCR common stock based on the option pricing formula defined in the Merger Agreement. As a result of the transaction, Manor Care became a wholly owned subsidiary of HCR and HCR changed its name to HCR Manor Care, Inc. In accordance with the Merger Agreement, HCR Manor Care, Inc. changed its name to Manor Care, Inc. (the Company) on September 25, 1999. The merger has been accounted for by the pooling-of-interests method. Accordingly, the consolidated financial statements give retroactive effect to the merger and include the combined operations for all periods presented. See Note 1 to the consolidated financial statements for further discussion. The Company is a provider of a range of health care services, including skilled nursing care, assisted living, subacute medical care, rehabilitation therapy, home health care, and management services for subacute care, rehabilitation therapy, vision care and eye surgery. The most significant portion of the Company's business relates to skilled nursing care and assisted living. At December 31, 1999, the Company operated 301 skilled nursing facilities and 45 assisted living facilities in 32 states with more than 60 percent located in Ohio, Michigan, Illinois, Pennsylvania and Florida. Within some of the Company's centers, there are medical specialty units which provide subacute medical care, rehabilitation programs and/or Alzheimer's care programs. Some of the Company's assisted living facilities operate under the brand names "Arden Courts" and "Springhouse." The Arden Courts facilities are specifically focused on providing care to persons suffering from early to middle-stage Alzheimer's disease and related memory impairment, while the Springhouse facilities serve the general assisted living population of frail elderly. These assisted living facilities provide housing, personalized support and health care services in a non-institutional setting designed to address the needs of the elderly or Alzheimer's afflicted. During the fourth quarter of 1998, the Company formed a strategic alliance with Alterra Healthcare Corporation (Alterra) to develop a broad-based network primarily dedicated to the care of patients suffering from Alzheimer's disease. Key provisions of the alliance included the sale of 26 facilities and lease of two facilities to Alterra in 1999; creation of a joint venture to develop and construct up to $500 million of Alzheimer's dementia care assisted living facilities in the Company's core markets over the next three to five years; and the formation of a new company to provide a variety of ancillary services, including rehabilitation therapy and home and hospice care, to residents in Alterra centers. 16 19 Growth in the core business continued with the construction of new facilities. The table below details the number of skilled nursing and assisted living facilities and beds built or sold during the past three years. Some of the facilities sold to Alterra and the joint venture were not open at the time of sale and are not included below.
1999 1998 1997 Facilities Beds Facilities Beds Facilities Beds ---------- ---- ---------- ---- ---------- ---- Skilled nursing facilities Built/Acquired 3 414 2 240 5 748 Assisted living facilities Built 12 752 26 1,680 7 443 Sold/Leased to others 31 2,602 2 185
The Company has developed an integrated health care network from acquisitions, investments and management agreements. Heartland Rehabilitation Services, Inc., a wholly owned subsidiary, provides rehabilitation therapy in long-term care centers of the Company, other skilled centers, hospitals and outpatient therapy clinics serving the Midwestern and Mid-Atlantic states, Texas and Florida. The Company operated 82 outpatient clinics at December 31, 1999. HCR Home Health Care and Hospice, Inc., a wholly owned subsidiary, specializes in all levels of home health, hospice care and rehabilitation therapy with offices located in Ohio, Michigan, Indiana, Illinois, Florida and Pennsylvania. This subsidiary had 33 offices at December 31, 1999. The Company owns 41 percent of the common stock and all of the preferred stock of In Home Health, Inc. (IHHI). IHHI is a publicly traded company which provides a broad range of professional and support services to clients requiring medical and personal assistance in their homes. During 1998, the Company changed the accounting for its investment in IHHI. The investment was consolidated until the fourth quarter of 1998 when the Company changed to the equity method of accounting, retroactive to January 1, 1998. This change to the equity method resulted from the Second Preferred Stock Modification Agreement (the Agreement) between the Company and IHHI executed on December 22, 1998. Under the terms of the Agreement, the Company irrevocably waived the right of the preferred stock to vote on an as-if-converted basis along with the common stock, except with respect to certain protective rights. In consideration for the Company entering into the Agreement, IHHI waived the right to pay the 12 percent annual dividend on the preferred stock in the form of shares of common stock. IHHI has historically paid this dividend in cash, and as a result of the Agreement will continue to do so. The Agreement does not affect the voting rights of the common stock. As a result of the Agreement, the Company no longer has majority voting power with respect to the election of IHHI's board of directors. MileStone Healthcare, Inc. (MileStone), a wholly owned subsidiary acquired in January 1997, is a provider of program management services for subacute care and acute rehabilitation programs in hospitals and skilled nursing centers. These services were provided in 39 subacute and rehabilitation units at December 31, 1999. The Company is the general partner and a limited partner of Mesquite Community Hospital, L.P. 17 20 which owns and operates Mesquite Community Hospital in Mesquite, Texas, a Dallas suburb. It is a general medical/surgical acute care hospital with 172 licensed beds. Vision Management Services, Inc., a majority-owned subsidiary, and RVA Management Services, Inc., a wholly owned subsidiary, entered into long-term management contracts in 1996 and 1995 with physician practices in the Midwestern states, specializing in vision care and refractive eye surgery. The Company receives a management fee equal to a percentage of operating income as defined by the agreements. The Company owns approximately 90 percent of the common stock of Heartland Medical Information Services, Inc., a start-up medical transcription company which converts medical dictation into electronically formatted patient records. Health care providers use the records in connection with patient care and other administrative purposes. Changes in Medicare reimbursement affected the Company's results during 1998 and 1999. Under the Balanced Budget Act of 1997 (Budget Act), a new Medicare prospective payment system (PPS) commenced on July 1, 1998. The new payment system becomes effective for different segments of the health care continuum (hospitals, skilled nursing, home health, etc.) at different times and even commenced at different dates for different nursing facilities. Although management believes that PPS will ultimately be a net positive for its skilled nursing business, the same may not be true for other businesses and customers of the Company. MileStone Healthcare, Inc. (MileStone) provides management services to skilled nursing, subacute care and acute rehabilitation programs, primarily in hospitals. MileStone lost certain contracts during the second and third quarters of 1998 that have not been replaced due to the impact of PPS on its customers. In addition, the Budget Act also had an unfavorable impact on the reimbursement for home health care companies due to an interim payment system (IPS) which was effective October 1997 for IHHI and January 1998 for the Company's home health subsidiary. Under IPS, reimbursement rates were reduced as a result of revised rate ceilings combined with establishing an annual payment limitation per individual. As a result of IPS, the Company has been focusing on reducing its costs to offset the revenue reductions. PPS is scheduled to replace IPS for home health reimbursement in October 2000. However, a reduction in the base payment rate has been delayed by BBRA 99, as discussed below. The Company does not believe that the impact of PPS on its home health subsidiary will have a significant effect on the results of the Company. The Company's rehabilitation business also was affected due to reduced reimbursement from the April 1998 implementation of Medicare reimbursement ceilings for speech and occupational therapy salaries. See discussion of impairment charges in 1998 on these businesses below. In November 1999, Congress passed the Medicare Balanced Budget Refinement Act (BBRA 99). The BBRA 99 redresses certain reductions in Medicare reimbursement resulting from the Budget Act. There are several provisions that will positively affect the Company primarily in the latter half of 2000. First, there is a temporary increase in the payment for certain high cost nursing home patients, for services provided from April 1, 2000 through September 30, 2000. This temporary increase may continue until such time as the Secretary of Health and Human Services implements a refined case mix system to better account for medically complex patients. Second, the federal per diem rates will be increased by an additional 4 percent per year for the 12 months ended September 30, 2001 and 2002. Third, for cost reporting periods beginning on or after January 1, 2000, skilled nursing facilities may waive the PPS transition period and elect to receive 100 percent of the federal per diem rate. Fourth, certain specific services or items 18 21 (ambulance services in conjunction with renal dialysis, chemotherapy items and prosthetic devices) furnished on or after April 1, 2000 may be reimbursed in addition to the PPS per diem rate. Fifth, there is a two-year moratorium on the annual $1,500 therapy caps each for physical/speech therapy and occupational therapy beginning with services provided on or after January 1, 2000. Sixth, there is a delay in the reduction in the base payment level by 15 percent for the Company's home health business until October 2001. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenues decreased $73.7 million or 3 percent from the prior year. Revenues from skilled nursing and assisted living facilities decreased $76.1 million or 4 percent due to decreases in rates ($64.9 million) and occupancy ($65.2 million) which were partially offset by an increase in capacity ($54.0 million). The decline in rates was primarily attributable to transitioning onto the Medicare PPS in 1999. The occupancy level for all facilities including start-up facilities was 89 percent in 1998 compared to 86 percent in 1999. The occupancy for the Company's skilled nursing facilities declined from 89 percent in 1998 to 87 percent in 1999, reflecting a decline in Medicare patients and private pay patients over the last year. The growth in bed capacity was due to the timing of opening three skilled nursing and 12 assisted living facilities in 1999, and two skilled nursing and 26 assisted living facilities in 1998, partially offset by the divestiture of 31 assisted living facilities in 1999. The quality mix of revenue from Medicare, private pay and insured patients related to skilled nursing and assisted living facilities and rehabilitation operations declined from 71 percent in 1998 to 67 percent in 1999. This decline was primarily a result of the decrease in Medicare rates and census due to the Medicare PPS, as well as a decline in private pay patients. Operating expenses decreased $30.5 million or 2 percent compared to 1998. Operating expenses from skilled nursing and assisted living facilities decreased $31.2 million or 2 percent. By excluding the effect of start-up facilities in 1999 and 1998, operating expenses for the facilities decreased $28.1 million. The decrease was attributable to a decline in ancillary costs as the Company found alternate methods of service which resulted in lower costs. The decrease was partially offset by an increase in labor costs, primarily as a result of temporary staffing in certain markets. General and administrative expenses decreased $6.3 million from the prior year. By excluding the net gains from the sale of assets in 1998, general and administrative expenses decreased $11.7 million for the same period as a result of synergies obtained from combining HCR and Manor Care. In 1998, a gain of $7.4 million from the sale of three former Manor Care corporate office buildings and a loss of $2.0 million from the sale of two Springhouse facilities were included in general and administrative expenses. Depreciation decreased $2.2 million from the prior year due to the decline in depreciation from the sale of assets. Amortization decreased $2.4 million as a result of the write-down of assets in 1998. 19 22 The components of the restructuring charge, merger expenses, asset impairment and other charges for 1998 and 1999 consist of the following:
Cash 1998 1998 Liability 1999 1999 Liability Non-cash Charge Activity at 12/31/98 Charge Activity at 12/31/99 -------- ------ -------- ----------- ------ -------- ----------- (In thousands) Manor Care planned spin-off: Employee benefits cash $ 5,917 $ (5,300) $ 617 $ 219 $ (836) Transaction costs cash 6,805 (6,805) Write-down of assets non-cash 778 (778) -------- --------- ------- ------- -------- ------ 13,500 (12,883) 617 219 (836) -------- --------- ------- ------- -------- ------ HCR and Manor Care transaction: Employee benefits cash 41,028 (12,734) 28,294 (27,184) $1,110 Deferred compensation non-cash 11,867 (11,867) Other exit costs cash 4,234 4,234 (3,314) 920 Merger transaction costs cash 21,122 (21,122) Write-down of assets non-cash 56,468 (56,468) -------- --------- ------- ------- -------- ------ 134,719 (102,191) 32,528 (30,498) 2,030 -------- --------- ------- ------- -------- ------ Other costs: Amortization non-cash 7,863 (7,863) 10,554 (10,554) Duplicate costs cash 5,725 (5,725) 2,328 (2,328) Other cash 1,685 (685) 1,000 (1,000) Asset impairment unrelated to merger non-cash 114,769 (114,769) 1,686 (1,686) -------- --------- ------- ------- -------- ------ 130,042 (129,042) 1,000 14,568 (15,568) -------- --------- ------- ------- -------- ------ Total $278,261 $(244,116) $34,145 $14,787 $(46,902) $2,030 ======== ========= ======= ======= ======== ======
In 1998, the Company recorded a $278.3 million charge related to restructuring, merger expenses, asset impairment and other related charges. A component pertains to Manor Care's $13.5 million charge recorded in the second quarter in connection with its plan to separate its skilled nursing facility management, assisted living and home health businesses from its skilled nursing facility ownership, real estate and health care facility development business. As a result of the transaction with HCR, the separation of Manor Care's businesses did not occur. Charges related to the transaction totaled $134.7 million. In connection with the merger, the Company developed a plan to integrate the businesses of both companies that included closing Manor Care's corporate office in Gaithersburg, Maryland and realigning the operating divisions from eight to six. The remaining $130.0 million of the charge related to other unusual costs as a result of the merger and asset impairment unrelated to the restructuring. In 1999, the Company recorded a $14.8 million charge with the major portion relating to the amortization of Manor Care's software applications until the transition to HCR's applications. The liability outstanding relating to all restructuring and other charges is recorded in other accrued liabilities. In Manor Care's planned spin-off of its non-health care businesses, a total of 208 employees were terminated. The employees did not receive a lump-sum severance payment upon termination, but rather received their severance as biweekly payments through 1999. The transaction costs primarily included financial advisory, legal, and accounting fees and expenses, and printing and mailing costs. In the transaction between HCR and Manor Care, the employee benefit costs related to severance 20 23 payments and retention bonuses for 505 corporate employees and 26 field employees of Manor Care who received termination notices. A total of 364 employees left the Company as of December 31, 1998, but 269 employees continued to be paid their severance payments on a biweekly basis. The majority of the Manor Care employees remaining with the Company at December 31, 1998 had termination dates in the first quarter of 1999. At December 31, 1999, all but three employees who received termination notices had left the Company. The cash severance payments will continue through 2000. The deferred compensation expense of $11.9 million was attributable to the lapsing of restrictions on HCR's restricted stock due to the merger. The other exit costs pertain to various lease agreements and hardware and software contracts that will be or have been terminated. The merger transaction costs primarily included financial advisory, legal, and accounting fees and expenses, and printing and mailing costs. The Company identified two groups of assets that were impaired as a result of the merger. The Company has integrated the information systems of the companies, which resulted in the write-off of the net book value ($45.2 million) of Manor Care's computer hardware and software that was no longer being utilized by the Company as of December 31, 1998. Certain construction development project costs ($11.3 million), excluding the land value, have been abandoned due to a change in strategy. The Company recorded other unusual costs as a result of the merger. The non-cash charge primarily related to the amortization of certain Manor Care software applications which were being used until the transition to HCR applications. The carrying value of the software was amortized over its estimated useful life ranging from six to nine months. Certain general and administrative costs of $5.7 million in 1998 and $2.3 million in 1999 represented salaries and benefits for employees performing duplicate services in Toledo or Gaithersburg. In 1998, the Company also recorded a charge for impairment of certain assets based on its quarterly review of long-lived and intangible assets. Management determined that MileStone's intangible assets with a net book value of $52.5 million were impaired based on the effects of changes in the Medicare reimbursement system discussed above and reduced the book value by $44.6 million to the assets' estimated fair value. The fair value was determined based on a multiple of projected annual earnings. The remaining useful life has been adjusted from 38 years to 18 years. The asset impairment of the Company's home health businesses was also related largely to the Medicare reimbursement changes discussed above. Based on the impact of IPS in 1998 and the anticipated effects of PPS after October 2000, management determined that the expected future earnings does not support the carrying value of these assets. Therefore, the book value of the related goodwill was reduced by $22.0 million to zero in 1998. Its estimated fair value was determined based on a multiple of projected annual earnings. Management determined that the fixed assets for five skilled nursing facilities and two assisted living facilities were impaired based on the carrying value exceeding the undiscounted cash flows. The skilled nursing facilities were generating negative cash flows, and the fixed assets were written off except for the land. The estimated fair value of the assisted living facilities was determined based on a multiple of projected annual earnings. The fixed assets of the skilled nursing and assisted living facilities had a carrying value of $23.8 million and were written down by $19.9 million in 1998. 21 24 The Company has three vision management businesses. The first business was a start-up business in 1995 which had $4.6 million in advances and $1.0 million in fixed assets. Since the business had not been able to generate cash flows to cover its expenses, the assets were written off in 1998. With the second business, the Company had advances of $1.5 million which were written down by $1.1 million in 1998. The third business had a 40-year management contract with a carrying value of $11.8 million. Based on a multiple of projected annual earnings, the estimated fair value was $3.4 million, and the remaining estimated useful life was reduced from 36 years to 16 years. The primary reason for the decrease in projected annual earnings was declining reimbursement. Management determined that the intangible assets for six rehabilitation businesses were impaired based on the carrying value exceeding the undiscounted cash flows. The businesses were generating negative cash flows, and the Company had exhausted all measures to return the operations to a level of profitability. The book value of the related intangible assets was reduced by $8.4 million to zero carrying value in 1998. Interest expense increased $7.5 million compared to the prior year due to an increase in average debt outstanding under the bank credit facilities and a decrease in the amount of interest capitalized for construction projects. On April 26, 1998, Vitalink Pharmacy Services, Inc. (Vitalink) entered into an Agreement and Plan of Merger (Vitalink Merger Agreement) with Genesis Health Ventures, Inc. (Genesis). Pursuant to the Vitalink Merger Agreement that was consummated on August 28, 1998, Manor Care received 586,240 shares of Genesis Series G Cumulative Convertible Preferred Stock (Series G Preferred Stock) valued at $293.1 million as consideration for all of its common stock of Vitalink. The Series G Preferred Stock bears cash dividends at the initial rate of 5.9375 percent. The Company accrued $5.8 million of dividend income in 1998 which was paid in 1999. The Company continued to accrue dividend income of $4.4 million each quarter in 1999. At December 31, 1999, Genesis had failed to pay dividends on the Series G Preferred Stock for four consecutive quarters. Upon a third-party valuation, the Company recorded a reserve of $17.4 million for accrued 1999 dividends and reduced the basis of its Series G Preferred Stock investment by $274.1 million based on Genesis' inability to pay dividends and its current operating performance. As a result of the non-payment of the cumulative dividends for four consecutive quarters, all future dividends will be payable in additional shares of Series G Preferred Stock valued at $500 per share until such time as all accrued and unpaid dividends are paid in full in cash. The Company does not plan to increase the value of its preferred stock for the additional shares of Series G Preferred Stock received in 2000. Net other expense in 1999 included $12.4 million of start-up losses related to the Company's medical transcription business. Net other income in 1998 included $5.8 million of dividend income as discussed above. The income taxes recorded in 1999 included the tax effects of the impairment of the Genesis investment and an adjustment of the Company's prior years' estimated tax liabilities. The income taxes recorded in 1998 included the tax effects of the provision for restructuring charge, merger expenses, asset impairment and other related charges, some of which were not deductible for income tax purposes. The effective tax rate, excluding these items, was 39.5 percent in 1999 compared to 36.1 percent in 1998. The increase in the effective tax rate was due to a decline in the 22 25 deductions for corporate-owned life insurance and the dividend received deduction as well as an increase in state and local income taxes. During 1998, the Company recorded a gain of $99.8 million ($59.9 million after tax) from the conversion of Vitalink common stock to Genesis Series G Preferred Stock. The financial results of Vitalink were recorded as income from discontinued pharmacy operations for all periods presented. During 1999, the Company sold assets for a net gain of $11.5 million after tax. The net gain was recorded as an extraordinary item as required after a business combination accounted for as a pooling of interests. The Company sold 26 facilities to Alterra for $154.5 million, realizing a gain of $6.1 million ($3.7 million after tax). The Company also exercised a purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland and sold the property, realizing net proceeds of $24.5 million and a $10.1 million gain ($6.1 million after tax). During 1998, the Company recorded an extraordinary loss from the early extinguishment of debt totaling $31.7 million ($19.0 million after tax). On September 25,1998, the Company repaid the outstanding debt under HCR's and Manor Care's prior credit arrangements. In conjunction with the extinguishment of debt, the Company terminated three interest rate swaps with a total notional amount of $350 million that were designated as a hedge of Manor Care's debt. The extraordinary loss primarily related to the termination of the swaps but also included the unamortized debt issue costs. The Company believes that inflation has had no material impact on the results of operations. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 As explained in the overview, the Company changed the accounting for its investment in IHHI retroactive to January 1, 1998. In the table below, IHHI's financial results have been removed from 1997 to be comparative with 1998.
Percent 1998 1997 Change ---- ---- ------ Revenues $2,209,087 $2,118,866 4 % Expenses: Operating 1,715,575 1,635,321 5 % General and administrative 96,017 99,038 (3)% Depreciation and amortization 119,223 109,771 9 %
Revenues increased $90.2 million or 4 percent from the prior year. Revenues from skilled nursing and assisted living facilities increased $99.2 million or 5 percent due to increases in rates ($44.6 million), capacity ($51.7 million) and occupancy ($2.9 million). This increase was offset by a decrease in revenues primarily due to changes in reimbursement, as discussed in the overview, from the Company's ancillary businesses, such as MileStone, home health and rehabilitation. There was a net increase of 1,500 beds during 1998. The occupancy level was 88 percent in 1997 compared to 89 percent in 1998. The quality mix of revenue from Medicare, private pay and insured patients related to skilled nursing and assisted living facilities and rehabilitation operations declined from 73 percent in 1997 to 71 percent in 1998. 23 26 Operating expenses increased $80.3 million or 5 percent compared to 1997. Operating expenses from skilled nursing and assisted living facilities increased $93.3 million or 6 percent which was attributable to expensing start-up costs in 1998 ($22.7 million), labor costs ($46.7 million) which included wages from increased bed capacity, and higher ancillary costs, bad debt expense and other general costs. During the fourth quarter of 1998, the Company elected to adopt Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5), which requires start-up costs to be expensed as incurred. The cumulative effect of expensing the start-up costs capitalized as of January 1, 1998 was $9.4 million ($5.6 million after tax). During 1998, the Company expensed $22.7 million of start-up costs and reversed $4.9 million of amortized start-up costs included in depreciation and amortization. The operating expenses for the ancillary businesses decreased $13.0 million due to the changes in reimbursement, as discussed in the overview, and correspond to the decline in revenues. General and administrative expenses decreased $3.0 million from the prior year. By excluding the net gains from the sale of assets, general and administrative expenses were constant as a result of reclassifying $5.7 million to the provision for restructuring charge, merger expenses, asset impairment and other related charges, as explained previously. In 1998, a gain of $7.4 million from the sale of three former Manor Care corporate office buildings and a loss of $2.0 million from the sale of two Springhouse facilities were included in general and administrative expenses. In 1997, a gain of $2.0 million from the sale of a former Manor Care corporate office building was included in general and administrative expenses. Depreciation and amortization increased $9.5 million from the prior year. By excluding $2.9 million of start-up costs that were amortized in 1997 before the adoption of SOP 98-5, depreciation and amortization increased $12.4 million. The increase was primarily due to increases in property and equipment resulting from additions and renovations to existing facilities, as well as the completion of new construction projects during the past year. Interest expense decreased $10.2 million compared to the prior year due to the retirement of $140.1 million of Manor Care's 9.5% Senior Subordinated Notes in November 1997. The Senior Subordinated Notes were redeemed at a price of 103.56 percent, and the premium paid on redemption was recorded as an extraordinary item of $3.2 million after taxes. The decline in the minority interest related to the removal of IHHI's minority interest due to the deconsolidation. Net other income increased from the prior year due to the $5.8 million dividend income related to the Series G Preferred Stock. Interest income from advances to discontinued lodging segment declined from the prior year due to the prepayment of $110.0 million and $115.7 million of indebtedness in the second quarter and fourth quarter of 1997, respectively. The income taxes recorded for 1998 included the tax effects of the provision for restructuring charge, merger expenses, asset impairment and other related charges, some of which were not deductible for income tax purposes. The effective tax rate, excluding these items, was 36.1 percent compared to 35.4 percent for 1997. The Company had a loss from continuing operations of $46.2 million primarily due to the provision for restructuring charge, merger expenses, asset impairment and other related charges of $278.3 million ($213.5 million after tax). The net income from discontinued pharmacy operations was significantly higher in 1997 due to the 24 27 after-tax gain of $30.4 million from the issuance of 11.4 million shares of Vitalink common stock in connection with Vitalink's merger with TeamCare, the pharmacy subsidiary of GranCare, Inc., in February 1997. On November 20, 1997, a consensus was reached by the Emerging Issues Task Force regarding the reengineering costs (Issue 97-13), providing that all reengineering costs be expensed as incurred. As a result, in November 1997, Manor Care expensed $3.2 million of reengineering costs after taxes as the cumulative effect of a change in accounting principle. The Company believes that inflation has had no material impact on the results of operations. FINANCIAL CONDITION - DECEMBER 31, 1999 AND 1998 Property and equipment decreased $189.8 million in 1999 as a result of the sale of assets with a net book value of $248 million and depreciation expense of $109 million which was partially offset by additions to property and equipment of $167 million for new construction, and renovations and capital improvements to existing facilities. Upon a third-party valuation, the Company reduced the basis of its investment in Genesis Series G Preferred Stock by $274.1 million in 1999 due to Genesis' inability to pay 1999 dividends and its current operating performance. There was no valuation allowance related to the deferred tax assets at December 31, 1999 and 1998, as the assets could be realized through the reversal of existing taxable temporary differences. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which was postponed in Statement No. 137 and is now effective January 1, 2001. This Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. This Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Management has not determined when it will adopt this Statement nor the impact of adoption. CAPITAL RESOURCES AND LIQUIDITY During 1999, the Company satisfied its cash requirements from a combination of cash generated from operating activities and proceeds from the sale of assets. The Company used the cash principally for capital expenditures and the purchase of the Company's common stock. Expenditures for property and equipment during 1999 consisted of $86.2 million for construction of new facilities and $80.3 million for renovation and capital improvements of existing facilities. The proceeds from the sale of assets of $263.9 million included the sale of the former Manor Care corporate headquarters ($24.5 million), 26 assisted living facilities to Alterra ($154.5 million) and 20 properties as part of the development joint venture with Alterra ($77.8 million). At December 31, 1999, the Company had a $44.5 million receivable related to the Alterra and joint venture transactions which is expected to be paid in the first half of 2000. On May 4, 1999, the Board of Directors authorized the Company to purchase up to $200 million of 25 28 its common stock through December 31, 2000, and on February 8, 2000, the Board authorized an additional $100 million through December 31, 2001. The shares may be used for internal stock option and 401(k) match programs and for other uses, such as possible future acquisitions. The Company purchased 8.7 million shares for $180.4 million in 1999. The Company has a five-year, $500 million credit agreement (Five Year Agreement) and a 364-day, $200 million credit agreement (364 Day Agreement) with a group of banks, under which both the Company and Manor Care are borrowers. At December 31, 1999, outstanding borrowings of both companies aggregated $476.5 million under the Five Year Agreement and $179.0 million under the 364 Day Agreement - a total of $655.5 million. The Company plans to annually refinance the 364 Day Agreement. After consideration of usage for letters of credit, the remaining credit availability under the combined agreements totaled $30.4 million. The Company believes that its cash flow from operations will be sufficient to cover debt payments, future capital expenditures and operating needs. It is likely that the Company will pursue growth from acquisitions, partnerships and other ventures which would be funded from excess cash from operations, credit available under the bank credit agreement and other financing arrangements that are normally available in the marketplace. COMMITMENTS AND CONTINGENCY As of December 31, 1999, the Company had contractual commitments of $20.8 million relating to its internal and external construction program. The Company had total letters of credit of $49.2 million at December 31, 1999 that benefit certain third-party insurers and bondholders of certain industrial revenue bonds, and 86 percent relate to recorded liabilities. The Company had obligations under non-cancelable operating leases totaling $80.8 million at December 31, 1999. The Company, Alterra and the development joint venture have jointly and severally guaranteed a $200 million revolving credit agreement which matures September 30, 2002. The Company and Alterra each have a 50 percent interest in the development joint venture which is the 10 percent owner and managing owner or partner in the various project companies and partnerships which are entitled to borrow under the credit agreement. At December 31, 1999, there was $48 million of guaranteed debt outstanding under the revolving credit agreement. Funds are used to construct and support start-up working capital for the assisted living residences. The debt will be repaid upon sale of each facility, which will occur after the facility reaches break-even operating earnings. One or more subsidiaries or affiliates of Manor Care have been identified as potentially responsible parties (PRPs) in a variety of actions (the Actions) relating to waste disposal sites which allegedly are subject to remedial action under the Comprehensive Environmental Response Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state laws. CERCLA imposes retroactive, strict joint and several liability on PRPs for the costs of hazardous waste clean-up. The Actions arise out of the alleged activities of Cenco, Incorporated and its subsidiary and affiliated companies (Cenco). Cenco was acquired in 1981 by a wholly owned subsidiary of Manor Care. The Actions allege that Cenco transported and/or generated hazardous substances that came to be located at the sites in question. Environmental proceedings such as the Actions may involve owners and/or operators of the hazardous waste site, multiple waste generators and multiple waste transportation disposal companies. Such proceedings involve efforts by governmental entities and/or private parties to allocate or recover site investigation and clean-up 26 29 costs, which costs may be substantial. The potential liability exposure for currently pending environmental claims and litigation, without regard to insurance coverage, cannot be quantified with precision because of the inherent uncertainties of litigation in the Actions and the fact that the ultimate cost of the remedial actions for some of the waste disposal sites where Manor Care is alleged to be a potentially responsible party has not yet been quantified. Based upon its current assessment of the likely outcome of the Actions, the Company believes that the potential environmental liability exposure, after consideration of insurance coverage, is approximately $4.5 million. The Company is party to various other legal proceedings arising in the ordinary course of business. The Company does not believe the results of such proceedings, even if unfavorable to the Company, would have a material adverse effect on its financial position. YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its upgrade of its infrastructure including hardware, operating systems and business applications. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. Since inception of the project, the Company has incurred approximately $36.2 million ($3.8 million expensed and $32.4 million capitalized) through December 31, 1999. The Company does not expect to incur any additional costs related to this project. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed properly. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Statements contained in this report which are not historical facts may be forward-looking statements within the meaning of federal law. Such forward-looking statements reflect management's beliefs and assumptions and are based on information currently available to management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; changes in business strategy or development plans; and the ability to attract and retain qualified personnel. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth or referred to above in this paragraph. The Company disclaims any obligation to update such factors or to publicly announce the result of any 27 30 revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risks inherent in derivatives and other financial instruments result primarily from changes in U.S. interest rates. The Company is not a party to any material derivative financial instruments. The Company's interest expense is most sensitive to changes in the general level of U.S. interest rates applicable to its U.S. dollar indebtedness. To mitigate the impact of fluctuations in variable interest rates, the Company could, at its option, convert to fixed interest rates by either refinancing variable rate debt with fixed rate debt or entering into interest rate swaps. The Company had three interest rate swaps with a notional amount of $30.3 million at December 31, 1998 that effectively converted the Company's interest rate exposure from a floating rate operating lease on Manor Care's corporate headquarters to a fixed interest rate of 5.6 percent. In conjunction with exercising a purchase option and selling the headquarters in 1999, the Company terminated the interest rate swaps and recorded a $0.5 million gain as an extraordinary item along with the gain on the sale of the headquarters. The following table provides information about the Company's significant interest rate risk at December 31:
1999 1998 ---- ---- Fair Fair Outstanding Value Outstanding Value ----------- ----- ----------- ----- (In thousands) Variable rate debt: 364 Day Credit Agreement, matures September 2000 and 1999, interest at a Eurodollar based rate plus 1.00% and .40%, respectively $179,000 $179,000 $230,000 $230,000 Five Year Credit Agreement, matures September 2003, interest at a Eurodollar based rate plus .50% and .40%, respectively 476,500 476,500 476,000 476,000 Fixed rate debt: Senior Notes, due June 2006, interest rate at 7.5% 150,000 143,020 150,000 154,773 Interest rate swaps - liability: Receive variable rate (5.25%) and pay fixed rate (5.60%), due August 2002 494
28 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- Report of Ernst & Young LLP Independent Auditors 30 Consolidated Balance Sheets 31 Consolidated Statements of Operations 32 Consolidated Statements of Cash Flows 33 Consolidated Statements of Shareholders' Equity 34 Notes to Consolidated Financial Statements 35 Supplementary Data (Unaudited) - Summary of Quarterly Results 59
29 32 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Manor Care, Inc. We have audited the accompanying consolidated balance sheets of Manor Care, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also include the financial statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Manor Care, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, in 1998 the Company changed its method of accounting for start-up costs and in 1997 the Company changed its method of accounting for business reengineering costs. /s/ Ernst & Young LLP Toledo, Ohio February 2, 2000 30 33 MANOR CARE, INC. Consolidated Balance Sheets
December 31, December 31, 1999 1998 ----------- ---------- (In thousands, except per share data) ASSETS Current assets: Cash and cash equivalents $ 12,287 $ 33,718 Receivables, less allowances for doubtful accounts of $58,975 and $58,125, respectively 294,449 314,883 Receivable from sale of assets 44,467 Prepaid expenses and other assets 28,409 27,643 Deferred income taxes 51,539 49,099 ----------- ---------- Total current assets 431,151 425,343 Net property and equipment 1,550,507 1,740,326 Intangible assets, net of amortization of $13,513 and $10,023, respectively 88,286 80,802 Investment in Genesis preferred stock 19,000 293,120 Other assets 191,922 183,136 ----------- ---------- Total assets $ 2,280,866 $2,722,727 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 86,614 $ 107,341 Employee compensation and benefits 52,376 60,976 Accrued insurance liabilities 35,870 26,313 Income tax payable 14,906 7,587 Other accrued liabilities 33,266 72,534 Revolving loans 179,000 230,000 Long-term debt due within one year 6,617 6,547 ----------- ---------- Total current liabilities 408,649 511,298 Long-term debt 687,502 693,180 Deferred income taxes 126,754 245,564 Other liabilities 76,608 72,422 Minority interest 1,316 1,095 Shareholders' equity: Preferred stock, $.01 par value, 5 million shares authorized Common stock, $.01 par value, 300 million shares authorized, 111.0 and 110.9 million shares issued 1,110 1,109 Capital in excess of par value 358,958 356,333 Retained earnings 798,068 841,726 ----------- ---------- 1,158,136 1,199,168 Less treasury stock, at cost (8.7 million shares) (178,099) ----------- ---------- Total shareholders' equity 980,037 1,199,168 ----------- ---------- Total liabilities and shareholders' equity $ 2,280,866 $2,722,727 =========== ==========
See accompanying notes. 31 34 MANOR CARE, INC. Consolidated Statements of Operations
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- (In thousands, except per share data) Revenues $2,135,345 $2,209,087 $2,228,534 Expenses: Operating 1,685,059 1,715,575 1,760,923 General and administrative 89,743 96,017 99,881 Depreciation and amortization 114,601 119,223 112,723 Provision for restructuring charge, merger expenses, asset impairment and other related charges 14,787 278,261 ---------- ---------- ---------- 1,904,190 2,209,076 1,973,527 ---------- ---------- ---------- Income from continuing operations before other income (expenses) and income taxes 231,155 11 255,007 Other income (expenses): Interest expense (54,082) (46,587) (56,805) Minority interest (289) (443) 13,245 Impairment of Genesis investment (274,120) Equity in earnings of affiliated companies 1,729 5,376 2,806 Net other income (expense) (6,789) 17,078 10,044 Interest income from advances to discontinued lodging segment 16,058 ---------- ---------- ---------- Net other expenses (333,551) (24,576) (14,652) ---------- ---------- ---------- Income (loss) from continuing operations before income taxes (102,396) (24,565) 240,355 Income taxes (47,238) 21,597 85,064 ---------- ---------- ---------- Income (loss) from continuing operations (55,158) (46,162) 155,291 Discontinued operations: Income from discontinued pharmacy operations (net of taxes of $7,256 and $36,992, respectively) 8,044 41,209 Gain on conversion of Vitalink stock (net of taxes of $39,908) 59,861 ---------- ---------- ---------- Income (loss) before extraordinary item and cumulative effect (55,158) 21,743 196,500 Extraordinary item (net of taxes of $7,508, $12,690 and $2,150, respectively) 11,500 (19,036) (3,216) Cumulative effect of change in accounting principle (net of taxes of $3,759 and $2,115, respectively) (5,640) (3,173) ---------- ---------- ---------- Net income (loss) $ (43,658) $ (2,933) $ 190,111 ========== ========== ========== Earnings per share - basic Income (loss) from continuing operations $ (.51) $ (.42) $ 1.44 Income from discontinued operations (net of taxes) .62 .38 Extraordinary item (net of taxes) .11 (.17) (.03) Cumulative effect (net of taxes) (.05) (.03) ---------- ---------- ---------- Net income (loss) $ (.41)* $ (.03)* $ 1.76 ========== ========== ========== Earnings per share - diluted Income (loss) from continuing operations $ (.51) $ (.42) $ 1.40 Income from discontinued operations (net of taxes) .62 .37 Extraordinary item (net of taxes) .11 (.17) (.03) Cumulative effect (net of taxes) (.05) (.03) ---------- ---------- ---------- Net income (loss) $ (.41)* $ (.03)* $ 1.71 ========== ========== ========== Weighted-average shares: Basic 107,627 108,958 108,159 Diluted 107,627 108,958 110,881
*Doesn't add due to rounding See accompanying notes. 32 35 MANOR CARE, INC. Consolidated Statements of Cash Flows
Year ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- (In thousands) OPERATING ACTIVITIES Net income (loss) $ (43,658) $ (2,933) $ 190,111 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Income from discontinued operations (67,905) (41,209) Depreciation and amortization 115,910 119,329 113,268 Asset impairment and other non-cash charges 12,240 191,745 Impairment of Genesis investment 274,120 Provision for bad debts 29,005 39,485 50,196 Deferred income taxes (112,984) (46,537) 41,586 Net gain on sale of assets (18,963) (6,545) (2,058) Minority interest 289 443 (13,245) Equity in earnings of affiliated companies (1,729) (5,376) (2,806) Changes in assets and liabilities, excluding sold facilities and acquisitions: Receivables (69,974) (83,798) (107,732) Prepaid expenses and other assets (10,302) 23,956 (23,188) Liabilities (36,844) (26,461) (32,696) --------- --------- --------- Total adjustments 180,768 138,336 (17,884) --------- --------- --------- Net cash provided by continuing operations 137,110 135,403 172,227 Net cash provided by (used in) discontinued operations 17,836 (8,440) --------- --------- --------- Net cash provided by operating activities 137,110 153,239 163,787 --------- --------- --------- INVESTING ACTIVITIES Investment in property and equipment (166,503) (295,578) (223,876) Investment in systems development (11,122) (22,158) (29,110) Acquisitions (9,229) (9,841) (98,381) Proceeds from sale of assets 263,941 24,137 6,680 (Advances to) payments from non-consolidated affiliates (2,799) 213,133 Decrease due to deconsolidation of subsidiary (13,948) Other, net (6,847) 3,469 --------- --------- --------- Net cash provided by (used in) investing activities of continuing operations 77,087 (327,034) (128,085) Net cash used in investing activities of discontinued operations (6,810) (83,524) --------- --------- --------- Net cash provided by (used in) investing activities 77,087 (333,844) (211,609) --------- --------- --------- FINANCING ACTIVITIES Net borrowings (repayments) under bank credit agreements (50,500) 191,940 186,093 Principal payments of long-term debt (6,712) (6,788) (47,064) Payment of debentures (146,100) Proceeds from exercise of stock options 1,954 3,120 11,894 Purchase of common stock for treasury (180,370) (4,838) (47,707) Dividends paid by Manor Care of America, Inc. (2,805) (6,141) --------- --------- --------- Net cash provided by (used in) financing activities of continuing operations (235,628) 180,629 (49,025) Net cash provided by (used in) financing activities of discontinued operations (11,026) 91,964 --------- --------- --------- Net cash provided by (used in) financing activities (235,628) 169,603 42,939 --------- --------- --------- Net decrease in cash and cash equivalents (21,431) (11,002) (4,883) Net Manor Care of America, Inc. cash flows for December 1997 (3,213) Cash and cash equivalents at beginning of period 33,718 47,933 52,816 --------- --------- --------- Cash and cash equivalents at end of period $ 12,287 $ 33,718 $ 47,933 ========= ========= =========
See accompanying notes. 33 36 MANOR CARE, INC. Consolidated Statements of Shareholders' Equity
Capital Total Common Stock in Excess Treasury Stock Share- ------------ of Par Retained -------------- holders' Shares Amount Value Earnings Shares Amount Equity ------ ------ ----- -------- ------ ------ ------ (In thousands, except per share data) Balance at January 1, 1997 114,831 $ 7,086 $ 450,900 $664,219 (6,864) $(127,515) $ 994,690 Purchase of treasury stock (1,493) (48,104) (48,104) Exercise of stock options 1,037 113 9,018 (4,908) 512 8,980 13,203 Tax benefit from restricted stock and exercise of stock options 7,504 7,504 Net income 190,111 190,111 Dividend of discontinued lodging segment 7,151 7,151 Manor Care of America, Inc. cash dividends ($.088 per share) (6,141) (6,141) Other 4,508 107 4,615 ------- ------- --------- -------- ------- --------- ---------- Balance at December 31, 1997 115,868 7,199 471,930 850,539 (7,845) (166,639) 1,163,029 Adjustment to conform Manor Care of America, Inc.'s fiscal year 9 121 4,627 4,748 Issue and vesting of restricted stock 339 3 13,110 13,113 Purchase of treasury stock (369) (16,056) (16,056) Exercise of stock options 218 6 2,138 (6,993) 577 10,742 5,893 Tax benefit from restricted stock and exercise of stock options 34,997 34,997 Net loss (2,933) (2,933) Manor Care of America, Inc. cash dividends ($.044 per share) (2,805) (2,805) Exchange of Manor Care of America, Inc. common stock and stock options for the Company's common stock (5,488) (6,099) (165,854) 7,637 171,953 Other (109) (709) (818) ------- ------- --------- -------- ------- --------- ---------- Balance at December 31, 1998 110,946 1,109 356,333 841,726 1,199,168 Purchase of treasury stock (8,793) (181,268) (181,268) Exercise of stock options 87 1 (1,165) 125 3,169 2,005 Tax benefit from restricted stock and exercise of stock options 3,790 3,790 Net loss (43,658) (43,658) ------- ------- --------- -------- ------- --------- ---------- Balance at December 31, 1999 111,033 $ 1,110 $ 358,958 $798,068 (8,668) $(178,099) $ 980,037 ======= ======= ========= ======== ======= ========= ==========
See accompanying notes. 34 37 MANOR CARE, INC. Notes to Consolidated Financial Statements 1. BUSINESS COMBINATION AND BASIS OF PRESENTATION On September 24, 1998, the shareholders of Health Care and Retirement Corporation (HCR) and the shareholders of the former Manor Care, Inc., now known as Manor Care of America, Inc. (Manor Care), separately approved the merger of Manor Care into a subsidiary of HCR, effective September 25, 1998. In accordance with the Amended and Restated Agreement and Plan of Merger (the Merger Agreement) dated June 10, 1998, each share of Manor Care common stock was converted into one share of HCR common stock for a total of approximately 63.9 million shares, and Manor Care stock options outstanding were converted into approximately 2.1 million shares of HCR common stock based on the option pricing formula defined in the Merger Agreement. As a result of the transaction, Manor Care became a wholly owned subsidiary of HCR and HCR changed its name to HCR Manor Care, Inc. In accordance with the Merger Agreement, HCR Manor Care, Inc. changed its name to Manor Care, Inc. (the Company) on September 25, 1999. The merger has been accounted for by the pooling-of-interests method. Accordingly, the accompanying consolidated financial statements give retroactive effect to the merger and include the combined operations for all periods presented. The historical financial information of Manor Care (previously reported on fiscal years ending May 31) has been restated. As of January 1, 1998, Manor Care's historical financial information has been restated to conform with HCR's quarterly and annual reporting periods for 1998. For 1997, Manor Care's historical financial information for the 12 months ended November 30, 1997 was combined with HCR's annual reporting period ended December 31, 1997. Due to the different fiscal year ends, Manor Care's results for the month of December 1997 are not included in the restated financial statements for 1998 or 1997. For December 1997, Manor Care had revenues of $113.7 million, operating expenses of $90.8 million, income from continuing operations of $6.1 million, net income of $6.0 million and cash dividends of $1.4 million. Summarized results of the separate companies through September 30, 1998 follow:
Manor Charge HCR Care (see Note 3) Consolidated --- ---- ------------ ------------ (In thousands) Nine months ended September 30, 1998 Revenues $683,072 $970,856 $1,653,928 Income (loss) from continuing operations 59,979 63,798 $(197,621) (73,844) Net income (loss) 59,979 126,063 (216,657) (30,615) Other changes in shareholders' equity 1,567 (244) 1,323 Year ended December 31, 1997 Revenues 891,963 1,336,571 2,228,534 Income from continuing operations 70,121 85,170 155,291 Net income 70,121 119,990 190,111 Other changes in shareholders' equity (29,149) 7,377 (21,772)
35 38 2. ACCOUNTING POLICIES NATURE OF OPERATIONS The Company is a provider of a range of health care services, including skilled nursing care, assisted living, subacute medical care, rehabilitation therapy, home health care and management services for subacute care, rehabilitation therapy, vision care and eye surgery. The most significant portion of the Company's business relates to skilled nursing care and assisted living, operating 346 centers in 32 states with more than 60 percent located in Ohio, Michigan, Illinois, Pennsylvania and Florida. The Company provides rehabilitation therapy in nursing centers of its own and others, and in 82 outpatient therapy clinics serving the Midwestern and Mid-Atlantic states, Texas and Florida. The home health care business specializes in all levels of home health, hospice care and rehabilitation therapy from 33 offices located in six states. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. As a result of Manor Care's spin-off of its lodging operations in 1996 and the merger of Vitalink Pharmacy Services, Inc. (Vitalink) with and into Genesis Health Ventures, Inc. (Genesis) in 1998, the accompanying consolidated financial statements reflect the lodging and pharmacy segments as discontinued operations. Significant intercompany accounts and transactions have been eliminated in consolidation, except for advances to the discontinued lodging segment and the related interest income. The Company uses the equity method to account for investments in entities in which it has less than a majority interest but can exercise significant influence. These investments are classified on the accompanying balance sheets as other long-term assets. Under the equity method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of the net earnings or losses of the affiliate as it occurs. Losses are limited to the extent of the Company's investments in, advances to and guarantees for the investee. The Company's 41 percent ownership interest in In Home Health, Inc. (IHHI) and its ownership interest in certain partnerships are recorded under the equity method. During 1998, the Company changed the accounting for its investment in IHHI. The Company owns 41 percent of the common stock and all of the preferred stock of IHHI. The investment was consolidated until the fourth quarter of 1998 when the Company changed to the equity method of accounting, retroactive to January 1, 1998. The change to the equity method resulted from the Second Preferred Stock Modification Agreement (the Agreement) between the Company and IHHI executed on December 22, 1998. Under the terms of the Agreement, the Company irrevocably waived the right of the preferred stock to vote on an as-if-converted basis along with the common stock, except with respect to certain protective rights. In consideration for the Company entering into the Agreement, IHHI waived the right to pay the 12 percent annual dividend on the preferred stock in the form of shares of common stock. IHHI has historically paid this dividend in cash, and as a result of the Agreement will continue to do so. The Agreement does not affect the voting rights of the common stock. As a result of the Agreement, the Company no longer has majority voting power with respect to the election of IHHI's board of directors. 36 39 The Company has controlling investments in certain entities which are not wholly owned. Amounts reflected as minority interest represent the minority owners' share of income in these entities. Minority interest liability represents the cumulative minority owners' share of income in these entities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS Investments with a maturity of three months or less when purchased are considered cash equivalents for purposes of the statements of cash flows. RECEIVABLES AND REVENUES Revenues are recognized when the related patient services are provided. Receivables and revenues are stated at amounts estimated by management to be the net realizable value. See Note 7 for further discussion. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, generally three to 20 years for equipment and furnishings and 10 to 40 years for buildings and improvements. Direct incremental costs are capitalized for major development projects and are amortized over the lives of the related assets. The Company capitalizes interest on borrowings applicable to facilities in progress. INTANGIBLE ASSETS Goodwill and other intangible assets of businesses acquired are amortized by the straight-line method over periods ranging from five to 15 years for non-compete agreements, 20 to 40 years for management contracts and 20 to 40 years for goodwill. Deferred financing costs are amortized to interest expense over the life of the related borrowings, using the interest method. INVESTMENT The Company's investment in Genesis preferred stock is recorded at cost. Unrealized losses that are other than temporary are recognized in net income. See Note 6 for further discussion. IMPAIRMENT OF LONG-LIVED ASSETS The carrying value of long-lived and intangible assets is reviewed quarterly to determine if facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be changed. The Company considers external factors relating to each asset, including contract changes, local market developments, national health care trends and other publicly available information. If these external factors and the projected undiscounted cash flows of the company over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to the estimated fair value. See Note 3 for further discussion of impairment charges in 1998. 37 40 SYSTEMS DEVELOPMENT COSTS Costs incurred for systems development include direct payroll and consulting costs. These costs are capitalized and are amortized over the lesser of the estimated useful lives of the related systems or 10 years. Prior to November 1997, the Company capitalized and amortized its business process reengineering costs related to its system projects. On November 20, 1997, a consensus was reached by the Emerging Issues Task Force regarding business process reengineering costs (Issue 97-13), providing that all reengineering costs be expensed as incurred. As a result, in November 1997, the Company changed its accounting policy and expensed $3.2 million of reengineering costs (net of taxes) as the cumulative effect of a change in accounting principle. START-UP COSTS Prior to 1998, the Company capitalized start-up costs and amortized the costs over two years. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5), which requires start-up costs to be expensed as incurred. In the fourth quarter of 1998, the Company elected to adopt SOP 98-5 as of January 1, 1998. The cumulative effect of expensing all capitalized start-up costs as of January 1 was $9.4 million, or $5.6 million after tax. INVESTMENT IN LIFE INSURANCE Investment in corporate-owned life insurance policies is recorded net of policy loans in other assets. The net life insurance expense, which includes premiums and interest on cash surrender borrowings, net of all increases in cash surrender values, is included in operating expenses. INTEREST RATE SWAPS The Company enters into interest rate swap agreements to modify the interest characteristics of its outstanding debt. Each interest rate swap agreement is associated with all or a portion of the principal balance and term of a specific obligation. These agreements involve the exchange of payments based on a fixed interest rate for payments based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the associated debt. The fair value of the swap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation and its associated interest rate swap, any realized or unrealized gain or loss from the swap is recognized in income coincident with the extinguishment gain or loss. 38 41 ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred $9.5 million, $20.3 million and $12.7 million in advertising costs for the years ended December 31, 1999, 1998 and 1997, respectively. TREASURY STOCK The Company records the purchase of its common stock for treasury at cost. The treasury stock is reissued on a first-in, first-out method. If the proceeds from reissuance of treasury stock exceed the cost of the treasury stock, the gain is recorded in capital in excess of par value. If the cost of the treasury stock exceeds the proceeds from reissuance of the treasury stock, the loss is first charged against any gains previously recorded in capital in excess of par value and any remainder is charged to retained earnings. STOCK-BASED COMPENSATION Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for the stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock options. EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income (income available to common shareholders) by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to basic EPS except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Dilutive potential common shares for the Company include shares issuable upon exercise of the Company's non-qualified stock options and restricted stock that has not vested. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which was postponed in Statement No. 137 and is now effective January 1, 2001. This Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. This Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Management has not determined when it will adopt this Statement nor the impact of adoption. RECLASSIFICATIONS Certain reclassifications affecting income taxes have been made in the 1998 financial statements to conform with the 1999 presentation. 39 42 3. RESTRUCTURING CHARGE, MERGER EXPENSES, ASSET IMPAIRMENT AND OTHER CHARGES The components of the restructuring charge, merger expenses, asset impairment and other charges for 1998 and 1999 consist of the following:
Cash 1998 1998 Liability 1999 1999 Liability Non-cash Charge Activity at 12/31/98 Charge Activity at 12/31/99 (In thousands) Manor Care planned spin-off: Employee benefits cash $5,917 $(5,300) $617 $219 $(836) Transaction costs cash 6,805 (6,805) Write-down of assets non-cash 778 (778) -------- --------- ------- ------- -------- ------ 13,500 (12,883) 617 219 (836) -------- --------- ------- ------- -------- ------ HCR and Manor Care transaction: Employee benefits cash 41,028 (12,734) 28,294 (27,184) $1,110 Deferred compensation non-cash 11,867 (11,867) Other exit costs cash 4,234 4,234 (3,314) 920 Merger transaction costs cash 21,122 (21,122) Write-down of assets non-cash 56,468 (56,468) -------- --------- ------- ------- -------- ------ 134,719 (102,191) 32,528 (30,498) 2,030 -------- --------- ------- ------- -------- ------ Other costs: Amortization non-cash 7,863 (7,863) 10,554 (10,554) Duplicate costs cash 5,725 (5,725) 2,328 (2,328) Other cash 1,685 (685) 1,000 (1,000) Asset impairment unrelated to merger non-cash 114,769 (114,769) 1,686 (1,686) -------- --------- ------- ------- -------- ------ 130,042 (129,042) 1,000 14,568 (15,568) -------- --------- ------- ------- -------- ------ Total $278,261 $(244,116) $34,145 $14,787 $(46,902) $2,030 ======== ========= ======= ======= ======== ======
In 1998, the Company recorded a $278.3 million charge related to restructuring, merger expenses, asset impairment and other related charges. A component pertains to Manor Care's $13.5 million charge recorded in the second quarter in connection with its plan to separate its skilled nursing facility management, assisted living and home health businesses from its skilled nursing facility ownership, real estate and health care facility development business. As a result of the transaction with HCR, the separation of Manor Care's businesses did not occur. Charges related to the transaction totaled $134.7 million. In connection with the merger, the Company developed a plan to integrate the businesses of both companies that included closing Manor Care's corporate office in Gaithersburg, Maryland and realigning the operating divisions from eight to six. The remaining $130.0 million of the charge related to other unusual costs as a result of the merger and asset impairment unrelated to the restructuring. In 1999, the Company recorded a $14.8 million charge with the major portion relating to the amortization of Manor Care's software applications until the transition to HCR's applications. The liability outstanding relating to all restructuring and other charges is recorded in other accrued liabilities. In Manor Care's planned spin-off of its non-health care businesses, a total of 208 employees were terminated. The employees did not receive a lump-sum severance payment upon termination, but rather received their severance as biweekly payments through 1999. The transaction costs primarily included financial advisory, legal, and accounting fees and expenses, and printing and mailing costs. 40 43 In the transaction between HCR and Manor Care, the employee benefit costs related to severance payments and retention bonuses for 505 corporate employees and 26 field employees of Manor Care who received termination notices. A total of 364 employees left the Company as of December 31, 1998, but 269 employees continued to be paid their severance payments on a biweekly basis. The majority of the Manor Care employees remaining with the Company at December 31, 1998 had termination dates in the first quarter of 1999. At December 31, 1999, all but three employees who received termination notices had left the Company. The cash severance payments will continue through 2000. The deferred compensation expense of $11.9 million was attributable to the lapsing of restrictions on HCR's restricted stock due to the merger. The other exit costs pertained to various lease agreements and hardware and software contracts that will be or have been terminated. The merger transaction costs primarily included financial advisory, legal, and accounting fees and expenses, and printing and mailing costs. The Company identified two groups of assets that were impaired as a result of the merger. The Company has integrated the information systems of the companies, which resulted in the write-off of the net book value ($45.2 million) of Manor Care's computer hardware and software that was no longer being utilized by the Company as of December 31, 1998. Certain construction development project costs ($11.3 million), excluding the land value, have been abandoned due to a change in strategy. The Company recorded other unusual costs as a result of the merger. The non-cash charge primarily related to the amortization of certain Manor Care software applications which are being used until the transition to HCR applications. The carrying value of the software is being amortized over its estimated useful life ranging from six to nine months. Certain general and administrative costs of $5.7 million in 1998 and $2.3 million in 1999 represented salaries and benefits for employees performing duplicative services in Toledo or Gaithersburg. In 1998, the Company also recorded a charge for impairment of certain assets based on its quarterly review of long-lived and intangible assets. The charge of $114.8 million consisted of a majority of the goodwill related to the Company's program management service business, all of the goodwill related to the Company's home health businesses, the intangible assets related to six of the Company's rehabilitation businesses, a majority of the fixed assets related to seven facilities and certain assets relating to the Company's vision management businesses. A significant feature of the Company's evaluation is the evolving impact of the Balanced Budget Act of 1997 (Budget Act) under which a new Medicare prospective payment system (PPS) commenced on July 1, 1998 and an interim payment system (IPS) for home health businesses commenced on October 1, 1997 for the Company. PPS is scheduled to replace IPS for home health reimbursement in October 2000. These new reimbursement systems have had an unfavorable impact on the program management service, home health and vision management businesses, resulting in an impairment loss. The write-off of the facility fixed assets and the rehabilitation company intangible assets resulted from specific entities which were not generating cash flow despite efforts by the Company to return the operations to a level of profitability. The estimated fair value of the impaired assets was based on a multiple of projected annual earnings. 41 44 4. ACQUISITIONS/DIVESTITURES The Company paid $9.2 million, $9.8 million and $68.4 million in 1999, 1998 and 1997, respectively, for the acquisition of rehabilitation therapy businesses, skilled nursing centers and management services agreements. The acquisitions were accounted for under the purchase method of accounting. Certain of these acquisition agreements contain a provision for additional consideration contingent upon the future financial results of the businesses. The maximum contingent consideration aggregates $26.0 million and will, if earned, be paid over the next three years and treated as additions to the purchase price of the businesses. The results of operations of the acquired businesses are included in the consolidated statements of income from the date of acquisition. The pro forma consolidated results of operations would not be materially different from the amounts reported in 1999, 1998 and 1997. The Company also acquired 1.5 million shares of Vitalink Pharmacy Services, Inc. common stock for $30.0 million in 1997. The Company formed a strategic alliance with Alterra Healthcare Corporation (Alterra) in 1998. Two of the key provisions of the alliance include the sale of 26 centers and the lease of two centers to Alterra in 1999 and the creation of a joint venture to develop and construct specialized assisted living residences in the Company's core markets. In 1999, the Company completed the sale of 26 facilities for $154.5 million, realizing a gain of $6.1 million ($3.7 million after tax). As part of the development joint venture, the Company contributed 20 facilities to various project companies or partnerships of which the joint venture has a 10 percent equity interest. The facilities had a net book value of $77.8 million, and the Company recognized no gain or loss on the sale. At December 31, 1999, there was a $44.5 million receivable related to the Alterra and joint venture transactions. During 1999, the Company exercised a purchase option on Manor Care's corporate headquarters in Gaithersburg, Maryland and sold the property, realizing net proceeds of $24.5 million and a $10.1 million gain ($6.1 million after tax). The gains on asset sales in 1999 have all been recorded as extraordinary items as required after a business combination accounted for as a pooling of interests. During 1998, the Company sold two assisted living facilities for $4.7 million and three corporate office buildings for $16.5 million. During 1997, the Company sold one corporate office building for $6.7 million. 5. DISCONTINUED LODGING OPERATIONS On November 1, 1996, Manor Care completed the spin-off of its lodging segment. Manor Care's shareholders of record on October 10, 1996 received one share of Choice Hotels International, Inc. common stock for each outstanding share of Manor Care common stock. Manor Care recorded interest income of $16.1 million in 1997 related to cash advances provided to the discontinued lodging segment for the acquisition and renovation of lodging assets. Total advances amounted to $225.7 million which were prepaid in full in 1997. 42 45 6. DISCONTINUED PHARMACY OPERATIONS Subsidiaries of Manor Care owned approximately 50 percent of Vitalink Pharmacy Services, Inc. (Vitalink) common stock. On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger (Vitalink Merger Agreement) with Genesis Health Ventures, Inc. (Genesis). Pursuant to the Vitalink Merger Agreement, on August 28, 1998, Manor Care received .045 shares of Series G Cumulative Convertible Preferred Stock of Genesis (Series G Preferred Stock) for each share of Vitalink common stock. Manor Care received 586,240 preferred shares valued at $293.1 million as consideration for all of its common stock of Vitalink. As a result of the conversion of stock, Manor Care recorded a gain of $99.8 million ($59.9 million after tax). Accordingly, the Vitalink results are reported as discontinued operations for all periods presented. The Series G Preferred Stock bears cash dividends at an initial annual rate of 5.9375 percent. The Company accrued $5.8 million of dividend income in 1998 which was paid in 1999. The Company continued to accrue dividend income of $4.4 million each quarter in 1999. At December 31, 1999, Genesis had failed to pay dividends on the Series G Preferred Stock for four consecutive quarters. Based on Genesis' inability to pay dividends and its current operating performance, the Company recorded a reserve of $17.4 million for accrued 1999 dividends and reduced the basis of its $293.1 million investment by $274.1 million. As a result of the non-payment of the cumulative dividends for four consecutive quarters, all future dividends will be payable in additional shares of Series G Preferred Stock valued at $500 per share, and the holders of Series G Preferred Stock are entitled to elect two additional directors to the Genesis board until such time as all accrued and unpaid dividends are paid in full in cash. Series G Preferred Stock holders are initially entitled to 13.441 votes per share of Series G Preferred Stock, and will vote together with the holders of Genesis common stock and as a separate class on matters as to which the Pennsylvania Business Corporation Law requires a separate class vote. At the option of Manor Care, each share of Series G Preferred Stock is convertible at any time into Genesis common stock at a conversion price of $37.20 per share, subject to adjustment under certain circumstances. Beginning April 26, 2001, Genesis may, under certain circumstances, force conversion of the Series G Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per share of Genesis common stock. Dividends will cease to accrue in respect to the Series G Preferred Stock as of the date of the conversion. 43 46 The revenues, income from discontinued pharmacy operations before income taxes and net income from discontinued pharmacy operations for the years ended December 31, 1998 and 1997 were as follows:
1998 1997 ---- ---- (In thousands) Revenues (a) $381,075 $432,834 Income from discontinued pharmacy operations before income taxes (b) 15,300 78,201 Net income from discontinued pharmacy operations 8,044 41,209 Gain on conversion of Vitalink stock (net of taxes) 59,861
(a) Includes sales to Manor Care's skilled nursing and assisted living facilities of $31,828 and $44,599 for the years ended December 31, 1998 and 1997, respectively (b) Income from discontinued pharmacy operations before income taxes for 1997 includes a $50.3 million pretax gain resulting from the issuance of 11.4 million shares of Vitalink common stock in connection with Vitalink's merger with TeamCare, the pharmacy subsidiary of GranCare, Inc., in February 1997. 7. REVENUES The Company receives reimbursement under the federal Medicare program and various state Medicaid programs. Revenues under these programs totalled $1.1 billion, $1.1 billion and $1.2 billion for the years ended December 31, 1999, 1998 and 1997, respectively. In 1996, the Health Care Financing Administration issued a modification to regulations governing the treatment of interest expense and investment income offsets for Medicare reimbursement purposes. As a result of the modification, the Company recognized revenues of $20.0 million in 1997, which had been reserved in prior years. Medicare and certain Medicaid program revenues are subject to audit and retroactive adjustment by government representatives. In the opinion of management, any differences between the net revenue recorded and final determination will not materially affect the consolidated financial statements. Net third-party settlements amounted to a $9.6 million payable and $6.4 million receivable at December 31, 1999 and 1998, respectively. There were no non-governmental receivables which represented amounts in excess of 10 percent of total receivables at December 31, 1999 and 1998. Revenues for certain health care services are as follows:
1999 1998 1997 ---- ---- ---- (In thousands) Skilled and assisted living services $1,911,720 $1,987,815 $1,888,578 Rehabilitation services 63,767 70,522 72,645 Home health services 61,062 48,416 168,209 Other services 98,796 102,334 99,102 ---------- ---------- ---------- $2,135,345 $2,209,087 $2,228,534 ========== ========== ==========
44 47 8. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1999 1998 ---- ---- (In thousands) Land and improvements $217,457 $ 179,481 Buildings and improvements 1,473,425 1,615,366 Equipment and furnishings 347,455 369,752 Capitalized leases 31,329 32,293 Construction in progress 77,232 125,724 ------------ ---------- 2,146,898 2,322,616 Less accumulated depreciation 596,391 582,290 ----------- ----------- Net property and equipment $1,550,507 $1,740,326 ========== ==========
Depreciation expense, including amortization of capitalized leases, amounted to $108.5 million, $110.8 million and $96.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. Accumulated depreciation includes $10.8 million and $9.2 million at December 31, 1999 and 1998, respectively, relating to capitalized leases. 9. DEBT Debt consists of the following at December 31:
1999 1998 ---- ---- (In thousands) Five Year Agreement $476,500 $476,000 364 Day Agreement 179,000 230,000 Senior Notes, net of discount 149,615 149,555 Mortgages and other notes 61,135 68,014 Capital lease obligations (see Note 11) 6,869 6,158 -------- -------- 873,119 929,727 Less: 364 Day Agreement 179,000 230,000 Amounts due within one year 6,617 6,547 --------- --------- Long-term debt $687,502 $693,180 ======== ========
Concurrent with the merger, a five-year, $500 million credit agreement (Five Year Agreement) and a 364-day, $300 million credit agreement (364 Day Agreement) were established with a group of banks, under which both the Company and Manor Care are borrowers. The credit agreements were established to repay borrowings of HCR and Manor Care under prior credit arrangements, as discussed below, to provide additional credit capacity for future developments and to provide credit back-up for the issuance of commercial paper. The credit agreements contain various covenants, restrictions and events of default. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on its ability to incur indebtedness, create liens, pay dividends, repurchase stock, dispose of assets and make acquisitions. 45 48 The Company's $300 million credit agreement, which matured September 24, 1999, was amended and now provides for a $200 million credit agreement (364 Day Agreement). Loans under the amended 364 Day Agreement, which mature September 22, 2000, bear interest at variable rates that reflect, at the election of the Company, either the agent bank's base lending rate or an increment over Eurodollar indices of .50 percent to 1.275 percent, depending on the quarterly performance of a key ratio. In addition, the 364 Day Agreement provides for a fee on the total amount of the facility, ranging from .125 percent to .225 percent, depending on the performance of the same ratio. Loans under the Five Year Agreement, which mature September 24, 2003, bear interest at variable rates that reflect, at the election of the Company, the agent bank's base lending rate, rates offered by any of the participating banks under bid procedures or an increment over Eurodollar indices of .15 percent to .50 percent, depending on the quarterly performance of a key ratio. In addition to direct borrowings, the Five Year Agreement may be used to support the issuance of up to $100 million of letters of credit. The Five Year Agreement also provides for a fee on the total amount of the facility, ranging from .125 percent to .25 percent, depending on the performance of the same key ratio. Whenever the aggregate utilization of both credit facilities exceeds $350 million, an additional fee of .05 percent is charged on loans due under the Five Year Agreement and an additional fee ranging from .10 percent to .125 percent is charged on loans under the 364 Day Agreement, based on the performance of a key ratio. The average interest rate on loans under the Five Year and 364 Day Credit Agreements was 6.64 percent at December 31, 1999, excluding the fee on the total facility. After consideration of usage for letters of credit, the remaining credit availability under the combined agreements totaled $30.4 million. The Company, Alterra and the development joint venture have jointly and severally guaranteed a $200 million revolving credit agreement, which matures September 30, 2002. The Company and Alterra each have a 50 percent interest in the development joint venture which is the 10 percent owner and managing owner or partner in the various project companies and partnerships which are entitled to borrow under the credit agreement. At December 31, 1999, there was $48 million of guaranteed debt outstanding under the revolving credit agreement. Funds are used to construct and support start-up working capital for assisted living residences. The debt will be repaid upon sale of each facility, which will occur after the facility reaches break-even operating earnings. On September 25, 1998, the Company repaid $264 million outstanding under HCR's prior credit agreement and $325 million on Manor Care's prior credit arrangements. The repayment of the prior credit facilities was accounted for as an early extinguishment of debt. In conjunction with the extinguishment of debt, the Company terminated three interest rate swaps with a total notional amount of $350 million that were designated as a hedge of Manor Care's debt. The loss on terminating the swaps along with the unamortized debt issue costs was recorded as an extraordinary item that totaled $31.7 million ($19.0 million after tax). In June 1996, Manor Care issued $150 million of 7.5% Senior Notes due 2006. These notes are redeemable at the option of Manor Care at any time at a price equal to the greater of (a) the principal amount or (b) the sum of the present values of the remaining scheduled payments of principal and interest, discounted with an applicable treasury rate plus 15 basis points, plus accrued interest to the date of the redemption. The proceeds of the offering were used to repay 46 49 borrowings under Manor Care's prior credit facility. In November 1997, Manor Care redeemed all outstanding 9.5% Senior Subordinated Notes at a redemption price of 103.56 percent with the proceeds of borrowings under Manor Care's prior credit facility. Manor Care recorded an extraordinary item of $3.2 million after taxes representing the premium paid on redemption. Interest rates on mortgages and other long-term debt ranged from 3.47 percent to 11.58 percent. Maturities range from 2000 to 2019. Owned property with a net book value of $121.9 million was pledged or mortgaged. Interest paid on all debt amounted to $56.4 million, $47.1 million and $56.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. Capitalized interest costs amounted to $3.2 million, $8.6 million and $4.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. Debt maturities for the five years subsequent to December 31, 1999 are as follows: 2000 - $185.6 million; 2001 - $5.7 million; 2002 - $5.9 million; 2003 - $485.4 million and 2004 - $3.7 million. 10. INTEREST RATE HEDGE Historically, the Company entered into multiple interest rate swap agreements to hedge its exposure to fluctuations in interest rates on certain long-term debt and operating leases. At December 31, 1999, there were no interest rate swap agreements outstanding. In conjunction with exercising a purchase option and selling the Manor Care corporate headquarters in 1999, the Company terminated three interest rate swaps with a total notional principal amount of $30.3 million. The gain of $0.5 million on terminating the swaps was recorded as an extraordinary item along with the gain on the sale of the building. In conjunction with the repayment of Manor Care's prior credit arrangements in September 1998, Manor Care terminated three interest rate swaps with a notional principal amount of $350.0 million, resulting in a $31.3 million cash loss. The loss on terminating the swaps was recorded as an extraordinary item along with the unamortized debt issue costs. These agreements effectively converted Manor Care's interest rate exposure on certain floating rate debt to a weighted-average fixed rate of 6.53 percent. In conjunction with the June 1996 issuance of $150.0 million of 7.5% Senior Notes, Manor Care also entered into a series of interest rate swap and treasury lock agreements having a total notional principal amount of $150.0 million. Agreements with a total notional principal amount of $100.0 million were terminated concurrent with the pricing of the notes offering on May 30, 1996 with a $2.7 million cash gain. The remaining agreement, with a total notional principal amount of $50.0 million, was terminated on October 23, 1996 with a $1.4 million cash gain. The gains on the termination of the agreements have been deferred and are being amortized against interest expense over the life of the 7.5% Senior Notes, effectively reducing the interest rate on the notes to 7.1 percent. 47 50 11. LEASES The Company leases certain property and equipment under both operating and capital leases, which expire at various dates to 2036. Certain of the facility leases contain purchase options, and the Company's headquarters lease includes a residual guarantee of $22.8 million. Payments under non-cancelable operating leases, minimum lease payments and the present value of net minimum lease payments under capital leases as of December 31, 1999 are as follows:
Operating Capital Leases Leases (In thousands) 2000 $ 12,654 $ 728 2001 10,289 643 2002 9,535 648 2003 8,929 650 2004 3,134 610 Later years 36,287 13,050 ------- ------ Total minimum lease payments $80,828 16,329 ======= Less amount representing interest 9,460 ------ Present value of net minimum lease payments (included in long-term debt - see Note 9) $ 6,869 =======
Rental expense was $17.8 million, $18.0 million and $22.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. 48 51 12. INCOME TAXES The provision (benefit) for income taxes consists of the following:
1999 1998 1997 ---- ---- ---- (In thousands) Current: Federal $51,865 $58,885 $37,436 State and local 15,641 9,249 6,042 ------- ------- ------- 67,506 68,134 43,478 Deferred: Federal (93,983) (39,782) 35,188 State and local (20,761) (6,755) 6,398 --------- -------- ------- (114,744) (46,537) 41,586 -------- -------- ------ Provision (benefit) for income taxes from continuing operations (47,238) 21,597 85,064 Provision for income taxes from discontinued operations 47,164 36,992 Provision (benefit) for income taxes from extraordinary items 7,508 (12,690) (2,150) Benefit for income taxes from cumulative effect of change in accounting principle (3,759) (2,115) -------- ------- -------- Total provision (benefit) for income taxes $(39,730) $52,312 $117,791 ======== ======= ========
The reconciliation of the amount computed by applying the statutory federal income tax rate to income (loss) from continuing operations before income taxes to the provision (benefit) for income taxes from continuing operations is as follows:
1999 1998 1997 ---- ---- ---- (In thousands) Income taxes (benefit) computed at statutory rate $(35,839) $(8,598) $84,124 Differences resulting from: Write-off of non-deductible goodwill 22,028 Non-deductible transaction costs 7,217 State and local income taxes (3,328) 1,621 8,086 Non-deductible compensation 1,870 2,028 Exclusion of dividends received (588) (2,093) (672) Jobs tax credits (1,520) (1,484) (765) Corporate-owned life insurance (163) (1,079) (6,455) Unrealized losses of subsidiary 4,340 Adjustment to prior years' estimated tax liabilities (11,653) Other (357) 1,957 746 -------- ---------- ------ Provision (benefit) for income taxes from continuing operations $(47,238) $21,597 $85,064 ======== ======= =======
The Internal Revenue Service has examined the Company's federal income tax returns for all years through May 31, 1995 for Manor Care and through December 31, 1996 for HCR. The years have been closed through May 31, 1995 for Manor Care and through December 31, 1992 for HCR. The Company believes that it has made adequate provision for income taxes that may become payable with respect to open tax years. 49 52 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company's federal and state deferred tax assets and liabilities are as follows:
1999 1998 ---- ---- (In thousands) Deferred tax assets: Net loss on Genesis investment $35,499 Allowances for receivables and settlements 31,565 $21,577 Employee compensation and benefits 27,998 32,346 Accrued insurance reserves 16,890 11,153 Net operating loss carryover 11,553 13,864 Other 4,471 3,938 -------- ------- $127,976 $82,878 ======== ======= Deferred tax liabilities: Fixed asset and intangible asset bases differences $150,588 $155,134 Gain on Vitalink transactions 71,236 Leveraged leases 36,646 38,938 Pension receivable 7,832 6,867 Other 8,125 7,168 -------- -------- $203,191 $279,343 ======== ======== Net deferred tax liabilities $(75,215) $(196,465) ======== =========
At December 31, 1999, the Company had approximately $29.2 million of net operating loss carryforwards for tax purposes which expire in 2018, and the maximum amount to be used in any year is $5.8 million. Net income taxes paid amounted to $50.0 million, $9.0 million and $28.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. 13. COMMITMENTS/CONTINGENCY One or more subsidiaries or affiliates of Manor Care have been identified as potentially responsible parties (PRPs) in a variety of actions (the Actions) relating to waste disposal sites which allegedly are subject to remedial action under the Comprehensive Environmental Response Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state laws. CERCLA imposes retroactive, strict joint and several liability on PRPs for the costs of hazardous waste clean-up. The Actions arise out of the alleged activities of Cenco, Incorporated and its subsidiary and affiliated companies (Cenco). Cenco was acquired in 1981 by a wholly owned subsidiary of Manor Care. The Actions allege that Cenco transported and/or generated hazardous substances that came to be located at the sites in question. Environmental proceedings such as the Actions may involve owners and/or operators of the hazardous waste site, multiple waste generators and multiple waste transportation disposal companies. Such proceedings involve efforts by governmental entities and/or private parties to allocate or recover site investigation and clean-up costs, which costs may be substantial. The potential liability exposure for currently pending environmental claims and litigation, without regard to insurance coverage, cannot be quantified with precision because of the inherent uncertainties of litigation in the Actions and the fact that the 50 53 ultimate cost of the remedial actions for some of the waste disposal sites where Manor Care is alleged to be a potentially responsible party has not yet been quantified. Based upon its current assessment of the likely outcome of the Actions, the Company believes that the potential environmental liability exposure, after consideration of insurance coverage, is approximately $4.5 million. The Company is party to various other legal proceedings arising in the ordinary course of business. The Company does not believe the results of such proceedings, even if unfavorable to the Company, would have a material adverse effect on its financial position. As of December 31, 1999, the Company had contractual commitments of $20.8 million relating to its internal and external construction program. As of December 31, 1999, the Company has total letters of credit of $49.2 million that benefit certain third-party insurers and bondholders of certain industrial revenue bonds, and 86 percent relate to recorded liabilities. 14. EARNINGS PER SHARE The calculation of earnings per share (EPS) is as follows:
1999 1998 1997 (In thousands, except EPS) Numerator: Income (loss) from continuing operations (income available to common shareholders) $(55,158) $(46,162) $155,291 Denominator: Denominator for basic EPS - weighted- average shares 107,627 108,958 108,159 Effect of dilutive securities: Stock options 2,722 ------- ------- ------- Denominator for diluted EPS - adjusted weighted-average shares and assumed conversions 107,627 108,958 110,881 ======= ======= ======= Income (loss) from continuing operations: Basic EPS $(.51) $(.42) $1.44 Diluted EPS $(.51) $(.42) $1.40
In 1999 and 1998, the dilutive effect of stock options would have been 1,121,000 and 2,349,000 shares, respectively. These shares were not included in the calculation because the effect would be anti-dilutive with a loss from continuing operations. Restricted stock awards of 339,500 shares in 1997 were not included in the computation of diluted EPS because the effect would be anti-dilutive. Options to purchase 1,091,725 shares of the Company's common stock were not included in the computation of diluted EPS for 1997 because the options' exercise prices were greater than the average market price of the common shares. 51 54 15. STOCK PLANS The Company has stock option plans for key employees and for outside directors which authorize the grant of options for up to 11,199,000 and 800,000 shares, respectively. There were 3,962,016 and 3,772,792 shares available for future grant at December 31, 1999 and 1998, respectively. Generally, the exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is 10 years. The options for key employees vest between three and five years, and the options for outside directors vest immediately. In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), the Company has elected to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans, and, accordingly, did not recognize compensation expense for options granted in 1995 through 1999. If the Company had accounted for its 1995 through 1999 options under the fair value method of FAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 (In thousands, except earnings per share) Net income (loss) - as reported $(43,658) $(2,933) $190,111 Net income (loss) - pro forma $(46,346) $(17,581) $186,933 Earnings per share - as reported: Basic $(.41) $(.03) $1.76 Diluted $(.41) $(.03) $1.71 Earnings per share - pro forma: Basic $(.43) $(.16) $1.73 Diluted $(.43) $(.16) $1.68
The pro forma effect on net income for 1999, 1998 and 1997 is not representative of the pro forma effect on net income in future years, because it does not take into consideration pro forma compensation expense related to grants prior to 1995, and there was additional pro forma compensation expense in 1998 as a result of the merger. In 1998, all outstanding Manor Care options were converted, under their original terms, into the right to receive shares of the Company's common stock. Therefore, the remaining fair value of 1995 through 1998 grants was expensed in 1998 on a pro forma basis. Also, the vesting was accelerated for stock options granted in 1996 and 1997 for certain HCR executive officers, which required the remaining fair value to be expensed in 1998 on a pro forma basis. The fair value of each option grant is estimated on the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 0 percent for the Company in 1999 and HCR in 1998 and 1997; dividend yield based on historical dividends of $.088 per share annually for Manor Care in 1998 and 1997; expected volatility of 35.0 percent, 28.0 percent and 23.3 percent; risk-free interest rates of 5.35 percent, 4.72 percent and 5.70 percent; and expected lives of 4.8, 4.5 and 7.1 years. The weighted-average fair value of options granted is $10.25, $10.53 and $13.56 per share in 1999, 1998 and 1997, respectively. The option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully 52 55 transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's stock options have characteristics significantly different from those of traded options, and since variations in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Information regarding these option plans for 1997, 1998 and 1999 is as follows:
Weighted- Average Exercise Shares Price Options outstanding at January 1, 1997 8,884,864 $11.79 Options granted 1,181,522 $34.65 Options forfeited (143,473) $21.67 Options exercised (1,548,968) $8.09 ---------- Options outstanding at December 31, 1997 8,373,945 $15.53 Options granted 1,808,370 $34.22 Options forfeited (256,838) $29.01 Options exercised (804,489) $7.47 Converted to stock (see Note 1) (3,313,467) ---------- Options outstanding at December 31, 1998 5,807,521 $20.04 Options granted 38,001 $26.31 Options forfeited (227,226) $31.59 Options exercised (211,679) $9.33 ---------- Options outstanding at December 31, 1999 5,406,617 $20.02 ========= Options exercisable at December 31, 1997 4,816,141 $9.06 December 31, 1998 3,984,996 $14.24 December 31, 1999 3,952,392 $15.14
53 56 The following tables summarize information about options outstanding and options exercisable at December 31, 1999:
Options Outstanding Weighted- Weighted- Average Range of Average Remaining Exercise Number Exercise Contractual Prices Outstanding Price Life ------ ----------- ----------- -------------- $ 5 - $10 2,124,159 $ 5.88 2.0 $10 - $20 621,066 $15.26 4.4 $20 - $30 708,673 $24.65 6.5 $30 - $45 1,952,719 $35.23 7.7 --------- 5,406,617 $20.02 4.9 =========
Options Exercisable Weighted- Range of Average Exercise Number Exercise Prices Exercisable Price ------ ----------- ----------- $ 5 - $10 2,124,159 $5.88 $10 - $20 621,066 $15.26 $20 - $30 708,673 $24.65 $30 - $45 498,494 $40.93 --------- 3,952,392 $15.14 =========
The Company has a restricted stock plan for corporate officers and certain key senior management employees which authorizes up to 1,892,866 restricted shares to be issued. There were 662,250 restricted shares available for future grant at December 31, 1999. During 1997, executive officers and key senior management employees of HCR were awarded 339,500 restricted shares contingent upon the achievement during 1997 of certain performance-based criteria. Such criteria were met at December 31, 1997. The restricted stock was issued in January 1998 with a fair value of $38.63 after certification by the Board of Directors that the criteria were achieved. The restrictions associated with the restricted stock lapsed as of September 25, 1998 as a result of the merger, and the total deferred compensation expense of $11.9 million was recorded in the provision for restructuring charge in 1998. Compensation expense related to restricted stock was $12.7 million and $0.4 million for the years ended December 31, 1998 and 1997, respectively. 54 57 16. EMPLOYEE BENEFIT PLANS The Company has two qualified, defined benefit pension plans which were amended in 1994 and 1996 to freeze all future benefits. The funded status of these plans is as follows:
1999 1998 ---- ---- (In thousands) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $39,298 $39,857 Interest cost 2,575 2,528 Actuarial (gains) losses (1,957) 1,486 Benefits paid (4,404) (4,573) ------- ------- Benefit obligation at end of year 35,512 39,298 ------ ------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 61,965 60,476 Actual return on plan assets 7,571 5,962 Company contributions 100 Benefits paid (4,404) (4,573) ------ ------ Fair value of plan assets at end of year 65,132 61,965 ------ ------ Funded status of the plan 29,620 22,667 Unrecognized net actuarial gains (10,103) (5,971) --------- -------- Prepaid benefit cost $19,517 $16,696 ======= =======
The prepaid benefit under one plan was $19.7 million and $17.4 million at December 31, 1999 and 1998, respectively. The accrued pension cost under the other plan was $0.2 million and $0.7 million at December 31, 1999 and 1998, respectively. At December 31, 1999, the fair value of one plan's assets was $16.4 million with an associated projected benefit obligation of $17.7 million. The components of the net pension income for these plans are as follows:
1999 1998 1997 ---- ---- ---- (In thousands) Interest cost $ 2,575 $ 2,528 $ 2,757 Expected return on plan assets (5,395) (4,691) (4,527) ------ ------ ------ Net pension income $(2,820) $(2,163) $(1,770) ======= ======= =======
The actuarial present value of benefit obligations is based on an average discount rate of 7.8 percent and 7.0 percent at December 31, 1999 and 1998, respectively. The freezing of future pension benefits eliminated any future salary increases from the computation. The average expected long-term rate of return on assets is 10 percent for 1999 and 1998. The Company has two senior executive retirement plans which are non-qualified plans designed to provide pension benefits and life insurance for certain officers. Pension benefits are based on compensation and length of service. The benefits under one of the plans are provided from a 55 58 combination of the benefits to which the corporate officers are entitled under a defined benefit pension plan and from life insurance policies that are owned by certain officers who have assigned the corporate interest (the Company's share of premiums paid) in the policies to the Company. The Company's share of the cash surrender value of the policies was $30.1 million and $22.9 million at December 31, 1999 and 1998, respectively, and was included in other assets. The other plan is unfunded. The accrued liability for both plans was $9.4 million and $8.2 million at December 31, 1999 and 1998, respectively, and was included in other long-term liabilities. The Company maintains two savings programs qualified under Section 401(k) of the Internal Revenue Code (401(k)) and two non-qualified, deferred compensation programs. The Company contributes up to a maximum matching contribution ranging from 2 percent to 6 percent of the participant's compensation, as defined in each plan. The Company's expense for these plans amounted to $11.1 million, $8.8 million and $11.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease in expense for 1998 was primarily due to a decline in earnings on one of the non-qualified, deferred compensation programs. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and fair value of the financial instruments are as follows:
1999 1998 ----------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value (In thousands) Cash and cash equivalents $ 12,287 $ 12,287 $ 33,718 $ 33,718 Debt, excluding capitalized leases 866,250 861,255 923,569 931,930 Interest rate swaps - liability 494
The carrying amount of cash and cash equivalents is equal to its fair value due to the short maturity of the investments. The carrying amount of debt, excluding capitalized lease obligations, approximates its fair value due to the significant amount of variable rate debt. The fair value is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates. The fair market value for the outstanding interest rate swap agreements was determined based on quoted market rates. 56 59 18. SHAREHOLDER RIGHTS PLAN Each outstanding share of the Company's common stock includes an exercisable Right which, under certain circumstances, will entitle the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock for an exercise price of $150, subject to adjustment. The Rights expire on May 2, 2005. Such rights will not be exercisable nor transferable apart from the common stock until 10 days after a person or group acquires 15 percent, except as noted below, of the Company's common stock or initiates a tender offer or exchange offer that would result in ownership of 15 percent of the Company's common stock. In the event that the Company is merged, and its common stock is exchanged or converted, the Rights will entitle the holders to buy shares of the acquirer's common stock at a 50 percent discount. Under certain other circumstances, the Rights can become rights to purchase the Company's common stock at a 50 percent discount. The Rights may be redeemed by the Company for one cent per Right at any time prior to the first date that a person or group acquires a beneficial ownership of 15 percent of the Company's common stock. The description and terms of the Rights are set forth in a Rights Agreement, dated as of May 2, 1995, and amended on June 10, 1998 (Rights Agreement), between the Company and Harris Trust and Savings Bank, as Rights Agent. Pursuant to the Rights Agreement, the trigger percentage is raised to 20 percent in the case of a Bainum Family Member or Bainum Family Entity, as defined in the Rights Agreement. 19. SEGMENT INFORMATION The Company provides a range of health care services. The Company has one reportable operating segment, long-term care, which includes the operation of skilled nursing and assisted living facilities. The "Other" category includes the non-reportable segments and corporate items not considered to be an operating segment. The revenues in the "Other" category include services for rehabilitation, home health and hospital care. Asset information, including capital expenditures, is not reported by segment by the Company. 57 60 The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates performance and allocates resources based on operating margin which represents revenues less operating expenses. The operating margin does not include general and administrative expense, depreciation and amortization, the provision for restructuring and other charges, other income and expense items, and income taxes.
Long-term Care Other Total (In thousands) Year ended December 31, 1999 Revenues from external customers $1,911,720 $223,625 $2,135,345 Intercompany revenues 20,993 20,993 Depreciation and amortization 107,185 7,416 114,601 Operating margin 398,668 51,618 450,286 Year ended December 31, 1998 Revenues from external customers $1,987,815 $221,272 $2,209,087 Intercompany revenues 38,319 38,319 Depreciation and amortization 94,506 24,717 119,223 Operating margin 443,609 49,903 493,512
58 61 MANOR CARE, INC. Supplementary Data (Unaudited) Summary Of Quarterly Results
Year ended December 31, 1999 First Second Third Fourth Year (In thousands, except per share amounts) Revenues $ 531,848 $ 530,454 $ 536,732 $536,311 $ 2,135,345 Income from continuing operations before other income (expenses) 66,571 55,687 55,837 53,060 231,155 Income (loss) before extraordinary item and cumulative effect 41,028 33,616 33,497 (163,299) (55,158) Net income (loss) 41,028 40,506 39,544 (164,736) (43,658) Earnings per share - basic: Income (loss) before extraordinary item and cumulative effect $ .37 $ .30 $ .32 $ (1.59) $ (.51) Earnings per share - diluted: Income (loss) before extraordinary item and cumulative effect $ .37 $ .30 $ .31 $ (1.59) $ (.51)
Year ended December 31, 1998 First Second Third Fourth Year Revenues $ 551,149 $ 545,393 $ 557,386 $ 555,159 $ 2,209,087 Income (loss) from continuing operations before other income (expenses) 71,674 47,142 (164,651) 45,846 11 Income (loss) from continuing operations 42,481 26,481 (142,806) 27,682 (46,162) Income from discontinued operations (net of taxes) 4,370 3,521 60,014 67,905 Income (loss) before extraordinary item and cumulative effect 46,851 30,002 (82,792) 27,682 21,743 Net income (loss) 41,211 30,002 (101,828) 27,682 (2,933) Earnings per share - basic: Income (loss) from continuing operations $ .39 $ .24 $ (1.32) $ .25 $ (.42) Income from discontinued operations $ .04 $ .03 $ .55 $ .62 Income (loss) before extraordinary item and cumulative effect $ .43 $ .28 $ (.76) $ .25 $ .20 Earnings per share - diluted: Income (loss) from continuing operations $ .38 $ .24 $ (1.32) $ .25 $ (.42) Income from discontinued operations $ .04 $ .03 $ .55 $ .62 Income (loss) before extraordinary item and cumulative effect $ .42 $ .27 $ (.76) $ .25 $ .20
In the fourth quarter of 1999, the Company reduced the basis of its investment in Genesis preferred stock by $274.1 million ($165.8 million after tax) and recorded a reserve of $17.4 million ($16.2 million after tax) related to accrued 1999 dividend income. See Note 6 to the consolidated financial statements for further discussion. In the fourth quarter of 1999, the Company also recorded losses of $12.4 million related to a start-up business. In the first, second and third quarters of 1999, the Company recorded a provision for restructuring charge, merger expenses, asset impairment and other related charges of $6.9 million ($4.6 million after tax), $3.8 million ($2.5 million after tax) and $4.1 million ($2.7 million after tax), respectively. In the second, third and fourth quarters of 1998, the Company recorded a provision for restructuring charge, merger expenses, asset impairment and other related charges of $13.5 million ($9.1 million after tax), $240.7 million ($188.5 million after tax) and $24.1 million ($15.9 million after tax), respectively. See Note 3 to the consolidated financial statements for further discussion. 59 62 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on directors of the Registrant is incorporated herein by reference under the heading "Election of Directors" in the Registrant's Proxy Statement which will be filed pursuant to Regulation 14A with the Commission prior to April 30, 2000. The names, ages, offices and positions held during the last five years of each of the Company's executive officers is set forth below. EXECUTIVE OFFICERS
NAME AGE OFFICE AND EXPERIENCE - ---- --- --------------------- PAUL A. ORMOND 50 President and Chief Executive Officer of the Company since August 1991 and Chairman of the Board of the Company from August 1991 to September 1998. Member of Class I of the Board of Directors of the Company, with a term expiring in 2001. M. KEITH WEIKEL 62 Senior Executive Vice President and Chief Operating Officer of the Company since August 1991. Member of Class III of the Board of Directors of the Company, with a term expiring in 2000. GEOFFREY G. MEYERS 55 Executive Vice President and Chief Financial Officer of the Company since August 1991 and Treasurer of the Company from August 1991 to August 1998. R. JEFFREY BIXLER 54 Vice President and General Counsel of the Company since November 1991 and Secretary of the Company since December 1991. NANCY A. EDWARDS 49 Vice President and General Manager of Central Division of the Company since December 1993.
60 63 JEFFREY A. GRILLO 41 Vice President and General Manager of Mid-Atlantic Division of the Company since February 1999, Regional Director of Operations in Mid-Atlantic District of ManorCare Health Services, Inc. (MCHS), a subsidiary of the Company, from 1996 to January 1999, and Regional Director of Operations in Southeast District of MCHS from 1994 to 1996. LARRY C. LESTER 57 Vice President and General Manager of Midwest Division of the Company since January 2000, Regional Director of Operations in Midwest Region of Health Care and Retirement Corporation of America (HCRA), a subsidiary of the Company, from January 1998 to December 1999, and Vice President of Oakwood Healthcare System from January 1993 to December 1997. SPENCER C. MOLER 52 Vice President and Controller of the Company since August 1991. O. WILLIAM MORRISON 61 Vice President and General Manager of Eastern Division of the Company since March 1999, Assistant Vice President and General Manager of Texas of the Company from October 1998 to February 1999, and Regional Manager in the Central Division of HCRA from September 1995 to September 1998. RICHARD W. PARADES 43 Vice President and General Manager of Mid-States Division of the Company since January 1999, District Vice President and General Manager of Mid-States of MCHS from February 1997 to December 1998, and Regional Director of Operations in Mid-States District of MCHS from 1994 to January 1997. F. JOSEPH SCHMITT 52 Vice President and General Manager of Southern Division of the Company since December 1993.
ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation is incorporated herein by reference under the heading "Executive Compensation" in the Registrant's Proxy Statement which will be filed with the Commission prior to April 30, 2000. 61 64 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on security ownership of certain beneficial owners is incorporated herein by reference under the heading "Security Ownership of Certain Management and Beneficial Owners" in the Registrant's Proxy Statement which will be filed with the Commission prior to April 30, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information on certain relationships and related transactions is incorporated herein by reference under the heading "Election of Directors" in the Registrant's Proxy Statement which will be filed with the Commission prior to April 30, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Manor Care, Inc. and subsidiaries are filed as part of this Form 10-K in Item 8 on the pages indicated:
Page Report of Ernst & Young LLP, Independent Auditors 30 Consolidated Balance Sheets - December 31, 1999 and 1998 31 Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997 32 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 33 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1999, 1998 and 1997 34 Notes to Consolidated Financial Statements - December 31, 1999 35
The following consolidated financial statement schedule of Manor Care, Inc. and subsidiaries is included in this Form 10-K on page 63: Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 62 65 MANOR CARE, INC. Schedule II - Valuation and Qualifying Accounts
Charged Additions Balance at to Costs Deduc- From Balance Beginning Other and tions Acquisi- at End of of Period (Note 1) Expenses (Note 2) tions Period ---------- -------- -------- -------- --------- --------- (In thousands) Year ended December 31, 1999: Deducted from asset accounts: Allowance for doubtful accounts $58,125 $29,005 $(28,230) $75 $58,975 ======= ======= ======== ======= ======= Reserve of Genesis dividend $ $17,404 $17,404 ======= ======= ======= Year ended December 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts $52,590 $(469) $39,485 $(33,481) $58,125 ======= ===== ======= ======== ======= Year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts $39,136 $34,745 $(22,431) $1,140 $52,590 ======= ======= ======== ====== =======
(1) Amount includes $1,725,000 for Manor Care's December 1997 net activity offset by the removal of In Home Health, Inc.'s (IHHI) allowance for doubtful accounts of $2,194,000 as of January 1, 1998 due to the deconsolidation of IHHI. (2) Uncollectible accounts written off, net of recoveries. 63 66 EXHIBITS
S-K Item 601 No. Document 2.1 --Amended and Restated Agreement and Plan of Merger, dated as of June 10, 1998, by and among Manor Care, Inc., Catera Acquisition Corp. and the Registrant (filed as Annex A to Health Care and Retirement Corporation's (HCR) Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 3.1 -- Certificate of Incorporation of Health Care and Retirement Corporation (filed as Exhibit 4.1 to HCR's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 3.2 -- Form of Certificate of Amendment of Certificate of Incorporation of the Registrant (filed as Annex D to HCR's Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 3.3 -- Form of Amended and Restated By-laws of the Registrant (filed as Exhibit 3 to Manor Care, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). 4.1 -- Rights Agreement, dated as of May 2, 1995, between Health Care and Retirement Corporation and Harris Trust and Savings Bank (filed as Exhibit 1 to HCR's Registration Statement on Form 8-A and incorporated herein by reference). 4.2 -- Second Amendment to Rights Agreement dated as of June 10, 1998 between Health Care and Retirement Corporation and Harris Trust and Savings Bank (filed as Exhibit 4.1 to HCR Manor Care Inc.'s Form 8-K filed on October 1, 1998 and incorporated herein by reference). 4.3 -- Third Amendment to Rights Agreement dated as of March 11, 2000 between Manor Care, Inc., as successor to Health Care and Retirement Corporation, and Harris Trust and Savings Bank (filed as Exhibit 4.1 to Manor Care Inc.'s Form 8-K filed on March 14, 2000 and incorporated herein by reference). 4.4 -- Registration Rights Amendment dated as of September 25, 1998 between HCR Manor Care, Inc. and Stewart Bainum, Stewart Bainum, Jr., Bainum Associates Limited Partnership, MC Investment Limited Partnership, Realty Investment Company, Inc., Mid Pines Associates Limited Partnership, The Stewart Bainum Declaration of Trust and The Jane L. Bainum Declaration of Trust (filed as Exhibit 4.2 to HCR Manor Care, Inc.'s Form 8-K filed on October 1, 1998 and incorporated herein by reference). 4.5 -- Credit Agreement dated as of September 25, 1998 among HCR Manor Care, Inc., Manor Care, Inc., Bank of America National Trust and Savings Association, The Chase Manhattan Bank, TD Securities (USA) Inc., and the Other Financial Institutions Party Hereto (filed as Exhibit 4 to HCR Manor Care, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference). *4.6 -- First Amendment to Five Year Credit Agreement dated as of February 9, 2000 among Manor Care, Inc. (formerly known as HCR Manor Care, Inc.), Manor Care of America, Inc. (formerly known as Manor Care, Inc.), various financial institutions, and Bank of America, N.A., as Administrative Agent. 4.7 -- 364 Day Credit Agreement dated as of September 25, 1998 among HCR Manor Care, Inc., Manor Care, Inc., Bank of America National Trust and Savings Association, The Chase Manhattan Bank, TD Securities (USA) Inc., and the Other Financial Institutions Party Hereto (filed as Exhibit 4.1 to HCR Manor Care, Inc.'s Quarterly Report on Form 10-Q for
64 67 the quarter ended September 30, 1998 and incorporated herein by reference). 4.8 --364 Day Credit Agreement dated as of September 25, 1998, as amended as of September 24, 1999, among HCR Manor Care, Inc., Manor Care, Inc., Bank of America, National Association, the Chase Manhattan Bank, Deutsche Bank and the Other Financial Institutions Party Hereto (filed as Exhibit 4 to Manor Care, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). *4.9 --The Second Amendment to the 364 Day Credit Agreement dated as of February 9, 2000 among Manor Care, Inc. (formerly HCR Manor Care, Inc.), Manor Care of America, Inc. (formerly Manor Care, Inc.), various financial institutions, and Bank of America, N.A., as Administrative Agent. 4.10 --Indenture dated as of June 4, 1996 between Manor Care, Inc. and Wilmington Trust Company, Trustee (filed as Exhibit 4.1 to Manor Care of America, Inc.'s (MCA), formerly known as Manor Care, Inc., Form 8-K dated June 4, 1996 and incorporated herein by reference). 4.11 --Supplemental Indentures dated as of June 4, 1996 between Manor Care, Inc. and Wilmington Trust Company, Trustee (filed as Exhibit 4.2 to MCA's Form 8-K dated June 4, 1996 and incorporated herein by reference). 10.1 --Stock Purchase Agreement and amendment among HCR, HCRC Inc., O-I Health Care Holding Corp. and Owens-Illinois, Inc. dated as of August 30, 1991 (filed as Exhibit 10.1 and 10.1(a) to HCR's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 10.2 --Form of Annual Incentive Award Plan (filed as Exhibit 10.2 to HCR's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 10.3 --Performance Award Plan (filed on pages A1 to A4 of HCR's Proxy Statement dated March 22, 1994 in connection with its Annual Meeting held on May 3, 1994 and incorporated herein by reference). 10.4 --Amended Stock Option Plan for Key Employees (filed as Exhibit 4 to HCR's Registration Statement on Form S-8, File No. 33-83324 and incorporated herein by reference). 10.5 --First Amendment, Second Amendment and Third Amendment to the Amended Stock Option Plan for Key Employees (filed as Exhibits 4.1, 4.2 and 4.3, respectively, to HCR's Registration Statement on Form S-8, File No. 333-64181 and incorporated herein by reference). 10.6 --Revised form of Non-Qualified Stock Option Agreement between HCR and various Key Employees participating in the Stock Option Plan for Key Employees (filed as Exhibit 4.7 to HCR's Registration Statement on Form S-8, File No.33-48885 and incorporated herein by reference). 10.7 --Amended Restricted Stock Plan (filed on pages A1 to A9 of HCR's Proxy Statement dated March 25, 1997 in connection with its Annual Meeting held on May 6, 1997 and incorporated herein by reference). 10.8 --First Amendment to Amended Restricted Stock Plan (filed as Exhibit 4.2 to HCR's Registration Statement on Form S-8, File No. 333-64235 and incorporated herein by reference). 10.9 --Revised form of Restricted Stock Plan Agreement between HCR and officers participating in Restricted Stock Plan (filed as Exhibit 10.7(a) to HCR's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 10.10 --Executive Officer Deferred Compensation Plan dated December 18, 1991 (filed as Exhibit
65 68 10.12 to HCR's Annual Report on Form 10-K for the period ended December 31, 1991 and incorporated herein by reference). 10.11 --Form of Indemnification Agreement between HCR and various officers and directors (filed as Exhibit 10.9 to HCR's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 10.12 --Senior Executive Retirement Plan dated October 1, 1992 (filed as Exhibit 10.15 to HCR's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). 10.13 --Senior Management Savings Plan dated December 17, 1992 (filed as Exhibit 10.16 to HCR's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). *10.14 --Form of Severance Agreement between HCR Manor Care, Inc., HCRA, and Paul A. Ormond. *10.15 --Form of Severance Agreement between HCR Manor Care, Inc., HCRA and M. Keith Weikel. *10.16 --Form of Severance Agreement between HCR Manor Care, Inc., HCRA and Geoffrey G. Meyers. *10.17 --Form of Severance Agreement between HCR Manor Care, Inc., HCRA and R. Jeffrey Bixler. 10.18 --Form of Executive Retention Agreement among the Registrant, HCRA and Paul A. Ormond (filed as Exhibit 10.1 to HCR's Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 10.19 --Form of Executive Retention Agreement among the Registrant, HCRA and M. Keith Weikel (filed as Exhibit 10.2 to HCR's Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 10.20 --Form of Executive Retention Agreement among the Registrant, HCRA and Geoffrey G. Meyers (filed as Exhibit 10.3 to HCR's Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 10.21 --Form of Executive Retention Agreement among the Registrant, HCRA and R. Jeffrey Bixler (filed as Exhibit 10.4 to HCR's Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 10.22 --Form of Retention Agreement among the Registrant, Manor Care, Inc. and Stewart Bainum, Jr. (filed as Exhibit 10.13 to MCA's Annual Report on Form 10-K for the year ended May 31, 1998 and incorporated herein by reference). 10.23 --Form of Noncompetition Agreement among the Registrant, Manor Care, Inc. and Stewart Bainum, Jr.(filed as Exhibit 10.12 to MCA's Annual Report on Form 10-K for the year ended May 31, 1998 and incorporated herein by reference). 10.24 --Form of Chairman's Service Agreement between the Registrant and Stewart Bainum, Jr. (filed as Exhibit 10.7 to HCR's Registration Statement on Form S-4, File No. 333-61677 and incorporated herein by reference). 10.25 --Stock Option Plan for Outside Directors (filed as Exhibit 4.4 to HCR's Registration Statement on Form S-8, File No. 33-48885 and incorporated herein by reference). 10.26 --First Amendment, Second Amendment and Third Amendment to the Stock Option Plan for Outside Directors (filed as Exhibits 4.4, 4.5 and 4.6, respectively, to HCR's Registration Statement on Form S-8, File No. 333-64181 and incorporated herein by reference). 10.27 --Form of Non-Qualified Stock Option Agreement between HCR and various outside directors participating in Stock Option Plan for Outside Directors (filed as Exhibit 4.6
66 69 to HCR's Registration Statement on Form S-8, File No. 33-48885 and incorporated herein by reference). 10.28 --Manor Care, Inc.'s Non-Employee Director Stock Compensation Plan (filed as Exhibit A to MCA's Proxy Statement dated August 28, 1996 which is Exhibit 99 to the Annual Report on Form 10-K for the year ended May 31, 1997 and incorporated herein by reference). *21 --Subsidiaries of the Registrant *23 --Consent of Independent Auditors *27.1 --Financial Data Schedule for the year ended December 31, 1999 *27.2 --Financial Data Schedule that is being restated for the year ended
December 31, 1998. REPORTS ON FORM 8-K The Company did not file any Form 8-Ks in the fourth quarter of 1999. The Company did file a Form 8-K on March 14, 2000 for the Third Amendment to the Rights Agreement which is incorporated by reference as Exhibit 4.3. - ------------ * Filed herewith. 67 70 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. Manor Care, Inc. (Registrant) by /s/ R. Jeffrey Bixler --------------------------------------------- R. Jeffrey Bixler Vice President, General Counsel and Secretary DATE: March 29, 2000 68 71 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Manor Care, Inc. and in the capacities and on the date indicated.
SIGNATURE TITLE DATE /s/ Joseph H. Lemieux - ------------------------------ Joseph H. Lemieux Director March 29, 2000 /s/ William H. Longfield - ------------------------------ William H. Longfield Director March 29, 2000 /s/ Frederic V. Malek - ------------------------------ Frederic V. Malek Director March 29, 2000 /s/ Geoffrey G. Meyers - ------------------------------ Geoffrey G. Meyers Executive Vice President and Chief Financial Officer (Principal Financial Officer) March 29, 2000 /s/ Spencer C. Moler - ------------------------------ Spencer C. Moler Vice President and Controller (Principal Accounting Officer) March 29, 2000 /s/ Paul A. Ormond - ------------------------------ Paul A. Ormond President and Chief Executive Officer (Principal Executive Officer); Director March 29, 2000 /s/ Robert G. Siefers - ------------------------------ Robert G. Siefers Director March 29, 2000 /s/ M. Keith Weikel - ------------------------------ M. Keith Weikel Senior Executive Vice President and Chief Operating Officer; Director March 29, 2000 /s/ Gail R. Wilensky - ------------------------------ Gail R. Wilensky Director March 29, 2000 /s/ Thomas L. Young - ------------------------------ Thomas L. Young Director March 29, 2000
69 72 EXHIBIT INDEX
Exhibit Number Description ------ ----------- 4.6 First Amendment to Five Year Credit Agreement dated as of February 9, 2000 among Manor Care, Inc. (formerly known as HCR Manor Care, Inc.), Manor Care of America, Inc. (formerly known as Manor Care, Inc.), various financial institutions, and Bank of America, N.A., as Administrative Agent. 4.9 The Second Amendment to the 364 Day Credit Agreement dated as of February 9, 2000 among Manor Care, Inc. (formerly HCR Manor Care, Inc.), Manor Care of America, Inc. (formerly Manor Care, Inc.), various financial institutions, and Bank of America, N.A., as Administrative Agent. 10.14 Form of Severance Agreement between HCR Manor Care, Inc., HCRA, and Paul A. Ormond. 10.15 Form of Severance Agreement between HCR Manor Care, Inc., HCRA and M. Keith Weikel. 10.16 Form of Severance Agreement between HCR Manor Care, Inc., HCRA and Geoffrey G. Meyers. 10.17 Form of Severance Agreement between HCR Manor Care, Inc., HCRA and R. Jeffrey Bixler. 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27.1 Financial Data Schedule for the year ended December 31, 1999 27.2 Financial Data Schedule that is being restated for the year ended December 31, 1998.
70 EX-4.6 2 EXHIBIT 4.6 1 Exhibit 4.6 First Amendment to Five Year Credit Agreement 2 FIRST AMENDMENT TO FIVE YEAR CREDIT AGREEMENT THIS FIRST AMENDMENT TO FIVE YEAR CREDIT AGREEMENT is made and dated as of February 9, 2000 (the "FIRST AMENDMENT") among MANOR CARE, INC., a Delaware corporation formerly known as HCR Manor Care, Inc. (the "Company"), MANOR CARE OF AMERICA, INC., a Delaware corporation formerly known as HCR Manor Care, Inc. ("MANOR Care"; Manor Care and the Company are collectively called the "BORROWERS" and are each individually called a "BORROWER"), the financial institution's party to the Credit Agreement referred to below, and BANK OF AMERICA, N.A., a national banking association, as Administrative Agent (the "AGENT"), and amends that certain Credit Agreement dated as of September 25, 1998 (as amended or modified from time to time, the "CREDIT AGREEMENT"). RECITALS -------- WHEREAS, the Borrowers have requested that the Agent and the Banks amend certain provisions of the Credit Agreement, and the Agent and the Banks are willing to do so, on the terms and conditions specified herein; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Terms. All terms used herein shall have the same meanings as in the Credit Agreement unless otherwise defined herein. 2. Amendments. The Credit Agreement is hereby amended as follows: 2.1. The definition of the term "Consolidated EBITDA" in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Consolidated EBITDA" means the Company's and its Subsidiaries' earnings before Consolidated Interest Expense, taxes, depreciation, amortization, extraordinary items of gain and all Specified Losses and before the $274,120,000 of charges taken by the Company in the quarter ending 3 December 31, 1999 in connection with the write-down of its investment in Genesis Health Ventures, Inc. and the $17,404,000 charge taken by the Company in the quarter ending December 31, 1999 in connection with its write-off of accrued and unpaid dividends from Genesis Health Ventures, Inc. and after deduction of $4,351,000 for each of the fiscal quarters ending on March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999. 3. Representations and Warranties. The Borrowers represent and warrant to the Agent and the Banks that, on and as of the date hereof, and after giving effect to this First Amendment: 3.1. Authorization. The execution, delivery and performance by the Borrowers of this First Amendment have been duly authorized by all necessary corporate action, and this First Amendment has been duly executed and delivered by the Borrowers. 3.2. Binding Obligation. This First Amendment constitutes the legal, valid and binding obligation of the Borrowers, enforceable against the Borrowers in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 3.3. No Legal Obstacle to Amendment. The execution, delivery and performance of this First Amendment will not (a) contravene the Organization Documents of either Borrower; (b) constitute a breach or default under any material Contractual Obligation or violate or contravene any law or governmental regulation or court decree or order binding on or affecting either Borrower which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect; or (c) result in, or require the creation or imposition of, any Lien on any of either Borrower's properties. No approval or authorization of any governmental authority is required to permit the execution, delivery or performance by the Borrowers of this First Amendment, or the transactions contemplated hereby. 4 3.4. Incorporation of Certain Representations. After giving effect to the terms of this First Amendment, the representations and warranties of the Company set forth in Article V of the Credit Agreement are true and correct in all respects on and as of the date hereof as though made on and as of the date hereof, except as to such representations made as of an earlier specified date. 3.5. Default. No Default or Event of Default under the Credit Agreement has occurred and is continuing. 4. Conditions, Effectiveness. The effectiveness of this First Amendment shall be subject to the compliance by the Borrowers with their agreements herein contained, and to the delivery of the following to Agent in form and substance satisfactory to Agent: 4.1. Amendment Fee. An amendment fee (the "Amendment Fee"), for the ratable benefit of the Banks that have consented to the First Amendment not later than 5:00 p.m., Eastern Standard Time, on February 9, 2000, of 0.075% of the aggregate Commitments of such consenting Banks. The Amendment Fee shall be paid to the Agent in immediately available funds and shall be non-refundable. The Amendment Fee is in addition to any fees, costs, expenses or other amounts otherwise payable pursuant to this First Amendment or the Amended Agreement. 4.2. Authorized Signatories. A certificate, signed by the Secretary or an Assistant Secretary of each of the Borrowers and dated the date of this First Amendment, as to the incumbency of the person or persons authorized to execute and deliver this First Amendment and any instrument or agreement required hereunder on behalf of the Borrowers. 4.3. Guarantor Affirmation. An acknowledgment and reaffirmation letter in the form of Exhibit A hereto duly executed by each party to the Guaranty (a "Guarantor"). 4.4. Other Evidence. Such other evidence with respect to the Borrowers or any other person as the Agent or any Bank may reasonably request to establish the consummation of the trans-actions contemplated hereby, the taking of all corporate action in connection with this First Amendment and the Credit 5 Agreement and the compliance with the conditions set forth herein. 5. Miscellaneous. 5.1. Effectiveness of the Credit Agreement. Except as hereby expressly amended, the Credit Agreement shall each remain in full force and effect and is hereby ratified and confirmed in all respects on and as of the date hereof. 5.2. Waivers. This First Amendment is limited solely to the matters expressly set forth herein and is specific in time and in intent and does not constitute, nor should it be construed as, a waiver or amendment of any other term or condition, right, power or privilege under the Credit Agreement or under any agreement, contract, indenture, document or instrument mentioned therein; nor does it preclude or prejudice any rights of the Agent or the Banks thereunder, or any exercise thereof or the exercise of any other right, power or privilege, nor shall it require the Majority Banks to agree to an amendment, waiver or consent for a similar transaction or on a future occasion, nor shall any future waiver of any right, power, privilege or default hereunder, or under any agreement, contract, indenture, document or instrument mentioned in the Credit Agreement, constitute a waiver of any other right, power, privilege or default of the same or of any other term or provision. 5.3. Counterparts. This First Amendment may be executed in any number of counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. This First Amendment shall not become effective until the Borrowers, the Agent and the Majority Banks shall have signed a copy hereof and the same shall have been delivered to the Agent and the conditions set forth in Section 4 hereof have been satisfied. Upon satisfaction of the foregoing conditions, the effectiveness of this First Amendment shall be retroactive to December 31, 1999. Delivery of an executed counterpart of a signature page to this First Amendment should be effective as delivery of a manually executed counterpart of this First Amendment. 5.4. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of New York. 6 5.5. Severability. The illegality or unenforceability of any provision of this First Amendment or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this First Amendment or any instrument or agreement required hereunder. 7 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. MANOR CARE, INC. By:___________________________ Title:________________________ MANOR CARE OF AMERICA, INC. By:___________________________ Title:________________________ BANK OF AMERICA, N.A., as Agent By:___________________________ Title:________________________ BANK OF AMERICA, N.A., as a Bank By:___________________________ Title:________________________ THE CHASE MANHATTAN BANK By:___________________________ Title:________________________ THE TORONTO-DOMINION BANK By:___________________________ Title:________________________ 8 DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:___________________________ Title:________________________ By:___________________________ Title:________________________ THE HUNTINGTON NATIONAL BANK By:___________________________ Title:________________________ BANK OF MONTREAL By:___________________________ Title:________________________ THE BANK OF NEW YORK By:___________________________ Title:________________________ BANK ONE, N.A. By:___________________________ Title:________________________ ALLFIRST BANK By:___________________________ Title:________________________ 9 NATIONAL CITY BANK By:___________________________ Title:________________________ SUNTRUST BANK By:___________________________ Title:________________________ WACHOVIA BANK, N.A. By:___________________________ Title:________________________ FLEET NATIONAL BANK By:___________________________ Title:________________________ THE FIFTH THIRD BANK By:___________________________ Title:________________________ 10 EXHIBIT A TO FIRST AMENDMENT TO CREDIT AGREEMENT February 9, 2000 The parties listed on the acknowledgment pages hereof: Re: Five Year Credit Agreement dated as of September 25, 1998 Ladies and Gentlemen: Please refer to (i) the Credit Agreement dated as of September 25, 1998 (as so amended, the "Credit Agreement") by and among Manor Care, Inc. and Manor Care of America, Inc., as the borrowers, the commercial lending institutions party thereto (the "Banks") and Bank of America, N.A., as administrative agent (in such capacity, the "Agent") and (ii) the Guaranty dated as of September 25, 1998 (the "Guaranty", which was executed by you on such date or to which you later became a party pursuant to a Guaranty Assumption Agreement. Pursuant to an amendment of even date herewith, certain terms of the Credit Agreement were amended. We hereby request that you (i) consent to the terms of the amendment, (ii) acknowledge and reaffirm all of your obligations and undertakings under the Guaranty and (iii) acknowledge and agree that the Guaranty is and shall remain in full force and effect in accordance with the terms thereof. Please indicate your agreement to the foregoing by signing in the space provided below, and returning the executed copy to the undersigned. Very truly yours, BANK OF AMERICA, N.A., as Agent By:________________________________ Title:_____________________________ 11 Acknowledged and Agreed to: MANOR CARE, INC. By: ________________________________ Title: _____________________________ MANOR CARE OF AMERICA, INC. By: ________________________________ Title: _____________________________ ANCILLARY SERVICES MANAGEMENT, INC. BIRCHWOOD MANOR, INC. BLUE RIDGE REHABILITATION SERVICES, INC. CANTEBURY VILLAGE, INC. DIVERSIFIED REHABILITATION SERVICES, INC. DONAHOE MANOR, INC. EAST MICHIGAN CARE CORPORATION EYE-Q NETWORK, INC. GEORGIAN BLOOMFIELD, INC. GREENVIEW MANOR, INC. HCR ACQUISITION CORPORATION HCR HOME HEALTH CARE AND HOSPICE, INC. HCR INFORMATION CORPORATION HCR PHYSICIAN MANAGEMENT SERVICES, INC. HCR REHABILITATION CORP. HCR THERAPY SERVICES, INC. HCRA OF TEXAS, INC. HCRC INC. HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA HEARTLAND CAREPARTNERS, INC. HEARTLAND HOME CARE, INC. HEARTLAND HOME HEALTH CARE SERVICES, INC. HEARTLAND HOSPICE SERVICES, INC. HEARTLAND MANAGEMENT SERVICES, INC. HEARTLAND PAIN AND REHABILITATION CENTER, INC. HEARTLAND REHABILITATION SERVICES OF NORTH FLORIDA, INC. HEARTLAND REHABILITATION SERVICES, INC. HEARTLAND SERVICES CORP. 12 HERBERT LASKIN, RPT - JOHN MCKENZIE, RPT PHYSICAL THERAPY PROFESSIONAL ASSOCIATES, INC. HGCC OF ALLENTOWN, INC. IONIA MANOR, INC. KENSINGTON MANOR, INC. KNOLLVIEW MANOR, INC. LINCOLN HEALTH CARE, INC. MARINA VIEW MANOR, INC. MEDI-SPEECH SERVICE, INC. MID-SHORE PHYSICAL THERAPY ASSOCIATES, INC. MILESTONE HEALTH SYSTEMS, INC. MILESTONE HEALTHCARE, INC. MILESTONE REHABILITATIONS SERVICES, INC. MILESTONE THERAPY SERVICES, INC. MRC REHABILITATION, INC. NUVISTA REFRACTIVE SURGERY AND LASER CENTER, INC. PERRYSBURG PHYSICAL THERAPY, INC. PHYSICAL OCCUPATIONAL AND SPEECH THERAPY, INC. REHABILITATION ADMINISTRATIVE CORPORATION REHABILITATION ASSOCIATES, INC. REHABILITATION SERVICES OF ROANOKE, INC. REINBOLT AND BURKAM, INC. RICHARDS HEALTHCARE, INC. RIDGEVIEW MANOR, INC. RVA MANAGEMENT SERVICES, INC. SPRINGHILL MANOR, INC. SUN VALLEY MANOR, INC. THERAPY ASSOCIATES, INC. THREE RIVERS MANOR, INC. VISION MANAGEMENT SERVICES, INC. WASHTENAW HILLS MANOR, INC. WHITEHALL MANOR, INC. By:____________________________________ Name: _________________________________ Its:___________________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No. 419-252-5571 Telephone: 419-252-5500 13 AMERICAN HOSPITAL BUILDING CORPORATION AMERICANA HEALTHCARE CENTER OF PALOS TOWNSHIP, INC. AMERICANA HEALTHCARE CORPORATION OF GEORGIA AMERICANA HEALTHCARE CORPORATION OF NAPLES ARCHIVE ACQUISITION, INC. ARCHIVE RETRIEVAL SYSTEMS, INC. BAILY NURSING HOME, INC. CHARLES MANOR, INC. CHESAPEAKE MANOR, INC. DEVON MANOR CORPORATION DISTCO, INC. EXECUTIVE ADVERTISING, INC. FOUR SEASONS NURSING CENTERS, INC. HEALTHCARE CONSTRUCTION CORP. INDUSTRIAL WASTES INC. JACKSONVILLE HEALTHCARE CORPORATION LEADER NURSING AND REHABILITATION CENTER OF BETHEL PARK, INC. LEADER NURSING AND REHABILITATION CENTER OF GLOUCESTER, INC. LEADER NURSING AND REHABILITATION CENTER OF SCOTT TOWNSHIP, INC. LEADER NURSING AND REHABILITATION CENTER OF VIRGINIA, INC. MCHS OF NEW YORK, INC. MNR FINANCE CORP. MRS, INC. MANORCARE HEALTH SERVICES, INC. MANORCARE HEALTH SERVICES OF BOYNTON BEACH, INC. MANORCARE HEALTH SERVICES OF GEORGIA, INC. MANOR CARE AVIATION, INC. MANOR CARE MANAGEMENT CORPORATION MANOR CARE OF AKRON, INC. MANOR CARE OF ARIZONA, INC. MANOR CARE OF ARLINGTON, INC. MANOR CARE OF BOCA RATON, INC. MANOR CARE OF BOYNTON BEACH, INC. MANOR CARE OF CANTON, INC. MANOR CARE OF CHARLESTON, INC. MANOR CARE OF CINCINNATI, INC. MANOR CARE OF COLUMBIA, INC. MANOR CARE OF DARIEN, INC. MANOR CARE OF DUNEDIN, INC. MANOR CARE OF FLORIDA, INC. 14 MANORCARE HEALTH SERVICES OF NORTHHAMPTON COUNTY, INC. MANORCARE HEALTH SERVICES OF VIRGINIA, INC. MANOR CARE OF HINSDALE, INC. MANOR CARE OF KANSAS, INC. MANOR CARE OF KINGSTON COURT, INC. MANOR CARE OF LARGO, INC. MANOR CARE OF LEXINGTON, INC. MANOR CARE OF MEADOW PARK, INC. MANOR CARE OF MESQUITE, INC. MANOR CARE OF NORTH OLMSTEAD, INC. MANOR CARE OF PINEHURST, INC. MANOR CARE OF PLANTATION, INC. MANOR CARE OF ROLLING MEADOWS, INC. MANOR CARE OF ROSSVILLE, INC. MANOR CARE OF SARASOTA, INC. MANOR CARE OF WILLOUGHBY, INC. MANOR CARE OF WILMINGTON, INC. MANOR OF YORK (NORTH), INC. MANOR OF YORK (SOUTH), INC. MANOR CARE PROPERTIES, INC. MANOR LIVING CENTERS, INC. MEDICAL AID TRAINING SCHOOLS, INC. NEW MANORCARE HEALTH SERVICES, INC. THE NIGHTINGALE NURSING HOME, INC. PEAK REHABILITATION, INC. PNEUMATIC CONCRETE, INC. PORTFOLIO ONE, INC. ROLAND PARK NURSING CENTER, INC. SILVER SPRING - WHEATON NURSING HOME, INC. STEWALL CORPORATION STRATFORD MANOR, INC. STUTEX CORP. TOTALCARE CLINICAL LABORATORIES, INC. By:____________________________________ Name: _________________________________ Title:_________________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 ANNANDALE ARDEN, LLC 15 BAINBRIDGE ARDEN, LLC BINGHAM FARMS ARDEN, LLC CRESTVIEW ARDEN, LLC FIRST LOUISVILLE ARDEN, LLC HANOVER ARDEN, LLC JEFFERSON ARDEN, LLC KENWOOD ARDEN, LLC LEXINGTON ARDEN, LLC LINWOOD ARDEN, LLC LIVONIA ARDEN, LLC MEMPHIS ARDEN, LLC NAPA ARDEN, LLC NASHVILLE ARDEN, LLC NISHAYUNA ARDEN, LLC ROANOKE ARDEN, LLC SAN ANTONIO ARDEN, LLC SECOND LOUISVILLE ARDEN, LLC SETAUKET ARDEN, LLC SILVER SPRING ARDEN, LLC TAMPA ARDEN, LLC TUSTIN ARDEN, LLC WALL ARDEN, LLC WEST WINDSOR ARDEN, LLC WILLIAMSVILLE ARDEN, LLC By: Manor Care of America, Inc., its sole member By:_______________________________ Name: _______________________ Title:_______________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No. 419-252-5571 Telephone: 419-252-5500 BATH ARDEN, LLC EMERSON SPRINGHOUSE, LLC FRESNO ARDEN, LLC LAKE ZURICH ARDEN, LLC METUCHEN ARDEN, LLC MIDDLETOWN ARDEN, LLC MONROE ARDEN, LLC MOORESTOWN ARDEN, LLC OVERLAND PARK ARDEN, LLC OVERLAND PARK SKILLED NURSING, LLC 16 ROCKFORD ARDEN, LLC ROCKLEIGH ARDEN, LLC TOM'S RIVER ARDEN, LLC TUSCAWILLA ARDEN, LLC WAYNE ARDEN, LLC WAYNE SPRINGHOUSE, LLC WEST DEPTFORD ARDEN, LLC WEST ORANGE ARDEN, LLC WEST ORANGE SPRINGHOUSE, LLC By: Manor Care Health Services, Inc., its sole member By:_______________________________ Name: _______________________ Title:_______________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No. 419-252-5571 Telephone: 419-252-5500 BOOTH LIMITED PARTNERSHIP By: Jacksonville Healthcare Corporation, its general partner By:________________________________ Name: ________________________ Title_________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 COLEWOOD LIMITED PARTNERSHIP By: American Hospital Building Corporation, its general partner 17 By:________________________________ Name: ________________________ Title:________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 HEARTLAND EMPLOYMENT SERVICES, INC. By:________________________________ Name: _____________________________ Title:_____________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 ANCILLARY SERVICES, LLC By: Heartland Rehabilitation Corporation By:_____________________________________ Name: _____________________________ Title:_____________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 Alburquerque Arden, LLC Colonie Arden, LLC Geneva Arden, LLC Glen Ellyn Arden, LLC Kansas skilled Nursing, LLC Laureldaly Arden, LLC Susquehanna Arden, LLC Warminster Arden, LLC 18 By: Manor Care of America, Inc. Name: _____________________________ Title:_____________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 EX-4.9 3 EXHIBIT 4.9 1 Exhibit 4.9 Second Amendment to the 364 Day Credit Agreement 2 SECOND AMENDMENT TO 364 DAY CREDIT AGREEMENT THIS SECOND AMENDMENT TO 364 DAY CREDIT AGREEMENT is made and dated as of February 9, 2000 (the "SECOND AMENDMENT") among MANOR CARE, INC., a Delaware corporation formerly known as HCR Manor Care, Inc. (the "Company"), MANOR CARE OF AMERICA, INC., a Delaware corporation formerly known as Manor Care, Inc. ("MANOR CARE"; Manor Care and the Company are collectively called the "BORROWERS" and are each individually called a "Borrower"), the financial institution's party to the Credit Agreement referred to below, and BANK OF AMERICA, N.A., a national banking association, as Administrative Agent (the "AGENT"), and amends that certain 364 Day Credit Agreement dated as of September 25, 1998, as amended by that certain First Amendment to 364 Day Credit Agreement dated as of September 24, 1999 (as amended or modified from time to time, the "CREDIT AGREEMENT"). RECITALS -------- WHEREAS, the Borrowers have requested that the Agent and the Banks amend certain provisions of the Credit Agreement, and the Agent and the Banks are willing to do so, on the terms and conditions specified herein; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Terms. All terms used herein shall have the same meanings as in the Credit Agreement unless otherwise defined herein. 2. Amendments. The Credit Agreement is hereby amended as follows: 2.1. The definition of the term "Consolidated EBITDA" in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Consolidated EBITDA" means the Company's and its Subsidiaries' earnings before Consolidated Interest Expense, taxes, depreciation, amortization, extraordinary items of gain and all Specified Losses and before the $274,120,000 of 3 charges taken by the Company in the quarter ending December 31, 1999 in connection with the write-down of its investment in Genesis Health Ventures, Inc. and the $17,404,000 charge taken by the Company in the quarter ending December 31, 1999 in connection with its write-off of accrued and unpaid dividends from Genesis Health Ventures, Inc. and after deduction of $4,351,000 for each of the fiscal quarters ending on March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999. 3. Representations and Warranties. The Borrowers represent and warrant to the Agent and the Banks that, on and as of the date hereof, and after giving effect to this Second Amendment: 3.1. Authorization. The execution, delivery and performance by the Borrowers of this Second Amendment have been duly authorized by all necessary corporate action, and this Second Amendment has been duly executed and delivered by the Borrowers. 3.2. Binding Obligation. This Second Amendment constitutes the legal, valid and binding obligation of the Borrowers, enforceable against the Borrowers in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 3.3. No Legal Obstacle to Amendment. The execution, delivery and performance of this Second Amendment will not (a) contravene the Organization Documents of either Borrower; (b) constitute a breach or default under any material Contractual Obligation or violate or contravene any law or governmental regulation or court decree or order binding on or affecting either Borrower which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect; or (c) result in, or require the creation or imposition of, any Lien on any of either Borrower's properties. No approval or authorization of any governmental authority is required to permit the execution, delivery or performance by the Borrowers of this Second Amendment, or the transactions contemplated hereby. 4 3.4. Incorporation of Certain Representations. After giving effect to the terms of this Second Amendment, the representations and warranties of the Company set forth in Article V of the Credit Agreement are true and correct in all respects on and as of the date hereof as though made on and as of the date hereof, except as to such representations made as of an earlier specified date. 3.5. Default. No Default or Event of Default under the Credit Agreement has occurred and is continuing. 4. Conditions, Effectiveness. The effectiveness of this Second Amendment shall be subject to the compliance by the Borrowers with their agreements herein contained, and to the delivery of the following to Agent in form and substance satisfactory to Agent: 4.1. Amendment Fee. An amendment fee (the "Amendment Fee"), for the ratable benefit of the Banks that have consented to the Second Amendment not later than 5:00 p.m., Eastern Standard Time, on February 9, 2000, of 0.075% of the aggregate Commitments of such consenting Banks. The Amendment Fee shall be paid to the Agent in immediately available funds and shall be non-refundable. The Amendment Fee is in addition to any fees, costs, expenses or other amounts otherwise payable pursuant to this Second Amendment or the Amended Agreement. 4.2. Authorized Signatories. A certificate, signed by the Secretary or an Assistant Secretary of each of the Borrowers and dated the date of this Second Amendment, as to the incumbency of the person or persons authorized to execute and deliver this Second Amendment and any instrument or agreement required hereunder on behalf of the Borrowers. 4.3. Guarantor Affirmation. An acknowledgment and reaffirmation letter in the form of Exhibit A hereto duly executed by each party to the Guaranty (a "Guarantor"). 4.4. Other Evidence. Such other evidence with respect to the Borrowers or any other person as the Agent or any Bank may reasonably request to establish the consummation of the trans-actions contemplated hereby, the taking of all corporate action in connection with this Second Amendment and the Credit 5 Agreement and the compliance with the conditions set forth herein. 5. Miscellaneous. 5.1. Effectiveness of the Credit Agreement. Except as hereby expressly amended, the Credit Agreement shall each remain in full force and effect and is hereby ratified and confirmed in all respects on and as of the date hereof. 5.2. Waivers. This Second Amendment is limited solely to the matters expressly set forth herein and is specific in time and in intent and does not constitute, nor should it be construed as, a waiver or amendment of any other term or condition, right, power or privilege under the Credit Agreement or under any agreement, contract, indenture, document or instrument mentioned therein; nor does it preclude or prejudice any rights of the Agent or the Banks thereunder, or any exercise thereof or the exercise of any other right, power or privilege, nor shall it require the Majority Banks to agree to an amendment, waiver or consent for a similar transaction or on a future occasion, nor shall any future waiver of any right, power, privilege or default hereunder, or under any agreement, contract, indenture, document or instrument mentioned in the Credit Agreement, constitute a waiver of any other right, power, privilege or default of the same or of any other term or provision. 5.3. Counterparts. This Second Amendment may be executed in any number of counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. This Second Amendment shall not become effective until the Borrowers, the Agent and the Majority Banks shall have signed a copy hereof and the same shall have been delivered to the Agent and the conditions set forth in Section 4 hereof have been satisfied. Upon satisfaction of the foregoing conditions, the effectiveness of this Second Amendment shall be retroactive to December 31, 1999. Delivery of an executed counterpart of a signature page to this Second Amendment should be effective as delivery of a manually executed counterpart of this Second Amendment. 5.4. Governing Law. This Second Amendment shall be governed by and construed in accordance with the laws of the State of New York. 6 5.5. Severability. The illegality or unenforceability of any provision of this Second Amendment or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Second Amendment or any instrument or agreement required hereunder. 7 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. MANOR CARE, INC. By:___________________________ Title:________________________ MANOR CARE OF AMERICA, INC. By:___________________________ Title:________________________ BANK OF AMERICA, N.A.,as Agent By:___________________________ Title:________________________ BANK OF AMERICA, N.A.,as a Bank By:___________________________ Title:________________________ THE CHASE MANHATTAN BANK By:___________________________ Title:________________________ 8 DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:___________________________ Title:________________________ By:___________________________ Title:________________________ FLEET NATIONAL BANK By:___________________________ Title:________________________ THE HUNTINGTON NATIONAL BANK By:___________________________ Title:________________________ ALLFIRST BANK By: __________________________ Title:________________________ BANK OF MONTREAL By:___________________________ Title:________________________ THE BANK OF NEW YORK By: __________________________ Title:________________________ 9 NATIONAL CITY BANK By:___________________________ Title:________________________ WACHOVIA BANK, N.A. By: __________________________ Title:________________________ THE FIFTH THIRD BANK By: __________________________ Title:________________________ BANK ONE, N.A. By: __________________________ Title:________________________ SUNTRUST BANK By: __________________________ Title:________________________ 10 EXHIBIT A TO SECOND AMENDMENT TO CREDIT AGREEMENT February 9, 2000 The parties listed on the acknowledgment pages hereof: Re: 364 Day Credit Agreement dated as of September 25, 1998 Ladies and Gentlemen: Please refer to (i) the 364 Day Credit Agreement dated as of September 25, 1998, as amended by that certain First Amendment to 364 Day Credit Agreement dated as of September 24, 1999 (as so amended, the "Credit Agreement") by and among Manor Care, Inc. and Manor Care of America, Inc., as the borrowers, the commercial lending institutions party thereto (the "Banks") and Bank of America, N.A., as administrative agent (in such capacity, the "Agent") and (ii) the Guaranty dated as of September 25, 1998 (the "Guaranty", which was executed by you on such date or to which you later became a party pursuant to a Guaranty Assumption Agreement. Pursuant to an amendment of even date herewith, certain terms of the Credit Agreement were amended. We hereby request that you (i) consent to the terms of the amendment, (ii) acknowledge and reaffirm all of your obligations and undertakings under the Guaranty and (iii) acknowledge and agree that the Guaranty is and shall remain in full force and effect in accordance with the terms thereof. 11 Please indicate your agreement to the foregoing by signing in the space provided below, and returning the executed copy to the undersigned. Very truly yours, BANK OF AMERICA, N.A., as Agent By:________________________________ Title:_____________________________ 12 Acknowledged and Agreed to: MANOR CARE, INC. By: ________________________________ Title: _____________________________ MANOR CARE OF AMERICA, INC. By: ________________________________ Title: _____________________________ ANCILLARY SERVICES MANAGEMENT, INC. BIRCHWOOD MANOR, INC. BLUE RIDGE REHABILITATION SERVICES, INC. CANTEBURY VILLAGE, INC. DIVERSIFIED REHABILITATION SERVICES,INC. DONAHOE MANOR, INC. EAST MICHIGAN CARE CORPORATION EYE-Q NETWORK, INC. GEORGIAN BLOOMFIELD, INC. GREENVIEW MANOR, INC. HCR ACQUISITION CORPORATION HCR HOME HEALTH CARE AND HOSPICE, INC. HCR INFORMATION CORPORATION HCR PHYSICIAN MANAGEMENT SERVICES, INC. HCR REHABILITATION CORP. HCR THERAPY SERVICES, INC. HCRA OF TEXAS, INC. HCRC INC. HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA HEARTLAND CAREPARTNERS, INC. HEARTLAND HOME CARE, INC. HEARTLAND HOME HEALTH CARE SERVICES,INC. HEARTLAND HOSPICE SERVICES, INC. HEARTLAND MANAGEMENT SERVICES, INC. HEARTLAND PAIN AND REHABILITATION CENTER, INC. HEARTLAND REHABILITATION SERVICES OF NORTH FLORIDA, INC. HEARTLAND REHABILITATION SERVICES, INC. HEARTLAND SERVICES CORP. HERBERT LASKIN, RPT - JOHN MCKENZIE, RPT PHYSICAL THERAPY PROFESSIONAL ASSOCIATES, INC. 13 HGCC OF ALLENTOWN, INC. IONIA MANOR, INC. KENSINGTON MANOR, INC. KNOLLVIEW MANOR, INC. LINCOLN HEALTH CARE, INC. MARINA VIEW MANOR, INC. MEDI-SPEECH SERVICE, INC. MID-SHORE PHYSICAL THERAPY ASSOCIATES, INC. MILESTONE HEALTH SYSTEMS, INC. MILESTONE HEALTHCARE, INC. MILESTONE REHABILITATIONS SERVICES, INC. MILESTONE THERAPY SERVICES, INC. MRC REHABILITATION, INC. NUVISTA REFRACTIVE SURGERY AND LASER CENTER, INC. PERRYSBURG PHYSICAL THERAPY, INC. PHYSICAL OCCUPATIONAL AND SPEECH THERAPY, INC. REHABILITATION ADMINISTRATIVE CORPORATION REHABILITATION ASSOCIATES, INC. REHABILITATION SERVICES OF ROANOKE, INC. REINBOLT AND BURKAM, INC. RICHARDS HEALTHCARE, INC. RIDGEVIEW MANOR, INC. RVA MANAGEMENT SERVICES, INC. SPRINGHILL MANOR, INC. SUN VALLEY MANOR, INC. THERAPY ASSOCIATES, INC. THREE RIVERS MANOR, INC. VISION MANAGEMENT SERVICES, INC. WASHTENAW HILLS MANOR, INC. WHITEHALL MANOR, INC. By:____________________________________ Name: _________________________________ Its:___________________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No. 419-252-5571 Telephone: 419-252-5500 14 AMERICAN HOSPITAL BUILDING CORPORATION AMERICANA HEALTHCARE CENTER OF PALOS TOWNSHIP, INC. AMERICANA HEALTHCARE CORPORATION OF GEORGIA AMERICANA HEALTHCARE CORPORATION OF NAPLES ARCHIVE ACQUISITION, INC. ARCHIVE RETRIEVAL SYSTEMS, INC. BAILY NURSING HOME, INC. CHARLES MANOR, INC. CHESAPEAKE MANOR, INC. DEVON MANOR CORPORATION DISTCO, INC. EXECUTIVE ADVERTISING, INC. FOUR SEASONS NURSING CENTERS, INC. HEALTHCARE CONSTRUCTION CORP. INDUSTRIAL WASTES INC. JACKSONVILLE HEALTHCARE CORPORATION LEADER NURSING AND REHABILITATION CENTER OF BETHEL PARK, INC. LEADER NURSING AND REHABILITATION CENTER OF GLOUCESTER, INC. LEADER NURSING AND REHABILITATION CENTER OF SCOTT TOWNSHIP, INC. LEADER NURSING AND REHABILITATION CENTER OF VIRGINIA, INC. MCHS OF NEW YORK, INC. MNR FINANCE CORP. MRS, INC. MANORCARE HEALTH SERVICES, INC. MANORCARE HEALTH SERVICES OF BOYNTON BEACH,INC. MANORCARE HEALTH SERVICES OF GEORGIA, INC. MANOR CARE AVIATION, INC. MANOR CARE MANAGEMENT CORPORATION MANOR CARE OF AKRON, INC. MANOR CARE OF ARIZONA, INC. MANOR CARE OF ARLINGTON, INC. MANOR CARE OF BOCA RATON, INC. MANOR CARE OF BOYNTON BEACH, INC. MANOR CARE OF CANTON, INC. MANOR CARE OF CHARLESTON, INC. MANOR CARE OF CINCINNATI, INC. MANOR CARE OF COLUMBIA, INC. MANOR CARE OF DARIEN, INC. MANOR CARE OF DUNEDIN, INC. MANOR CARE OF FLORIDA, INC. 15 MANORCARE HEALTH SERVICES OF NORTHHAMPTON COUNTY, INC. MANORCARE HEALTH SERVICES OF VIRGINIA, INC. MANOR CARE OF HINSDALE, INC. MANOR CARE OF KANSAS, INC. MANOR CARE OF KINGSTON COURT, INC. MANOR CARE OF LARGO, INC. MANOR CARE OF LEXINGTON, INC. MANOR CARE OF MEADOW PARK, INC. MANOR CARE OF MESQUITE, INC. MANOR CARE OF NORTH OLMSTEAD, INC. MANOR CARE OF PINEHURST, INC. MANOR CARE OF PLANTATION, INC. MANOR CARE OF ROLLING MEADOWS, INC. MANOR CARE OF ROSSVILLE, INC. MANOR CARE OF SARASOTA, INC. MANOR CARE OF WILLOUGHBY, INC. MANOR CARE OF WILMINGTON, INC. MANOR OF YORK (NORTH), INC. MANOR OF YORK (SOUTH), INC. MANOR CARE PROPERTIES, INC. MANOR LIVING CENTERS, INC. MEDICAL AID TRAINING SCHOOLS, INC. NEW MANORCARE HEALTH SERVICES, INC. THE NIGHTINGALE NURSING HOME, INC. PEAK REHABILITATION, INC. PNEUMATIC CONCRETE, INC. PORTFOLIO ONE, INC. ROLAND PARK NURSING CENTER, INC. SILVER SPRING - WHEATON NURSING HOME, INC. STEWALL CORPORATION STRATFORD MANOR, INC. STUTEX CORP. TOTALCARE CLINICAL LABORATORIES, INC. By:________________________________ Name: _________________________________ Title:_________________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 16 ANNANDALE ARDEN, LLC BAINBRIDGE ARDEN, LLC BINGHAM FARMS ARDEN, LLC CRESTVIEW ARDEN, LLC FIRST LOUISVILLE ARDEN, LLC HANOVER ARDEN, LLC JEFFERSON ARDEN, LLC KENWOOD ARDEN, LLC LEXINGTON ARDEN, LLC LINWOOD ARDEN, LLC LIVONIA ARDEN, LLC MEMPHIS ARDEN, LLC NAPA ARDEN, LLC NASHVILLE ARDEN, LLC NISHAYUNA ARDEN, LLC ROANOKE ARDEN, LLC SAN ANTONIO ARDEN, LLC SECOND LOUISVILLE ARDEN, LLC SETAUKET ARDEN, LLC SILVER SPRING ARDEN, LLC TAMPA ARDEN, LLC TUSTIN ARDEN, LLC WALL ARDEN, LLC WEST WINDSOR ARDEN, LLC WILLIAMSVILLE ARDEN, LLC By: Manor Care of America, Inc., its sole member By:_______________________________ Name: _______________________ Title:_______________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No. 419-252-5571 Telephone: 419-252-5500 BATH ARDEN, LLC EMERSON SPRINGHOUSE, LLC FRESNO ARDEN, LLC LAKE ZURICH ARDEN, LLC METUCHEN ARDEN, LLC MIDDLETOWN ARDEN, LLC MONROE ARDEN, LLC MOORESTOWN ARDEN, LLC OVERLAND PARK ARDEN, LLC 17 OVERLAND PARK SKILLED NURSING, LLC ROCKFORD ARDEN, LLC ROCKLEIGH ARDEN, LLC TOM'S RIVER ARDEN, LLC TUSCAWILLA ARDEN, LLC WAYNE ARDEN, LLC WAYNE SPRINGHOUSE, LLC WEST DEPTFORD ARDEN, LLC WEST ORANGE ARDEN, LLC WEST ORANGE SPRINGHOUSE, LLC By: Manor Care Health Services, Inc., its sole member By:_______________________________ Name: _______________________ Title:_______________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No. 419-252-5571 Telephone: 419-252-5500 BOOTH LIMITED PARTNERSHIP By: Jacksonville Healthcare Corporation, its general partner By:________________________________ Name: ________________________ Title_________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 COLEWOOD LIMITED PARTNERSHIP By: American Hospital Building Corporation, its general partner 18 By:________________________________ Name: ________________________ Title:________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 HEARTLAND EMPLOYMENT SERVICES, INC. By:________________________________ Name: _____________________________ Title:_____________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 ANCILLARY SERVICES, LLC By: Heartland Rehabilitation Corporation By:_____________________________________ Name: _____________________________ Title:_____________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 Alburquerque Arden, LLC Colonie Arden, LLC Geneva Arden, LLC Glen Ellyn Arden, LLC Kansas skilled Nursing, LLC Laureldaly Arden, LLC Susquehanna Arden, LLC 19 Warminster Arden, LLC By: Manor Care of America, Inc. By:_____________________________________ Name: _____________________________ Title:_____________________________ Address: One Seagate Toledo, Ohio 43604-2616 Fax No.: 419-252-5571 Telephone: 419-252-5500 EX-10.14 4 EXHIBIT 10.14 1 Exhibit 10.14 SEVERANCE AGREEMENT ------------------- This SEVERANCE AGREEMENT ("Agreement"), effective as of August 20, 1999 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HCR MANORCARE, INC., a Delaware corporation and sole stockholder of the Company ("HCR") and PAUL A. ORMOND ("Employee"), supersedes and replaces all prior employment agreements between the parties hereto. RECITALS -------- A. The Company has agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. B. The Company wishes to insure that its senior executives and other key employees are not practically disabled from discharging their duties in respect to a proposed or actual Corporate Transaction. C. The Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including Employee, applicable in the event of a Corporate Transaction. EVENTS ------ In consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Employee and the Company hereby agree as follows: 1. CERTAIN DEFINED TERMS. The following terms have the meanings set forth below: (a) "Accounting Firm" is defined in Section 10(b). (b) "Aggregate Cash Compensation" means at the time of any determination, the sum of: (A) the Employee's Base Pay, (B) the Employee's Annual Incentive Plan bonus payable for the year in which the Termination Date occurs, calculated by multiplying the product of the Employee's Base Pay and the Employee's bonus percentage by 200%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs at maximum performance level. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination 2 (d) "Board" means the Board of Directors of HCR. (e) "Cause" means Employee's financial dishonesty, fraud in the performance of his duties, willful failure to perform assigned duties hereunder or the commission of a felony. (f) "Change in Control" means the occurrence during the Protected Term of any of the following events, but only to the extent such events do not constitute a Merger of Equals: (i) HCR is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than sixty-five percent of the combined voting power of the then outstanding securities of such resulting corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of HCR immediately prior to such transaction; (ii) HCR sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than sixty-five percent of the combined voting power of the then outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of HCR immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule l3d-3 or any successor rule or regulation promulgated under the Exchange Act) of 15% or more of the then outstanding Voting Stock of HCR; (iv) HCR files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of HCR has occurred or will occur in the future pursuant to any then existing contract or transaction; or (v) If, during any consecutive twelve month period, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, PROVIDED, HOWEVER, that for purposes of this clause (v) each Director who is first elected, or first nominated for election by HCR's stockholders, by a vote of at least one-half of the Directors (or a committee thereof) then still in office who were Directors at the beginning of any such period will be deemed to have been a Director at the beginning of such period. 2 3 Notwithstanding the foregoing provisions of Sections l(f)(iii) or 1(f)(iv), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Sections l(f)(iii) or 1(f)(iv) solely because (1) HCR, (2) any Subsidiary (including, without limitation, the Company) or (3) any employee stock ownership plan or any other employee benefit plan of HCR or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock of HCR, whether in excess of 15% or otherwise, or because HCR reports that a change in control of HCR has occurred or will occur in the future by reason of such beneficial ownership. (g) "Competing Business" shall mean any person, corporation or other entity engaged in the United States of America in providing long-term care, skilled nursing or rehabilitative services or selling or attempting to sell or providing or attempting to provide any other product or service which is the same as or similar to products or services sold or provided by the Company within the last 2 years prior to termination of Employee's employment hereunder. (h) "Continuation Period" means the thirty-six months immediately following the Termination Date. (i) "Corporate Transaction" means either a Change of Control or a Merger of Equals. (j) "Director" means a member of the Board. (k) "Employee Benefits" means the perquisites and benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Employee is entitled to participate at any time of determination, including, without limitation, any stock option, stock purchase, stock appreciation, savings, pension, supplemental employee retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Excise Tax" is defined in Section 10(a). (n) "Gross-Up Payment" is defined in Section 10(a). (o) "ISO" is defined in Section 10(a). 3 4 (p) "Merger of Equals" means during the Protected Term the merger or consolidation of HCR with another corporation or other legal person and (i) as a result of such merger or consolidation less than sixty-five percent but more than thirty-five percent of the combined voting power of the then outstanding securities of the resulting corporation or person (the "Surviving Entity") immediately after such transaction are held in the aggregate by holders of Voting Stock of HCR immediately prior to such transaction and (ii) on the first anniversary of the transaction either: (i) (A) a majority of the executive officers of the Surviving Entity are individuals who were executive officers of HCR immediately prior to the transaction; or (ii) (B) a majority of the directors of the Surviving Entity are individuals who were directors of HCR immediately prior to the transaction. (q) "Payment" is defined in Section 10(a). (r) "Protected Term" means the three year period commencing as of the date hereof and expiring as of the close of business on the third anniversary hereof; PROVIDED, HOWEVER, that: (i) the term of this Agreement will automatically be extended for successive one year periods unless, not later than 90 days prior to the expiration of the then applicable term either party shall have given notice that it does not wish to have the Protected Term extended; and (ii) except as otherwise provided in the last sentence of Section 12, if, prior to a Corporate Transaction, Employee ceases for any reason to be an employee of the Company, thereupon without further action the Protected Term shall be deemed to have expired and Sections 8, 10, 11 and 14(a) and the last sentence of Section 12 of this Agreement and the portion of any other provision of this Agreement that incorporates such provisions will immediately terminate and be of no further effect. For purposes of this Section l(r), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. (s) "Severance Period" means the period of time commencing on the date of the occurrence of a Corporate Transaction and continuing until the earliest of (i) the third anniversary of the occurrence of the Corporate Transaction, or (ii) Employee's death. (t) "Severance Benefits" are defined in Section 8(b). (u) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (v) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(v), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. 4 5 (w) "Underpayment" is defined in Section 10(a). (x) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. SALARY AND POSITION. Employee's Base Pay and job title shown on Schedule I are correct as of the date hereof and in accordance with Employee's understanding. 3. AT-WILL EMPLOYMENT. Employee's employment with the Company is not for any specified term and may be terminated by Employee or by the Company at any time for any reason, with or without Cause. 4. NO OTHER AGREEMENTS. Except as specifically set forth herein and in Schedule II attached hereto, Employee represents and warrants that there are no other written or oral agreements, understandings or commitments relating to Employee's severance entitlements upon termination. 5. ENTIRE AGREEMENT This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding severance upon termination of their employment relationship and supersede any and all prior written or oral agreements, understandings or commitments. Employee understands that no representative of the Company has been authorized to enter into any agreement, understanding or commitment with Employee which is inconsistent in any way with the terms of this Agreement. 6. PROHIBITION AGAINST AMENDMENT. Employee's Base Pay may be modified by the Company at any time in its sole discretion. The Employee Benefits in which Employee is entitled to participate or receive may be improved, reduced or terminated by the Company at any time in its sole discretion; provided, however, that no vested or accrued benefit shall be adversely affected. No term set forth in this Agreement, including without limitation the terms set forth in Section 3 hereof, may be modified in any way except by a written agreement signed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 7. SEVERANCE PAYMENT NOT FOLLOWING A CORPORATE TRANSACTION. Except as provided in Section 8: (a) Upon the termination of Employee's employment as a result of Employee's electing to resign his employment or to retire without the consent of the Company, no payments shall be required or made pursuant to this Section 7. (b) Upon the termination of Employee's employment by the Company for Cause, no payments shall be required or made pursuant to this Section 7. 5 6 (c) Upon the termination of Employee's employment by the Company for any reason other than for Cause, death or disability, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date. The Company shall give thirty (30) days written notice of any such termination which notice shall specify the Termination Date. (d) Upon the termination of Employee's employment as a result of the death of Employee, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; PROVIDED, HOWEVER, that such payments shall be offset by any survivor benefits, excluding life insurance proceeds, received by Employee's spouse or other designated beneficiary under the Company's plans, programs and policies. (e) Upon the termination of Employee's employment as a result of his becoming unable to perform his duties due to a disability as established by the award of long-term disability benefits under the Company's long-term disability plan, the Company may terminate Employee's employment by giving Employee thirty (30) days written notice of its intention to terminate. In such event, Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; provided, however, that such payments shall be offset by any disability benefits received by Employee, or his legal guardian, under the Company's plans, programs and policies. (f) Notwithstanding anything to the contrary contained in this Section 7, upon the termination of Employee's employment for any reason other than pursuant to Section 8, whether voluntarily or involuntarily and whether with or without Cause, Employee shall be entitled to the payments provided for hereunder and such rights as he otherwise has under the Company's Restricted Stock Plan and the Company's Stock Option Plan in the circumstances of his particular termination. 8. TERMINATION FOLLOWING A CORPORATE TRANSACTION. (a) ELIGIBILITY FOR SEVERANCE BENEFITS. (i) If, during the Severance Period, Employee's employment is terminated by the Company other than for Cause and other than as a result of his death or disability pursuant to Section 7(d) or (e), Employee shall be entitled to the Severance Benefits. (ii) Following the consummation of a Corporate Transaction and the occurrence of one of the following events, Employee may elect, within either the 6 month period following the occurrence of one of the following events, or the 180 day period following the first anniversary of the Corporate Transaction, to terminate employment with the Company and receive the Severance Benefits (pursuant to written notice to the Board specifying the effective date of such termination which shall not be earlier than the date of the Board's receipt of such 6 7 notice and shall not be later than the end of such six month or 180 day period, as applicable): (A) Failure to elect or reelect or otherwise to maintain Employee in the office or position, or a substantially equivalent office or position, of or with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction , or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) or Chairman of the Board if Employee shall have been a Director or Chairman of the Board immediately prior to the Corporate Transaction; (A) The occurrence of any of the following which is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee: (I) a significant adverse change, whether such change involves a reduction or expansion, in the nature or scope of the authorities, positions, powers, functions, responsibilities or duties attached to the position with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction, including but not limited to any change in the reporting lines, offices and/or positions to which Employee reported immediately prior to the Corporate Transaction and/or changes due to HCR or any successor no longer being a reporting company under the Exchange Act; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Corporate Transaction; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to the Corporate Transaction; (IV) any material breach of this Agreement by the Company, HCR, or any successor thereof; or (V) the continuation or repetition of harassing or denigrating treatment of Employee which is inconsistent with Employee's position with the Company, HCR, or any successor thereof. (B) The liquidation, dissolution, merger, consolidation or reorganization of the Company or HCR, or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company or HCR (by liquidation, merger, consolidation, 7 8 reorganization, transfer or otherwise), to which all or substantially all of such business and/or assets have been transferred (directly or by operation of law) assumes all duties and obligations of the Company and HCR under this Agreement pursuant to Section 16(a); (C) The Company, HCR, or any successor thereof, as the case may be, by which Employee is employed relocates its principal executive offices, or requires Employee to have his principal location of work changed, to any location which increases by more than 25 miles Employee's commute to such location immediately prior to the Corporate Transaction, or requires Employee to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than the average of such time that was required of Employee in the three full years immediately prior to the Corporate Transaction without, in either case, his prior written consent. (iii) If Employee elects to terminate employment with the Company or any successor, as the case may be, for any reason, or without reason, during such portion of the 180-day period immediately following the first anniversary of the occurrence of any Change in Control, Employee shall be entitled to the Severance Benefits. (b) SEVERANCE BENEFITS. If, Employee's employment with the Company is terminated pursuant to Section 8(a), the Company will pay to Employee the following amounts within five business days after the Termination Date and will provide to Employee the following benefits (collectively, the "Severance Benefits"): (i) A lump sum payment equal to three times Employee's Aggregate Cash Compensation for the year in which the Termination Date occurs; (ii) During the Continuation Period: (A) the Company will arrange to provide Employee with group medical, dental and vision benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Corporate Transaction; and (B) the Company (or successor) will provide Employee the use of office space, furnishings and secretarial support services comparable to those provided to Employee immediately prior to the Corporate Transaction; If and to the extent that any benefit described in Section 8(b)(ii)(A) is not or cannot be paid or provided under any policy, plan program or 8 9 arrangement of the Company, then the Company will pay or provide for the payment to Employee, his dependents and beneficiaries, of such Employee Benefits in any manner selected by the Company. Without otherwise limiting the purposes or effect of Section 8, Employee Benefits otherwise receivable by Employee pursuant to Section 8(b)(ii)(A) will be reduced to the extent comparable welfare benefits are actually received by Employee from another employer during the Continuation Period, and any such benefits received by Employee shall be reported by Employee to the Company. (iii) The Company shall take whatever action is necessary to fund completely any split-dollar life insurance arrangement maintained by the Company for the benefit of Employee, effective as of the Termination Date and based on Employee's service through the end of the Continuation Period; (iv) Effective as of the Termination Date, Employee will be credited with service with the Company for an additional 36 months for the purpose of determining service credits and benefits due and payable to Employee under the Company's retirement income, supplemental retirement and other benefit plans of the Company applicable to Employee, his dependents or his beneficiaries immediately prior to the Corporate Transaction; (v) If the Termination Date is prior to the Employee's attainment of age 55 or the fifth anniversary of the date of the Corporate Transaction, the Employee's qualified and non-qualified defined benefit plan retirement benefits shall be calculated as if Employee had attained at least age 55 and had at least five years of service from and after the date of the Corporate Transaction. Any additional benefit to which Employee is entitled pursuant to this Section 8(b)(v) shall be paid either by the Company directly or pursuant to the terms of the non-qualified plan. (vi) Effective as of the Termination Date the option (the "1998 Option") to purchase Company stock granted to Employee pursuant to that certain Non-Qualified Stock Option Agreement dated as of September 25, 1998 by and between HCR and Employee shall be fully vested and exercisable in full as of such date; and (vii) Employee shall be permitted to elect to defer receipt of amounts payable to him, if any, under the Company's Senior Management Savings Plan and Senior Management Savings Plan for Corporate Officers until any date not later than the expiration of the Continuation Period. (c) Without limiting the rights of Employee at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Section 8 on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite 9 10 "prime rate" as quoted from time to time during the relevant period in the Midwest Edition of The Wall Street Journal. Any change in such prime rate will be effective on and as of the date such change is so published. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 8 and under Section 11 will survive: (i) any termination or expiration of this Agreement following a Corporate Transaction prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Corporate Transaction prior to the expiration of the Protected Term. 9. NO SET-OFF; NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible (a) for Employee to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Employee may suffer as a result of termination of employment hereunder. In addition, the Company acknowledges that its severance pay plans applicable to corporate officers do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the payment of the severance compensation by the Company to Employee in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and Employee will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Employee hereunder or otherwise, except as expressly provided in Sections 7(d) and (e) and the last sentence of Section 8 (b)(ii). 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Corporate Transaction occurs prior to the expiration of the Protected Term and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (collectively, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Internal Revenue Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise 10 11 Tax"), then Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-Up Payment shall be made with respect to the Excise Tax, if any, attributable to: (i) any incentive stock option, as defined by Section 422 of the Internal Revenue Code ("ISO"), granted prior to the execution of this Agreement; or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by Employee of all taxes, including any Excise Tax (and including any interest or penalties imposed with respect to such taxes), imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 10(f) hereof, all determinations required to be made under this Section 10, including whether an Excise Tax is payable by Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Company. The Company shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Employee within thirty (30) calendar days after any Termination Date arising pursuant to Section 8(a). If the Accounting Firm determines that any Excise Tax is payable by Employee, the Company shall pay the required Gross-Up Payment to Employee within five (5) business days after receipt of such determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall, at the same time as it makes such determination, furnish the Company and Employee an opinion that Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Internal Revenue Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 10(f) hereof and Employee thereafter is required to make a payment of any Excise Tax, Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Employee within five business days after receipt of such determination and calculations. (c) The Company and Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination and calculations contemplated by Section 10(b) hereof. Except as contemplated by Sections 10(f) or 10(g), any final determination 11 12 by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Employee. (d) The federal, state and local income or other tax returns filed by Employee shall be prepared and filed on a consistent basis with the determinations of the Accounting Firm with respect to the Excise Tax payable by Employee. Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the company true and correct copies (with any amendments ) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Employee shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 10(b) hereof shall be borne by the Company. (f) Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after Employee actually receives notice of such claim and Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Employee). Employee shall not pay such claim prior to the earlier of: (i) the expiration of the ten (10) calendar day period following the date on which he gives such notice to the Company; and (ii) the date that any payment of such amount with respect to such claim is due. If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (A) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and 12 13 (D) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 10(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 10(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that Employee may participate therein at his own cost and expense) and may, at its option, either direct Employee to pay the tax claimed and sue for refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED, FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, Employee receives any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 10(f) hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to Employee pursuant to this Section 10. 11. LEGAL FEES AND EXPENSES. It is the intent of the Company that Employee not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Employee's rights under Section 8 of this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits 13 14 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under it this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Employee the benefits provided or intended to be provided to Employee hereunder, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice, at the expense of the Company as hereafter provided, to advise and represent Employee in connection with any such interpretation, enforcement or defense, including, without limitation, the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Without respect to whether Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable attorneys' and related fees and expenses by Employee in connection with any of the foregoing. 12. EMPLOYMENT RIGHTS; TERMINATION PRIOR TO CORPORATE TRANSACTION. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or Employee to have Employee remain in the employment of the Company prior to or following any Corporate Transaction. Any termination of employment of Employee by the Company other than for Cause or by reason of his death or disability pursuant to Sections 7(b), (d) or (e) during the period beginning on the date that is sixty (60) days prior to the date of the first public announcement by the Company of the potential occurrence of an event that would constitute a Corporate Transaction and ending on the date of consummation of such Corporate Transaction shall be deemed to be a termination of Employee after a Corporate Transaction for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) COVENANT NOT TO COMPETE. Employee covenants and agrees that during Employee's employment with the Company and for a period of one (1) year following the termination of Employee's employment, including without limitation termination by the Company for cause or without cause, Employee shall not, in the United States of America, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise, alone or in association with any other person, corporation or other entity, in any Competing Business. Notwithstanding the foregoing, Employee may own, directly or indirectly, up to 1% of the outstanding equity of any business which may be a Competing Business without violating the provisions of this Section 13(a). (b) NON-SOLICITATION OF CUSTOMERS. Employee agrees that during his employment with the Company he shall not, directly or indirectly, solicit the business of, or do business with, any customer or prospective customer of the Company for any business purpose other than for the benefit of the Company. Employee further agrees that for one (1) year following termination of his employment with the Company, including without limitation termination by the Company for cause or without cause, Employee 14 15 shall not, directly or indirectly, solicit the business of, or do business with, any customers or prospective customers of the Company. (c) NON-SOLICITATION OF EMPLOYEES. Employee agrees that, during his employment with the Company and for one (1) year following termination of Employee's employment with the Company, including without limitation termination by the Company for cause or without cause, Employee shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the employment of the Company for any reason whatsoever, or hire any employee of the Company except into the employment of the Company. 14. VESTING OF OPTIONS AND RESTRICTED STOCK; EMPLOYEE BENEFITS. (a) Upon the consummation of a Corporate Transaction prior to the expiration of the Protected Term, (i) all options to purchase Company stock, other than the 1998 Option, then held by Employee shall be fully vested and exercisable in full as of such date; (ii) all shares of restricted Company stock issuable to Employee under outstanding restricted stock awards made to Employee prior to the date of such Corporate Transaction shall be issued to Employee as of such date; and (iii) the restrictions applicable to all shares of restricted stock then held by Employee (including shares issued pursuant to subsection (ii) above) shall lapse as of such date. (b) Except as otherwise expressly provided herein, no termination of Employee's employment with the Company will affect any rights which Employee may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits. 15. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or governmental regulation or ruling. 16. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require all successors (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to any substantial portion of the business or assets of the Company, by agreement in form and substance satisfactory to Employee, jointly and severally expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, 15 16 including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 16(a) and 16(b) hereof. Without limiting the generality or effect of the foregoing, Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 16(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 17. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic .facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express or UPS, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Employee at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 18. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 19. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 20. MISCELLANEOUS. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions 16 17 or conditions at the same or at any prior or subsequent time. References to Sections are to references to Sections of this Agreement. 21. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement. 22. TITLES. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA By: ----------------------------------- Its: ----------------------------------- HCR MANORCARE, INC. By: ----------------------------------- Its: ----------------------------------- EMPLOYEE: --------------------------------------- PAUL A. ORMOND 17 18 SCHEDULE I ---------- Employee: Current Base Rate: Job Titles: 18 19 SCHEDULE II ----------- Executive Retention Agreement 19 EX-10.15 5 EXHIBIT 10.15 1 Exhibit 10.15 SEVERANCE AGREEMENT ------------------- This SEVERANCE AGREEMENT ("Agreement"), effective as of August 20, 1999 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HCR MANORCARE, INC., a Delaware corporation and sole stockholder of the Company ("HCR") and M. KEITH WEIKEL ("Employee"), supersedes and replaces all prior employment agreements between the parties hereto. RECITALS -------- A. The Company has agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. B. The Company wishes to insure that its senior executives and other key employees are not practically disabled from discharging their duties in respect to a proposed or actual Corporate Transaction. C. The Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including Employee, applicable in the event of a Corporate Transaction. EVENTS ------ In consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Employee and the Company hereby agree as follows: 1. CERTAIN DEFINED TERMS. The following terms have the meanings set forth below: (a) "Accounting Firm" is defined in Section 10(b). (b) "Aggregate Cash Compensation" means at the time of any determination, the sum of: (A) the Employee's Base Pay, (B) the Employee's Annual Incentive Plan bonus payable for the year in which the Termination Date occurs, calculated by multiplying the product of the Employee's Base Pay and the Employee's bonus percentage by 200%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs at maximum performance level. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination 2 (d) "Board" means the Board of Directors of HCR. (e) "Cause" means Employee's financial dishonesty, fraud in the performance of his duties, willful failure to perform assigned duties hereunder or the commission of a felony. (f) "Change in Control" means the occurrence during the Protected Term of any of the following events, but only to the extent such events do not constitute a Merger of Equals: (i) HCR is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than sixty-five percent of the combined voting power of the then outstanding securities of such resulting corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of HCR immediately prior to such transaction; (ii) HCR sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than sixty-five percent of the combined voting power of the then outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of HCR immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule l3d-3 or any successor rule or regulation promulgated under the Exchange Act) of 15% or more of the then outstanding Voting Stock of HCR; (iv) HCR files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of HCR has occurred or will occur in the future pursuant to any then existing contract or transaction; or (v) If, during any consecutive twelve month period, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, PROVIDED, HOWEVER, that for purposes of this clause (v) each Director who is first elected, or first nominated for election by HCR's stockholders, by a vote of at least one-half of the Directors (or a committee thereof) then still in office who were Directors at the beginning of any such period will be deemed to have been a Director at the beginning of such period. 2 3 Notwithstanding the foregoing provisions of Sections l(f)(iii) or 1(f)(iv), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Sections l(f)(iii) or 1(f)(iv) solely because (1) HCR, (2) any Subsidiary (including, without limitation, the Company) or (3) any employee stock ownership plan or any other employee benefit plan of HCR or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock of HCR, whether in excess of 15% or otherwise, or because HCR reports that a change in control of HCR has occurred or will occur in the future by reason of such beneficial ownership. (g) "Competing Business" shall mean any person, corporation or other entity engaged in the United States of America in providing long-term care, skilled nursing or rehabilitative services or selling or attempting to sell or providing or attempting to provide any other product or service which is the same as or similar to products or services sold or provided by the Company within the last 2 years prior to termination of Employee's employment hereunder. (h) "Continuation Period" means the thirty-six months immediately following the Termination Date. (i) "Corporate Transaction" means either a Change of Control or a Merger of Equals. (j) "Director" means a member of the Board. (k) "Employee Benefits" means the perquisites and benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Employee is entitled to participate at any time of determination, including, without limitation, any stock option, stock purchase, stock appreciation, savings, pension, supplemental employee retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Excise Tax" is defined in Section 10(a). (n) "Gross-Up Payment" is defined in Section 10(a). (o) "ISO" is defined in Section 10(a). 3 4 (p) "Merger of Equals" means during the Protected Term the merger or consolidation of HCR with another corporation or other legal person and (i) as a result of such merger or consolidation less than sixty-five percent but more than thirty-five percent of the combined voting power of the then outstanding securities of the resulting corporation or person (the "Surviving Entity") immediately after such transaction are held in the aggregate by holders of Voting Stock of HCR immediately prior to such transaction and (ii) on the first anniversary of the transaction either: (i) (A) a majority of the executive officers of the Surviving Entity are individuals who were executive officers of HCR immediately prior to the transaction; or (ii) (B) a majority of the directors of the Surviving Entity are individuals who were directors of HCR immediately prior to the transaction. (q) "Payment" is defined in Section 10(a). (r) "Protected Term" means the three year period commencing as of the date hereof and expiring as of the close of business on the third anniversary hereof; PROVIDED, HOWEVER, that: (i) the term of this Agreement will automatically be extended for successive one year periods unless, not later than 90 days prior to the expiration of the then applicable term either party shall have given notice that it does not wish to have the Protected Term extended; and (ii) except as otherwise provided in the last sentence of Section 12, if, prior to a Corporate Transaction, Employee ceases for any reason to be an employee of the Company, thereupon without further action the Protected Term shall be deemed to have expired and Sections 8, 10, 11 and 14(a) and the last sentence of Section 12 of this Agreement and the portion of any other provision of this Agreement that incorporates such provisions will immediately terminate and be of no further effect. For purposes of this Section l(r), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. (s) "Severance Period" means the period of time commencing on the date of the occurrence of a Corporate Transaction and continuing until the earliest of (i) the third anniversary of the occurrence of the Corporate Transaction, or (ii) Employee's death. (t) "Severance Benefits" are defined in Section 8(b). (u) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (v) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(v), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. 4 5 (w) "Underpayment" is defined in Section 10(a). (x) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. SALARY AND POSITION. Employee's Base Pay and job title shown on Schedule I are correct as of the date hereof and in accordance with Employee's understanding. 3. AT-WILL EMPLOYMENT. Employee's employment with the Company is not for any specified term and may be terminated by Employee or by the Company at any time for any reason, with or without Cause. 4. NO OTHER AGREEMENTS. Except as specifically set forth herein and in Schedule II attached hereto, Employee represents and warrants that there are no other written or oral agreements, understandings or commitments relating to Employee's severance entitlements upon termination. 5. ENTIRE AGREEMENT. This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding severance upon termination of their employment relationship and supersede any and all prior written or oral agreements, understandings or commitments. Employee understands that no representative of the Company has been authorized to enter into any agreement, understanding or commitment with Employee which is inconsistent in any way with the terms of this Agreement. 6. PROHIBITION AGAINST AMENDMENT. Employee's Base Pay may be modified by the Company at any time in its sole discretion. The Employee Benefits in which Employee is entitled to participate or receive may be improved, reduced or terminated by the Company at any time in its sole discretion; provided, however, that no vested or accrued benefit shall be adversely affected. No term set forth in this Agreement, including without limitation the terms set forth in Section 3 hereof, may be modified in any way except by a written agreement signed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 7. SEVERANCE PAYMENT NOT FOLLOWING A CORPORATE TRANSACTION. Except as provided in Section 8: (a) Upon the termination of Employee's employment as a result of Employee's electing to resign his employment or to retire without the consent of the Company, no payments shall be required or made pursuant to this Section 7. (b) Upon the termination of Employee's employment by the Company for Cause, no payments shall be required or made pursuant to this Section 7. (c) Upon the termination of Employee's employment by the Company for any reason other than for Cause, death or disability, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of 5 6 three years after such Termination Date. The Company shall give thirty (30) days written notice of any such termination which notice shall specify the Termination Date. (d) Upon the termination of Employee's employment as a result of the death of Employee, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; PROVIDED, HOWEVER, that such payments shall be offset by any survivor benefits, excluding life insurance proceeds, received by Employee's spouse or other designated beneficiary under the Company's plans, programs and policies. (e) Upon the termination of Employee's employment as a result of his becoming unable to perform his duties due to a disability as established by the award of long-term disability benefits under the Company's long-term disability plan, the Company may terminate Employee's employment by giving Employee thirty (30) days written notice of its intention to terminate. In such event, Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; provided, however, that such payments shall be offset by any disability benefits received by Employee, or his legal guardian, under the Company's plans, programs and policies. (f) Notwithstanding anything to the contrary contained in this Section 7, upon the termination of Employee's employment for any reason other than pursuant to Section 8, whether voluntarily or involuntarily and whether with or without Cause, Employee shall be entitled to the payments provided for hereunder and such rights as he otherwise has under the Company's Restricted Stock Plan and the Company's Stock Option Plan in the circumstances of his particular termination. 8. TERMINATION FOLLOWING A CORPORATE TRANSACTION. (a) ELIGIBILITY FOR SEVERANCE BENEFITS. (i) If, during the Severance Period, Employee's employment is terminated by the Company other than for Cause and other than as a result of his death or disability pursuant to Section 7(d) or (e), Employee shall be entitled to the Severance Benefits. (ii) Following the consummation of a Corporate Transaction and the occurrence of one of the following events, Employee may elect, within either the 6 month period following the occurrence of one of the following events, or the 180 day period following the first anniversary of the Corporate Transaction, to terminate employment with the Company and receive the Severance Benefits (pursuant to written notice to the Board specifying the effective date of such termination which shall not be earlier than the date of the Board's receipt of such notice and shall not be later than the end of such six month or 180 day period, as applicable): 6 7 (A) Failure to elect or reelect or otherwise to maintain Employee in the office or position, or a substantially equivalent office or position, of or with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction , or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) or Chairman of the Board if Employee shall have been a Director or Chairman of the Board immediately prior to the Corporate Transaction; (A) The occurrence of any of the following which is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee: (I) a significant adverse change, whether such change involves a reduction or expansion, in the nature or scope of the authorities, positions, powers, functions, responsibilities or duties attached to the position with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction, including but not limited to any change in the reporting lines, offices and/or positions to which Employee reported immediately prior to the Corporate Transaction and/or changes due to HCR or any successor no longer being a reporting company under the Exchange Act; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Corporate Transaction; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to the Corporate Transaction; (IV) any material breach of this Agreement by the Company, HCR, or any successor thereof; or (V) the continuation or repetition of harassing or denigrating treatment of Employee which is inconsistent with Employee's position with the Company, HCR, or any successor thereof. (B) The liquidation, dissolution, merger, consolidation or reorganization of the Company or HCR, or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company or HCR (by liquidation, merger, consolidation, reorganization, transfer or otherwise), to which all or substantially all of such business and/or assets have been transferred (directly or by operation 7 8 of law) assumes all duties and obligations of the Company and HCR under this Agreement pursuant to Section 16(a); (C) The Company, HCR, or any successor thereof, as the case may be, by which Employee is employed relocates its principal executive offices, or requires Employee to have his principal location of work changed, to any location which increases by more than 25 miles Employee's commute to such location immediately prior to the Corporate Transaction, or requires Employee to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than the average of such time that was required of Employee in the three full years immediately prior to the Corporate Transaction without, in either case, his prior written consent. (iii) If Employee elects to terminate employment with the Company or any successor, as the case may be, for any reason, or without reason, during such portion of the 180-day period immediately following the first anniversary of the occurrence of any Change in Control, Employee shall be entitled to the Severance Benefits. (b) SEVERANCE BENEFITS. If, Employee's employment with the Company is terminated pursuant to Section 8(a), the Company will pay to Employee the following amounts within five business days after the Termination Date and will provide to Employee the following benefits (collectively, the "Severance Benefits"): (i) A lump sum payment equal to three times Employee's Aggregate Cash Compensation for the year in which the Termination Date occurs; (ii) During the Continuation Period: (A) the Company will arrange to provide Employee with group medical, dental and vision benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Corporate Transaction; and (B) the Company (or successor) will provide Employee the use of office space, furnishings and secretarial support services comparable to those provided to Employee immediately prior to the Corporate Transaction; If and to the extent that any benefit described in Section 8(b)(ii)(A) is not or cannot be paid or provided under any policy, plan program or arrangement of the Company, then the Company will pay or provide for the payment to Employee, his dependents and beneficiaries, of such 8 9 Employee Benefits in any manner selected by the Company. Without otherwise limiting the purposes or effect of Section 8, Employee Benefits otherwise receivable by Employee pursuant to Section 8(b)(ii)(A) will be reduced to the extent comparable welfare benefits are actually received by Employee from another employer during the Continuation Period, and any such benefits received by Employee shall be reported by Employee to the Company. (iii) The Company shall take whatever action is necessary to fund completely any split-dollar life insurance arrangement maintained by the Company for the benefit of Employee, effective as of the Termination Date and based on Employee's service through the end of the Continuation Period; (iv) Effective as of the Termination Date, Employee will be credited with service with the Company for an additional 36 months for the purpose of determining service credits and benefits due and payable to Employee under the Company's retirement income, supplemental retirement and other benefit plans of the Company applicable to Employee, his dependents or his beneficiaries immediately prior to the Corporate Transaction; (v) If the Termination Date is prior to the Employee's attainment of age 55 or the fifth anniversary of the date of the Corporate Transaction, the Employee's qualified and non-qualified defined benefit plan retirement benefits shall be calculated as if Employee had attained at least age 55 and had at least five years of service from and after the date of the Corporate Transaction. Any additional benefit to which Employee is entitled pursuant to this Section 8(b)(v) shall be paid either by the Company directly or pursuant to the terms of the non-qualified plan. (vi) Effective as of the Termination Date the option (the "1998 Option") to purchase Company stock granted to Employee pursuant to that certain Non-Qualified Stock Option Agreement dated as of September 25, 1998 by and between HCR and Employee shall be fully vested and exercisable in full as of such date; and (vii) Employee shall be permitted to elect to defer receipt of amounts payable to him, if any, under the Company's Senior Management Savings Plan and Senior Management Savings Plan for Corporate Officers until any date not later than the expiration of the Continuation Period. (c) Without limiting the rights of Employee at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Section 8 on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Midwest 9 10 Edition of The Wall Street Journal. Any change in such prime rate will be effective on and as of the date such change is so published. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 8 and under Section 11 will survive: (i) any termination or expiration of this Agreement following a Corporate Transaction prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Corporate Transaction prior to the expiration of the Protected Term. 9. NO SET-OFF; NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible (a) for Employee to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Employee may suffer as a result of termination of employment hereunder. In addition, the Company acknowledges that its severance pay plans applicable to corporate officers do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the payment of the severance compensation by the Company to Employee in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and Employee will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Employee hereunder or otherwise, except as expressly provided in Sections 7(d) and (e) and the last sentence of Section 8 (b)(ii). 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Corporate Transaction occurs prior to the expiration of the Protected Term and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (collectively, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Internal Revenue Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment or payments 10 11 (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-Up Payment shall be made with respect to the Excise Tax, if any, attributable to: (i) any incentive stock option, as defined by Section 422 of the Internal Revenue Code ("ISO"), granted prior to the execution of this Agreement; or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by Employee of all taxes, including any Excise Tax (and including any interest or penalties imposed with respect to such taxes), imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 10(f) hereof, all determinations required to be made under this Section 10, including whether an Excise Tax is payable by Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Company. The Company shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Employee within thirty (30) calendar days after any Termination Date arising pursuant to Section 8(a). If the Accounting Firm determines that any Excise Tax is payable by Employee, the Company shall pay the required Gross-Up Payment to Employee within five (5) business days after receipt of such determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall, at the same time as it makes such determination, furnish the Company and Employee an opinion that Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Internal Revenue Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 10(f) hereof and Employee thereafter is required to make a payment of any Excise Tax, Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Employee within five business days after receipt of such determination and calculations. (c) The Company and Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination and calculations contemplated by Section 10(b) hereof. Except as contemplated by Sections 10(f) or 10(g), any final determination 11 12 by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Employee. (d) The federal, state and local income or other tax returns filed by Employee shall be prepared and filed on a consistent basis with the determinations of the Accounting Firm with respect to the Excise Tax payable by Employee. Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the company true and correct copies (with any amendments ) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Employee shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 10(b) hereof shall be borne by the Company. (f) Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after Employee actually receives notice of such claim and Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Employee). Employee shall not pay such claim prior to the earlier of: (i) the expiration of the ten (10) calendar day period following the date on which he gives such notice to the Company; and (ii) the date that any payment of such amount with respect to such claim is due. If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (A) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and 12 13 (D) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 10(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 10(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that Employee may participate therein at his own cost and expense) and may, at its option, either direct Employee to pay the tax claimed and sue for refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED, FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, Employee receives any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 10(f) hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to Employee pursuant to this Section 10. 11. LEGAL FEES AND EXPENSES. It is the intent of the Company that Employee not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Employee's rights under Section 8 of this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits 13 14 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under it this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Employee the benefits provided or intended to be provided to Employee hereunder, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice, at the expense of the Company as hereafter provided, to advise and represent Employee in connection with any such interpretation, enforcement or defense, including, without limitation, the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Without respect to whether Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable attorneys' and related fees and expenses by Employee in connection with any of the foregoing. 12. EMPLOYMENT RIGHTS; TERMINATION PRIOR TO CORPORATE TRANSACTION. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or Employee to have Employee remain in the employment of the Company prior to or following any Corporate Transaction. Any termination of employment of Employee by the Company other than for Cause or by reason of his death or disability pursuant to Sections 7(b), (d) or (e) during the period beginning on the date that is sixty (60) days prior to the date of the first public announcement by the Company of the potential occurrence of an event that would constitute a Corporate Transaction and ending on the date of consummation of such Corporate Transaction shall be deemed to be a termination of Employee after a Corporate Transaction for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) COVENANT NOT TO COMPETE. Employee covenants and agrees that during Employee's employment with the Company and for a period of one (1) year following the termination of Employee's employment, including without limitation termination by the Company for cause or without cause, Employee shall not, in the United States of America, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise, alone or in association with any other person, corporation or other entity, in any Competing Business. Notwithstanding the foregoing, Employee may own, directly or indirectly, up to 1% of the outstanding equity of any business which may be a Competing Business without violating the provisions of this Section 13(a). (b) NON-SOLICITATION OF CUSTOMERS. Employee agrees that during his employment with the Company he shall not, directly or indirectly, solicit the business of, or do business with, any customer or prospective customer of the Company for any business purpose other than for the benefit of the Company. Employee further agrees that for one (1) year following termination of his employment with the Company, including without limitation termination by the Company for cause or without cause, Employee 14 15 shall not, directly or indirectly, solicit the business of, or do business with, any customers or prospective customers of the Company. (c) NON-SOLICITATION OF EMPLOYEES. Employee agrees that, during his employment with the Company and for one (1) year following termination of Employee's employment with the Company, including without limitation termination by the Company for cause or without cause, Employee shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the employment of the Company for any reason whatsoever, or hire any employee of the Company except into the employment of the Company. 14. VESTING OF OPTIONS AND RESTRICTED STOCK; EMPLOYEE BENEFITS. (a) Upon the consummation of a Corporate Transaction prior to the expiration of the Protected Term, (i) all options to purchase Company stock, other than the 1998 Option, then held by Employee shall be fully vested and exercisable in full as of such date; (ii) all shares of restricted Company stock issuable to Employee under outstanding restricted stock awards made to Employee prior to the date of such Corporate Transaction shall be issued to Employee as of such date; and (iii) the restrictions applicable to all shares of restricted stock then held by Employee (including shares issued pursuant to subsection (ii) above) shall lapse as of such date. (b) Except as otherwise expressly provided herein, no termination of Employee's employment with the Company will affect any rights which Employee may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits. 15. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or governmental regulation or ruling. 16. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require all successors (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to any substantial portion of the business or assets of the Company, by agreement in form and substance satisfactory to Employee, jointly and severally expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, 15 16 including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 16(a) and 16(b) hereof. Without limiting the generality or effect of the foregoing, Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 16(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 17. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic .facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express or UPS, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Employee at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 18. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 19. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 20. MISCELLANEOUS. 16 17 21. NO WAIVER BY EITHER PARTY HERETO AT ANY TIME OF ANY BREACH BY THE OTHER PARTY HERETO OR COMPLIANCE WITH ANY CONDITION OR PROVISION OF THIS AGREEMENT TO BE PERFORMED BY SUCH OTHER PARTY WILL BE DEEMED A WAIVER OF SIMILAR OR DISSIMILAR PROVISIONS OR CONDITIONS AT THE SAME OR AT ANY PRIOR OR SUBSEQUENT TIME. REFERENCES TO SECTIONS ARE TO REFERENCES TO SECTIONS OF THIS AGREEMENT. 22. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement. 23. TITLES. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA By: --------------------------- Its: --------------------------- HCR MANORCARE, INC. By: --------------------------- Its: --------------------------- EMPLOYEE: ------------------------------- M. KEITH WEIKEL 17 18 SCHEDULE I ---------- Employee: Current Base Rate: Job Titles: 18 19 SCHEDULE II ----------- Executive Retention Agreement 19 EX-10.16 6 EXHIBIT 10.16 1 Exhibit 10.16 SEVERANCE AGREEMENT ------------------- This SEVERANCE AGREEMENT ("Agreement"), effective as of August 28, 1999 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HCR MANORCARE, INC., a Delaware corporation and sole stockholder of the Company ("HCR") and GEOFFREY G. MEYERS ("Employee"), supersedes and replaces all prior employment agreements between the parties hereto. RECITALS -------- A. The Company has agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. B. The Company wishes to insure that its senior executives and other key employees are not practically disabled from discharging their duties in respect to a proposed or actual Corporate Transaction. C. The Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including Employee, applicable in the event of a Corporate Transaction. EVENTS ------ In consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Employee and the Company hereby agree as follows: 1. CERTAIN DEFINED TERMS. The following terms have the meanings set forth below: (a) "Accounting Firm" is defined in Section 10(b). (b) "Aggregate Cash Compensation" means at the time of any determination, the sum of: (A) the Employee's Base Pay, (B) the Employee's Annual Incentive Plan bonus payable for the year in which the Termination Date occurs, calculated by multiplying the product of the Employee's Base Pay and the Employee's bonus percentage by 200%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs at maximum performance level. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination 2 (d) "Board" means the Board of Directors of HCR. (e) "Cause" means Employee's financial dishonesty, fraud in the performance of his duties, willful failure to perform assigned duties hereunder or the commission of a felony. (f) "Change in Control" means the occurrence during the Protected Term of any of the following events, but only to the extent such events do not constitute a Merger of Equals: (i) HCR is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than sixty-five percent of the combined voting power of the then outstanding securities of such resulting corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of HCR immediately prior to such transaction; (ii) HCR sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than sixty-five percent of the combined voting power of the then outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of HCR immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule l3d-3 or any successor rule or regulation promulgated under the Exchange Act) of 15% or more of the then outstanding Voting Stock of HCR; (iv) HCR files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of HCR has occurred or will occur in the future pursuant to any then existing contract or transaction; or (v) If, during any consecutive twelve month period, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, PROVIDED, HOWEVER, that for purposes of this clause (v) each Director who is first elected, or first nominated for election by HCR's stockholders, by a vote of at least one-half of the Directors (or a committee thereof) then still in office who were Directors at the beginning of any such period will be deemed to have been a Director at the beginning of such period. 2 3 Notwithstanding the foregoing provisions of Sections l(f)(iii) or 1(f)(iv), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Sections l(f)(iii) or 1(f)(iv) solely because (1) HCR, (2) any Subsidiary (including, without limitation, the Company) or (3) any employee stock ownership plan or any other employee benefit plan of HCR or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock of HCR, whether in excess of 15% or otherwise, or because HCR reports that a change in control of HCR has occurred or will occur in the future by reason of such beneficial ownership. (g) "Competing Business" shall mean any person, corporation or other entity engaged in the United States of America in providing long-term care, skilled nursing or rehabilitative services or selling or attempting to sell or providing or attempting to provide any other product or service which is the same as or similar to products or services sold or provided by the Company within the last 2 years prior to termination of Employee's employment hereunder. (h) "Continuation Period" means the thirty-six months immediately following the Termination Date. (i) "Corporate Transaction" means either a Change of Control or a Merger of Equals. (j) "Director" means a member of the Board. (k) "Employee Benefits" means the perquisites and benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Employee is entitled to participate at any time of determination, including, without limitation, any stock option, stock purchase, stock appreciation, savings, pension, supplemental employee retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Excise Tax" is defined in Section 10(a). (n) "Gross-Up Payment" is defined in Section 10(a). (o) "ISO" is defined in Section 10(a). 3 4 (p) "Merger of Equals" means during the Protected Term the merger or consolidation of HCR with another corporation or other legal person and (i) as a result of such merger or consolidation less than sixty-five percent but more than thirty-five percent of the combined voting power of the then outstanding securities of the resulting corporation or person (the "Surviving Entity") immediately after such transaction are held in the aggregate by holders of Voting Stock of HCR immediately prior to such transaction and (ii) on the first anniversary of the transaction either: (i) (A) a majority of the executive officers of the Surviving Entity are individuals who were executive officers of HCR immediately prior to the transaction; or (ii) (B) a majority of the directors of the Surviving Entity are individuals who were directors of HCR immediately prior to the transaction. (q) "Payment" is defined in Section 10(a). (r) "Protected Term" means the three year period commencing as of the date hereof and expiring as of the close of business on the third anniversary hereof; PROVIDED, HOWEVER, that: (i) the term of this Agreement will automatically be extended for successive one year periods unless, not later than 90 days prior to the expiration of the then applicable term either party shall have given notice that it does not wish to have the Protected Term extended; and (ii) except as otherwise provided in the last sentence of Section 12, if, prior to a Corporate Transaction, Employee ceases for any reason to be an employee of the Company, thereupon without further action the Protected Term shall be deemed to have expired and Sections 8, 10, 11 and 14(a) and the last sentence of Section 12 of this Agreement and the portion of any other provision of this Agreement that incorporates such provisions will immediately terminate and be of no further effect. For purposes of this Section l(r), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. (s) "Severance Period" means the period of time commencing on the date of the occurrence of a Corporate Transaction and continuing until the earliest of (i) the third anniversary of the occurrence of the Corporate Transaction, or (ii) Employee's death. (t) "Severance Benefits" are defined in Section 8(b). (u) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (v) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(v), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. 4 5 (w) "Underpayment" is defined in Section 10(a). (x) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. SALARY AND POSITION. Employee's Base Pay and job title shown on Schedule I are correct as of the date hereof and in accordance with Employee's understanding. 3. AT-WILL EMPLOYMENT. Employee's employment with the Company is not for any specified term and may be terminated by Employee or by the Company at any time for any reason, with or without Cause. 4. NO OTHER AGREEMENTS. Except as specifically set forth herein and in Schedule II attached hereto, Employee represents and warrants that there are no other written or oral agreements, understandings or commitments relating to Employee's severance entitlements upon termination. 5. ENTIRE AGREEMENT This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding severance upon termination of their employment relationship and supersede any and all prior written or oral agreements, understandings or commitments. Employee understands that no representative of the Company has been authorized to enter into any agreement, understanding or commitment with Employee which is inconsistent in any way with the terms of this Agreement. 6. PROHIBITION AGAINST AMENDMENT. Employee's Base Pay may be modified by the Company at any time in its sole discretion. The Employee Benefits in which Employee is entitled to participate or receive may be improved, reduced or terminated by the Company at any time in its sole discretion; provided, however, that no vested or accrued benefit shall be adversely affected. No term set forth in this Agreement, including without limitation the terms set forth in Section 3 hereof, may be modified in any way except by a written agreement signed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 7. SEVERANCE PAYMENT NOT FOLLOWING A CORPORATE TRANSACTION. Except as provided in Section 8: (a) Upon the termination of Employee's employment as a result of Employee's electing to resign his employment or to retire without the consent of the Company, no payments shall be required or made pursuant to this Section 7. (b) Upon the termination of Employee's employment by the Company for Cause, no payments shall be required or made pursuant to this Section 7. 5 6 (c) Upon the termination of Employee's employment by the Company for any reason other than for Cause, death or disability, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date. The Company shall give thirty (30) days written notice of any such termination which notice shall specify the Termination Date. (d) Upon the termination of Employee's employment as a result of the death of Employee, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; PROVIDED, HOWEVER, that such payments shall be offset by any survivor benefits, excluding life insurance proceeds, received by Employee's spouse or other designated beneficiary under the Company's plans, programs and policies. (e) Upon the termination of Employee's employment as a result of his becoming unable to perform his duties due to a disability as established by the award of long-term disability benefits under the Company's long-term disability plan, the Company may terminate Employee's employment by giving Employee thirty (30) days written notice of its intention to terminate. In such event, Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; provided, however, that such payments shall be offset by any disability benefits received by Employee, or his legal guardian, under the Company's plans, programs and policies. (f) Notwithstanding anything to the contrary contained in this Section 7, upon the termination of Employee's employment for any reason other than pursuant to Section 8, whether voluntarily or involuntarily and whether with or without Cause, Employee shall be entitled to the payments provided for hereunder and such rights as he otherwise has under the Company's Restricted Stock Plan and the Company's Stock Option Plan in the circumstances of his particular termination. 8. TERMINATION FOLLOWING A CORPORATE TRANSACTION. (a) ELIGIBILITY FOR SEVERANCE BENEFITS. (i) If, during the Severance Period, Employee's employment is terminated by the Company other than for Cause and other than as a result of his death or disability pursuant to Section 7(d) or (e), Employee shall be entitled to the Severance Benefits. (ii) Following the consummation of a Corporate Transaction and the occurrence of one of the following events, Employee may elect, within either the 6 month period following the occurrence of one of the following events, or the 180 day period following the first anniversary of the Corporate Transaction, to terminate employment with the Company and receive the Severance Benefits (pursuant to written notice to the Board specifying the effective date of such termination which shall not be earlier than the date of the Board's receipt of such 6 7 notice and shall not be later than the end of such six month or 180 day period, as applicable): (A) Failure to elect or reelect or otherwise to maintain Employee in the office or position, or a substantially equivalent office or position, of or with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction , or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) or Chairman of the Board if Employee shall have been a Director or Chairman of the Board immediately prior to the Corporate Transaction; (A) The occurrence of any of the following which is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee: (I) a significant adverse change, whether such change involves a reduction or expansion, in the nature or scope of the authorities, positions, powers, functions, responsibilities or duties attached to the position with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction, including but not limited to any change in the reporting lines, offices and/or positions to which Employee reported immediately prior to the Corporate Transaction and/or changes due to HCR or any successor no longer being a reporting company under the Exchange Act; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Corporate Transaction; (III) a material reduction in the scope or value of Employee Benefits as in I effect immediately prior to the Corporate Transaction; (IV) any material breach of this Agreement by the Company, HCR, or any successor thereof; or (V) the continuation or repetition of harassing or denigrating treatment of Employee which is inconsistent with Employee's position with the Company, HCR, or any successor thereof. (B) The liquidation, dissolution, merger, consolidation or reorganization of the Company or HCR, or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company or HCR (by liquidation, merger, consolidation, 7 8 reorganization, transfer or otherwise), to which all or substantially all of such business and/or assets have been transferred (directly or by operation of law) assumes all duties and obligations of the Company and HCR under this Agreement pursuant to Section 16(a); (C) The Company, HCR, or any successor thereof, as the case may be, by which Employee is employed relocates its principal executive offices, or requires Employee to have his principal location of work changed, to any location which increases by more than 25 miles Employee's commute to such location immediately prior to the Corporate Transaction, or requires Employee to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than the average of such time that was required of Employee in the three full years immediately prior to the Corporate Transaction without, in either case, his prior written consent. (iii) If Employee elects to terminate employment with the Company or any successor, as the case may be, for any reason, or without reason, during such portion of the 180-day period immediately following the first anniversary of the occurrence of any Change in Control, Employee shall be entitled to the Severance Benefits. (b) SEVERANCE BENEFITS. If, Employee's employment with the Company is terminated pursuant to Section 8(a), the Company will pay to Employee the following amounts within five business days after the Termination Date and will provide to Employee the following benefits (collectively, the "Severance Benefits"): (i) A lump sum payment equal to three times Employee's Aggregate Cash Compensation for the year in which the Termination Date occurs; (ii) During the Continuation Period: (A) the Company will arrange to provide Employee with group medical, dental and vision benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Corporate Transaction; and (B) the Company (or successor) will provide Employee the use of office space, furnishings and secretarial support services comparable to those provided to Employee immediately prior to the Corporate Transaction; If and to the extent that any benefit described in Section 8(b)(ii)(A) is not or cannot be paid or provided under any policy, plan program or 8 9 arrangement of the Company, then the Company will pay or provide for the payment to Employee, his dependents and beneficiaries, of such Employee Benefits in any manner selected by the Company. Without otherwise limiting the purposes or effect of Section 8, Employee Benefits otherwise receivable by Employee pursuant to Section 8(b)(ii)(A) will be reduced to the extent comparable welfare benefits are actually received by Employee from another employer during the Continuation Period, and any such benefits received by Employee shall be reported by Employee to the Company. (iii) The Company shall take whatever action is necessary to fund completely any split-dollar life insurance arrangement maintained by the Company for the benefit of Employee, effective as of the Termination Date and based on Employee's service through the end of the Continuation Period; (iv) Effective as of the Termination Date, Employee will be credited with service with the Company for an additional 36 months for the purpose of determining service credits and benefits due and payable to Employee under the Company's retirement income, supplemental retirement and other benefit plans of the Company applicable to Employee, his dependents or his beneficiaries immediately prior to the Corporate Transaction; (v) If the Termination Date is prior to the Employee's attainment of age 55 or the fifth anniversary of the date of the Corporate Transaction, the Employee's qualified and non-qualified defined benefit plan retirement benefits shall be calculated as if Employee had attained at least age 55 and had at least five years of service from and after the date of the Corporate Transaction. Any additional benefit to which Employee is entitled pursuant to this Section 8(b)(v) shall be paid either by the Company directly or pursuant to the terms of the non-qualified plan. (vi) Effective as of the Termination Date the option (the "1998 Option") to purchase Company stock granted to Employee pursuant to that certain Non-Qualified Stock Option Agreement dated as of September 25, 1998 by and between HCR and Employee shall be fully vested and exercisable in full as of such date; and (vii) Employee shall be permitted to elect to defer receipt of amounts payable to him, if any, under the Company's Senior Management Savings Plan and Senior Management Savings Plan for Corporate Officers until any date not later than the expiration of the Continuation Period. (c) Without limiting the rights of Employee at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Section 8 on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite 9 10 "prime rate" as quoted from time to time during the relevant period in the Midwest Edition of The Wall Street Journal. Any change in such prime rate will be effective on and as of the date such change is so published. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 8 and under Section 11 will survive: (i) any termination or expiration of this Agreement following a Corporate Transaction prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Corporate Transaction prior to the expiration of the Protected Term. 9. NO SET-OFF; NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible (a) for Employee to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Employee may suffer as a result of termination of employment hereunder. In addition, the Company acknowledges that its severance pay plans applicable to corporate officers do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the payment of the severance compensation by the Company to Employee in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and Employee will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Employee hereunder or otherwise, except as expressly provided in Sections 7(d) and (e) and the last sentence of Section 8 (b)(ii). 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Corporate Transaction occurs prior to the expiration of the Protected Term and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (collectively, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Internal Revenue Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise 10 11 Tax"), then Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-Up Payment shall be made with respect to the Excise Tax, if any, attributable to: (i) any incentive stock option, as defined by Section 422 of the Internal Revenue Code ("ISO"), granted prior to the execution of this Agreement; or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by Employee of all taxes, including any Excise Tax (and including any interest or penalties imposed with respect to such taxes), imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 10(f) hereof, all determinations required to be made under this Section 10, including whether an Excise Tax is payable by Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Company. The Company shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Employee within thirty (30) calendar days after any Termination Date arising pursuant to Section 8(a). If the Accounting Firm determines that any Excise Tax is payable by Employee, the Company shall pay the required Gross-Up Payment to Employee within five (5) business days after receipt of such determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall, at the same time as it makes such determination, furnish the Company and Employee an opinion that Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Internal Revenue Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 10(f) hereof and Employee thereafter is required to make a payment of any Excise Tax, Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Employee within five business days after receipt of such determination and calculations. (c) The Company and Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination and calculations contemplated by Section 10(b) hereof. Except as contemplated by Sections 10(f) or 10(g), any final determination 11 12 by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Employee. (d) The federal, state and local income or other tax returns filed by Employee shall be prepared and filed on a consistent basis with the determinations of the Accounting Firm with respect to the Excise Tax payable by Employee. Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the company true and correct copies (with any amendments ) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Employee shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 10(b) hereof shall be borne by the Company. (f) Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after Employee actually receives notice of such claim and Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Employee). Employee shall not pay such claim prior to the earlier of: (i) the expiration of the ten (10) calendar day period following the date on which he gives such notice to the Company; and (ii) the date that any payment of such amount with respect to such claim is due. If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (A) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and 12 13 (D) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 10(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 10(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that Employee may participate therein at his own cost and expense) and may, at its option, either direct Employee to pay the tax claimed and sue for refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED, FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, Employee receives any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 10(f) hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to Employee pursuant to this Section 10. 11. LEGAL FEES AND EXPENSES. It is the intent of the Company that Employee not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Employee's rights under Section 8 of this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits 13 14 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under it this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Employee the benefits provided or intended to be provided to Employee hereunder, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice, at the expense of the Company as hereafter provided, to advise and represent Employee in connection with any such interpretation, enforcement or defense, including, without limitation, the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Without respect to whether Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable attorneys' and related fees and expenses by Employee in connection with any of the foregoing. 12. EMPLOYMENT RIGHTS; TERMINATION PRIOR TO CORPORATE TRANSACTION. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or Employee to have Employee remain in the employment of the Company prior to or following any Corporate Transaction. Any termination of employment of Employee by the Company other than for Cause or by reason of his death or disability pursuant to Sections 7(b), (d) or (e) during the period beginning on the date that is sixty (60) days prior to the date of the first public announcement by the Company of the potential occurrence of an event that would constitute a Corporate Transaction and ending on the date of consummation of such Corporate Transaction shall be deemed to be a termination of Employee after a Corporate Transaction for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) COVENANT NOT TO COMPETE. Employee covenants and agrees that during Employee's employment with the Company and for a period of one (1) year following the termination of Employee's employment, including without limitation termination by the Company for cause or without cause, Employee shall not, in the United States of America, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise, alone or in association with any other person, corporation or other entity, in any Competing Business. Notwithstanding the foregoing, Employee may own, directly or indirectly, up to 1% of the outstanding equity of any business which may be a Competing Business without violating the provisions of this Section 13(a). (b) NON-SOLICITATION OF CUSTOMERS. Employee agrees that during his employment with the Company he shall not, directly or indirectly, solicit the business of, or do business with, any customer or prospective customer of the Company for any business purpose other than for the benefit of the Company. Employee further agrees that for one (1) year following termination of his employment with the Company, including without limitation termination by the Company for cause or without cause, Employee 14 15 shall not, directly or indirectly, solicit the business of, or do business with, any customers or prospective customers of the Company. (c) NON-SOLICITATION OF EMPLOYEES. Employee agrees that, during his employment with the Company and for one (1) year following termination of Employee's employment with the Company, including without limitation termination by the Company for cause or without cause, Employee shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the employment of the Company for any reason whatsoever, or hire any employee of the Company except into the employment of the Company. 14. VESTING OF OPTIONS AND RESTRICTED STOCK; EMPLOYEE BENEFITS. (a) Upon the consummation of a Corporate Transaction prior to the expiration of the Protected Term, (i) all options to purchase Company stock, other than the 1998 Option, then held by Employee shall be fully vested and exercisable in full as of such date; (ii) all shares of restricted Company stock issuable to Employee under outstanding restricted stock awards made to Employee prior to the date of such Corporate Transaction shall be issued to Employee as of such date; and (iii) the restrictions applicable to all shares of restricted stock then held by Employee (including shares issued pursuant to subsection (ii) above) shall lapse as of such date. (b) Except as otherwise expressly provided herein, no termination of Employee's employment with the Company will affect any rights which Employee may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits. 15. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or governmental regulation or ruling. 16. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require all successors (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to any substantial portion of the business or assets of the Company, by agreement in form and substance satisfactory to Employee, jointly and severally expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, 15 16 including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 16(a) and 16(b) hereof. Without limiting the generality or effect of the foregoing, Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 16(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 17. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic .facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express or UPS, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Employee at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 18. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 19. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 20. MISCELLANEOUS. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or 16 17 conditions at the same or at any prior or subsequent time. References to Sections are to references to Sections of this Agreement. 21. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement. 22. TITLES. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA By: ------------------------- Its: ------------------------- HCR MANORCARE, INC. By: ------------------------- Its: ------------------------- EMPLOYEE: ----------------------------- GEOFFREY G. MEYERS 17 18 SCHEDULE I ---------- Employee: Current Base Rate: Job Titles: 18 19 SCHEDULE II ----------- Executive Retention Agreement 19 EX-10.17 7 EXHIBIT 10.17 1 Exhibit 10.17 SEVERANCE AGREEMENT ------------------- This SEVERANCE AGREEMENT ("Agreement"), effective as of August 20, 1999 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HCR MANORCARE, INC., a Delaware corporation and sole stockholder of the Company ("HCR") and R. JEFFREY BIXLER ("Employee"), supersedes and replaces all prior employment agreements between the parties hereto. RECITALS -------- A. The Company has agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. B. The Company wishes to insure that its senior executives and other key employees are not practically disabled from discharging their duties in respect to a proposed or actual Corporate Transaction. C. The Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including Employee, applicable in the event of a Corporate Transaction. EVENTS ------ In consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Employee and the Company hereby agree as follows: 1. CERTAIN DEFINED TERMS. The following terms have the meanings set forth below: (a) "Accounting Firm" is defined in Section 10(b). (b) "Aggregate Cash Compensation" means at the time of any determination, the sum of: (A) the Employee's Base Pay, (B) the Employee's Annual Incentive Plan bonus payable for the year in which the Termination Date occurs, calculated by multiplying the product of the Employee's Base Pay and the Employee's bonus percentage by 200%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs at maximum performance level. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination 2 (d) "Board" means the Board of Directors of HCR. (e) "Cause" means Employee's financial dishonesty, fraud in the performance of his duties, willful failure to perform assigned duties hereunder or the commission of a felony. (f) "Change in Control" means the occurrence during the Protected Term of any of the following events, but only to the extent such events do not constitute a Merger of Equals: (i) HCR is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than sixty-five percent of the combined voting power of the then outstanding securities of such resulting corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of HCR immediately prior to such transaction; (ii) HCR sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person, and as a result of such sale or transfer less than sixty-five percent of the combined voting power of the then outstanding Voting Stock of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of HCR immediately prior to such sale or transfer; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule l3d-3 or any successor rule or regulation promulgated under the Exchange Act) of 15% or more of the then outstanding Voting Stock of HCR; (iv) HCR files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of HCR has occurred or will occur in the future pursuant to any then existing contract or transaction; or (v) If, during any consecutive twelve month period, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, PROVIDED, HOWEVER, that for purposes of this clause (v) each Director who is first elected, or first nominated for election by HCR's stockholders, by a vote of at least one-half of the Directors (or a committee thereof) then still in office who were Directors at the beginning of any such period will be deemed to have been a Director at the beginning of such period. 2 3 Notwithstanding the foregoing provisions of Sections l(f)(iii) or 1(f)(iv), unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of Sections l(f)(iii) or 1(f)(iv) solely because (1) HCR, (2) any Subsidiary (including, without limitation, the Company) or (3) any employee stock ownership plan or any other employee benefit plan of HCR or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock of HCR, whether in excess of 15% or otherwise, or because HCR reports that a change in control of HCR has occurred or will occur in the future by reason of such beneficial ownership. (g) "Competing Business" shall mean any person, corporation or other entity engaged in the United States of America in providing long-term care, skilled nursing or rehabilitative services or selling or attempting to sell or providing or attempting to provide any other product or service which is the same as or similar to products or services sold or provided by the Company within the last 2 years prior to termination of Employee's employment hereunder. (h) "Continuation Period" means the thirty-six months immediately following the Termination Date. (i) "Corporate Transaction" means either a Change of Control or a Merger of Equals. (j) "Director" means a member of the Board. (k) "Employee Benefits" means the perquisites and benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Employee is entitled to participate at any time of determination, including, without limitation, any stock option, stock purchase, stock appreciation, savings, pension, supplemental employee retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Excise Tax" is defined in Section 10(a). (n) "Gross-Up Payment" is defined in Section 10(a). (o) "ISO" is defined in Section 10(a). 3 4 (p) "Merger of Equals" means during the Protected Term the merger or consolidation of HCR with another corporation or other legal person and (i) as a result of such merger or consolidation less than sixty-five percent but more than thirty-five percent of the combined voting power of the then outstanding securities of the resulting corporation or person (the "Surviving Entity") immediately after such transaction are held in the aggregate by holders of Voting Stock of HCR immediately prior to such transaction and (ii) on the first anniversary of the transaction either: (i) (A) a majority of the executive officers of the Surviving Entity are individuals who were executive officers of HCR immediately prior to the transaction; or (ii) (B) a majority of the directors of the Surviving Entity are individuals who were directors of HCR immediately prior to the transaction. (q) "Payment" is defined in Section 10(a). (r) "Protected Term" means the three year period commencing as of the date hereof and expiring as of the close of business on the third anniversary hereof; PROVIDED, HOWEVER, that: (i) the term of this Agreement will automatically be extended for successive one year periods unless, not later than 90 days prior to the expiration of the then applicable term either party shall have given notice that it does not wish to have the Protected Term extended; and (ii) except as otherwise provided in the last sentence of Section 12, if, prior to a Corporate Transaction, Employee ceases for any reason to be an employee of the Company, thereupon without further action the Protected Term shall be deemed to have expired and Sections 8, 10, 11 and 14(a) and the last sentence of Section 12 of this Agreement and the portion of any other provision of this Agreement that incorporates such provisions will immediately terminate and be of no further effect. For purposes of this Section l(r), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. (s) "Severance Period" means the period of time commencing on the date of the occurrence of a Corporate Transaction and continuing until the earliest of (i) the third anniversary of the occurrence of the Corporate Transaction, or (ii) Employee's death. (t) "Severance Benefits" are defined in Section 8(b). (u) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (v) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(v), Employee shall not be deemed to have ceased to be an employee of the Company by reason of the transfer of Employee's employment between or among HCR and the Company or any other Subsidiary. 4 5 (w) "Underpayment" is defined in Section 10(a). (x) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. SALARY AND POSITION. Employee's Base Pay and job title shown on Schedule I are correct as of the date hereof and in accordance with Employee's understanding. 3. AT-WILL EMPLOYMENT. Employee's employment with the Company is not for any specified term and may be terminated by Employee or by the Company at any time for any reason, with or without Cause. 4. NO OTHER AGREEMENTS. Except as specifically set forth herein and in Schedule II attached hereto, Employee represents and warrants that there are no other written or oral agreements, understandings or commitments relating to Employee's severance entitlements upon termination. 5. ENTIRE AGREEMENT. This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding severance upon termination of their employment relationship and supersede any and all prior written or oral agreements, understandings or commitments. Employee understands that no representative of the Company has been authorized to enter into any agreement, understanding or commitment with Employee which is inconsistent in any way with the terms of this Agreement. 6. PROHIBITION AGAINST AMENDMENT. Employee's Base Pay may be modified by the Company at any time in its sole discretion. The Employee Benefits in which Employee is entitled to participate or receive may be improved, reduced or terminated by the Company at any time in its sole discretion; provided, however, that no vested or accrued benefit shall be adversely affected. No term set forth in this Agreement, including without limitation the terms set forth in Section 3 hereof, may be modified in any way except by a written agreement signed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 7. SEVERANCE PAYMENT NOT FOLLOWING A CORPORATE TRANSACTION. Except as provided in Section 8: (a) Upon the termination of Employee's employment as a result of Employee's electing to resign his employment or to retire without the consent of the Company, no payments shall be required or made pursuant to this Section 7. (b) Upon the termination of Employee's employment by the Company for Cause, no payments shall be required or made pursuant to this Section 7. (c) Upon the termination of Employee's employment by the Company for any reason other than for Cause, death or disability, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of 5 6 three years after such Termination Date. The Company shall give thirty (30) days written notice of any such termination which notice shall specify the Termination Date. (d) Upon the termination of Employee's employment as a result of the death of Employee, the Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; PROVIDED, HOWEVER, that such payments shall be offset by any survivor benefits, excluding life insurance proceeds, received by Employee's spouse or other designated beneficiary under the Company's plans, programs and policies. (e) Upon the termination of Employee's employment as a result of his becoming unable to perform his duties due to a disability as established by the award of long-term disability benefits under the Company's long-term disability plan, the Company may terminate Employee's employment by giving Employee thirty (30) days written notice of its intention to terminate. In such event, Company shall continue payment of Employee's Base Pay, at the rate then in effect on the Termination Date, for a period of three years after such Termination Date; provided, however, that such payments shall be offset by any disability benefits received by Employee, or his legal guardian, under the Company's plans, programs and policies. (f) Notwithstanding anything to the contrary contained in this Section 7, upon the termination of Employee's employment for any reason other than pursuant to Section 8, whether voluntarily or involuntarily and whether with or without Cause, Employee shall be entitled to the payments provided for hereunder and such rights as he otherwise has under the Company's Restricted Stock Plan and the Company's Stock Option Plan in the circumstances of his particular termination. 8. TERMINATION FOLLOWING A CORPORATE TRANSACTION. (a) ELIGIBILITY FOR SEVERANCE BENEFITS. (i) If, during the Severance Period, Employee's employment is terminated by the Company other than for Cause and other than as a result of his death or disability pursuant to Section 7(d) or (e), Employee shall be entitled to the Severance Benefits. (ii) Following the consummation of a Corporate Transaction and the occurrence of one of the following events, Employee may elect, within either the 6 month period following the occurrence of one of the following events, or the 180 day period following the first anniversary of the Corporate Transaction, to terminate employment with the Company and receive the Severance Benefits (pursuant to written notice to the Board specifying the effective date of such termination which shall not be earlier than the date of the Board's receipt of such notice and shall not be later than the end of such six month or 180 day period, as applicable): 6 7 (A) Failure to elect or reelect or otherwise to maintain Employee in the office or position, or a substantially equivalent office or position, of or with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction , or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) or Chairman of the Board if Employee shall have been a Director or Chairman of the Board immediately prior to the Corporate Transaction; (A) The occurrence of any of the following which is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee: (I) a significant adverse change, whether such change involves a reduction or expansion, in the nature or scope of the authorities, positions, powers, functions, responsibilities or duties attached to the position with the Company, HCR, or any successor thereof, as the case may be, which Employee held immediately prior to the Corporate Transaction, including but not limited to any change in the reporting lines, offices and/or positions to which Employee reported immediately prior to the Corporate Transaction and/or changes due to HCR or any successor no longer being a reporting company under the Exchange Act; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Corporate Transaction; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to the Corporate Transaction; (IV) any material breach of this Agreement by the Company, HCR, or any successor thereof; or (V) the continuation or repetition of harassing or denigrating treatment of Employee which is inconsistent with Employee's position with the Company, HCR, or any successor thereof. (B) The liquidation, dissolution, merger, consolidation or reorganization of the Company or HCR, or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company or HCR (by liquidation, merger, consolidation, reorganization, transfer or otherwise), to which all or substantially all of such business and/or assets have been transferred (directly or by operation 7 8 of law) assumes all duties and obligations of the Company and HCR under this Agreement pursuant to Section 16(a); (C) The Company, HCR, or any successor thereof, as the case may be, by which Employee is employed relocates its principal executive offices, or requires Employee to have his principal location of work changed, to any location which increases by more than 25 miles Employee's commute to such location immediately prior to the Corporate Transaction, or requires Employee to travel away from his office in the course of discharging his responsibilities or duties hereunder at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than the average of such time that was required of Employee in the three full years immediately prior to the Corporate Transaction without, in either case, his prior written consent. (iii) If Employee elects to terminate employment with the Company or any successor, as the case may be, for any reason, or without reason, during such portion of the 180-day period immediately following the first anniversary of the occurrence of any Change in Control, Employee shall be entitled to the Severance Benefits. (b) SEVERANCE BENEFITS. If, Employee's employment with the Company is terminated pursuant to Section 8(a), the Company will pay to Employee the following amounts within five business days after the Termination Date and will provide to Employee the following benefits (collectively, the "Severance Benefits"): (i) A lump sum payment equal to three times Employee's Aggregate Cash Compensation for the year in which the Termination Date occurs; (ii) During the Continuation Period: (A) the Company will arrange to provide Employee with group medical, dental and vision benefits substantially similar to those which Employee was receiving or entitled to receive immediately prior to the Corporate Transaction; and (B) the Company (or successor) will provide Employee the use of office space, furnishings and secretarial support services comparable to those provided to Employee immediately prior to the Corporate Transaction; If and to the extent that any benefit described in Section 8(b)(ii)(A) is not or cannot be paid or provided under any policy, plan program or arrangement of the Company, then the Company will pay or provide for the payment to Employee, his dependents and beneficiaries, of such 8 9 Employee Benefits in any manner selected by the Company. Without otherwise limiting the purposes or effect of Section 8, Employee Benefits otherwise receivable by Employee pursuant to Section 8(b)(ii)(A) will be reduced to the extent comparable welfare benefits are actually received by Employee from another employer during the Continuation Period, and any such benefits received by Employee shall be reported by Employee to the Company. (iii) The Company shall take whatever action is necessary to fund completely any split-dollar life insurance arrangement maintained by the Company for the benefit of Employee, effective as of the Termination Date and based on Employee's service through the end of the Continuation Period; (iv) Effective as of the Termination Date, Employee will be credited with service with the Company for an additional 36 months for the purpose of determining service credits and benefits due and payable to Employee under the Company's retirement income, supplemental retirement and other benefit plans of the Company applicable to Employee, his dependents or his beneficiaries immediately prior to the Corporate Transaction; (v) If the Termination Date is prior to the Employee's attainment of age 55 or the fifth anniversary of the date of the Corporate Transaction, the Employee's qualified and non-qualified defined benefit plan retirement benefits shall be calculated as if Employee had attained at least age 55 and had at least five years of service from and after the date of the Corporate Transaction. Any additional benefit to which Employee is entitled pursuant to this Section 8(b)(v) shall be paid either by the Company directly or pursuant to the terms of the non-qualified plan. (vi) Effective as of the Termination Date the option (the "1998 Option") to purchase Company stock granted to Employee pursuant to that certain Non-Qualified Stock Option Agreement dated as of September 25, 1998 by and between HCR and Employee shall be fully vested and exercisable in full as of such date; and (vii) Employee shall be permitted to elect to defer receipt of amounts payable to him, if any, under the Company's Senior Management Savings Plan and Senior Management Savings Plan for Corporate Officers until any date not later than the expiration of the Continuation Period. (c) Without limiting the rights of Employee at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Section 8 on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Midwest 9 10 Edition of The Wall Street Journal. Any change in such prime rate will be effective on and as of the date such change is so published. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 8 and under Section 11 will survive: (i) any termination or expiration of this Agreement following a Corporate Transaction prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Corporate Transaction prior to the expiration of the Protected Term. 9. NO SET-OFF; NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult and may be impossible (a) for Employee to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Employee may suffer as a result of termination of employment hereunder. In addition, the Company acknowledges that its severance pay plans applicable to corporate officers do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the payment of the severance compensation by the Company to Employee in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and Employee will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Employee hereunder or otherwise, except as expressly provided in Sections 7(d) and (e) and the last sentence of Section 8 (b)(ii). 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Corporate Transaction occurs prior to the expiration of the Protected Term and it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (collectively, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Internal Revenue Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment or payments 10 11 (collectively, a "Gross-Up Payment"); PROVIDED, HOWEVER, that no Gross-Up Payment shall be made with respect to the Excise Tax, if any, attributable to: (i) any incentive stock option, as defined by Section 422 of the Internal Revenue Code ("ISO"), granted prior to the execution of this Agreement; or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by Employee of all taxes, including any Excise Tax (and including any interest or penalties imposed with respect to such taxes), imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (b) Subject to the provisions of Section 10(f) hereof, all determinations required to be made under this Section 10, including whether an Excise Tax is payable by Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Company. The Company shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Employee within thirty (30) calendar days after any Termination Date arising pursuant to Section 8(a). If the Accounting Firm determines that any Excise Tax is payable by Employee, the Company shall pay the required Gross-Up Payment to Employee within five (5) business days after receipt of such determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall, at the same time as it makes such determination, furnish the Company and Employee an opinion that Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Internal Revenue Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 10(f) hereof and Employee thereafter is required to make a payment of any Excise Tax, Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, Employee within five business days after receipt of such determination and calculations. (c) The Company and Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination and calculations contemplated by Section 10(b) hereof. Except as contemplated by Sections 10(f) or 10(g), any final determination 11 12 by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and Employee. (d) The federal, state and local income or other tax returns filed by Employee shall be prepared and filed on a consistent basis with the determinations of the Accounting Firm with respect to the Excise Tax payable by Employee. Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the company true and correct copies (with any amendments ) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Employee shall within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 10(b) hereof shall be borne by the Company. (f) Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than 10 business days after Employee actually receives notice of such claim and Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Employee). Employee shall not pay such claim prior to the earlier of: (i) the expiration of the ten (10) calendar day period following the date on which he gives such notice to the Company; and (ii) the date that any payment of such amount with respect to such claim is due. If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (A) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and 12 13 (D) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 10(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 10(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that Employee may participate therein at his own cost and expense) and may, at its option, either direct Employee to pay the tax claimed and sue for refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to Employee on an interest-free basis and shall indemnify and hold Employee harmless, on an after tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and PROVIDED, FURTHER, HOWEVER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, Employee receives any refund with respect to such claim, Employee shall (subject to the Company's complying with the requirements of Section 10(f) hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Employee of any amount advanced by the Company pursuant to Section 10(f) hereof, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to Employee pursuant to this Section 10. 11. LEGAL FEES AND EXPENSES. It is the intent of the Company that Employee not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Employee's rights under Section 8 of this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits 13 14 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under it this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Employee the benefits provided or intended to be provided to Employee hereunder, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice, at the expense of the Company as hereafter provided, to advise and represent Employee in connection with any such interpretation, enforcement or defense, including, without limitation, the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Without respect to whether Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all reasonable attorneys' and related fees and expenses by Employee in connection with any of the foregoing. 12. EMPLOYMENT RIGHTS; TERMINATION PRIOR TO CORPORATE TRANSACTION. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or Employee to have Employee remain in the employment of the Company prior to or following any Corporate Transaction. Any termination of employment of Employee by the Company other than for Cause or by reason of his death or disability pursuant to Sections 7(b), (d) or (e) during the period beginning on the date that is sixty (60) days prior to the date of the first public announcement by the Company of the potential occurrence of an event that would constitute a Corporate Transaction and ending on the date of consummation of such Corporate Transaction shall be deemed to be a termination of Employee after a Corporate Transaction for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) COVENANT NOT TO COMPETE. Employee covenants and agrees that during Employee's employment with the Company and for a period of one (1) year following the termination of Employee's employment, including without limitation termination by the Company for cause or without cause, Employee shall not, in the United States of America, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise, alone or in association with any other person, corporation or other entity, in any Competing Business. Notwithstanding the foregoing, Employee may own, directly or indirectly, up to 1% of the outstanding equity of any business which may be a Competing Business without violating the provisions of this Section 13(a). (b) NON-SOLICITATION OF CUSTOMERS. Employee agrees that during his employment with the Company he shall not, directly or indirectly, solicit the business of, or do business with, any customer or prospective customer of the Company for any business purpose other than for the benefit of the Company. Employee further agrees that for one (1) year following termination of his employment with the Company, including without limitation termination by the Company for cause or without cause, Employee 14 15 shall not, directly or indirectly, solicit the business of, or do business with, any customers or prospective customers of the Company. (c) NON-SOLICITATION OF EMPLOYEES. Employee agrees that, during his employment with the Company and for one (1) year following termination of Employee's employment with the Company, including without limitation termination by the Company for cause or without cause, Employee shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the employment of the Company for any reason whatsoever, or hire any employee of the Company except into the employment of the Company. 14. VESTING OF OPTIONS AND RESTRICTED STOCK; EMPLOYEE BENEFITS. (a) Upon the consummation of a Corporate Transaction prior to the expiration of the Protected Term, (i) all options to purchase Company stock, other than the 1998 Option, then held by Employee shall be fully vested and exercisable in full as of such date; (ii) all shares of restricted Company stock issuable to Employee under outstanding restricted stock awards made to Employee prior to the date of such Corporate Transaction shall be issued to Employee as of such date; and (iii) the restrictions applicable to all shares of restricted stock then held by Employee (including shares issued pursuant to subsection (ii) above) shall lapse as of such date. (b) Except as otherwise expressly provided herein, no termination of Employee's employment with the Company will affect any rights which Employee may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits. 15. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or governmental regulation or ruling. 16. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require all successors (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to any substantial portion of the business or assets of the Company, by agreement in form and substance satisfactory to Employee, jointly and severally expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, 15 16 including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 16(a) and 16(b) hereof. Without limiting the generality or effect of the foregoing, Employee's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Employee's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 16(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 17. NOTICES. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic .facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express or UPS, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to Employee at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 18. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 19. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 20. MISCELLANEOUS. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or 16 17 conditions at the same or at any prior or subsequent time. References to Sections are to references to Sections of this Agreement. 21. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement. 22. TITLES. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA By: ------------------------------- Its: ------------------------------ HCR MANORCARE, INC. By: ------------------------------- Its: ------------------------------ EMPLOYEE: ---------------------------------- R. JEFFREY BIXLER 17 18 SCHEDULE I ---------- Employee: Current Base Rate: Job Titles: 18 19 SCHEDULE II ----------- Executive Retention Agreement 19 EX-21 8 EXHIBIT 21 1 EXHIBIT 21 Manor Care, Inc. Subsidiaries of the Company Manor Care, Inc. is a Delaware corporation. 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. ManorCare Health Services, Inc., a Delaware corporation - includes 68 active omitted subsidiaries operating in the United States and providing health care services. 2. New ManorCare Health Services, Inc., a Delaware corporation - includes 19 active omitted subsidiaries operating in the United States and providing health care services. 3. Four Seasons Nursing Centers, Inc., a Delaware corporation. 4. Health Care and Retirement Corporation of America, an Ohio corporation - includes 19 active omitted subsidiaries operating in the United States and providing health care services. 5. Heartland Rehabilitation Services, Inc., an Ohio corporation - includes 22 active omitted subsidiaries operating in the United States and providing health care services. 6. HCR Home Health Care and Hospice, Inc., an Ohio corporation - includes two active omitted subsidiaries operating in the United States and providing health care services. 7. In Home Health, Inc., a Minnesota corporation, of which the Company owns approximately 41 percent of its common stock and all of its preferred stock. 8. MileStone Healthcare, Inc., a Delaware corporation. 9. Community Hospital of Mesquite, Inc., a Texas corporation. 10. Genesis Health Ventures, Inc., a Pennsylvania corporation, of which the Company effectively controls approximately 14 percent of the voting capital stock. 11. Heartland Medical Information Services, Inc., an Ohio corporation, of which the Company owns approximately 90 percent of its common stock. 12. MNR Finance Corp., a Delaware corporation. EX-23 9 EXHIBIT 23 1 EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-44257) pertaining to the Health Care and Retirement Corporation of America Stock Purchase and Savings Program of Health Care and Retirement Corporation (HCR), the Registration Statement (Form S-8, No. 33-48885) pertaining to the Health Care and Retirement Corporation Stock Option Plan for Outside Directors and the Stock Option Plan for Key Employees of HCR, the Registration Statement (Form S-8, No. 33-83324) pertaining to the Health Care and Retirement Corporation Amended Stock Option Plan for Key Employees of HCR, the Registration Statement (Form S-8, No. 33-87640) pertaining to the HCR Stock Purchase and Retirement Savings Plan (formerly known as Health Care and Retirement Corporation of America Stock Purchase and Savings Program) of HCR, the Registration Statement (Form S-8, No. 333-64181) pertaining to the Health Care and Retirement Corporation Stock Option Plan for Outside Directors and the Stock Option Plan for Key Employees of HCR, the Registration Statement (Form S-8, No. 333-64235) pertaining to the Health Care and Retirement Corporation Amended Restricted Stock Plan of HCR, the Registration Statement (Form S-8, 333-81833) pertaining to the Manor Care, Inc. Retirement Savings and Investment Plan of HCR Manor Care, Inc., the Registration Statement (Form S-8, 333-93575) pertaining to the Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan of Manor Care, Inc., and the Registration Statement (Form S-8, 333-93573) pertaining to the HCR Stock Purchase and Retirement Savings Plan of Manor Care, Inc. of our report dated February 2, 2000, with respect to the consolidated financial statements and schedule of Manor Care, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Toledo, Ohio March 28, 2000 EX-27.1 10 EXHIBIT 27.1
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 12,287 0 397,891 58,975 0 431,151 2,146,898 596,391 2,280,866 408,649 687,502 0 0 1,110 978,927 2,280,866 0 2,135,345 0 1,685,059 114,601 29,005 54,082 (102,396) (47,238) (55,158) 0 11,500 0 (43,658) (0.41) (0.41)
EX-27.2 11 EXHIBIT 27.2
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 33,718 0 373,008 58,125 0 425,343 2,322,616 582,290 2,722,727 511,298 693,180 0 0 1,109 1,198,059 2,722,727 0 2,209,087 0 1,715,575 119,223 39,485 46,587 (24,565) 21,597 (46,162) 67,905 (19,036) (5,640) (2,933) (0.03) (0.03)
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