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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _______________
Commission File Number 1-8195
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MANOR CARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1200376
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11555 Darnestown Road, Gaithersburg, Maryland 20878
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 979-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
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Common Stock, Par Value $.10 per share New York Stock Exchange
Registrant's Guaranty of 4-3/4% Con-
vertible Subordinated Debentures due
September 1, 1997 issued by Cenco
Incorporated New York Stock Exchange
Registrant's Guaranty of 5% Convertible
Subordinated Debentures due November 1,
1996 issued by Cenco Incorporated New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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15-1/2% Subordinated Debentures due August 1, 2002
9-1/2% Senior Subordinated Notes due 2002
7-1/2% Senior Notes due 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 _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates was
$1,374,652,828 as of August 1, 1996 based upon a closing price of $34.25 per
share.
The number of shares of Manor Care's Common Stock outstanding at May 31,
1996 was 62,731,168.
DOCUMENTS INCORPORATED BY REFERENCE:
PART I 1996 Annual Report to Stockholders
PART II 1996 Annual Report to Stockholders
PART III Proxy Statement dated August 28, 1996
PART I
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ITEM 1. Business.
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General
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Manor Care, Inc. ("Manor Care"), a Delaware corporation organized in August
1981, is a holding company that conducts its business through the Manor Care
Hotel Division ("Hotel Division") and four principal subsidiaries, Manor
Healthcare Corp. ("Healthcare"), Vitalink Pharmacy Services, Inc. ("Vitalink"),
In Home Health, Inc. ("In Home Health") and Choice Hotels International, Inc.
("Choice"). Healthcare and
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its subsidiaries have been engaged since October 1968 in the business of
developing, owning and managing nursing facilities, which provide skilled
nursing and convalescent care principally for residents over the age of 65.
Healthcare owns approximately 82.3% of Vitalink, a public company that operates
institutional pharmacies, and acquired an approximately 63% ownership interest
in In Home Health on October 24, 1995. In Home Health is a public company which
specializes in providing comprehensive health care services to clients of all
ages in their home. Healthcare also owns and operates an acute care general
hospital, in-patient skilled nursing and rehabilitation facilities and assisted
living facilities. Choice franchises the use of the "Quality," "Comfort,"
"Clarion," "Sleep," "Rodeway," "Econo Lodge" and "MainStay" trademarks and other
related trademarks and services. The Hotel Division is engaged in the business
of owning and operating hotels in the United States under the Choice trademarks.
Other subsidiaries of Manor Care are engaged in owning, operating and
franchising hotels in foreign countries.
In fiscal year 1996, Manor Care derived approximately 44% of its total
revenues from continuing operations through Medicare and Medicaid programs;
aside from the foregoing, Manor Care has no few or single customers upon whom it
is dependent.
On March 7, 1996, Manor Care announced its intention to spin-off its
lodging business to its shareholders in a tax free transaction (the "Spin-off").
Manor Care anticipates that the Spin-off will be completed in the Fall of 1996.
However, there can be no assurance that the Spin-off will occur.
Industry Segments
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Manor Care's Consolidated Statements of Income and the information under
the heading "Discontinued Operations", set forth on pages 15 and 25,
respectively, of the Company's 1996 Annual Report, are hereby incorporated by
reference.
Manor Healthcare Corp. - Healthcare Operations
- ----------------------------------------------
Manor Care, through Healthcare and its subsidiaries, owns, operates or
manages 175 in-patient skilled nursing and rehabilitation facilities and 25
assisted living facilities, which provide high acuity services, skilled nursing
care, intermediate nursing care, custodial care and assisted living, principally
for residents over the age of 65. Manor Care and its subsidiaries also own and
operate an acute care hospital, 23 pharmacies and 42 home health offices.
Nursing Center Operations
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Healthcare's nursing facilities provide, in general, five types of
services:
-- High acuity services - for persons who require complex medical and
physical rehabilitation services (patients who would otherwise be treated in an
acute care hospital setting).
-- Skilled nursing care - for persons who require 24-hour-a-day
professional services of a registered nurse or a licensed practical nurse.
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-- Intermediate care - for persons needing less intensive nursing care
than that provided to those requiring skilled care.
-- Custodial care - for persons needing a minimum level of care.
-- Assisted living - for persons needing some supervision and assistance
with personal care.
Services provided to all patients include the required type of nursing
care, room and board, special diets, occupational, speech, physical and
recreational therapy and other services that may be specified by the patient's
physician, who directs the admission, treatment and discharge of that patient.
Each high acuity, skilled and intermediate nursing facility is under the
direction of a state-licensed nursing center administrator supported by other
professional personnel, such as a medical director, social worker, dietitian and
recreation staff. Nursing departments in each such facility are under the
supervision of a director of nurses who is state licensed. The nursing staffs
are composed of other registered nurses and licensed practical nurses, as well
as nursing assistants. Staff size and composition vary depending on the size
and location of each facility.
Manor Care has developed a Quality Assurance Program to ensure that high
standards of care are maintained in each facility. The Quality Assurance
Department is composed of a director, registered nurses, dietitians, nutrition
specialists, an environmental services specialist and a recreational therapist.
These staff specialists set corporate standards for delivery of care, direct the
Quality Improvement Program, and provide consulting and educational services to
the facilities.
Manor Care's in-patient skilled nursing and rehabilitation facilities range
in bed capacity from 48 to 281 beds and have an aggregate bed capacity of 23,689
beds, and its assisted living facilities have an aggregate bed capacity of 2,759
beds, both of which achieved an occupancy rate of 90% during the 1996 fiscal
year. Manor Care's nursing facilities are located in 28 states: Arizona,
California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico, North
Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South
Dakota, Texas, Utah, Virginia, Washington and Wisconsin.
The nursing facilities are modern structures generally of wall-bearing
masonry with fire resistive or protective floor and roof suspension systems.
Most have been designed to permit private and semi-private patient room
accommodations, and rooms at some facilities may be converted to accommodate up
to four beds. Most facilities have individually controlled heating and air-
conditioning units. Each nursing facility contains a fully equipped kitchen, an
isolation room, day room areas, administrative offices and most contain a
physical therapy room. Many of Manor Care's nursing facilities have specialized
wings for assisted living, Alzheimer's patients, individuals with catastrophic
injuries, and persons desiring extra amenities and activities. Manor Care
believes all of the nursing facilities and related equipment are in good
condition and well maintained.
Manor Care operates MedBridge units within its in-patient skilled nursing
facilities, which offer post-acute care for patients who no longer need hospital
care. Twenty-three MedBridge units within skilled nursing
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facilities currently operate in Colorado, Delaware, Florida, Illinois, Indiana,
Maryland, New Jersey, Ohio, Pennsylvania, Virginia and Washington. During
fiscal year 1996, the Company opened three nursing facilities with 120 beds each
in Washington, Florida and Illinois. During fiscal year 1996, Manor Care
acquired four nursing facilities and an operating lease located in California,
Illinois, Pennsylvania and Washington for approximately $32,369,000 cash and
$13,000,000 in assumed liabilities. Manor Care has six nursing facilities with
a total of 728 beds under construction in California, Maryland, Florida, Ohio
and Pennsylvania. Additions to nineteen existing facilities with a total of 360
beds are also under construction.
Patients seeking the services of the nursing facilities come from a variety
of sources, and are principally referred by hospitals and physicians. Most of
Manor Care's nursing facilities participate in state Medicaid and in the federal
Medicare program (see "Federal and State Assistance Programs"). However, Manor
Care attempts to locate and operate its nursing facilities in a manner designed
to attract patients who pay directly to the facilities for services without
benefit of any government assistance program ("private patients").
As a general rule, the profit margin is higher with private patients than
with patients to whom services are rendered with government assistance programs.
The following table sets forth certain information concerning revenues from
government assistance programs for all of Manor Care's health care operations
during fiscal year 1996:
<TABLE>
<CAPTION>
Gross Contractual Net
Revenues Adjustment* Revenues
------------ ------------ ------------
<S> <C> <C> <C>
Medicare $414,489,000 $147,579,000 $266,910,000
Medicaid 396,633,000 114,452,000 282,181,000
============ ============ ============
</TABLE>
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* Represents the estimated difference between private billing rates and amounts
recoverable under government programs.
The following table sets forth certain information concerning occupancy and
revenues of Manor Care's nursing facilities and hospital during fiscal year
1996:
<TABLE>
<CAPTION>
Nursing and
Assisted Living Facilities Hospital
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% of % of % of % of
Occupancy Revenues Occupancy Revenues
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Private patients 56% 59% 39% 63%
Medicaid patients 34% 23% 25% 10%
Medicare patients 10% 18% 36% 27%
--- --- --- ---
100% 100% 100% 100%
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</TABLE>
Assisted Living Operations
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Manor Care operates Springhouse Senior Residences (assisted living
facilities designed for the frail elderly) and Arden Courts (assisted living
facilities for persons with early to mid-stage Alzheimer's who do not yet need
nursing care). There are 18 Springhouse facilities, located in California,
Florida, Indiana, Illinois, Maryland, Michigan, North Carolina and Ohio. During
fiscal year 1996, Manor Care acquired six
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Springhouse facilities with five attached skilled nursing units for
approximately $74,300,000. There are seven Arden Courts in Florida, Illinois,
Maryland and Pennsylvania, four of which opened in fiscal year 1996.
Pharmacy Operations
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Healthcare owns 82.3% of Vitalink, a publicly traded company that owns and
operates 23 pharmacies located in California, Colorado, Florida, Illinois,
Indiana, Iowa, Maryland, New Jersey, Ohio, Oklahoma, Oregon, Pennsylvania, Texas
and Wisconsin.
Vitalink operates institutional pharmacies, which provide, in general,
three types of services:
-- Customized filling of prescription and non-prescription medications
for individual patients pursuant to physician orders delivered to nursing
facilities.
-- Consultant pharmacist services to help ensure quality patient care
through monitoring and reporting on prescription drug therapy.
-- Infusion therapy services, consisting of a product (nutrient,
antibiotic, chemotherapy or other drugs or fluids) and its administration by
tube, catheter or intravenously. Vitalink prepares and delivers the product,
which is administered by nursing center staff.
Pursuant to various master agreements, a portion of Vitalink's business is
with Manor Care. As of May 31, 1996, Vitalink had contracts to serve 19,300
Manor Care beds and 30,600 beds not affiliated with Manor Care, resulting in
revenues of $67,066,000 and $74,049,000, respectively, for fiscal 1996.
On July 6, 1995, Vitalink acquired the infusion therapy business of Home
Intravenous Care, Inc., located in Loveland, Colorado, for $2,325,000 in cash
plus the assumption of $105,000 in liabilities and future contingent payments
based on the achievement of certain future profitability objectives.
On November 3, 1995, Vitalink acquired the institutional pharmacy business
of Brentview Clinical Pharmacy, located in Los Angeles, California for
$3,206,000 in cash plus the assumption of $45,000 in liabilities and future
contingent payments based on the achievement of future profitability objectives.
Home Health Care Operations
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Healthcare owns effective control of approximately 63% of the voting stock
of In Home Health, Inc., a publicly traded company which provides services from
42 offices and eleven pharmacies located in 13 states. In Home Health offers its
clients a broad range of professional and support services to meet medical and
personal needs at home, including nursing, infusion therapy, rehabilitation,
personal care and homemaking.
Each of In Home Health's 29 branches has two divisions: a Visit Division
and an Extended Hour Division. The Visit Division provides clients with short-
term care, usually up to two hours per visit. The Extended Care Division
provides clients with care up to 24 hours a day. Through the Visit Division, In
Home Health operates eleven infusion pharmacies which provide pharmaceutical
drugs, fluids and supplies.
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Hospital Operations
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Manor Care owns and operates Mesquite Community Hospital in Mesquite,
Texas, a Dallas suburb. The 172 licensed bed facility, which opened in 1978, is
a general medical/surgical acute care hospital fully accredited by the Joint
Commission for the Accreditation of Health Care Organizations. Services include
obstetrics, emergency services, coronary/intensive care, day surgery, skilled
nursing, and geriatric psychiatry. Fully equipped, modern ancillary and
diagnostic services include MRI, CT, nuclear medicine, cardiac catheterization
and ultrasound with doppler. The medical staff, representing virtually every
medical and surgical specialty, admit and refer patients into the hospital from
their private office practices. Patient services are reimbursed from
traditional insurance programs, managed care (HMO and PPO), Medicare and
Medicaid. The hospital recently completed a 23,560 square foot, two-story
addition, which houses a new emergency services department and a four operating
suite day surgery center. Renovation of 14,300 square foot of existing hospital
space will be completed in the fall of 1996.
Training School Operations
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Medical Aid Training Schools, Inc., a subsidiary of Healthcare which
previously operated five nursing assistant training schools located in New York,
was closed as of May, 1996.
Regulation
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Manor Care's healthcare facilities are subject to certain federal statutes
and regulations and to regulatory licensing requirements by state and local
authorities. All of Manor Care's facilities are currently so licensed. In
addition, the facilities are subject to various local building codes and other
ordinances. It is anticipated that government regulation of the healthcare
industry will become more comprehensive in the future. The extent of the impact
of such increased regulation on Manor Care's operations and earnings cannot be
predicted.
State and local agencies survey all nursing facilities on a regular basis
to determine whether such facilities are in compliance with governmental
operating and health standards and conditions for participation in government
medical assistance programs. Such surveys include reviews of patient
utilization of healthcare facilities and standards for patient care. Manor Care
endeavors to maintain and operate its facilities in compliance with all such
standards and conditions. Manor Care believes that at this time, none of its
facilities is in violation of any applicable regulation that would threaten the
operation of its business or materially affect the standard of care provided.
Federal and State Assistance Programs
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Substantially all Manor Care's nursing facilities and the Hospital are
currently certified to receive benefits provided under the Federal Health
Insurance for the Aged Act (commonly referred to as "Medicare"), and under
programs administered by the various states to provide medical assistance to the
medically indigent ("Medicaid"). Both initial and continuing qualification of a
nursing center or hospital to participate in such programs depends upon many
factors including accommodations, equipment, services, patient care, safety,
personnel, physical environment, and adequate policies, procedures and controls.
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Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, drugs, biologicals, supplies, and
surgical, ancillary diagnostic and other necessary ser vices of the type
provided by extended care or acute care facilities. Under the Medicare program,
the federal government pays the reasonable direct and indirect allowable costs
(including depreciation and interest) of the services furnished.
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to medically
indigent persons. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits, at rates based generally on cost reimbursement principles.
Funds received by Manor Care under Medicare and Medicaid are subject to
audit with respect to the proper application of various payment formulas. Such
audits can result in retroactive adjustments of revenue from these programs,
resulting in either amounts due to the government agency from Manor Care or
amounts due Manor Care from the government agency. Manor Care believes that its
payment formulas have been properly applied and that any future adjustments will
not have a material adverse impact on its financial position or results of
operations.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease the rate of program payments to healthcare
facilities. Manor Care can give no assurance that payments under such programs
will in the future remain at a level comparable to the present level or be
sufficient to cover the operating and fixed costs allocable to such patients.
Competition
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Manor Care's nursing facilities compete on a local and regional basis with
other long-term healthcare providers, some of which have greater financial
resources or operate on a nonprofit basis. The degree of success with which
Manor Care's facilities compete varies from location to location and is
dependent on a number of factors. Manor Care believes that the quality of care
provided, reputation and physical appearance of facilities, and, in the case of
private patients, charges for services, are significant competitive factors.
Accordingly, it seeks to meet competition in each locality by establishing a
reputation within the local medical communities for competent and competitive
nursing center services. There is limited, if any, competition in price with
respect to Medicaid and Medicare patients, since revenues for services to such
patients are strictly controlled and based on fixed rates and cost reimbursement
principles.
Manor Care's Hospital encounters competition in the Mesquite, Texas area
where it competes for community and physician acceptance with other hospitals.
Vitalink's pharmacies compete with other local distributors of pharmaceuticals.
In Home Health competes with hospitals, public health agencies, national
temporary employment agencies, national specialized home care providers and
other independent home care companies.
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Hotel Division - Domestic Lodging Operations
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The Hotel Division operated 65 domestic hotels containing a total of 9,713
as of May 31, 1996. During fiscal year 1996, the Hotel Division purchased 16
hotels containing 1,934 rooms in Arizona, Arkansas, Florida, Indiana, Kansas,
Maryland, Maine, Massachusetts, Michigan, Missouri, Nebraska, New Mexico, New
York, North Carolina, Tennessee and Virginia for an aggregate purchase price of
approximately $49,600,000.
The hotels operate under the "Clarion," "Comfort," "Quality," "Sleep,"
"Econo Lodge" and "Rodeway" trade names and are located in Alabama, Arizona,
Arkansas, California, Florida, Georgia, Indiana, Kansas, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Missouri, Nebraska, New Mexico, New York,
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah and
Virginia. All of the hotels are owned by Manor Care or its subsidiaries except
two hotels located in California, which are leased.
During fiscal year 1996, lodging revenues and expenses included food and
beverage sales of $11,392,000 and costs of sales of $9,792,000.
QH Europe Partnership - Foreign Lodging Operations
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Quality Hotels Europe, Inc. and Choice Hotels International, Inc.
("Choice"), subsidiaries of Manor Care, formed QH Europe Partnership in 1994 to
own, operate and franchise hotels in Europe. Partnership subsidiaries own three
hotels in Germany and one in England containing 607 rooms, which operate under
the "Comfort" or "Quality" trade names.
During 1996, Manor Care Hotels France S.A. purchased an equity interest in
Friendly Hotels PLC for approximately $17.0 million. Concurrently, the rights
to franchise properties under Choice brand names was sold to Friendly Hotels PLC
for approximately $775,000 in Friendly Hotels common stock.
During 1994, Partnership subsidiaries acquired certain assets of a French
hotel chain, consisting primarily of franchise rights to approximately 100
hotels (now using the "Comfort" trade name), plus two owned and six leased
hotels. During 1995, operations grew to eight leased hotels.
Choice Hotels International, Inc. - Franchise Operations
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Manor Care owns 100% of the Common Stock of Choice, which franchises the
use of the "Quality," "Comfort," "Clarion," "Sleep," "Econo Lodge," "MainStay"
and "Rodeway" trademarks.
Services provided to franchisees include national and regional meetings and
periodic seminars to provide information on hotel operations and recent
developments in the industry, training programs for franchisees and their
employees, advertising and marketing, dissemination of directories of franchised
locations, participation in a national reservations system and agreements with
credit card companies.
Choice also offers its franchisees interior design and decorating services
and purchasing services for hotel furniture, fixtures and supplies. During
1996, the revenues and expenses of Choice included hotel supplies sales of
$24,838,000 and costs of sales of $20,741,000.
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The standard franchise agreement currently offered by Choice for Clarion
Hotels (luxury), Quality Inns and Quality Suites (mid-priced), MainStay Suites
(mid-priced), Comfort Inns and Comfort Suites (luxury- budget) and Sleep Inns
(economy hotels with standardized design) provides for an initial fee of $300
per guest room with a $40,000 minimum ($50,000 for Suites, $30,000 for MainStay,
$35,000 for Quality). Choice sells Econo Lodge and Rodeway Inn franchises
(economy brands) for an initial fee of $250 per guest room ($25,000 minimum).
In addition, franchisees are required to pay a royalty fee of 2.75% to 5% of
gross room revenues (depending on brand) and assessments for reservations and
marketing services at rates that may be changed to reflect inflation and actual
costs incurred. The agreement normally is for a 20-year term.
Choice supplies disclosure statements containing information for
prospective franchisees in accordance with regulations of the Federal Trade
Commission ("FTC"). In addition to the FTC regulations, certain states have
requirements for registration of franchisors and disclosure requirements similar
to the FTC regulations.
Choice and an affiliate of Journey's End Corporation, a Canadian lodging
management company, each own a 50% interest in a corporation that franchises
Choice brands in Canada. Choice also has franchised hotels in more than 28
other foreign countries, including England, Ireland, Norway, France, Italy,
Germany, Russia, India, New Zealand, Australia, Argentina, Japan, Thailand and
Mexico.
As of May 31, 1996, the seven (including MainStay) hotel chains comprised
3,052 open and operating hotels with 261,456 rooms, as set forth below:
<TABLE>
<CAPTION>
United States Foreign
------------------ ------------------
No. of No. of No. of No. of
Hotels Rooms Hotels Rooms
------ ------ ------ -------
<S> <C> <C> <C> <C>
Franchised Only 2,430 204,905 543 45,646
Owned/Managed by Manor Care 65 9,713 14 1,192
----- ------- --- ------
TOTALS 2,495 214,618 557 46,838
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</TABLE>
Competition
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The above hotels compete with other hotels in nearby locations, some of
which are affiliated with chains that are more widely known or offer different
types of services. Demand for accommodations at both franchised and company-
owned hotels is affected by such factors as the availability of accommodations
in the local area and national and regional economic conditions. The operation
of hotels may be seasonal, with a large percentage of revenues generated in the
summer months.
In the sale of franchises, Choice competes with many other hotel
franchisors, some of which have greater financial resources and offer different
fee structures and franchise services. However, Choice believes that its
continued growth, innovative hotel brands and successful reservations and
marketing services enhance its competitive position.
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Employees
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As of May 31, 1996, Manor Care employed approximately 31,218 full and part-
time employees, 25,322 of whom were employed in healthcare operations, 4,835 in
hotel operations and the remainder in Manor Care's headquarters.
From time to time, some of Manor Care's nursing facilities and the Hospital
experience shortages of professional nursing help which may require Manor Care
to seek temporary employees through employment agencies at an increased cost.
Manor Care does not believe that use of these contract employees has had a
material adverse effect on its financial position to date.
A majority of the employees are covered by the federal minimum wage laws,
and a few employees are represented by labor unions. Attempts have been made
from time to time to unionize employees of certain other facilities. Manor Care
believes that it enjoys a good relationship with its employees.
Insurance
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Manor Care maintains property insurance on its healthcare and lodging
facilities. Manor Care insures some of its liability exposures and self
insures, either directly or indirectly through insurance arrangements requiring
it to reimburse insurance carriers, some of its liability risks other than
catastrophic exposures. Physicians and dentists practicing at the Hospital are
responsible for their own professional liability insurance coverage. Manor Care
insures its workers' compensation risks in some states and self insures in
others.
ITEM 2. Properties.
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As of May 31, 1996, Manor Care owned, leased or managed 175 in-patient
skilled nursing and rehabilitation facilities and 25 assisted living facilities
in 28 states and one acute care general hospital in Texas, as indicated below:
<TABLE>
<CAPTION>
Number Number of
Property Of Units Operating Beds
-------- -------- --------------
<S> <C> <C>
Nursing and Rehabilitation
and Assisted Living Facilities:
Owned 184 24,405
Leased 14 1,808
Managed 2 235
Acute Care Hospital 1 134
--- ------
TOTALS 201 26,582
=== ======
</TABLE>
As of May 31, 1996, Vitalink leased 23 pharmacies in 14 states and its
corporate offices in Naperville, Illinois and In Home Health leased 42 offices
and its corporate offices in Minnetonka, Minnesota. As of May 31, 1996, Manor
Care owned, managed or leased 79 hotels consisting of 65 domestic hotels
containing 9,713 guest rooms and 14 hotels containing 1,192 rooms located in
foreign countries.
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Manor Care owns its current three headquarters buildings in Silver Spring,
Maryland and two additional buildings in Silver Spring, one that is used by
employees and leased to third parties and the other of which is a warehouse
building. On August 30, 1995, Manor Care leased a new 400,000 square foot
headquarters building and a 200,000 square foot free-standing warehouse in
Gaithersburg, Maryland, which lease was guaranteed by Manor Care and certain of
its subsidiaries. Manor Care anticipates that as employees begin relocating to
the Gaithersburg headquarters, it will lease to third parties its current
headquarters buildings in Silver Spring. However, there can be no assurance
that Manor Care will be able to lease such buildings. Manor Care also owns a
building in Phoenix, Arizona, that serves as Western Regional Office of Choice
and several undeveloped parcels. Manor Care also leases office space as needed
to accommodate regional employees.
Forty-eight (48) nursing facilities have been pledged to secure related
mortgage and capital lease obligations.
ITEM 3. Legal Proceedings.
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One or more subsidiaries or affiliates of Manor Care have been identified
as potentially responsible parties ("PRPs") in a variety of actions (the
"Actions") relating to approximately 11 waste disposal sites which allegedly
are subject to remedial action under the Comprehensive Environmental Response
Compensation and Liability Act, as amended, 42 U.S.C. (S)(S) 9601 et seq.
("CERCLA") and similar state laws. CERCLA imposes retroactive, strict joint and
several liability on PRPs for the costs of hazardous substance cleanup. The
Actions arise out of the alleged activities of Cenco Incorporated and its
subsidiary and affiliated companies ("Cenco") which were acquired by Healthcare
in 1981. The Actions allege that such parties transported and/or generated
hazardous substances that came to be located at the sites in question. These
Actions allegedly occurred prior to Healthcare's acquisition of Cenco.
Environmental proceedings such as the Actions may involve owners and/or
operators of the hazardous waste site, multiple waste generators, and multiple
waste transportation disposal companies. Such proceedings typically involve
efforts of governmental entities and/or private parties to allocate or recover
site investigation and cleanup costs, which costs may be substantial. Manor Care
believes it has adequate insurance coverage for a substantial portion of the
claims asserted in the Actions.
The most significant Action for Manor Care arises from the Kramer landfill,
located in Mantua, New Jersey. On October 30, 1989, the New Jersey Department
of Environmental Protection sued Manor Care and other defendants in U.S.
District Court, District of New Jersey, seeking clean-up costs at the site where
subsidiaries of Cenco allegedly transported waste. At about the same time, the
United States filed a lawsuit against approximately 25 defendants in the same
court seeking recovery of its expenses arising in connection with this site.
Manor Care is a third party defendant in the latter suit. Based upon a recent
court approved final allocation plan, and also in view of its insurance
coverage, Manor Care believes that the Kramer Action will not have a material
adverse effect on its financial condition or results of operation. This final
allocation plan is not binding. If the matter is not resolved by settlement, a
court would have to allocate responsibility and Manor Care's allocation could
change.
Although Manor Care, together with its insurers, is vigorously contesting
its liability in the Actions, it is not possible at the present time to estimate
the ultimate legal and financial liability of Manor Care in respect to the
Actions. Manor Care, believes, however, that any such Action will not be
material.
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Manor Care also is subject to other regulatory and legal actions,
investigations or claims for damages that arise from time to time in the
ordinary course of business. Manor Care is defending the claims against it and
believes that these proceedings will not have a material adverse effect on its
financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1996.
EXECUTIVE OFFICERS OF MANOR CARE, INC.
The name, age, title, present principal occupation, business address and
other material occupations, positions, offices and employment of each of the
executive officers of Manor Care, Inc. ("Manor Care") are set forth below. The
business address of each executive officer is 11555 Darnestown Road,
Gaithersburg, Maryland 20878-3200, unless otherwise indicated.
Stewart Bainum, Jr. (50) Chairman of the Board of Manor Care and Manor
------------------
Healthcare Corp. ("Healthcare") since March 1987; Chief Executive Officer of
Manor Care since March 1987 and President since June 1989; Vice Chairman of the
Board of Vitalink Pharmacy Services, Inc. ("Vitalink") since February 1995; Vice
Chairman of the Board of Manor Care and subsidiaries from June 1982 to March
1987; Director of Manor Care since August 1981, of Vitalink since September
1991, of Healthcare since 1976 and of Choice Hotels International, Inc. and its
predecessors ("Choice") since 1977; Chief Executive Officer of Healthcare since
June 1989 and President from May 1990 to May 1991; Chairman of the Board and
Chief Executive Officer of Vitalink from September 1991 to February 1995 and
President and Chief Executive Officer from March 1987 to September 1991;
Chairman of the Board of Choice from March 1987 to June 1990.
Donald J. Landry. (47) President of Choice since January 1995; President
----------------
of Manor Care Hotel Division since March 1992; various executive positions with
Richfield Hotel Management, Inc. and its predecessors for more than 15 years,
including President of MHM Corporation.
James A. MacCutcheon. (44) Senior Vice President, Chief Financial Officer
--------------------
and Treasurer of Manor Care, Healthcare and Choice since September 1993; Senior
Vice President-Finance and Treasurer from October 1987 to September 1993;
Treasurer of Vitalink since September 1992 and a Director since September 1994;
Senior Vice President-Finance and Treasurer and a Director of Vitalink from
October 1987 to September 1991.
James H. Rempe. (66) Senior Vice President, General Counsel and Secretary
--------------
of Manor Care since August 1981, of Choice since February 1981 and of Healthcare
since December 1980; Secretary of Vitalink since January 1983 and a Director
since September 1994; Senior Vice President and a Director of Vitalink from
January 1983 to September 1991; Director of In Home Health, Inc. since October
1995.
13
<PAGE>
Margarita Schoendorfer. (47) Vice President-Controller of Manor Care,
----------------------
Healthcare and Choice since November 1990; Corporate Controller from April 1986
to November 1990; Assistant Corporate Controller from August 1981 to April 1986.
Donald C. Tomasso. (51) President, Long-Term Care Division, of Healthcare
-----------------
since February 1995 and a Director of Healthcare since June 1991; President and
Chief Operating Officer of Healthcare from May 1991 to February 1995; Chairman
and Chief Executive Officer of Vitalink since February 1995 and Vice Chairman
from September 1991 to February 1995; previously employed by Marriott
Corporation for more than five years, including as Executive Vice
President/General Manager of the Roy Rogers Division; Director of In Home
Health, Inc. since October 1995.
Joseph Buckley. (48) Executive Vice President of Manor Care and
--------------
Healthcare since March 1996; Director of Vitalink since July 1996; President,
Assisted Living Division, of Healthcare from February 1995 to March 1996;
Senior Vice President-Information Resources and Development of Manor Care from
June 1990 to February 1995; Vice President-Information Resources from July 1989
to June 1990; Vice President-Real Estate from September 1983 to July 1989;
Director of Vitalink since July 1996; Director of In Home Health, Inc. since
October 1995.
Mark L. Gildea. (44) Chief Executive Officer and Director of In Home
--------------
Health since October 1995; President, Alternate Site Services Division, of
Healthcare since December 1994; Vice President, Managed Care Marketing, from
December 1993 to December 1994; Executive Vice President of Option Care, Inc.
from October 1992 to December 1993; previously employed by Caremark, Inc. for
over 10 years, including as Area Vice President. Business Address: 601
Lakeshore Parkway, #500, Minnetonka, MN 55305-5214.
Donna L. DeNardo. (44) President and Chief Operating Officer of Vitalink
----------------
since September 1991; Vice President of Healthcare and Vice President and
General Manager of Vitalink from December 1989 to September 1991; various
management positions with Healthcare from 1977 to December 1989 including Senior
Regional Director of Nursing Facility Operations. Business address: 1250 East
Diehl Road, Naperville, Illinois 60563.
Scott Van Hove. (39) Senior Vice President of Manor Care and Healthcare
--------------
since December 1995; Vice President of Operations, of Manor Care from March 1990
to December 1995.
PART II
-------
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
The shares of Manor Care's Common Stock are listed and traded on the New
York Stock Exchange. Information on the high and low sales prices of Manor
Care's Common Stock during the past two years is included on page 27 of the 1996
Annual Report and is incorporated herein by reference.
As of August 1, 1996, there were 3,200 record holders of Manor Care Common
Stock.
14
<PAGE>
Information required on the frequency and amount of any dividends declared
during the past two years with respect to such Common Stock is included on page
27 the 1996 Annual Report and is incorporated herein by reference.
<TABLE>
<CAPTION>
Pages
-----
<S> <C> <C>
ITEM 6. Selected Financial Data.
- ------ -----------------------
The required information is included in the
specified pages of the 1996 Annual Report and
is incorporated herein by reference. Preceding 1
ITEM 7. Management's Discussion and Analysis of
- ------ ---------------------------------------
Financial Condition and Results of Operations.
----------------------------------------------
The required information is included in the
specified pages of the 1996 Annual Report
and is incorporated herein by reference. 14,19
ITEM 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The required information is included in the
specified pages of the 1996 Annual Report
and is incorporated herein by reference. See
Item 14 for index to financial statements 15-18,
and schedules. 20-27
ITEM 9. Changes in and Disagreements with Accountants
- ------ ---------------------------------------------
on Accounting and Financial Disclosure.
--------------------------------------
Not applicable.
</TABLE>
PART III
--------
<TABLE>
<S> <C>
ITEM 10. Directors and Executive Officers of the
- ------- ----------------------------------------
Registrant.
----------
The required information on directors is
included in the specified pages of the Proxy
Statement dated August 28, 1996 and is
incorporated herein by reference. 2-3,4
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
The required information on executive officers
is set forth in Part I of this Form 10-K under
an unnumbered item captioned "Executive Officers
of Manor Care, Inc."
ITEM 11. Executive Compensation.
- ------- ----------------------
The required information is included in the
specified pages of the Proxy Statement dated
August 28, 1996 and is incorporated herein by
reference. 7-12
ITEM 12. Security Ownership of Certain Beneficial Owners
- -------- -----------------------------------------------
and Management.
---------------
The required information is included in the
specified pages of the Proxy Statement dated
August 28, 1996 and is incorporated herein by
reference. 2-3
ITEM 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The required information is included in the
specified pages of the Proxy Statement dated
August 28, 1996 and is incorporated herein by
reference. 15-16
</TABLE>
PART IV
-------
<TABLE>
<CAPTION>
ITEM 14. Exhibits, Financial Statement Schedules, and
- -------- --------------------------------------------
Reports on Form 8-K.
--------------------------------------------
<S> <C> <C>
(a) 1. Financial Statements
Included on the following pages of the 1996 Annual Report:
Consolidated Statements of Income 15
Consolidated Balance Sheets 16
Consolidated Statements of Shareholders' Equity 17
Consolidated Statements of Cash Flows 18
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
Management's Report and Report of
Independent Public Accountants 20
Notes to Consolidated Financial Statements 21-27
2. Financial Statement Schedules
The following Report and Schedule are filed herewith on the
pages indicated:
Report of Independent Public Accountants 21
Schedule II - Valuation and Qualifying Accounts 22
All other schedules are not applicable
</TABLE>
3. Exhibits
3.1 - Articles of Incorporation, as amended. Exhibit 3.1 to Form
10-Q for the quarter ended August 31, 1994 is incorporated
herein by reference.
3.2 - By-Laws, as amended. Exhibit 3.2 to Form 10-K for the year
ended May 31, 1988 is incorporated herein by reference.
4.1 - Indenture dated as of November 15, 1992 covering 9-1/2%
Senior Subordinated Notes due 2002 between Manor Care, Inc.
and Chemical Bank. Exhibit 4.1 to Registration Statement
No. 33-52734 is incorporated herein by reference.
4.2 - Indenture dated as of June 4, 1996 between Manor Care, Inc.
and Wilmington Trust Company, Trustee. Exhibit 4.1 to Form
8-K dated June 4, 1996 is incorporated herein by reference.
4.3 - Supplemental Indentures dated as of June 4, 1996 between
Manor Care, Inc. and Wilmington Trust Company, Trustee.
Exhibit 4.2 to Form 8-K dated June 4, 1996 is incorporated
herein by reference.
10.1 - Supplemental Executive Retirement Plan. Exhibit 10.2 to
Form 10-K for the year ended May 31, 1986 is incorporated
herein by reference.
10.2 - Form of Executive Cash Incentive Plan. Exhibit 10.2 to Form
10-K for the year ended May 31, 1995 is incorporated herein
by reference.
17
<PAGE>
10.3 - Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan. Exhibit A to the Proxy
Statement dated August 10, 1994 is incorporated herein by
reference.
10.4 - Long-Term Incentive Plan. Exhibit A to Proxy Statement
dated August 28, 1995 is incorporated herein by reference.
10.5 - Employment Agreement dated April 27, 1995 between Manor
Healthcare Corp. and Mark Gildea. Exhibit 10.15 for Form
10-K for the year ended May 31, 1995 is incorporated herein
by reference.
10.6 - Employment Agreement dated June 5, 1995 between Vitalink
Pharmacy Services, Inc. and Donna L. DeNardo. Exhibit to
10.16 to Form 10-K for the year ended May 31, 1995 is
incorporated herein by reference.
10.7 - Employment Agreement dated September 1, 1995 among Manor
Care, Inc., Choice Hotels International, Inc and Donald J.
Landry.
10.8 - Agreement dated as of June 1, 1996 among Manor Care, Inc.,
Choice Hotels International, Inc. and Robert C. Hazard, Jr.
10.9 - Agreement dated as of June 1, 1996 among Manor Care, Inc.,
Choice Hotels International, Inc. and Gerald W. Petitt.
10.10 - Master Aircraft Lease Agreement dated September 1, 1994
between Manor Care, Inc. and Wilderness Investment Company,
Inc. Exhibit 10.17 to Form 10-K for the year ended May 31,
1995 is incorporated herein by reference.
10.11 - Lease dated as of August 30, 1995 between The Gaithersburg
Realty Trust and Manor Care, Inc.
10.12 - Guarantee dated as of August 30, 1995 made by Manor Care,
Inc., Manor Healthcare Corp., Choice Hotels International,
Inc., Quality Hotels Europe, Inc., Four Seasons Nursing
Center, Inc., MNR Financial Corp., Boulevard Motel Corp.
and Chemical Bank.
13 - 1996 Annual Report to Stockholders (information
incorporated by reference).
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
18
<PAGE>
99 - Proxy Statement dated August 28, 1996.
(b) One report on Form 8-K was filed during the last quarter of the fiscal
year ended May 31, 1995. The Report, filed May 7, 1996, reported as
Item 5 the intention of Manor Care to spin-off its lodging business
and the restatement of its annual audited financial statements to
reflect the lodging business as a discontinued operation. The
following financial statements were filed:
- Management's Review of Operating Results
- Consolidated Statements of Income
- Consolidated Balance Sheets
- Consolidated Statements of Shareholders' Equity
- Consolidated Statements of Cash Flow
- Management's Review of Financial Position and Cash Flows
- Report of Independent Public Accountants
- Notes to Consolidated Financial Statements
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 28, 1996 MANOR CARE, INC.
--
By:/s/ James A. MacCutcheon
---------------------------
James A. MacCutcheon
Senior Vice President-
Finance and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stewart Bainum, Jr. Chairman, Director, August 28, 1996
- -------------------------- --
Stewart Bainum, Jr. President and Chief
Executive Officer
/s/ Stewart Bainum Vice Chairman August 28, 1996
- -------------------------- --
Stewart Bainum and Director
19
<PAGE>
/s/ Kennett Simmons Director August 28, 1996
- -------------------------- --
Kennett Simmons
/s/ Regina E. Herzlinger Director August 28, 1996
- -------------------------- --
Regina E. Herzlinger
/s/ William H. Longfield Director August 28, 1996
- -------------------------- --
William H. Longfield
/s/ Frederic V. Malek Director August 28, 1996
- -------------------------- --
Frederic V. Malek
/s/ Jerry E. Robertson Director August 28, 1996
- -------------------------- --
Jerry E. Robertson
/s/ Margarita Schoendorfer Vice President- August 28, 1996
- -------------------------- --
Margarita Schoendorfer Corporate Controller
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF MANOR CARE, INC.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Manor Care, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated June 28, 1996. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed in the index in Item 14(a)2 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
June 28, 1996
21
<PAGE>
Schedule II
MANOR CARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Profit End
Description of Period and Loss Other Write-Offs of Period
- ----------- --------- --------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1996
Allowance for doubtful accounts $18,797 $16,190 $1,030 (A) $(11,706) $24,311
======= ======= ========== ======== =======
Year ended May 31, 1995
Allowance for doubtful accounts $15,481 $12,587 $ - $ (9,271) $18,797
======= ======= ========== ======== =======
Year ended May 31, 1994
Allowance for doubtful accounts $ 9,519 $10,563 $3,434(A) $ (8,035) $15,481
======= ======= ========== ======== =======
</TABLE>
/(A)/Represents reserves of acquired companies.
22
<PAGE>
__________________________________________________________________
__________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
EXHIBITS
to
FORM 10-K
Annual Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
________
MANOR CARE, INC.
__________________________________________________________________
__________________________________________________________________
23
<PAGE>
EXHIBIT INDEX
-------------
3.1 - Articles of Incorporation, as amended. Exhibit 3.1 to Form 10-Q for the
quarter ended August 31, 1994 is incorporated herein by reference.
3.2 - By-Laws, as amended. Exhibit 3.2 to Form 10-K for the year ended May 31,
1988 is incorporated herein by reference.
4.1 - Indenture dated as of November 15, 1992 covering 9-1/2% Senior
Subordinated Notes due 2002 between Manor Care, Inc. and Chemical Bank.
Exhibit 4.1 to Registration Statement No. 33-52734 is incorporated herein
by reference.
4.1 - Indenture dated as of November 15, 1992 covering 9-1/2% Senior
Subordinated Notes due 2002 between Manor Care, Inc. and Chemical Bank.
Exhibit 4.1 to Registration Statement No. 33-52734 is incorporated herein
by reference.
4.2 - Indenture dated as of June 4, 1996 between Manor Care, Inc. and
Wilmington Trust Company, Trustee. Exhibit 4.1 to Form 8-K dated June 4,
1996 is incorporated herein by reference.
4.3 - Supplemental Indentures dated as of June 4, 1996 between Manor Care, Inc.
and Wilmington Trust Company, Trustee. Exhibit 4.2 to Form 8-K dated June
4, 1996 is incorporated herein by reference.
10.1 - Supplemental Executive Retirement Plan. Exhibit 10.2 to Form 10-K for
the year ended May 31, 1986 is incorporated herein by reference.
10.2 - Form of Executive Cash Incentive Plan. Exhibit 10.2 to Form 10-K for the
year ended May 31, 1995 is incorporated herein by reference.
10.3 - Non-Employee Director Stock Option and Deferred Compensation Stock
Purchase Plan. Exhibit A to the Proxy Statement dated August 10, 1994 is
incorporated herein by reference.
10.4 - Long-Term Incentive Plan. Exhibit A to Proxy Statement dated August 28,
1995 is incorporated herein by reference.
10.5 - Employment Agreement dated April 27, 1995 between Manor Healthcare Corp.
and Mark Gildea. Exhibit 10.15 for Form 10-K for the year ended May 31,
1995 is incorporated herein by reference.
10.6 - Employment Agreement dated June 5, 1995 between Vitalink Pharmacy
Services, Inc. and Donna L. DeNardo. Exhibit to 10.16 to Form 10-K for
the year ended May 31, 1995 is incorporated herein by reference.
<PAGE>
10.7 - Employment Agreement dated September 1, 1995 among Manor Care, Inc.,
Choice Hotels International, Inc and Donald J. Landry.
10.8 - Agreement dated as of June 1, 1996 among Manor Care, Inc., Choice
Hotels International, Inc. and Robert C. Hazard, Jr.
10.9 - Agreement dated as of June 1, 1996 among Manor Care, Inc., Choice
International, Inc. and Gerald W. Pettit.
10.10 - Master Aircraft Lease Agreement dated September 1, 1994 between Manor
Care, Inc. and Wilderness Investment Company, Inc. Exhibit 10.17 to
Form 10-K for the year ended May 31, 1995 is incorporated herein by
reference
10.11 - Lease dated as of August 30, 1995 between The Gaithersburg Realty Trust
and Manor Care, Inc.
10.12 - Guarantee dated as of August 30, 1005 made by Manor Care, Inc., Manor
Healthcare Corp., Choice Hotels International, Inc., Quality Hotels
Europe, Inc., Four Seasons Nursing Center, Inc., MNR Financial Corp.,
Boulevard Motel Corp. and Chemical Bank.
13 - 1996 Annual Report to Stockholders (information incorporated by
reference).
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
99 - Proxy Statement dated August 28, 1996.
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
--------------------
This Agreement ("Agreement") dated this 1st day of September, 1995 between
Manor Care, Inc. ("Manor Care") and Choice Hotels International, Inc. ("Choice")
(collectively, "Employer"), Delaware corporations with principal offices at
10750 Columbia Pike, Silver Spring, Maryland 20901, and Donald J. Landry
("Employee"), sets forth the terms and conditions governing the employment
relationship between Employee and Manor.
1. Employment. During the term of this Agreement, as hereinafter
----------
defined, Manor Care hereby employs Employee as President-Manor Care Hotel
Division, and Choice hereby employs Employee as President. Employee hereby
accepts such employment upon the terms and conditions hereinafter set forth and
agrees to faithfully and to the best of his ability perform such duties as may
be from time to time assigned by Employer, its Board of Directors or its
designees, such duties to be rendered at the principal office of Employer or at
such other place or places as Employer shall require. Employee also agrees to
perform his duties in accordance with policies established by Employer's Board
of Directors, which may be changed from time to time.
2. Term. Subject to the provisions for termination hereinafter provided,
----
the term of this Agreement shall begin on December 1, 1994 and shall terminate
five (5) years thereafter. Upon expiration of said period, the parties may
extend the term if they mutually agree to do so.
3. Compensation. For all services rendered by Employee under this
------------
Agreement during the term thereof, Employer shall pay Employee the following
compensation:
(a) Salary. A base salary of Three Hundred Fifty Thousand Dollars
------
($350,000) per annum payable in accordance with Employer's standard payroll
practices from time to time in effect. Such salary shall be reviewed after
one year and may be increased at the discretion of Employer.
(b) Incentive Bonus. Employee shall have the opportunity to earn up
---------------
to a maximum of Fifty-Five Percent (55%) per annum of the base salary set
forth in subparagraph 3(a) above in Employer's bonus plans as adopted from
time to time by Employer's Board of Directors.
<PAGE>
(c) Automobile. Employer shall provide Employee with the use of a
----------
suitable automobile during the term of this Agreement, and shall provide
gas, oil, maintenance, insurance and other operating expenses for such
automobile, in accordance with Employer's standard practices. In lieu of
the above, Employee may elect to use his own automobile and receive an
allowance for automobile expenses of $850 per month.
(d) Club Membership. Employer shall provide Employee with an
---------------
appropriate corporate membership at a dining and/or recreational club for
the purpose of business entertainment.
(e) Stock Options. Employee shall be eligible to receive options
-------------
under the Manor Care, Inc. Key Executive Stock Option Plan, or similar
plan, to purchase common shares of Manor Care in accordance with the policy
of the Board of Directors as in effect from time to time.
(f) Other Benefits. Employee shall, when eligible, be entitled to
--------------
participate in all other fringe benefits accorded headquarters employees by
Employer as are in effect from time to time.
4. Extent of Services. Employee shall devote his full time, attention,
------------------
and energies to the business of Employer, and shall not during the term of this
Agreement be engaged in any other business activity whether or not such business
activity is pursued for gain, profit, or other pecuniary advantage; but this
shall not be construed as preventing Employee from investing his assets in the
securities of public companies, or the securities of private companies or
limited partnerships outside the healthcare and lodging industries, if such
holdings are passive investments of One Percent (1%) or less of outstanding
securities and Employee does not hold positions of director, officer, employee
or general partner. Employee warrants and represents that he has no contracts
or obligations to others which would materially inhibit the performance of his
services under this Agreement.
5. Disclosure and Use of Information. Employee recognizes and
---------------------------------
acknowledges that Employer's and affiliates' present and prospective clients,
franchises, management contracts, acquisitions and personnel, as they may exist
from time to time, are valuable, special and unique assets of Employer's
business. Throughout the term of this Agreement and for a period of two (2)
years after its termination or expiration for whatever cause or reason, Employee
shall not directly or indirectly, or cause others to: (1) make use of or
disclose to others any information relating to the business of Employer that has
not otherwise been made public, including but not limited to Employer's present
or prospective clients, franchises, management contracts or acquisitions; or (2)
without Employer's prior written consent, offer employment to or employ on
2
<PAGE>
behalf of Employee or any other person, any person who at any time is or has
been within the preceding one (1) year an employee of Employer or any affiliate
of Employer, or induce such person, directly or indirectly, to leave his or her
employment. In the event of an actual or threatened breach by Employee of the
provisions of this paragraph, Employer shall be entitled to injunctive relief
restraining Employee from committing such breach or threatened breach. Nothing
herein stated shall be construed as preventing Employer from pursuing any other
remedies available to Employer for such breach or threatened breach, including
the recovery of damages from Employee.
6. Notices. Any notice, request or demand required or permitted to be
-------
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or sent by certified or registered mail to his
residence in the case of Employee, or to its principal office in the case of the
Employer.
7. Elective Positions. Nothing contained in this Agreement is intended
------------------
to nor shall be construed to abrogate, limit or affect the powers, rights and
privileges of the Board of Directors or stockholders to remove Employee from the
positions set forth in paragraph 1, with or without just cause, during the term
of this Agreement or to elect someone other than Employee to those positions, as
provided by law and the By-Laws of Employer; provided, however, that if Employee
is so removed without cause, it is expressly understood and agreed, in the event
any one or combination of the foregoing occurs, Employee's rights under this
Agreement shall in no way be prejudiced, and Employee shall be entitled to
receive compensation referred to in paragraph 3 above, except ungranted stock
options, provided that he is ready, willing and able to perform the duties and
responsibilities set forth above. Notwithstanding the foregoing, the election
or appointment of Employee to a different executive position shall not be
considered removal hereunder. Employee upon removal shall be entitled to pursue
other employment, and Employer shall be entitled to receive as offset and
thereby reduce its payment, the amount received by Employee from any other
active employment. As a condition to Employee receiving his compensation from
Employer, Employee agrees to furnish Employer annually with full information
regarding such other employment and to permit verification of his employment
records and Federal income tax returns by an independent attorney or accountant.
Employer shall receive credit for unemployment insurance benefits, social
security insurance or like amounts actually received by Employee. In the event
Employee is removed without cause, Employer shall relocate Employee to any city
in the continental United States to the extent relocation assistance is not
provided by a new employer.
8. Waiver of Breach. The waiver of either party of a breach of any
----------------
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
3
<PAGE>
9. Assignment. The rights and obligations of Employer under this
----------
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. The obligations of Employee hereunder may not be
assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
------------------------
following events and conditions:
(a) Upon expiration of its term.
(b) For just cause, including but not limited to refusal to carry out
duties and instructions relative to the position, dishonesty, violation of
this Agreement, and any willful acts or omissions inimical to or contrary
to policies of Employer not arbitrarily applied in the case of Employee.
Just cause shall also include solicitation by Employee of offers of
employment from others prior to the last year of this Agreement, and the
solicitation of the services by Employee or material positive response by
Employee to the solicitation of professional search or executive
recruitment organizations prior to the last year of this Agreement. In the
event of termination by Employer for just cause, vested but unexercised
options granted during the term of this Agreement shall be forfeited as a
result thereof, as of the date of notice. In the event of a willful breach
of this Agreement by Employee, Employer shall have the right to purchase
from Employee, at the price paid by Employee, such of the Manor Care Common
Stock as has been acquired by Employee by exercise of a stock option
granted during the term of this Agreement if such exercise is within six
(6) months prior to termination of this Agreement as a result of such
breach. Employee shall be entitled to fourteen (14) days advance written
notice of termination, except where the basis for termination constitutes
conduct on the part of Employee involving dishonesty or bad faith, in which
case the termination shall be effective upon the sending of notice.
(c) In the event that Employee is unable to perform the services
called for hereunder by reason of incapacity or disablement for more than
six (6) months (whether or not consecutive) in any period of twenty-four
(24) consecutive months, Employer shall have the right to terminate this
Agreement by written notice to Employee. In the event of such termination,
all non-vested obligations of Employer to Employee pursuant to this
Agrement shall terminate.
(d) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date thereof.
4
<PAGE>
11. Entire Agreement. This instrument contains the entire agreement of
----------------
the parties and supersedes and replaces the Employment Agreement dated February
17, 1992. It may be changed only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension, or
discharge is sought. This Agreement shall be governed by the laws of the State
of Maryland, and any litigation shall be conducted in the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Employer:
MANOR CARE, INC.
By: ______________________________
Stewart Bainum, Jr.
Chairman, President & CEO
CHOICE HOTELS INTERNATIONAL, INC.
By: ______________________________
Stewart Bainum, Jr.
Vice Chairman
Employee:
__________________________________
Donald J. Landry
5
<PAGE>
EXHIBIT 10.8
AGREEMENT
This Agreement (the "Agreement") is made and entered into as of June 1,
1996, (the "Effective Date") by and among Manor Care, Inc. ("Manor Care"),
Choice Hotels International, Inc. ("CHI" and, together with Manor Care, the
"Company") and Robert C. Hazard, Jr. ("Hazard").
RECITAL
A. The employment of Hazard as Co-Chairman of CHI terminated on May 31,
1996.
B. The Company and Hazard now desire to set forth their agreement with
respect to certain continuing relationships between the Company and Hazard.
AGREEMENT
The Company and Hazard, in consideration of the foregoing and the mutual
promises and covenants made herein, agree as follows:
1. EMPLOYMENT. For the period from the Effective Date through May 31,
1997 (the "Employment Period") Hazard shall remain as a full-time, temporary
employee of CHI. During the Employment Period, Hazard will receive no salary or
other compensation. Hazard shall provide such services during the Employment
Period as the parties shall mutually agree.
2. STOCK OPTIONS.
A. Hazard agrees to waive any rights he may have, now or in the
future, under the proposed Non-Employee Director Stock Option and Deferred
Compensation Plan (the "Non-Employee Director Plan") of Choice Hotels Holdings,
Inc. ("Holdings") to receive options to purchase 5,000 shares of common stock of
Holdings upon initial election to the Holdings Board of Directors, in connection
with the proposed spin-off of the lodging business of Manor Care (the "Spin-
off"). However, nothing in this Agreement shall affect his rights to receive
any other award under the Non-Employee Director Plan to which he may be
entitled.
B. The Company and Hazard acknowledge that Hazard has outstanding
Class B Options to purchase 4,500 shares of the common stock of Manor Care
("Common Stock") at an exercise price of $9.46, exercisable on November 2, 1996,
and that this Agreement does not affect such options.
C. The Company and Hazard acknowledge that Hazard has outstanding
Class B Options to purchase 15,000 shares of Common Stock at an exercise price
of $8.96 per share, exercisable on May 30, 1997 (the "$8.96 Class B Options").
Hazard shall have the right to
<PAGE>
exercise the $8.96 Class B Options with respect to 500 shares of Common Stock
when the $8.96 Class B Options vest; however, Hazard hereby agrees to terminate
the $8.96 Class B Options with respect to 14,500 shares of Common Stock.
D. Changes arising from the Spin-off which affect other participants
in the stock option plans under which the options described in Subsections 2b
and 2c, above, were granted shall also apply to Hazard. Any consents necessary
with respect to such changes shall deemed granted by Hazard by his execution of
this Agreement.
3. BENEFITS.
Hazard agrees to waive all rights to and forego any participation in
any and all benefits to which full-time or part-time employees of the Company
are entitled, including, but not limited to, participation in the medical,
dental and life insurance plans of the Company, the Retirement Savings and
Investment Plan ("401(K) Plan") of the Company, the Nonqualified Retirement
Savings and Investment Plan ("Nonqualified Savings Plan") of the Company, the
Cash Accumulation Retirement Plan ("CARP") of the Company, the Dependent Care
Reimbursement Account and the Healthcare Reimbursement Account.
4. MODIFICATION. No change or modification of this Agreement shall be
valid unless made in writing and signed by both the parties.
5. APPLICABLE LAW AND VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland. In the event of
any legal or equitable action arising under this Agreement, the parties agree
that the jurisdiction and venue of such action shall lie exclusively within
either the state courts of Maryland or the United States District Court for the
District of Maryland, and the parties do hereby waive any other jurisdiction and
venue.
6. ENTIRE AGREEMENT. This Agreement incorporates the entire agreement
between the parties with respect to the subject matter of the Agreement, and
supersedes all other prior or contemporaneous agreements, negotiations or
discussions between the parties with respect thereto.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
MANOR CARE, INC.,
a Delaware corporation
By: __________________________________________
CHOICE HOTELS INTERNATIONAL, INC.,
a Delaware corporation
By: _________________________________________
_______________________________________________
Robert C. Hazard, Jr.
-3-
<PAGE>
Exhibit 10.9
AGREEMENT
This Agreement (the "Agreement") is made and entered into as of June 1,
1996, (the "Effective Date") by and among Manor Care, Inc. ("Manor Care"),
Choice Hotels International, Inc. ("CHI" and, together with Manor Care, the
"Company") and Gerald W. Petitt ("Petitt").
RECITAL
A. The employment of Petitt as Co-Chairman of CHI terminated on May 31,
1996.
B. The Company and Petitt now desire to set forth their agreement with
respect to certain continuing relationships between the Company and Petitt.
AGREEMENT
The Company and Petitt, in consideration of the foregoing and the mutual
promises and covenants made herein, agree as follows:
1. EMPLOYMENT. For the period from the Effective Date through May 31,
1997 (the "Employment Period") Petitt shall remain as a full-time, temporary
employee of CHI. During the Employment Period, Petitt will receive no salary or
other compensation. Petitt shall provide such services during the Employment
Period as the parties shall mutually agree.
2. STOCK OPTIONS.
A. Petitt agrees to waive any rights he may have, now or in the
future, under the proposed Non-Employee Director Stock Option and Deferred
Compensation Plan (the "Non-Employee Director Plan") of Choice Hotels Holdings,
Inc. ("Holdings") to receive options to purchase 5,000 shares of common stock of
Holdings upon initial election to the Holdings Board of Directors, in connection
with the proposed spin-off of the lodging business of Manor Care (the "Spin-
off"). However, nothing in this Agreement shall affect his rights to receive any
other award under the Non-Employee Director Plan to which he may be entitled.
B. The Company and Petitt acknowledge that Petitt has outstanding
Class B Options to purchase 4,500 shares of the common stock of Manor Care
("Common Stock") at an exercise price of $9.46, exercisable on November 2, 1996,
and that this Agreement does not affect such options.
C. The Company and Petitt acknowledge that Petitt has outstanding
Class B Options to purchase 15,000 shares of Common Stock at an exercise price
of $8.96 per share, exercisable on May 30, 1997 (the "$8.96 Class B Options").
Petitt shall have the right to exercise
<PAGE>
the $8.96 Class B Options with respect to 500 shares of Common Stock when the
$8.96 Class B Options vest; however, Petitt hereby agrees to terminate the $8.96
Class B Options with respect to 14,500 shares of Common Stock.
D. Changes arising from the Spin-off which affect other participants
in the stock option plans under which the options described in Subsections 2b
and 2c, above, were granted shall also apply to Petitt. Any consents necessary
with respect to such changes shall deemed granted by Petitt by his execution of
this Agreement.
3. BENEFITS.
Petitt agrees to waive all rights to and forego any participation in
any and all benefits to which full-time or part-time employees of the Company
are entitled, including, but not limited to, participation in the medical,
dental and life insurance plans of the Company, the Retirement Savings and
Investment Plan ("401(K) Plan") of the Company, the Nonqualified Retirement
Savings and Investment Plan ("Nonqualified Savings Plan") of the Company, the
Cash Accumulation Retirement Plan ("CARP") of the Company, the Dependent Care
Reimbursement Account and the Healthcare Reimbursement Account.
4. MODIFICATION. No change or modification of this Agreement shall be
valid unless made in writing and signed by both the parties.
5. APPLICABLE LAW AND VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland. In the event of
any legal or equitable action arising under this Agreement, the parties agree
that the jurisdiction and venue of such action shall lie exclusively within
either the state courts of Maryland or the United States District Court for the
District of Maryland, and the parties do hereby waive any other jurisdiction and
venue.
6. ENTIRE AGREEMENT. This Agreement incorporates the entire agreement
between the parties with respect to the subject matter of the Agreement, and
supersedes all other prior or contemporaneous agreements, negotiations or
discussions between the parties with respect thereto.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
MANOR CARE, INC.,
a Delaware corporation
By: _______________________________________
CHOICE HOTELS INTERNATIONAL, INC.,
a Delaware corporation
By: _______________________________________
___________________________________________
Gerald W. Petitt
-3-
<PAGE>
EXHIBIT 10.11
_________________________________________________________________________
LEASE
between
THE GAITHERSBURG REALTY TRUST,
as Lessor,
and
MANOR CARE, INC.,
as Lessee
___________________________
Dated as of August 30, 1995
___________________________
Manor Care, Inc. Office Building and Warehouse
Gaithersburg, Maryland
_________________________________________________________________________
This Lease is subject to a security interest in favor of Chemical Bank, as agent
(the "Agent"), under a Credit Agreement, dated as of August 30, 1995, among
Gaithersburg Realty Trust, the Lenders, and the Agent, as amended or
supplemented. This Lease has been executed in several counterparts. To the
extent, if any, that this Lease constitutes chattel paper (as such term is
defined in the Uniform Commercial Code of the State of Maryland or New York), no
security interest in this Lease may be created through the transfer or
possession of any counterpart other than the original counterpart containing the
receipt therefor executed by the Agent on the signature page hereof.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I...................................... 1
1.1 Definitions............................................................ 1
ARTICLE II..................................... 1
2.1 Property............................................................... 1
2.2 Lease Term............................................................. 1
2.3 Title.................................................................. 1
ARTICLE III.................................... 2
3.1 Rent................................................................... 2
3.2 Payment of Basic Rent.................................................. 2
3.3 Supplemental Rent...................................................... 2
3.4 Performance on a Non-Business Day...................................... 2
ARTICLE IV..................................... 3
4.1 Utility Charges........................................................ 3
ARTICLE V...................................... 3
5.1 Quiet Enjoyment........................................................ 3
ARTICLE VI..................................... 3
6.1 Net Lease.............................................................. 3
6.2 No Termination or Abatement............................................ 4
ARTICLE VII.................................... 4
7.1 Ownership of the Property.............................................. 4
ARTICLE VIII................................... 4
8.1 Condition of the Property.............................................. 4
8.2 Possession and Use of the Property..................................... 5
ARTICLE IX..................................... 5
9.1 Compliance with Legal Requirements and Insurance Requirements.......... 5
ARTICLE X...................................... 5
10.1 Maintenance and Repair; Return........................................ 5
10.2 Right of Inspection................................................... 6
10.3 Environmental Inspection.............................................. 6
ARTICLE XI..................................... 6
11.1 Modifications, Substitutions and Replacements......................... 6
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE XII.................................... 8
12.1 Warranty of Title..................................................... 8
12.2 Grants and Releases of Easements...................................... 8
ARTICLE XIII................................... 9
13.1 Permitted Contests Other Than in Respect of Impositions............... 9
ARTICLE XIV.................................... 10
14.1 Public Liability and Workers' Compensation Insurance.................. 10
14.2 Hazard and Other Insurance............................................ 10
14.3 Coverage.............................................................. 10
ARTICLE XV..................................... 11
15.1 Casualty, Condemnation and Title Defects.............................. 11
15.2 Environmental Matters................................................. 13
15.3 Notice of Environmental Matters....................................... 14
ARTICLE XVI.................................... 14
16.1 Termination upon Environmental Violation.............................. 14
16.2 Procedures............................................................ 14
ARTICLE XVII................................... 14
17.1 Lease Events of Default............................................... 14
17.2 Surrender of Possession............................................... 16
17.3 Reletting............................................................. 16
17.4 Damages............................................................... 16
17.5 Acceleration of Rent.................................................. 17
17.6 Final Liquidation Damages............................................. 17
17.7 Waiver of Certain Rights.............................................. 18
17.8 Assignment of Rights Under Contracts.................................. 18
17.9 Remedies Cumulative................................................... 18
17.10 Lessee's Right to Purchase............................................ 18
ARTICLE XVIII............................. 19
18.1 Lessor's Right to Cure Lessee's Lease Defaults........................ 19
ARTICLE XIX.............................. 19
19.1 Provisions Relating to Lessee's Termination of this Lease or Exercise
of Purchase Option................................................ 19
ARTICLE XX............................... 19
20.1 Purchase Option...................................................... 19
20.2 Maturity Date Purchase Option........................................ 20
ARTICLE XXI.............................. 20
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
21.1 Sale Procedure....................................................... 20
21.2 Application of Proceeds of Sale...................................... 21
21.3 Indemnity for Excessive Wear......................................... 21
21.4 Appraisal Procedure.................................................. 21
21.5 Certain Obligations Continue......................................... 22
ARTICLE XXII............................. 22
22.1 Holding Over......................................................... 22
ARTICLE XXIII............................ 22
23.1 Risk of Loss......................................................... 22
ARTICLE XXIV............................. 22
24.1 Subletting and Assignment............................................ 23
24.2 Subleases............................................................ 23
ARTICLE XXV.............................. 23
25.1 Estoppel Certificates................................................ 23
ARTICLE XXVI............................. 23
26.1 No Waiver............................................................ 23
ARTICLE XXVII............................ 24
27.1 Acceptance of Surrender.............................................. 24
ARTICLE XXVIII........................... 24
28.1 No Merger of Title................................................... 24
ARTICLE XXIX............................. 24
29.1 Notices.............................................................. 24
ARTICLE XXX............................... 25
30.1 Miscellaneous........................................................ 25
30.2 Amendments and Modifications......................................... 25
30.3 Successors and Assigns............................................... 25
30.4 Headings and Table of Contents....................................... 25
30.5 Counterparts......................................................... 25
30.6 GOVERNING LAW........................................................ 25
30.7 Limitations on Recourse.............................................. 25
30.8 Priority............................................................. 26
30.9 Reconfiguration Agreement............................................ 26
</TABLE>
-iii-
<PAGE>
LEASE (this "Lease"), dated as of August 30, 1995, between THE
-----
GAITHERSBURG REALTY TRUST, a Delaware business trust, having its principal
office at Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890, as lessor (the "Lessor"), and MANOR CARE, INC., a Delaware corporation,
------
having its principal office at 10750 Columbia Pike, Silver Spring, Maryland
20901, as lessee (the "Lessee").
------
In consideration of the mutual agreements herein contained, and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
1.1 Definitions. Capitalized terms used but not otherwise defined in
-----------
this Lease have the respective meanings specified in Annex A to this Lease.
ARTICLE II
2.1 Property. Subject to the terms and conditions hereinafter set
--------
forth, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
following (collectively, the "Property"):
--------
(a) all of Lessor's right, title and interest in and to the Land
described on Schedule A attached hereto;
----------
(b) all of Lessor's right, title and interest in and to the
Improvements;
(c) all of Lessor's right, title and interest in and to all the
Appurtenant Rights; and
(d) all of Lessor's right, title and interest in and to all fixtures
relating to the Improvements, including all components thereof, located in
or on the Improvements, together with all replacements, modifications,
alterations and additions thereto (collectively, the "Fixtures").
--------
2.2 Lease Term. The Property is leased for the Term, unless extended
----------
or earlier terminated in accordance with the provisions of this Lease.
2.3 Title. The Property is leased to Lessee without any
-----
representation or warranty, express or implied, by Lessor and subject to the
rights of parties in possession, the existing state of title (including, without
limitation, the Permitted Exceptions) and all applicable Legal Requirements,
except as to the absence of Lessor Liens. To obtain assurance as to the title
to the Property as between Lessee and Lessor, Lessee is relying solely upon a
policy of title insurance. Lessee shall in no event have any recourse against
Lessor for any defect in title to the Property.
<PAGE>
2
ARTICLE III
3.1 Rent. (a) On each applicable Payment Date and on any date when
----
this Lease shall terminate, Lessee shall pay the Basic Rent (which shall include
Tranche A Basic Rent, Tranche B Basic Rent and Investor Yield).
(b) Basic Rent shall be due and payable in lawful money of the United
States and shall be paid by wire transfer of immediately available funds on the
due date therefor to such account or accounts at such bank or banks or to such
other Person or in such other manner as Lessor shall from time to time direct.
(c) Neither Lessee's inability or failure to take possession of all,
or any portion, of the Property when delivered by Lessor, nor Lessor's inability
or failure to deliver all, or any portion, of the Property to Lessee, whether or
not attributable to any act or omission of Lessee or any act or omission of
Lessor, or for any other reason whatsoever, shall delay or otherwise affect
Lessee's obligation to pay Rent in accordance with the terms of this Lease.
3.2 Payment of Basic Rent. Basic Rent shall be paid absolutely net
---------------------
to Lessor, so that this Lease shall yield to Lessor the full amount thereof,
without setoff, deduction or reduction.
3.3 Supplemental Rent. Lessee shall pay to Lessor or the Person
-----------------
entitled thereto any and all Supplemental Rent promptly as the same shall become
due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall
have all rights, powers and remedies provided for herein or by law or equity or
otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor
as Supplemental Rent, among other things, on demand, to the extent permitted by
applicable Legal Requirements, interest at the applicable Overdue Rate on any
installment of Basic Rent not paid when due for the period for which the same
shall be overdue and on any payment of Supplemental Rent not paid when due or
demanded by Lessor for the period from the due date or the date of any such
demand, as the case may be, until the same shall be paid. The expiration or
other termination of Lessee's obligations to pay Basic Rent hereunder shall not
limit or modify the obligations of Lessee with respect to Supplemental Rent.
Unless expressly provided otherwise in this Lease or any other Operative
Agreement, in the event of any failure on the part of Lessee to pay and
discharge any Supplemental Rent as and when due, Lessee shall also promptly pay
and discharge any fine, penalty, interest or cost which may be assessed or added
for nonpayment or late payment of such Supplemental Rent, all of which shall
also constitute Supplemental Rent.
3.4 Performance on a Non-Business Day. If any payment is required
---------------------------------
hereunder on a day that is not a Business Day, then such payment shall be due on
the next succeeding Business Day.
<PAGE>
3
ARTICLE IV
4.1 Utility Charges. Lessee shall pay, or cause to be paid, all
---------------
charges for electricity, power, gas, oil, water, telephone, sanitary sewer
service and all other rents and utilities used in or on the Property during the
Term. Lessee shall be entitled to receive any credit or refund with respect to
any utility charge paid by Lessee and the amount of any credit or refund
received by Lessor on account of any utility charges paid by Lessee, net of the
costs and expenses incurred by Lessor in obtaining such credit or refund, shall
be promptly paid over to Lessee. All charges for utilities imposed with respect
to the Property for a billing period during which this Lease expires or
terminates shall be adjusted and prorated on a daily basis between Lessor and
Lessee, and each party shall pay or reimburse the other for each party's pro
rata share thereof.
ARTICLE V
5.1 Quiet Enjoyment. So long as no Lease Event of Default shall have
---------------
occurred and be continuing, Lessee shall peaceably and quietly have, hold and
enjoy the Property for the Term, free of any claim or other action by Lessor or
anyone rightfully claiming by, through or under Lessor with respect to any
matters arising from and after the Lease Commencement Date.
ARTICLE VI
6.1 Net Lease. This Lease shall constitute a net lease. Any present
---------
or future law to the contrary notwithstanding, this Lease shall not terminate,
nor shall Lessee be entitled to any abatement, suspension, deferment, reduction,
setoff, counterclaim, or defense with respect to the Rent, nor shall the
obligations of Lessee hereunder be affected by reason of: (i) any damage to or
destruction of the Property or any part thereof; (ii) any taking of the Property
or any part thereof or interest therein by Condemnation or otherwise; (iii) any
prohibition, limitation, restriction or prevention of Lessee's use, occupancy or
enjoyment of the Property or any part thereof, or any interference with such
use, occupancy or enjoyment by any Person or for any other reason; (iv) any
Title Defect (as defined below) or encumbrance or any matter affecting title to
the Property; (v) any eviction by paramount title or otherwise; (vi) any default
by Lessor hereunder; (vii) any action for bankruptcy, insolvency,
reorganization, liquidation, dissolution or other proceeding relating to or
affecting Lessor; (viii) the impossibility or illegality of performance by
Lessor, Lessee, or both; (ix) any action of any Governmental Authority; (x)
Lessee's acquisition of ownership of all or part of the Property (except to the
extent this Lease is terminated pursuant to the terms hereof); (xi) breach of
any warranty or representation with respect to the Property; (xii) any defect in
the condition, quality or fitness for use of the Property or any part thereof;
or (xiii) any other cause or circumstances whether similar or dissimilar to the
foregoing and whether or not Lessee shall have notice or knowledge of any of the
foregoing. The parties intend that the obligations of Lessee hereunder shall be
covenants and agreements that are separate and independent from any obligations
of Lessor hereunder and shall continue unaffected unless such obligations shall
have been modified or terminated in accordance with an express provision of this
Lease. The foregoing shall not preclude Lessee from instituting a
<PAGE>
4
separate action against Lessor for breach of its obligations under this Lease or
any of the other Operative Agreements.
6.2 No Termination or Abatement. Lessee shall remain obligated under
---------------------------
this Lease in accordance with its terms and shall not take any action to
terminate, rescind or avoid this Lease, notwithstanding any action for
bankruptcy, insolvency, reorganization, liquidation, dissolution, or other
proceeding affecting Lessor, or any action with respect to this Lease which may
be taken by any trustee, receiver or liquidator of Lessor or by any court with
respect to Lessor, except as otherwise expressly provided herein. Lessee hereby
waives all right (i) to terminate or surrender this Lease, except as otherwise
expressly provided herein, or (ii) to avail itself of any abatement, suspension,
deferment, reduction, setoff, counterclaim or defense with respect to any Rent.
Lessee shall remain obligated under this Lease in accordance with its terms and
Lessee hereby waives any and all rights now or hereafter conferred by statute or
otherwise to modify or to avoid strict compliance with its obligations under
this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound
by all of the terms and conditions contained in this Lease.
ARTICLE VII
7.1 Ownership of the Property. (a) Lessor and Lessee intend that
-------------------------
(i) for financial accounting purposes with respect to Lessee (A) this Lease will
be treated as an "operating lease" pursuant to Statement of Financial Accounting
Standards (SFAS) No. 13, as amended, (B) Lessor will be treated as the owner and
lessor of the Property and (C) Lessee will be treated as the lessee of the
Property, but (ii) for federal, state and local income tax purposes (A) this
Lease will be treated as a financing arrangement, (B) Lessor will be treated as
a subordinated lender making a loan to Lessee in an amount equal to the Investor
Contribution, which loan is secured by the Property, and (C) Lessee will be
treated as the owner of the Property and will be entitled to all tax benefits
ordinarily available to an owner of property like the Property for such tax
purposes.
(b) Lessor and Lessee further intend and agree that in the event of
any insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any State or Commonwealth thereof affecting Lessee or
Lessor, the transactions evidenced by this Lease shall be regarded as loans made
by an unrelated third party lender to Lessee.
ARTICLE VIII
8.1 Condition of the Property. EXCEPT AS OTHERWISE EXPRESSLY
-------------------------
PROVIDED IN ANY OPERATIVE AGREEMENT, LESSEE ACKNOWLEDGES AND AGREES THAT IT IS
RENTING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT
(EXPRESS OR IMPLIED) BY LESSOR AND SUBJECT TO (A) THE EXISTING STATE OF TITLE,
(B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS
WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW AND (D) VIOLATIONS OF
LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE
<PAGE>
5
HEREOF. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OPERATIVE AGREEMENT,
NEITHER LESSOR, THE AGENT NOR ANY LENDER HAS MADE OR SHALL BE DEEMED TO HAVE
MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED, INCLUDING,
WITHOUT LIMITATION, THE CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL
CONDITION, OR ANY ENVIRONMENTAL OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE
DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY,
USE, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY
PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER,
EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY (OR ANY PART THEREOF) AND
NEITHER LESSOR, THE AGENT NOR ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN,
OR PATENT DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO
COMPLY WITH ANY LEGAL REQUIREMENT.
8.2 Possession and Use of the Property. The Property shall be used
----------------------------------
for any lawful purpose. Lessee shall pay, or cause to be paid, all charges and
costs required in connection with the use of the Property and the Building.
Lessee shall not commit or permit any waste of the Property or any part thereof.
ARTICLE IX
9.1 Compliance with Legal Requirements and Insurance Requirements.
-------------------------------------------------------------
Subject to the terms of Article XIII relating to permitted contests, Lessee, at
its sole cost and expense, shall (a) comply with all Environmental Laws and
comply in all material respects with all other Legal Requirements and Insurance
Requirements relating to the Property, including the use, construction,
operation, maintenance, repair and restoration thereof, whether or not
compliance therewith shall require structural or extraordinary changes in the
Improvements or interfere with the use and enjoyment of the Property, and (b)
procure, maintain and comply in all material respects with all licenses,
permits, orders, approvals, consents and other authorizations required for the
construction, renovation, use, maintenance and operation of the Property and for
the use, operation, maintenance, repair and restoration of the Improvements.
ARTICLE X
10.1 Maintenance and Repair; Return. (a) Lessee, at its sole cost
------------------------------
and expense, shall maintain, or cause to be maintained, the Property in good
condition (ordinary wear and tear excepted) and make all necessary repairs
thereto, of every kind and nature whatsoever, whether interior or exterior,
ordinary or extraordinary, structural or nonstructural or foreseen or
unforeseen, in each case as required by all Legal Requirements and Insurance
Requirements and on a basis reasonably consistent with the operation and
maintenance of commercial properties comparable in type and location to the
Property subject, however, to the provisions of Article XV with respect to
Condemnation and Casualty.
(b) Lessor shall under no circumstances be required to build any
<PAGE>
6
improvements on the Property, make any repairs, replacements, alterations or
renewals of any nature or description to the Property, make any expenditure
whatsoever in connection with this Lease or maintain the Property in any way.
Lessor shall not be required to maintain, repair or rebuild all or any part of
the Property, and Lessee waives the right to (i) require Lessor to maintain,
repair, or rebuild all or any part of the Property, or (ii) make repairs at the
expense of Lessor pursuant to any Legal Requirement, Insurance Requirement,
contract, agreement, covenants, condition or restriction at any time in effect.
(c) Lessee shall, upon the expiration or earlier termination of the
Term (unless Lessee has exercised the Purchase Option or the Property is
otherwise conveyed to Lessee), vacate and surrender the Property to Lessor in
its then-current, "AS IS" condition, subject to Lessee's obligations under
Sections 9.1, 10.l(a), 10.2, 11.1 and 12.1.
10.2 Right of Inspection. Lessor may, at reasonable times and with
-------------------
reasonable prior notice, accompanied by a representative of Lessee, and without
interfering in any material way with any construction by, or other operations
of, Lessee enter upon, inspect and examine at its own cost and expense (unless a
Lease Event of Default exists, in which case the reasonable out-of-pocket costs
and expenses of Lessor shall be paid by Lessee), the Property. Lessor
acknowledges that it shall bear the risk for any losses sustained during such
inspections where the losses result from its own gross negligence or willful
misconduct in the course of such inspections. Lessee shall furnish to Lessor
statements, no more than once per year, accurate in all material respects,
regarding the condition and state of repair of the Property. Lessor shall have
no duty to make any such inspection or inquiry and shall not incur any liability
or obligation by reason of not making any such inspection or inquiry.
10.3 Environmental Inspection. Upon surrender of possession of the
------------------------
Property, or not more than 120 days nor less than 30 days prior to the
Expiration Date (unless Lessee has previously exercised the Purchase Option),
Lessee shall, at its sole cost and expense, provide to Lessor a report by an
environmental consultant selected by Lessee and reasonably satisfactory to
Lessor certifying that Hazardous Substances have not at any time during the Term
been generated, used, treated or stored on, transported to or from, Released at,
on or from or deposited at or on the Property, and no portion of the Property
has been used for such purposes other than (i) as necessary or desirable to use,
operate, maintain, repair and restore the Property and (ii) in full compliance
with all Environmental Laws. If such is not the case, the report shall set
forth a remedial response plan relating to the Property (which remedial response
plan, if required by any Environmental Law or Governmental Authority, shall be
approved by the appropriate Governmental Authority). Such remedial response
plan shall include, but shall not be limited to, plans for full response,
remediation, removal, or other corrective action, and the protection, or
mitigative action associated with the protection, of natural resources including
wildlife, aquatic species, and vegetation associated with the Property, as
required by all applicable Environmental Laws. If such report includes a
remedial response plan, Lessee shall promptly deposit funds in escrow sufficient
to ensure the full execution and implementation of such plan.
ARTICLE XI
11.1 Modifications, Substitutions and Replacements. (a) So long as
---------------------------------------------
no Lease
<PAGE>
7
Event of Default has occurred and is continuing, Lessee, at its sole cost and
expense, may at any time and from time to time make alterations, renovations,
improvements and additions to the Property or any part thereof (collectively,
"Modifications"); provided, that: (i) except for any Modification required to be
------------- --------
made pursuant to a Legal Requirement or an Insurance Requirement, no
Modification, individually, or when aggregated with any (A) other Modification
or (B) grant, dedication, transfer or release pursuant to Section 12.2, shall
impair the value of the Property by an amount in excess of $500,000 or impair
the utility or useful life of the Property from that which existed immediately
prior to such Modification; (ii) the Modification shall be done in a good and
workmanlike manner; (iii) Lessee shall comply with all Legal Requirements
(including all Environmental Laws) and Insurance Requirements applicable to the
Modification, including to the extent applicable the obtaining of all permits
and certificates of occupancy, and the structural integrity of the Building
shall not be adversely affected; (iv) Lessee shall maintain or cause to be
maintained builders' risk insurance at all times when a Modification the cost of
which is anticipated to exceed $1,000,000 is in progress; (v) subject to the
terms of Article XIII relating to permitted contests, Lessee shall pay all costs
and expenses and discharge any Liens (other than Lessor Liens) arising with
respect to the Modification; (vi) such Modifications shall comply with Sections
8.2 and 10.1 and shall not change the primary character of the Building as an
office building and warehouse; and (vii) no Improvements shall be demolished,
except to the extent such demolition does not materially impair the value,
utility or useful life of the Building. All Modifications (other than those that
may be readily removed without impairing the value, utility or remaining useful
life of the Property) shall remain part of the realty and shall be subject to
this Lease, and title thereto shall immediately vest in Lessor. So long as no
Lease Event of Default has occurred and is continuing, Lessee may place upon the
Property any inventory, trade fixtures, machinery, equipment or other property
belonging to Lessee or third parties and may remove the same at any time during
the term of this Lease; provided that such inventory, trade fixtures, machinery,
--------
equipment or other property, or their respective operations, do not impair the
value, utility or remaining useful life of the Property.
(b) Lessee shall notify Lessor of the undertaking of any
construction, repairs or alterations to the Property the cost of which is
anticipated to exceed $1,000,000 during any twelve month period. Prior to or
promptly after undertaking any construction or alterations, the cost of which is
anticipated to exceed $1,000,000 during any twelve month period, Lessee shall
deliver to Lessor (i) a brief narrative of the work to be done and a copy of the
plans and specifications relating to such work if the same are required to be
filed; and (ii) an Officer's Certificate stating that such work when completed
will not impair the value of the Property. Lessor, by itself or its agents,
shall have the right, but not the obligation, from time to time upon prior
notice and at reasonable times (except in the case of an emergency) accompanied
by a representative of Lessee, if available, to inspect such construction to
ensure that the same is completed consistent with the plans and specifications,
if any.
(c) Lessee shall not without the consent of Lessor undertake any
construction or alterations to the Property, the cost of which is anticipated to
exceed $1,000,000 during any twelve month period, if such construction or
alterations cannot, in the reasonable judgement of Lessee, be completed on or
prior to the date that is twelve months prior to the Expiration Date. The
restrictions contained in the preceding sentence shall not apply to (i) any
construction or alterations relating to tenant installations, (ii) work which is
required as a result of any Legal Requirement or Insurance Requirement and (iii)
any other construction or
<PAGE>
8
alterations, the cost of which is anticipated to be less than or equal to
$1,000,000 during any twelve month period and which, in the reasonable judgement
of Lessee, can be completed within six months and in any event prior to the
Expiration Date; provided, however, the foregoing restrictions contained in this
-------- -------
subparagraph (c) shall not apply if Lessee shall have irrevocably exercised the
Maturity Date Purchase Option. Notwithstanding anything in any Operative
Agreement to the contrary, any work undertaken or performance of any obligation
pursuant to an express provision of the Reconfiguration Agreement is hereby
consented to by the Lessor.
ARTICLE XII
12.1 Warranty of Title. (a) Lessee agrees that, except as otherwise
-----------------
provided herein and subject to the terms of Article XIII relating to permitted
contests, Lessee shall not directly or indirectly create or allow to remain, and
shall promptly discharge at its sole cost and expense, any Lien, defect,
attachment, levy, title retention agreement or claim upon the Property or any
Modifications or any Lien, attachment, levy or claim with respect to the Rent,
other than Permitted Liens and Lessor Liens. Lessee shall promptly notify
Lessor in the event it receives actual knowledge that a Lien (other than a
Permitted Lien) has occurred with respect to the Property.
(b) Nothing contained in this Lease shall be construed as
constituting the consent or request of Lessor, expressed or implied, to or for
the performance by any contractor, mechanic, laborer, materialman, supplier or
vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to the Property
or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE
LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO
LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER
LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO THE
PROPERTY.
12.2 Grants and Releases of Easements. Provided that no Lease Event
--------------------------------
of Default shall have occurred and be continuing and subject to the provisions
of Articles VIII, IX, X and XI, Lessor hereby consents to the following actions
by Lessee, in the name and stead of Lessor, but at Lessee's sole cost and
expense: (a) the granting (prior to the Lien of the Deed of Trust) of
easements, licenses, rights-of-way and other rights and privileges in the nature
of easements reasonably necessary or desirable for the use, repair, renovation
or maintenance of the Property as herein provided; (b) the release (free and
clear of the Lien of the Deed of Trust) of existing easements or other rights in
the nature of easements which are for the benefit of the Property; (c) the
dedication or transfer (prior to the Lien of the Deed of Trust) of unimproved
portions of the Property for road, highway or other public purposes; (d) the
execution of petitions to have the Property annexed to any municipal corporation
or utility district; and (e) the execution of amendments to any covenants and
restrictions affecting the Property; provided, that in each case Lessee shall
--------
have delivered to Lessor an Officer's Certificate stating that: (i) such grant,
release, dedication or transfer does not impair the value of the Property,
individually, or when aggregated with any (A) Modification or (B)
<PAGE>
9
other grant, dedication, transfer or release pursuant to this Section 12.2, by
an amount in excess of $500,000 or the utility and remaining useful life of the
Property, (ii) such grant, release, dedication or transfer is necessary in
connection with the use, maintenance, alteration, renovation or improvement of
the Property, (iii) Lessee shall remain obligated under this Lease and under any
instrument executed by Lessee consenting to the assignment of Lessor's interest
in this Lease as security for indebtedness, in each such case in accordance with
their terms, as though such grant, release, dedication or transfer, had not been
effected and (iv) Lessee shall pay and perform any obligations of Lessor under
such grant, release, dedication or transfer. Without limiting the effectiveness
of the foregoing, provided that no Lease Event of Default shall have occurred
and be continuing, Lessor shall, upon the request of Lessee, and at Lessee's
sole cost and expense, execute and deliver any instruments necessary or
appropriate to confirm any such grant, release, dedication or transfer to any
Person permitted under this Section.
ARTICLE XIII
13.1 Permitted Contests Other Than in Respect of Impositions. Except
-------------------------------------------------------
to the extent otherwise provided for in Section 11.2 of the Participation
Agreement, Lessee, on its own or on Lessor's behalf and in Lessor's name but at
Lessee's sole cost and expense, may contest, by appropriate administrative or
judicial proceedings conducted in good faith and with due diligence, the amount,
validity or application, in whole or in part, of any Legal Requirement, or
utility charges payable pursuant to Section 4.1, any third party charges with
respect to the Property or any Lien, attachment, levy, encumbrance or
encroachment, and Lessor agrees not to pay, settle or otherwise compromise any
such item, provided that: (a) the commencement and continuation of such
proceedings shall suspend the collection thereof from, and suspend the
enforcement thereof against the Property, Lessor, the Investor, the Agent and
the Lenders; (b) no part of the Property nor any Rent would be in any danger of
being sold, forfeited, lost or deferred; (c) at no time during the permitted
contest shall there be a risk of the imposition of criminal liability or
material civil liability on Lessor, the Agent or any Lender for failure to
comply therewith; and (d) in the event that, at any time, (i) during the
continuance of such contest, Lessee is in Applicable Rating Category 5 or 6 and
any such contest shall involve a sum of money that is then due and payable or a
potential loss (which shall include, for purposes of this Section, any potential
fines or similar charges for failure to comply with a Legal Requirement) in
excess of $2,000,000 or all of such contests at any one time pending shall
involve a sum of money that is then due and payable or a potential loss in
excess of the sum of $2,000,000, unless Lessee shall have posted security
reasonably acceptable to Lessor, or (ii) if Lessee shall have not irrevocably
exercised the Maturity Date Purchase Option during the course of the contest,
there shall be a material risk of extending the application of such item beyond
the end of the Term, then Lessee shall deliver to Lessor an Officer's
Certificate certifying as to the matters set forth in clauses (a), (b) and (c)
of this Section. Lessor, at Lessee's sole cost and expense, shall promptly
execute and deliver to Lessee such authorizations and other documents as may
reasonably be required in connection with any such contest or proceeding and, if
reasonably requested by Lessee, shall promptly join as a party therein at
Lessee's sole cost and expense. So long as no Event of Default has occurred and
is continuing, any awards, refunds or monies received in connection with such
contests or proceedings shall be the property of Lessee and if received by
Lessor shall promptly be paid to Lessee.
<PAGE>
10
ARTICLE XIV
14.1 Public Liability and Workers' Compensation Insurance. During
----------------------------------------------------
the Term, Lessee shall procure and carry, at Lessee's sole cost and expense,
commercial general liability insurance for claims for injuries or death
sustained by persons or damage to property while on the Property. Such
insurance shall be on terms and in amounts that are no less favorable than
insurance maintained by owners of similar properties, that are in accordance
with normal industry practice. The policy shall be endorsed to name Lessor, the
Owner Trustee, the Trust Company, the Investor, the Agent and the Lenders as
additional insureds. The policy shall also specifically provide that the policy
shall be considered primary insurance which shall apply to any loss or claim
before any contribution by any insurance which Lessor, the Owner Trustee, the
Trust Company, the Agent or the Lenders may have in force. Lessee shall, in the
operation of the Property, comply with the applicable workers' compensation laws
and protect Lessor against any liability under such laws.
14.2 Hazard and Other Insurance. (a) During the Term, Lessee shall
--------------------------
keep, or cause to be kept, the Property insured against loss or damage by fire
and other risks on terms and in amounts that are no less favorable than
insurance maintained by owners of similar properties, that are in accordance
with normal industry practice, are in amounts equal to the actual replacement
cost of the Building and that provide for a commercially reasonable deductible
or self-insured retention; provided that (i) if the Lessee is in Applicable
--------
Rating Category 1 through 4, such deductible or self-insured retention shall not
exceed $10,000,000 and (ii) if the Lessee is in Applicable Rating Category 5 or
6, such deductible or self-insured retention shall not exceed $6,000,000. So
long as no Lease Event of Default exists, any loss payable under the insurance
policy required by this Section will be paid to and adjusted solely by Lessee.
(b) If at any time during the Term the area in which the Property is
located is designated a "flood-prone" area pursuant to the Flood Disaster
Protection Act of 1973 or any amendments or supplements thereto, then Lessee
shall comply with the National Flood Insurance Program as set forth in the Flood
Disaster Protection Act of 1973, as may be amended. In addition, Lessee will
fully comply with the requirements of the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, as each may be amended from time
to time, and with any other Legal Requirement, concerning flood insurance to the
extent that it apply to the Property.
14.3 Coverage. (a) Lessee shall furnish Lessor with certificates
--------
showing the insurance required under Sections 14.1 and 14.2 to be in effect and
naming Lessor, the Owner Trustee and the Trust Company as an additional insured
with respect to liability insurance and showing the mortgagee endorsement
required by Section 14.3(c). All such insurance shall be at the cost and
expense of Lessee. Such certificates shall include a provision in which the
insurer agrees to endeavor to provide thirty (30) days' advance written notice
by the insurer to Lessor and the Agent in the event of cancellation or
modification of such insurance that could be adverse to the interests of Lessor
or the Agent. If a Lease Event of Default has occurred and is continuing and
Lessor so requests, Lessee shall deliver to Lessor copies of all insurance
policies required by this Lease.
<PAGE>
11
(b) Lessee agrees that the insurance policy or policies required by
this Lease shall include an appropriate clause pursuant to which such policy
shall provide that it will not be invalidated should Lessee waive, in writing,
prior to a loss, any or all rights of recovery against any party for losses
covered by such policy. Lessee hereby waives any and all such rights against
Lessor, the Agent and the Lenders to the extent of payments made under such
policies.
(c) All insurance policies required by Section 14.2 shall include a
"New York" or standard form mortgagee endorsement in favor of the Agent.
(d) Neither Lessor nor Lessee shall carry separate insurance
concurrent in kind or form or contributing in the event of loss with any
insurance required under this Lease except that Lessor may carry separate
liability insurance so long as (i) Lessee's insurance is designated as primary
and in no event excess or contributory to any insurance Lessor may have in force
which would apply to a loss covered under Lessee's policy and (ii) each such
insurance policy will not cause Lessee's insurance required under this Lease to
be subject to a coinsurance exception of any kind.
(e) Lessee shall pay as they become due all premiums for the
insurance required by this Lease, shall renew or replace each policy prior to
the expiration date thereof and shall promptly deliver to Lessor and the Agent
certificates for renewal and replacement policies.
(f) The Lessee also agrees to keep its other insurable properties
adequately insured at all times by financially sound and reputable insurers;
maintain such other insurance, to such extent and against such risks, including
fire and other risks insured against by extended coverage, as is customary with
companies in the same or similar businesses, including public liability
insurance against claims for personal injury or death or property damage
occurring upon, in, about or in connection with the use of any other properties
owned, occupied or controlled by it; and maintain such other insurance as may be
required by law.
ARTICLE XV
15.1 Casualty, Condemnation and Title Defects. (a) Except during
----------------------------------------
the occurrence and continuation of a Lease Event of Default, Lessee shall be
entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of
Lessor's right, title and interest in) any award, compensation or insurance
proceeds (collectively, "Proceeds") to which Lessee or Lessor may become
--------
entitled by reason of their respective interests in the Property if (i) all or a
portion of the Property is damaged or destroyed in whole or in part by a
Casualty or (ii) the use, access, occupancy, easement rights or title to such
Property or any part thereof is the subject of a Condemnation or (iii) the use,
access, occupancy, easement rights or title to such Property or any part thereof
is the subject of a title defect (a "Title Defect"), in each case to the extent,
------------
but only to the extent, that the aggregate amount of all such Proceeds to which
Lessee may be entitled during the Term is less than or equal to $3,000,000,
exclusive of Proceeds from a title insurance policy which constitutes a
repayment of counsel fees incurred
<PAGE>
12
of the Credit Agreement nor has commissioned an appraisal of the Property,
but instead has elected to purchase the Property in accordance with Section
20.1 hereof.
(c) In the event that the Lessee commissions an appraisal of the
Property in accordance with clause (b)(ii) above and, Lessee does not elect to
pay all such amounts in excess of $3,000,000 to the Agent to be applied in
accordance with the terms of the Credit Agreement or purchase the Property in
accordance with Section 20.1 hereof, then the disposition of such amounts shall
be governed as follows: (i) if Fair Market Sales Value of the Property, as
determined in accordance with the Appraisal Procedure and without giving effect
to any repair or restoration of the Property, is greater than or equal to the
Termination Value, then the Lessee shall be entitled to retain such Proceeds
and, in the case of a Casualty and, to the extent practicable, in the case of a
Condemnation or Title Defect, shall promptly restore the Property in accordance
with Section 15.1(e); or (ii) if the Fair Market Sales Value of the Property, as
determined in accordance with the Appraisal Procedure and without giving effect
to any repair or restoration of the Property, is less than the Termination
Value, then (x) if such Proceeds are greater than or equal to the Recovery
Limit, such Proceeds which are in excess of the Recovery Limit shall either (1)
subject to Section 15.1(d), in the case of a Condemnation or Title Defect, be
paid to the Agent to be applied in accordance with the Credit Agreement or (2)
in the case of a Casualty, be paid directly to Lessor and applied by Lessor to
the cost of restoration (or, if received by Lessee, shall be held in trust for
Lessor, and shall be paid over by Lessee to Lessor) and Lessee shall promptly
begin to restore the Property in accordance with Section 15.1(e) or (y) if such
Proceeds are less than the Recovery Limit, such Proceeds shall be released to
the Lessee to be applied, if practicable, to the cost of restoration. For the
purpose of this Section 15.1, "Recovery Limit" shall mean (i) if the Lessee is
--------------
in Applicable Rating Category 1 through 4, $7,500,000 and (ii) if the Lessee is
in Applicable Rating Category 5 or 6, $3,000,000.
(d) Notwithstanding the provisions of Section 15.1(c), in the event
that the conditions described in Section 15.1(c)(ii) with resect to a
Condemnation or a Title Defect exist and if such Proceeds are greater than or
equal to the Recovery Limit, Lessee shall have the option, to be exercised
within fifteen Business Days of its receipt of the appraisal indicating a Fair
Market Sales Value below the Termination Value, to deliver a notice to the
Lessor stating that it has elected, in lieu of delivering such Proceeds to the
Agent to be applied in accordance with the Credit Agreement, to cause to be
constructed on the Property improvements or additions in a manner which it
reasonably anticipates will cause the Fair Market Sales Value, after giving
effect to such improvements or additions, to increase to an amount equal to or
greater than the Termination Value. If Lessee chooses such option, such
improvements or additions shall be constructed in accordance with Section 11.1
and shall be completed within (i) 12 months from the date it received notice of
such Condemnation or Title Defect and (ii) six months prior to the Maturity
Date. Upon the completion of such improvements or additions, Lessee shall
commission a second appraisal by an appraiser reasonably satisfactory to the
Agent. If the fair market value of the Property, as determined by such
appraisal, remains less than the Termination Value, then the Proceeds of such
Condemnation or Title Defect shall be paid to the Agent to be applied in
accordance with the Credit Agreement. If the Fair Market Sales Value of the
Property, as determined in accordance with the Appraisal Procedure, is greater
than or equal to the Termination Value, then the Lessee shall be entitled to
retain such Proceeds, to be applied, if practicable, to the cost of restoration.
If Lessee provides the notice that it has elected to construct improvements or
additions to the Property pursuant to this paragraph, such Proceeds which are in
excess of the Recovery Limit shall be delivered directly to Lessor and applied
by
<PAGE>
13
Lessor to the cost of such improvements or additions (or, if received by Lessee,
shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor).
(e) If pursuant to this Section 15.1, this Lease shall continue in
full force and effect following a Casualty or a Condemnation, with respect to
the Property, Lessee shall, at its sole cost and expense, promptly and
diligently repair any damage to the Property caused by such Casualty or, to the
extent practicable, such Condemnation, in a good and workmanlike manner taking
into account the effect of the Casualty or Condemnation on the physical nature
of the Property in conformity with the requirements of Sections 10.1 and 11.1 so
as to restore the Property to the same or improved condition, operation,
function and value as existed immediately prior to such Casualty or
Condemnation. In such event, title to the Property shall remain with Lessor.
(f) If a Lease Default shall have occurred and be continuing such
award, compensation or insurance proceeds shall be paid directly to Lessor or,
if received by Lessee, shall be held in trust for Lessor, and shall be paid over
by Lessee to Lessor, however, if such Default shall be cured, such award,
compensation or insurance proceeds shall promptly be applied in accordance with
Sections 15(b) and 15(c). All amounts held by Lessor hereunder on account of
any award, compensation or insurance proceeds either paid directly to Lessor or
turned over to Lessor and not required to be paid to Lessee under this Lease or
any other Operative Agreement shall be held as security for the performance of
Lessee's obligations hereunder.
(g) So long as no Lease Event of Default has occurred and is
continuing, Lessee may appear in any proceeding or action to negotiate,
prosecute, adjust or appeal any claim for any award, compensation or insurance
payment on account of any such Casualty, Condemnation or Title Defect and shall
pay all expenses thereof.
(h) If Lessor or Lessee shall receive notice of a Casualty or a
possible Condemnation of the Property or any interest therein, Lessor or Lessee,
as the case may be, shall give notice thereof to the other and to the Agent
promptly after the receipt of such notice.
(i) In no event shall a Casualty or Condemnation with respect to
which this Lease remains in full force and effect under this Section 15.1 affect
Lessee's obligations to pay Rent pursuant to Section 3.1.
(j) Notwithstanding anything to the contrary set forth in Section XV,
if during the Term a Casualty occurs with respect to the Property, and following
such Casualty, the Property cannot reasonably be restored on or before the date
which is six months prior to the Maturity Date to the same condition as existed
immediately prior to such Casualty or before such day the Property is not in
fact so restored, then Lessee shall exercise its Purchase Option with respect to
the Property on the next Payment Date or irrevocably agree in writing to
exercise the Maturity Date Purchase Option with respect to the Property, and in
either such event such Casualty proceeds shall be paid to the Agent, which shall
pay such funds to Lessee upon the closing of the purchase of the Property.
<PAGE>
14
15.2 Environmental Matters. Promptly upon Lessee's actual knowledge
---------------------
of the presence of Hazardous Substances in any portion of the Property in
concentrations and conditions that constitute an Environmental Violation, Lessee
shall notify Lessor in writing of such condition. In the event of such
Environmental Violation, Lessee shall, not later than sixty (60) days after
Lessee has actual knowledge of such Environmental Violation, either deliver to
Lessor and the Agent an Officer's Certificate and a Termination Notice with
respect to the Property pursuant to Section 16.1, if applicable, or, at Lessee's
sole cost and expense, promptly and diligently undertake any response, clean up,
remedial or other action necessary to remove, cleanup or remediate the
Environmental Violation in accordance with the terms of Section 9.1. If Lessee
does not deliver a Termination Notice with respect to the Property pursuant to
Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause
to be prepared by an environmental consultant reasonably acceptable to Lessor a
report describing the Environmental Violation and the actions taken by Lessee
(or its agents) in response to such Environmental Violation, and a statement by
the consultant that the Environmental Violation has been remedied in full
compliance with applicable Environmental Laws.
15.3 Notice of Environmental Matters. Promptly, but in any event
-------------------------------
within five (5) Business Days from the date Lessee has actual knowledge thereof,
Lessee shall provide to Lessor written notice of any material pending or
threatened claim, action or proceeding involving any Environmental Law or any
Release on or in connection with the Property. All such notices shall describe
in reasonable detail the nature of the claim, action or proceeding and Lessee's
proposed response thereto. In addition, Lessee shall provide to Lessor, within
five (5) Business Days of receipt, copies of all written communications with any
Governmental Authority relating to any Environmental Law in connection with the
Property. Lessee shall also promptly provide such detailed reports of any such
environmental claims as may reasonably be requested by Lessor and the Agent.
<PAGE>
15
ARTICLE XVI
16.1 Termination upon Environmental Violation. If an Environmental
----------------------------------------
Violation occurs or is discovered and Lessee shall have delivered to Lessor an
Officer's Certificate stating that, in the reasonable, good-faith judgment of
Lessee, the cost to remediate the same will exceed $5,000,000, then Lessee shall
be obligated, within thirty (30) days after Lessee receives notice thereof, to
deliver a written notice in the form described in Section 16.2(a) (a
"Termination Notice") of the termination of this Lease.
- -------------------
16.2 Procedures. (a) A Termination Notice shall contain: (i)
----------
notice of termination of this Lease on a date not more than ninety (90) days
after Lessor's receipt of such Termination Notice (the "Termination Date"); and
----------------
(ii) a binding and irrevocable agreement of Lessee to pay the Termination Value
and purchase the Property on such Termination Date.
(b) On the Termination Date, Lessee shall pay to Lessor the
Termination Value, plus all amounts owing in respect of Rent (including
Supplemental Rent, other than the Maximum Residual Guarantee Amount) theretofore
accruing and Lessor shall convey the Property to Lessee (or Lessee's designee)
all in accordance with Section 19.1.
ARTICLE XVII
17.1 Lease Events of Default. If any one or more of the following
-----------------------
events (each a "Lease Event of Default") shall occur:
----------------------
(a) Lessee shall fail to make payment of (i) any Basic Rent or any
Supplemental Rent representing amounts owed under the Credit Agreement or
the other Credit Documents within five (5) Business Days after the same has
become due and payable or (ii) any Maximum Residual Guarantee Amount,
Purchase Option Price or Termination Value after the same has become due
and payable; or
(b) Lessee shall fail to make payment of any other Supplemental Rent
due and payable within five (5) Business Days after receipt of notice
thereof; or
(c) Lessee shall fail to maintain insurance as required by Article
XIV of this Lease; or
(d) Lessee shall fail to observe or perform any term, covenant or
condition of Lessee under this Lease, the Participation Agreement or any
other Operative Agreement to which it is a party (other than those set
forth in Section 17.1(a), (b) or (c) hereof) or any representation or
warranty by Lessee set forth in this Lease or in any other Operative
Agreement or in any document entered into in connection herewith or
therewith or in any document, certificate or financial or other statement
delivered in connection herewith or therewith shall be false or inaccurate
in any material way, and such failure or misrepresentation or breach of
warranty shall remain uncured for a period of five (5) Business Days after
receipt of written notice thereof; or
<PAGE>
16
(e) Lessee shall (i) admit in writing its inability to pay its debts
generally as they become due, (ii) file a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof, (iii) make a
general assignment for the benefit of its creditors, (iv) consent to the
appointment of a receiver of itself or the whole or any substantial part of
its property, (v) fail to cause the discharge of any custodian, trustee or
receiver appointed for Lessee or the whole or a substantial part of its
property within ninety (90) days after such appointment, or (vi) file a
petition or answer seeking or consenting to reorganization under the United
States bankruptcy laws or any other applicable insolvency law or statute of
the United States of America or any State or Commonwealth thereof; or
(f) insolvency proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof shall be
filed against Lessee and not dismissed within ninety (90) days from the
date of its filing, or a court of competent jurisdiction shall enter an
order or decree appointing, without the consent of Lessee, a receiver of
Lessee or the whole or a substantial part of its property, and such order
or decree shall not be vacated or set aside within ninety (90) days from
the date of the entry thereof; or
(g) a Credit Agreement Event of Default shall have occurred and be
continuing after the expiration of any applicable cure periods granted to
Lessee in the Participation Agreement; or
(h) an event of default under the Revolving Credit Agreement shall
have occurred and be continuing;
then, in any such event, Lessor may, in addition to the other rights and
remedies provided for in this Article XVII and in Section 18.1, terminate this
Lease by giving Lessee five (5) days notice of such termination, and this Lease
shall terminate. Lessee shall, to the fullest extent permitted by law, pay as
Supplemental Rent all costs and expenses incurred by or on behalf of Lessor,
including fees and expenses of counsel, as a result of any Lease Event of
Default hereunder.
17.2 Surrender of Possession. If a Lease Event of Default shall have
-----------------------
occurred and be continuing, and whether or not this Lease shall have been
terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written
notice, surrender to Lessor possession of the Property and Lessee shall quit the
same. Lessor may enter upon and repossess the Property by such means as are
available at law or in equity, and may remove Lessee and all other Persons and
any and all personal property and Lessee's equipment and personalty and
severable Modifications from the Property. Lessor shall have no liability by
reason of any such entry, repossession or removal performed in accordance with
applicable law.
17.3 Reletting. If a Lease Event of Default shall have occurred and
---------
be continuing, and whether or not this Lease shall have been terminated pursuant
to Section 17.1, Lessor may, but shall be under no obligation to, relet all, or
any portion, of the Property, for the account of Lessee or otherwise, for such
term or terms (which may be greater or less than
<PAGE>
17
the period which would otherwise have constituted the balance of the Term) and
on such conditions (which may include concessions or free rent) and for such
purposes as Lessor may determine, and Lessor may collect, receive and retain the
rents resulting from such reletting. Lessor shall not be liable to Lessee for
any failure to relet the Property or for any failure to collect any rent due
upon such reletting.
17.4 Damages. Neither (a) the termination of this Lease pursuant to
-------
Section 17.1; (b) the repossession of the Property; nor (c) except to the extent
required by applicable law, the failure of Lessor to relet all, or any portion,
of the Property, the reletting of all or any portion thereof, nor the failure of
Lessor to collect or receive any rentals due upon any such reletting shall
relieve Lessee of its liability and obligations hereunder, all of which shall
survive any such termination, repossession or reletting. If any Lease Event of
Default shall have occurred and be continuing and notwithstanding any
termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay
to Lessor all Basic Rent and other sums due and payable hereunder to and
including the date of such termination. Thereafter, on the days on which the
Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or
would have been payable under this Lease if the same had not been terminated
pursuant to Section 17.1 and until the end of the Term or what would have been
the Term in the absence of such termination, Lessee shall pay Lessor, as current
liquidated damages (it being agreed that it would be impossible accurately to
determine actual damages) an amount equal to the Basic Rent and Supplemental
Rent that are payable under this Lease or would have been payable by Lessee
hereunder if this Lease had not been terminated pursuant to Section 17.1, less
the net proceeds, if any, which are actually received by Lessor with respect to
the period in question of any reletting of the Property or any portion thereof;
provided that Lessee's obligation to make payments of Basic Rent and
- --------
Supplemental Rent under this Section 17.4 shall continue only so long as Lessor
shall not have received the amounts specified in Section 17.5 or Section 17.6.
In calculating the amount of such net proceeds from reletting, there shall be
deducted all of Lessor's, the Agent's and any Lenders' expenses in connection
therewith, including repossession costs, brokerage commissions, fees and
expenses for counsel and any necessary repair or alteration costs and expenses
incurred in preparation for such reletting. To the extent Lessor receives any
damages pursuant to this Section 17.4, such amounts shall be regarded as amounts
paid on account of Rent.
17.5 Acceleration of Rent. If a Lease Event of Default shall have
--------------------
occurred and be continuing, and this Lease shall not have been terminated
pursuant to Section 17.1, and whether or not Lessor shall have collected any
current liquidated damages pursuant to Section 17.4, Lessor may upon written
notice to Lessee accelerate all payments of Basic Rent due hereunder and, upon
such acceleration, Lessee shall immediately pay Lessor, as and for final
liquidated damages and in lieu of all current liquidated damages on account of
such Lease Event of Default beyond the date of such acceleration (it being
agreed that it would be impossible accurately to determine actual damages) an
amount equal to the sum of (a) all Basic Rent (assuming interest at a rate per
annum equal to the Overdue Rate), as applicable, due from the date of such
acceleration until the end of the Term, plus (b) the Maximum Residual Guarantee
----
Amount that would be payable under Section 21.1(c) assuming the proceeds of the
sale pursuant to such Section 21.1(c) are equal to zero, which sum is then
discounted to present value at a rate equal to the rate then being paid on
United States treasury securities with maturities corresponding to the then
remaining Term. Following payment of such amount by Lessee, Lessee will be
permitted to stay in possession of the
<PAGE>
17
Property for the remainder of the Term, subject to the terms and conditions of
this Lease, including the obligation to pay Supplemental Rent, provided that no
further Lease Event of Default shall occur and be continuing, following which
Lessor shall have all the rights and remedies set forth in this Article XVII
(but not including those set forth in this Section 17.5). If any statute or rule
of law shall limit the amount of such final liquidated damages to less than the
amount agreed upon, Lessor shall be entitled to the maximum amount allowable
under such statute or rule of law.
17.6 Final Liquidation Damages. If a Lease Event of Default shall
-------------------------
have occurred and be continuing, whether or not this Lease shall have been
terminated pursuant to Section 17.1 and whether or not Lessor shall have
collected any current liquidated damages pursuant to Section 17.4, Lessor shall
have the right to recover, by demand to Lessee and at Lessor's election, and
Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive
of the indemnities payable under Section 11.1 of the Participation Agreement,
and in lieu of all current liquidated damages beyond the date of such demand (it
being agreed that it would be impossible accurately to determine actual damages)
the sum of (a) the Termination Value, plus (b) all other amounts owing in
respect of Basic Rent and Supplemental Rent theretofore accruing under this
Lease. Upon payment of the amount specified pursuant to the first sentence of
this Section 17.6, Lessee shall be entitled to receive from Lessor, at Lessee's
request and after payment by Lessee of all costs relating thereto, Lessor's
entire interest in the Property, the Improvements, Fixtures and Modifications,
in each case in recordable form and otherwise in conformity with local custom
and free and clear of the Lien of all mortgages or deeds of trust (including the
Deed of Trust) and any Lessor Liens. The Property shall be conveyed to Lessee
(or Lessee's designee) "AS IS" and in its then present physical condition. If
any statute or rule of law shall limit the amount of such final liquidated
damages to less than the amount agreed upon, Lessor shall be entitled to the
maximum amount allowable under such statute or rule of law; provided, however,
-------- -------
Lessee shall not be entitled to receive an assignment or conveyance of all or
any part of Lessor's interest in the Property, the Improvements, Fixtures and
Modifications unless Lessee shall have paid in full the Termination Value.
17.7 Waiver of Certain Rights. If this Lease shall be terminated
------------------------
pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law,
(a) any notice of re-entry or the institution of legal proceedings to obtain re-
entry or possession; (b) any right of redemption, re-entry or repossession; (c)
the benefit of any laws now or hereafter in force exempting property from
liability for rent or for debt; and (d) any other rights which might otherwise
limit or modify any of Lessor's rights or remedies under this Article XVII.
17.8 Assignment of Rights Under Contracts. If a Lease Event of
------------------------------------
Default shall have occurred and be continuing, and whether or not this Lease
shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's
demand immediately assign, transfer and set over to Lessor all of Lessee's
right, title and interest in and to each agreement executed by Lessee in
connection with the construction, renovation, development, use or operation of
the Property (including, without limitation, all right, title and interest of
Lessee with respect to all warranty, performance, service and indemnity
provisions), as and to the extent that the same relate to the construction
renovation, and operation of the Property. Lessor agrees to reconvey its
interest in each such agreement if Lessee pays the damages described in Section
17.5, 17.6 or if Lessee exercises its Purchase Option described in Section
17.10.
<PAGE>
19
17.9 Remedies Cumulative. The remedies herein provided shall be
-------------------
cumulative and in addition to (and not in limitation of) any other remedies
available at law, equity or otherwise.
17.10 Lessee's Right to Purchase. Notwithstanding any provision
--------------------------
contained in this Lease or any other Operative Agreement, if a Lease Event of
Default has occurred and is continuing and whether or not the Lease has been
terminated in accordance with Section 17.1, Lessee shall have the right to
exercise its Purchase Option with respect to the Property at any time prior to
such time as a foreclosure upon the Property has been completed, and upon such
purchase of the Property the foregoing provisions of this Article XVII shall
cease to be in effect. In addition to the restrictions contained in the
preceding sentence, if a Lease Event of Default has occurred and is continuing
and Lessee thereafter has elected to exercise its Purchase Option, then Lessee
shall close the purchase of the Property within 60 days of the exercise of the
Purchase Option. The terms of this Section 17.10 shall survive the termination
of the Lease. Notwithstanding anything to the contrary contained in this
Section, in the event that (i) this Lease has terminated, (ii) Lessee has not
exercised the Purchase Option, and (iii) Lessor has elected to reject a third
party purchase proposal for less than the Limited Recourse Amount and retain the
Property pursuant to Section 21.1(b), and if Lessor, thereafter, has received a
bona fide offer of a third party purchaser to purchase the Property (prior to
Lessee's exercise of the Purchase Option), which offer Lessor is willing to
accept, then Lessor shall notify ("Lessor's Notice") Lessee in writing of such
---------------
third party purchaser's offer. Lessee shall then have a period of ten (10)
Business Days from receipt of Lessor's Notice within which to exercise the
Purchase Option and if Lessee fails to exercise the Purchase Option within said
ten (10) Business Day period, Lessor may sell the Property to such third party
purchaser. If Lessor sells the Property to such third party purchaser within one
hundred (120) days after delivery of Lessor's Notice, as aforesaid, Lessee shall
be deemed to have waived the Purchase Option. If Lessor fails to sell the
Property to such third party purchaser within said one hundred (120) day period
then, prior to selling the Property to a third party purchaser, Lessor must
again comply with the terms of this Section.
ARTICLE XVIII
18.1 Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without
----------------------------------------------
waiving or releasing any obligation or Lease Event of Default, may (but shall be
under no obligation to) remedy any Lease Event of Default for the account and at
the sole cost and expense of Lessee, including the failure by Lessee to maintain
any insurance required by Article XIV, and may, to the fullest extent permitted
by law, and notwithstanding any right of quiet enjoyment in favor of Lessee,
enter upon the Property for such purpose and take all such action thereon as may
be necessary or appropriate therefor. No such entry shall be deemed an eviction
of Lessee. All out-of-pocket costs and expenses so incurred (including the fees
and expenses of counsel), together with interest thereon at the Overdue Rate
from the date on which such sums or expenses are paid by Lessor, shall be paid
by Lessee to Lessor on demand as Supplemental Rent.
<PAGE>
20
ARTICLE XIX
19.1 Provisions Relating to Lessee's Termination of this Lease or
------------------------------------------------------------
Exercise of Purchase Option. In connection with any termination of this Lease
- ---------------------------
pursuant to the terms of Section 16.2, or in connection with Lessee's exercise
of its Purchase Option or Maturity Date Purchase Option, upon the date on which
this Lease is to terminate or upon the Expiration Date, and upon tender by
Lessee of the amounts set forth in Section 16.2(b), 17.6, 20.1 or 20.2, as
applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee)
at Lessee's cost and expense an assignment and conveyance of and Lessor's entire
interest in the Property and Net Proceeds (which shall include an assignment of
all of Lessor's right, title and interest in and to any Net Proceeds not
previously received by Lessor), in recordable form and otherwise in conformity
with local custom and free and clear of the Lien of the Deed of Trust and any
Lessor Liens; and the Property shall be conveyed to Lessee "AS IS" and in then
present physical condition.
ARTICLE XX
20.1 Purchase Option. Lessee shall have the option (exercisable by
---------------
giving Lessor irrevocable written notice (the "Purchase Notice") of Lessee's
---------------
election to exercise such option not less than ten (10) days prior to the date
of purchase pursuant to such option) to purchase the Property on the date
specified in such Purchase Notice at a price equal to the Termination Value (the
"Purchase Option Price") (which the parties do not intend to be a "bargain"
---------------------
purchase price). If Lessee exercises its option to purchase the Property
pursuant to this Section 20.1 (the "Purchase Option"), Lessor shall transfer to
---------------
Lessee all of Lessor's right, title and interest in and to the Property in
accordance with Section 19.1 as of the date specified in the Purchase Notice
upon receipt of the Purchase Option Price and all Rent through the date
specified in the Purchase Notice.
20.2 Maturity Date Purchase Option. (a) Subject to the terms of
-----------------------------
Section 20.1, not less than twelve months prior to the Maturity Date, Lessee
shall deliver to Lessor a written notice (the "Maturity Date Election Notice")
-----------------------------
stating that either (i) Lessee has elected to exercise the Maturity Date
Purchase Option, which notice shall be irrevocable, or (ii) Lessee has elected
not to exercise the Maturity Date Purchase Option but, rather, will endeavor to
sell the Property on behalf of Lessor and pay the Maximum Residual Guarantee
Amount in accordance with Section 21.1(c). If Lessee does not give a Maturity
Date Election Notice on or before the date twelve months prior to the Maturity
Date, then on the date twelve months prior to the Maturity Date Lessee shall be
deemed to have properly delivered a Purchase Notice obligating Lessee to
purchase the Property on the Maturity Date. If Lessee has elected, or is deemed
to have elected, to exercise the Maturity Date Purchase Option, then on the
Maturity Date Lessee shall pay to Lessor an amount equal to the Termination
Value for the Property (which the parties do not intend to be a "bargain"
purchase) and, upon receipt of such amount plus all Rent and other amounts then
due and payable under this Lease and any other Operative Agreement through the
purchase date, Lessor shall transfer to Lessee all of Lessor's right, title and
interest in and to the Property in accordance with Section 19.1.
(b) Notwithstanding anything to the contrary contained in Section
20.2(a), Lessee may at any time prior to the expiration of the Term, exercise
the Purchase Option by
<PAGE>
21
delivering to Lessor a Purchase Notice.
ARTICLE XXI
21.1 Sale Procedure. (a) At the expiration of the Term (unless
--------------
Lessee shall have purchased the Property and paid the Purchase Option Price or
otherwise terminated this Lease and paid Termination Value) Lessee shall (i) pay
to Lessor the Maximum Residual Guarantee Amount (after application of the third
party sale proceeds pursuant to Section 21.2), and (ii) sell the Property to one
or more third parties for cash in accordance with Section 21.1(b).
(b) During the Marketing Period, Lessee, on behalf of Lessor, shall
use its best efforts to obtain bids for the cash purchase of the Property for
the highest price available, shall notify Lessor promptly of the name and
address of each prospective purchaser and the cash price which each prospective
purchaser shall have offered to pay for the Property and shall provide Lessor
with such additional information about the bids and the bid solicitation
procedure as Lessor may request from time to time. Lessor may reject any and
all bids by giving Lessee written notice to that effect; provided, however, that
-------- -------
notwithstanding the foregoing, Lessor may not reject a bid if such bid is
greater than or equal to the sum of the Limited Recourse Amount and all costs
and expenses referred to in Section 21.2(i) and is a bona fide offer by a third
party purchaser who is not an Affiliate of Lessee. If the price which a
prospective purchaser shall have offered to pay for the Property, and which
offer Lessee has notified Lessor it desires to accept, is less than the sum of
the Limited Recourse Amount and all costs and expenses referred to in Section
21.2(i), Lessor may elect to retain the Property by giving Lessee notice of
Lessor's election to retain the Property within ten (10) Business Days' of
receipt by Lessor of the proposed purchase proposal, and upon receipt of such
notice, Lessee shall surrender the Property to Lessor pursuant to Section
10.1(c). Unless Lessor shall have elected to retain the Property pursuant to the
preceding sentence, Lessor shall sell the Property attributable to it, without
recourse or warranty, for cash to the purchaser or purchasers identified by
Lessee or Lessor, as the case may be. Lessee shall surrender the Property so
sold to the purchaser in the condition specified in Section 10.1.
(c) Unless Lessee has purchased the Property and paid the Purchase
Option Price or otherwise terminated this Lease and paid Termination Value, on
the earlier of (i) date on which the Property is sold pursuant to Section
21.1(b) and (ii) the Maturity Date, Lessee shall pay to the Lessor the Maximum
Residual Guarantee Amount as Supplemental Rent.
21.2 Application of Proceeds of Sale. Lessor shall apply the
-------------------------------
proceeds of sale of the Property in the following order of priority:
(i) FIRST, to pay or to reimburse Lessor for the payment of all
-----
reasonable costs and expenses incurred by Lessor in connection with the
sale; and
(ii) SECOND, the balance shall be paid to the Agent to be applied
------
pursuant to the provisions of the Credit Agreement.
21.3 Indemnity for Excessive Wear. If the proceeds of the sale
----------------------------
described in
<PAGE>
22
Section 21.1(b) with respect to the Property, less all expenses incurred by
Lessor in connection with such sale, shall be less than the Limited Recourse
Amount at the time of such sale and if it shall have been determined (pursuant
to the Appraisal Procedure) that the Fair Market Sales Value of the Property
shall have been impaired by greater than expected wear and tear during the Term,
Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's
written statement (i) the amount of such excess wear and tear determined by the
Appraisal Procedure or (ii) the amount of the Net Sale Proceeds Shortfall,
whichever amount is less.
21.4 Appraisal Procedure. For determining the Fair Market Sales
-------------------
Value of the Property or any other amount which may, pursuant to any provision
of any Operative Agreement, be determined by an appraisal procedure, Lessor and
Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor
-------------------
and Lessee shall endeavor to reach a mutual agreement as to such amount for a
period of ten (10) days from commencement of the Appraisal Procedure, and if
they cannot agree within ten (10) days, then two qualified appraisers, one
chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but
if either party shall fail to choose an appraiser within twenty (20) days after
notice from the other party of the selection of its appraiser, then the
appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If
the two appraisers cannot agree within twenty (20) days after both shall have
been appointed, then a third appraiser shall be selected by the two appraisers
or, failing agreement as to such third appraiser within thirty (30) days after
both shall have been appointed, by the American Arbitration Association. The
decisions of the three appraisers shall be given within twenty (20) days of the
appointment of the third appraiser and the decision of the appraiser most
different from the average of the other two shall be discarded and such average
shall be binding on Lessor and Lessee; provided that if the highest appraisal
--------
and the lowest appraisal are equidistant from the third appraisal, the third
appraisal shall be binding on Lessor and Lessee. The fees and expenses of all
of the appraisers shall be paid by the Lessee.
21.5 Certain Obligations Continue. During the Marketing Period, the
----------------------------
obligation of Lessee to pay Rent (including the installment of Basic Rent due on
the Maturity Date) shall continue undiminished until payment in full to Lessor
of the sale proceeds, the Maximum Residual Guarantee Amount, if any, the amount
due under Section 21.3, if any, and all other amounts due to Lessor with respect
to the Property. Lessor shall have the right, but shall be under no duty, to
solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise
to take action in connection with any such sale, other than as expressly
provided in this Article XXI.
ARTICLE XXII
22.1 Holding Over. If Lessee shall for any reason remain in
------------
possession of the Property after the expiration or earlier termination of this
Lease (unless the Property is conveyed to Lessee), such possession shall be as a
tenancy at sufferance during which time Lessee shall continue to pay
Supplemental Rent that would be payable by Lessee hereunder were the Lease then
in full force and effect with respect to the Property and Lessee shall continue
to pay Basic Rent at an annual rate equal to the rate payable hereunder
immediately preceding such expiration or earlier termination; provided, however,
-------- -------
that from and after the
<PAGE>
23
sixtieth (60th) day Lessee shall remain in possession of the Property after such
expiration or earlier termination, Lessee shall pay Basic Rent at an annual rate
equal to one hundred and ten percent (110%) of the Basic Rent payable hereunder
immediately preceding such expiration or earlier termination. Such Basic Rent
shall be payable from time to time upon demand by Lessor. During any period of
tenancy at sufferance, Lessee shall, subject to the second preceding sentence,
be obligated to perform and observe all of the terms, covenants and conditions
of this Lease, but shall have no rights hereunder other than the right, to the
extent given by law to tenants at sufferance, to continue its occupancy and use
of the Property. Nothing contained in this Article XXII shall constitute the
consent, express or implied, of Lessor to the holding over of Lessee after the
expiration or earlier termination of this Lease as to the Property (unless the
Property is conveyed to Lessee) and nothing contained herein shall be read or
construed as preventing Lessor from maintaining a suit for possession of the
Property or exercising any other remedy available to Lessor at law or in equity.
ARTICLE XXIII
23.1 Risk of Loss. During the Term, unless Lessee shall not be in
------------
actual possession of the Property solely by reason of Lessor's exercise of its
remedies of dispossession under Article XVII, the risk of loss of or decrease in
the enjoyment and beneficial use of the Property as a result of the damage or
destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise is assumed by Lessee, and Lessor shall in no event be answerable or
accountable therefor.
ARTICLE XXIV
24.1 Subletting and Assignment. Lessee may not assign this Lease or
-------------------------
any of its rights or obligations hereunder in whole or in part. Lessee may,
without the consent of Lessor, sublease the Property or a portion thereof to any
Person. No sublease or other relinquishment of possession of the Property shall
in any way discharge or diminish any of Lessee's obligations to Lessor hereunder
and Lessee shall remain directly and primarily liable under this Lease as to
the Property, or any portion thereof, so sublet. Any sublease of the Property
shall be made subject to and subordinate to this Lease and to the rights of
Lessor hereunder, and shall expressly provide for the surrender of the Property
after termination or expiration of this Lease (unless the Property is conveyed
to Lessee). Provided, with respect to the Sublease of a portion of the Property
by Lessee to National Geographic, Lessor shall deliver a nondisturbance
agreement to National Geographic in form and substance reasonably satisfactory
to Lessor providing that so long as National Geographic is not in default under
the Sublease that Lessor will not disturb National Geographic's use or occupancy
of the Sublet premises notwithstanding a default hereunder by Lessee. All such
subleases shall expressly provide for termination at or prior to the Expiration
Date.
24.2 Subleases. Promptly following the execution and delivery of any
---------
sublease permitted by this Article XXIV, Lessee shall deliver a copy of such
executed sublease to Lessor and the Agent.
<PAGE>
24
ARTICLE XXV
25.1 Estoppel Certificates. At any time and from time to time upon
---------------------
not less than twenty (20) days' prior request by Lessor or Lessee (the
"Requesting Party"), the other party (whichever party shall have received such
- -----------------
request, the "Certifying Party") shall furnish to the Requesting Party (but in
----------------
the case of Lessor, as Certifying Party, not more than four times per year
unless required to satisfy the requirements of any sublessees and only to the
extent that the required information has been provided to Lessor by Lessee or
the Agent) a certificate signed by an individual having the office of vice
president or higher in the Certifying Party certifying that this Lease is in
full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications); the dates to which the Basic Rent
or Renewal Rent and Supplemental Rent have been paid; to the best knowledge of
the signer of such certificate, whether or not the Requesting Party is in
default under any of its obligations hereunder (and, if so, the nature of such
alleged default); and such other matters under this Lease as the Requesting
Party may reasonably request. Any such certificate furnished pursuant to this
Article XXV may be relied upon by the Requesting Party, and any existing or
prospective mortgagee, purchaser or lender, and any accountant or auditor, of,
from or to the Requesting Party (or any Affiliate thereof).
ARTICLE XXVI
26.1 No Waiver. No failure by Lessor or Lessee to insist upon the
---------
strict performance of any term hereof or to exercise any right, power or remedy
upon a default hereunder, and no acceptance of full or partial payment of Rent
during the continuance of any such default, shall constitute a waiver of any
such default or of any such term. To the fullest extent permitted by law, no
waiver of any default shall affect or alter this Lease, and this Lease shall
continue in full force and effect with respect to any other then existing or
subsequent default.
ARTICLE XXVII
27.1 Acceptance of Surrender. Except as otherwise expressly provided
-----------------------
in this Lease, no surrender to Lessor of this Lease or of all or any portion of
the Property or of any interest therein shall be valid or effective unless
agreed to and accepted in writing by Lessor and, prior to the payment or
performance of all obligations under the Credit Documents, the Agent, and no act
by Lessor or the Agent or any representative or agent of Lessor or the Agent,
other than a written acceptance, shall constitute an acceptance of any such
surrender.
ARTICLE XXVIII
28.1 No Merger of Title. There shall be no merger of this Lease or
------------------
of the leasehold estate created hereby by reason of the fact that the same
Person may acquire, own or hold, directly or indirectly, in whole or in part,
(a) this Lease or the leasehold estate created hereby or any interest in this
Lease or such leasehold estate, (b) the fee estate in the Property, except as
may expressly be stated in a written instrument duly executed and
<PAGE>
25
delivered by the appropriate Person, or (c) a beneficial interest in Lessor.
ARTICLE XXIX
29.1 Notices. Unless otherwise specifically provided herein, all
-------
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by nationally recognized courier service and
any such notice shall become effective one Business Day after delivery to such
nationally recognized courier service specifying overnight delivery and shall be
directed to the address of such Person as indicated:
If to Lessee:
Manor Care, Inc.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel (Re: Real Estate)
If to Lessor:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Administration
with a copy to the Agent:
Chemical Agent Bank Services
140 East 45th Street
New York, New York 10017
Attention: Janet Belden
or such additional parties and/or other address as such party may hereafter
designate.
ARTICLE XXX
30.1 Miscellaneous. Anything contained in this Lease to the contrary
-------------
notwithstanding, all claims against and liabilities of Lessee or Lessor arising
from events commencing prior to the expiration or earlier termination of this
Lease shall survive such expiration or earlier termination. If any term or
provision of this Lease or any application thereof shall be declared invalid or
unenforceable, the remainder of this Lease and any other application of such
term or provision shall not be affected thereby. If any right or option of
Lessee provided in this Lease, including any right or option described in
Articles XV, XVI, XX or XXI, would, in the absence of the limitation imposed by
this sentence, be invalid or unenforceable as being in violation of the rule
against perpetuities or any other rule of law
<PAGE>
26
relating to the vesting of an interest in or the suspension of the power of
alienation of property, then such right or option shall be exercisable only
during the period which shall end twenty-one (21) years after the date of death
of the last survivor of the descendants of Franklin D. Roosevelt, the former
President of the United States, Henry Ford, the deceased automobile
manufacturer, and John D. Rockefeller, the founder of the Standard Oil Company,
known to be alive on the date of the execution and delivery of this Lease.
30.2 Amendments and Modifications. Neither this Lease nor any
----------------------------
provision hereof may be amended, waived, discharged or terminated except by an
instrument in writing signed by Lessor and Lessee.
30.3 Successors and Assigns. All the terms and provisions of this
----------------------
Lease shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
30.4 Headings and Table of Contents. The headings and table of
------------------------------
contents in this Lease are for convenience of reference only and shall not limit
or otherwise affect the meaning hereof.
30.5 Counterparts. This Lease may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument.
30.6 GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY, AND CONSTRUED
-------------
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND.
30.7 Limitations on Recourse. Except as expressly set forth in the
-----------------------
Operative Agreements, Lessee agrees to look solely to Lessor's estate and
interest in the Property, the proceeds of sale thereof, any insurance proceeds
or any other award or any third party proceeds received by Lessor in connection
with the Property for the collection of any judgment requiring the payment of
money by Lessor in the event of liability by Lessor, and no other property or
assets of Lessor, the Owner Trustee, the Trust Company or any shareholder, owner
or partner (direct or indirect) thereof, or any director, officer, employee,
beneficiary, Affiliate of any of the foregoing shall be subject to levy,
execution or other enforcement procedure for the satisfaction of Lessee's
remedies under or with respect to this Lease, the relationship of Lessor and
Lessee hereunder or Lessee's use of the Property or any other liability of
Lessor to Lessee; provided that nothing in this Section shall be construed to
--------
impair or limit the rights of Lessee against the Investor under the Operative
Agreements. Nothing in this Section shall be interpreted so as to limit the
terms of Section 6.1 or 6.2.
30.8 Priority. On and prior to the Maturity Date, the Deed of Trust
--------
shall be subject and subordinate to this Lease and following the Maturity Date,
the Deed of Trust shall be senior to this Lease without any further act by any
Person.
30.9 Reconfiguration Agreement. Lessor and Lessee agree that any
-------------------------
real property conveyed or reconveyed to Lessor pursuant to the terms of the
Reconfiguration Agreement shall automatically become a part of the Property and
any easements created for the benefit of the Property, whether created pursuant
to the Reconfiguration Agreement or otherwise, shall also automatically become
part of the Property.
<PAGE>
27
IN WITNESS WHEREOF, the parties have caused this Lease be duly
executed and delivered as of the date first above written.
MANOR CARE, INC.
By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------------
Name: [NAME ILLEGIBLE]
Title: [TITLE ILLEGIBLE]
THE GAITHERSBURG REALTY TRUST
By: WILMINGTON TRUST COMPANY, not
individually but solely as Owner Trustee
By: /S/ Donald G. MacKelcan
--------------------------------
Name: Donald G. MacKelcan
Title: Senior Financial Service Officer
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged on this 30th day of August, 1995.
CHEMICAL BANK, as the Agent for the Lenders
By: __________________________________
Name:
Title:
<PAGE>
Annex A
-------
RULES OF USAGE AND DEFINITIONS
Rules of Usage
--------------
The following rules of usage shall apply to this Annex A and the
Operative Agreements (and each appendix, schedule, exhibit and annex to the
foregoing) unless otherwise required by the context or unless otherwise defined
therein:
(a) Except as otherwise expressly provided, any definitions set forth
herein or in any other document shall be equally applicable to the singular
and plural forms of the terms defined.
(b) Except as otherwise expressly provided, references in any
document to articles, sections, paragraphs, clauses, annexes, appendices,
schedules or exhibits are references to articles, sections, paragraphs,
clauses, annexes, appendices, schedules or exhibits in or to such document.
(c) The headings, subheadings and table of contents used in any
document are solely for convenience of reference and shall not constitute a
part of any such document nor shall they affect the meaning, construction
or effect of any provision thereof.
(d) References to any Person shall include such Person, its
successors and permitted assigns and transferees.
(e) Except as otherwise expressly provided, reference to any
agreement means such agreement as amended, modified, extended or
supplemented from time to time in accordance with the applicable provisions
thereof.
(f) Except as otherwise expressly provided, references to any law
includes any amendment or modification to such law and any rules or
regulations issued thereunder or any law enacted in substitution or
replacement therefor.
(g) When used in any document, words such as "hereunder", "hereto",
"hereof" and "herein" and other words of like import shall, unless the
context clearly indicates to the contrary, refer to the whole of the
applicable document and not to any particular article, section, subsection,
paragraph or clause thereof.
<PAGE>
2
(h) References to "including" means including without limiting the
generality of any description preceding such term and for purposes hereof
the rule of ejusdem generis shall not be applicable to limit a general
------- -------
statement, followed by or referable to an enumeration of specific matters,
to matters similar to those specifically mentioned.
(i) Each of the parties to the Operative Agreements and their counsel
have reviewed and revised, or requested revisions to, the Operative
Agreements, and the usual rule of construction that any ambiguities are to
be resolved against the drafting party shall be inapplicable in the
construing and interpretation of the Operative Agreements and any
amendments or exhibits thereto.
Definitions
-----------
"ABR" shall mean, for any day, a rate per annum (rounded upwards,
---
if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the
Prime Rate in effect on such day, (b) the Base CD Rate in effect on such
day plus 1% and (c) the Federal Funds Effective Rate in effect on such day
plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of
----------
interest per annum publicly announced from time to time by the Agent as its
prime rate in effect at its principal office in New York City: each change
in the Prime Rate shall be effective on the date such change is publicly
announced as effective. "Base CD Rate" shall mean the sum of (a) the
------------
product of (i) the Three-Month Secondary CD Rate and (ii) Statutory
Reserves and (b) the C/D Assessment Rate. "Three-Mont Secondary CD Rate"
shall mean, for any day the secondary market rate for three-month
certificates of deposit reported as being in effect on such day (or, if
such day shall not be a Business Day, the next preceding Business Day) by
the Board through the public information telephone line of the Federal
Reserve Bank of New York (which rate will, under the current practices of
the Board, be published in Federal Reserve Statistical Release H.15(519)
during the week following such day), or, if such rate shall not be so
reported on such day or such next preceding Business day, the average of
the secondary market quotations for three month certificates of deposit of
major money center banks in New York City received at approximately 10:00
a.m., New York City time, on such day (or, if such day shall not be a
Business Day, on the next preceding Business Day) by the Agent from the New
York City negotiable certificate of deposit dealers of recognized national
standing selected by it. "Federal Funds Effective Rate" shall mean, for any
----------------------------
day, the weighted average of the rates on overnight Federal funds
transaction with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day by the
Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations
<PAGE>
3
for the day of such transactions received by the Agent from three Federal
funds brokers of recognized national standing selected by it. If for any
reason the Agent shall have determined that it is unable to ascertain the
Base CD Rate or the Federal Funds Effective Rate or both for any
reason,including the inability or failure of the Agent to obtain sufficient
quotations in accordance with the terms thereof, the Alternate Base Rate
shall be determined without regard to clauses (b) or (c) of the first
sentence of this definition, as appropriate, until the circumstances giving
rise to such inability no longer exist. Any change in the Alternate Base
Rate due to a change in the Prime Rate, the Three Month Secondary CD Rate
or the Federal Funds Effective Rate, respectively.
"ABR Loans" shall mean Loans the rate of interest applicable to which
---------
is based upon the ABR.
"Acceleration" shall have the meaning defined in Section 6 of the
------------
Credit Agreement.
"Account" shall have the meaning defined in Section 8.1(a) of the
-------
Credit Agreement.
"Administration Questionnaire" shall mean an Administrative
----------------------------
Questionnaire in the form of Exhibit D to the Credit Agreement.
"Advance" shall mean a borrowing by the Lesser under the Credit
-------
Agreement.
"Affiliate" shall mean, when used with respect to a specified person,
---------
another person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control
with the person specified.
"After Tax Basis" shall mean, with respect to any payment to be
---------------
received, the amount of such payment increased so that, after deduction of
the amount of all taxes required to be paid by the recipient (less any tax
savings realized and the present value of any tax savings projected to be
realized by the recipient as a result of the payment of the indemnified
amount) with respect to the receipt by the recipient of such amounts, such
increased payment (as so reduced) is equal to the payment otherwise
required to be made.
"Agent" shall mean Chemical Bank, together with its affiliates, as the
-----
arranger of the Commitments and as the agent for the Lenders under the
Credit Agreement and the other Operative Agreement.
<PAGE>
4
"Applicable Margin" shall mean as to any Loan, the application number
-----------------
of basis points per annum set forth below based upon the Applicable Rating
Category, as follows:
<TABLE>
<CAPTION>
Applicable Rating
Category Eurodollar Rate
----------------- ---------------
<S> <C>
Category 1 35.00
Category 2 40.00
Category 3 45.00
Category 4 50.00
Category 5 62.50
Category 6 75.00
</TABLE>
Any change in the Applicable Margin shall be effective as of the date on
which the Applicable Rating Category changes.
"Applicable Rating Category" shall at any time shall be determined as
--------------------------
set forth below based upon the Lessee's senior unsecured long-term debt
ratings by S&P and Moody's (or, if S&P or Moody's does not establish a
rating for the Lessee's senior unsecured long-term debt, the rating
(implied or otherwise) established by such agency for the Lessee's general
senior long-term debt).
<TABLE>
<CAPTION>
S&P/Moody's Ratings Applicable Rating Category
------------------- --------------------------
<S> <C>
A-/A3 or higher Category 1
BBB+/Baa1 Category 2
BBB/Baa2 Category 3
BBB-/Baa3 Category 4
BBB-/Ba1 Category 5
BB/Ba2 or lower Category 6
</TABLE>
For purposes of the foregoing, (i) if no rating (implied or otherwise) for
the Lessee's general senior long-term debt shall be available from either
rating agency, such rating agency shall be deemed to have established a
rating of BB/Ba2 or lower, (ii) if the ratings established or deemed to
have been established by Moody's and S&P shall fall within different
Categories, the Applicable Rating Category shall be based upon the lower of
(A) the higher of the two ratings and (B) the rating two Categories above
the lower of the two ratings, (iii) if any rating established or deemed to
have been established by Moody's or S&P shall be changed (other than as a
result of a change in the rating system of either Moody's or S&P), such
change shall be effective as of the date on which such change is first
announced by the rating agency making such change,
<PAGE>
5
and (iv) if there shall be no outstanding general senior long-term debt of
the Lessee and no rating (implied or otherwise) for such debt, the Lessee
and the Agent shall enter into negotiations to determine the Applicable
Rating Category, and pending agreement on another Applicable Rating
Category the Applicable Rating Category most recently in effect shall be
deemed to continue in effect. Each such change shall take effect on the
effective date of such change and shall end on the date immediately
preceding the effective date of the next such change. If the rating system
of either Moody's or S&P shall change prior to the Maturity Date, the
Lessee and the Lenders shall negotiate in good faith to amend the
references to specific ratings in this definition to reflect such changed
rating system, and pending agreement on another Applicable Rating Category
the Applicable Rating Category most recently in effect shall be deemed to
continue in effect.
"Appraisal" shall mean the appraisal, prepared by Peter A. Maholt,
---------
MAI, of the Property which in the judgement of counsel to the Agent, as of
the Closing Date, complies with all of the provisions of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the
rules and regulations adopted pursuant thereof, and all other applicable
Legal Requirements.
"Appraisal Procedure" shall have the meaning given such term in
-------------------
Section 21.4 of the Lease.
"Appurtenant Rights" shall mean (i) all agreements, easements, rights
------------------
of way or use, rights of ingress or egress, privileges, appurtenances,
tenements, hereditaments and other rights and benefits at any time
belonging or pertaining to the Land or the Improvements, including, without
limitation, the use of any streets, ways, alleys, vaults or strips of Land
adjoining, abutting, adjacent or contiguous to the Land and (ii) all
permits, licenses and rights, whether or not of record, appurtenant to the
Land.
"Assignment of Lease" shall have the meaning specified in Section 1 of
-------------------
the Participation Agreement.
"Bankruptcy Code" shall have the meaning defined in Section 6(h) of
---------------
the Credit Agreement.
"Basic Rent" shall mean, the sum of (i) the Tranche A Basic Rent, (ii)
----------
the Tranche B Basic Rent and (iii) the Investor Yield, calculated as of the
applicable date on which Basic Rent is due.
"Basic Term" shall mean the period commencing on August 30, 1995 and
----------
ending on August 29, 2002.
<PAGE>
6
"Benefitted Lender" shall have the meaning defined in Section 9.6(a)
-----------------
of the Credit Agreement.
"Board" shall mean the Board of Governors of the Federal Reserve
-----
System of the United States (or any successor).
"Building" shall mean the collective reference to the (i) 400,000
--------
square feet office building and (ii) 200,000 square foot warehouse each
located on the Land.
"Business Day" shall mean any day (other than a day which is a
------------
Saturday, Sunday or legal holiday in the State of New York) on which banks
are open for business in New York City; provided, however, that when used
-------- -------
in connection with a Eurodollar Loan, the term "Business Day" shall also
exclude any day on which banks are not open for dealings in dollar deposits
in the London interbank market.
"Capital Lease" shall mean, as applied to any Person, any lease of any
-------------
property (whether real, personal or mixed) by that Person as lessee which,
in conformity with GAAP, is, or is required to be, accounted for as a
capital lease on the balance sheet of that Person.
"Capitalized Lease Obligations" shall mean all obligations under
-----------------------------
Capital Leases of any Person, in each case taken at the amount thereof
accounted for as liabilities in accordance with GAAP.
"Casualty" shall mean any damage or destruction of all or any portion
--------
of the Property.
"C/D Assessment Rate" shall mean for any date the annual rate (rounded
-------------------
upwards, if necessary, to the next 1/100 of 1%) identified by the Agent
(or, if need be, reasonably estimated by the Agent) as the then current net
annual assessment rate that will be employed in determining amounts payable
by the Agent to the Federal Deposit Insurance Corporation (or any
successor) for insurance by such Corporation (or such successor) of time
deposits made in dollars at the Agent's domestic offices.
"CERCLA" shall mean the Comprehensive Environmental Response,
------
Compensation, and Liability Act of-1980, 42 U.S.C. (S)(S) 9601 et seq., as
-- ---
amended by the Superfund Amendments and Reauthorization Act of 1986.
"Certifying Party" shall have the meaning specified in Section 25.1 of
----------------
the Lease.
<PAGE>
7
"Claims" shall mean any and all actions, suits, penalties, claims and
------
demands and reasonable out-of-pocket liabilities, losses, costs and
expenses (including, without limitation, reasonable attorney's fees and
expenses) of any nature whatsoever, but excluding the fees of counsel to
the Agent and the Investor and one-half of the disbursements and other
charges of counsel to the Agent and the disbursements of the Lenders.
"Closing Date" shall have the meaning specified in Section 4.1 of the
------------
Participation Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time, or any successor statute thereto.
"Collateral" shall mean all assets of the Lessor, now owned or
----------
hereafter acquired, upon which a Lien is purported to be created by the
Security Documents.
"Commitment" shall mean, as to any Lender, the obligation of such
----------
Lender to make Loans to the Lessor under the Credit Agreement in principal
amount equal to the amount set forth opposite such Lender's name on
Schedule 1.1 of the Credit Agreement.
"Commitment Percentage" shall mean, as to any Lender at any time, the
---------------------
percentage which such Lender's Commitment then constitutes of the aggregate
Commitments (or, at any time after the Commitments shall have expired or
terminated, the percentage which the aggregate principal amount of such
Lender's Loans then outstanding constitutes of the aggregate principal
amount of the Loans then outstanding).
"Condemnation" shall mean any taking or sale of the use, access,
------------
occupancy, casement rights or title to the Property or any part thereof,
wholly or partially (temporarily or permanently), by or on account of any
actual eminent domain proceeding or taking of action by any Person having
the power of eminent domain, including an action by a Governmental
Authority to change the grade of, or widen the streets adjacent to, the
Property or alter the pedestrian or vehicular traffic flow to the Property
so as to result in a change in access to the Property, or by or on account
of an eviction by paramount title or any transfer made in lieu of any such
proceeding or action.
"Consent to Assignment" shall have the meaning specified in Section 1
---------------------
of the Participation Agreement.
"Contingent Obligations" shall mean, as to any Person, any obligation
----------------------
of such Person guaranteeing or intended to guarantee any Indebtedness,
leases, dividends or
<PAGE>
8
other monetary obligations ("primary obligations") of any other Person (the
-------------------
"primary obligor") in any manner, whether directly or indirectly,
---------------
including, without limitation, any obligation of such Person, whether or
not contingent, (a) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment on any such primary obligation or
(ii) to maintain working capital or equity capital of the primary obligor
or otherwise to maintain the net worth or solvency of the primary obligor,
(c) to purchase property, securities or services primarily for the purpose
of assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation or (d) otherwise
to assure or hold harmless to owner of such primary obligation against loss
in respect thereof; provided, however, that the term Contingent Obligation
-------- -------
shall not include (x) endorsements of instruments for deposit of collection
in the ordinary course of business or (y) guarantees made by a Person of
the obligations of a Subsidiary of Affiliates of such Person which do not
constitute Indebtedness of such Subsidiary of Affiliate and are incurred in
the ordinary course of business of such Subsidiary or Affiliate. The amount
of any Contingent Obligation shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof (assuming such
Person is required to perform thereunder) as determined by such Person in
good faith .
"Control" shall mean (including the correlative meanings of the terms
-------
"controlled by" and "under common control with"), as used with respect to
any Person, the possession directly or indirectly, of the power to direct
or cause the direction of the management policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Credit Agreement" shall mean the Credit Agreement, dated as of the
----------------
Closing Date, among the Lessor, the Agent and the Lenders.
"Credit Agreement Default" shall mean any event or condition which,
------------------------
with the lapse of time or the giving of notice, or both, would constitute a
Credit Agreement Event of Default.
"Credit Agreement Event of Default" shall mean any event or condition
---------------------------------
defined as an event of Default" in Section 6 of the Credit Agreement.
"Credit Documents" shall mean the Credit Agreement, the Notes the
----------------
Guarantee and the Security Documents.
<PAGE>
9
"Deed" shall mean the special warranty deed delivered by The National
----
Geographic Society to the Lessor with respect to the Property in accordance
with the terms and conditions of the Purchase Agreement dated July 11, 1995
between the Lessee and National Geographic Society.
"Deed of Trust" shall mean shall mean the Deed of Trust, dated as of
-------------
the Closing Date, made by the Lessor in favor of the Agent for the benefit
of the Lenders, and in substantially the form of Exhibit A to Participation
Agreement, which secures the obligations of the Lessor under the Notes.
"Default" shall mean any event or condition which, with the lapse of
-------
time or the giving of notice, or both, would constitute an Event of
Default.
"Dollars" and "$" shall mean dollars in lawful currency of the United
------- -
States of America.
"Effective Date" shall mean August 30, 1995.
--------------
"Employee Benefit Plan" or "Plan" shall mean an employee benefit plan
---------------------
(within the meaning of Section 3(3) of ERISA, including any multiemployer
plan (within the meaning of Section 3(37)(A) of ERISA)), or any "plan" as
defined in Section 4975(e)(I) of the Code and as interpreted by the
Internal Revenue Service and the Department of Labor in rules, regulations,
releases or bulletins in effect on the Closing Date.
"Environmental Audit" shall mean the environmental audit of the
-------------------
Property dated June 1995 and prepared by CRC Environmental Risk Management,
Inc.
"Environmental Law" shall mean, whenever enacted or promulgated, and
-----------------
federal, state, county or local law, statue, ordinance, rule, regulation,
license, permit, authorization, approval, covenant, administrative or court
order, judgment, decree, injunction, code or requirement or any agreement
with a Governmental Authority applicable to the Property:
(x) relating to pollution (or the cleanup, removal, remediation
or encapsulation thereof, or any other response thereto), or the
regulation or protection of human health, safety or the environment,
including air, water vapor, surface water, groundwater, drinking
water, land (including surface or subsurface), plant, aquatic and
animal life, or
(y) concerning exposure to, or the use, containment, storage,
recycling, treatment, generation, discharge, emission, Release or
threatened Release.
<PAGE>
10
transportation, processing, handling, labeling, containment,
production, disposal or remediation of any Hazardous Substance,
Hazardous Condition or Hazardous Activity,
in each case as amended and as now or hereafter in effect, and any common
law or equitable doctrine (including, without limitation, injunctive relief
and tort doctrines such as negligence, nuisance, trespass and strict
liability) that may impose liability or obligations for injuries (whether
personal or property) or damages due to or threatened as a result of the
presence of, exposure to, or ingestion of, any Hazardous Substance, whether
such common law or equitable doctrine is now or hereafter recognized or
developed. Applicable laws include, but are not limited to, CERCLA; the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901 et seq.:
-- ---
the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.: the
-- ---
Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq.: the National Environmental
-- ---
Policy Act, 42 U.S.C. (S) 4321; the Refuse Act, 33 U.S.C. (S)(S) 401 et
--
seq.: the Hazardous Materials Transportation Act of 1975, 49 U.S.C. 1801-
---
1812; the Toxic Substances Control Act, 15 U.S.C. 2601 et seq.: the
-- ---
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. (S)(S) 136 et
--
seq.: the Safe Drinking Water Act, 42 U.S.C. (S)(S) 300 f et seq.: and the
--- -- ---
Occupational Safety and Health Act of 1970, and their state and local
counterparts or equivalents.
"Environmental Violation" shall mean any activity, occurrence or
-----------------------
condition that violates or results in non-compliance with any
Environmental Law.
"Equipment" shall mean equipment, apparatus, furnishings, fittings and
---------
personal property of every kind and nature whatsoever purchased, leased or
otherwise acquired by using the proceeds of the Loans or the Investor
Contribution by the Lessee and now or subsequently attached to, contained
in or used or usable in any way in connection with any operation or letting
of the Property, including but without limiting the generality of the
foregoing, all screens, awnings, shades, blinds, curtains, draperies,
artwork, christmas decorations, bidets, toilets, carpets, rugs, storm doors
and windows, shelving, furniture and furnishings, heating, electrical, and
mechanical equipment lighting, switchboards, plumbing, ventilation, air
conditioning and air-cooling apparatus, refrigerating, and incinerating
equipment, escalators, elevators, loading and unloading equipment and
systems, stoves, ranges, laundry equipment, cleaning systems (including
window cleaning apparatus), telephones, communication systems (including
satellite dishes and antennae), televisions, computers, sprinkler systems
and other fire prevention and extinguishing apparatus and materials,
security systems, motors, engines, machinery, pipes, pumps, tanks,
conduits, appliances, fittings and fixtures of every kind and description.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
<PAGE>
11
"ERISA Affiliate" shall mean each entity required to be aggregated
---------------
with the Lessee pursuant to the requirements of Section 414(b) or (c) of
the Code.
"Eurocurrency Reserve Requirements" shall mean for any day as applied
---------------------------------
to a Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on such
day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board or other Governmental
Authority having jurisdiction with respect thereto) dealing with reserve
requirements prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board) maintained by a
member bank of the Federal Reserve System.
"Eurodollar Base Rate" shall mean, with respect to each day during
--------------------
each Interest Period pertaining to a Eurodollar Loan, the rate per annum
equal to the rate at which Chemical Bank is offered Dollar deposits at or
about 10:00 A.M., New York City time, two Business Days prior to the
beginning of such Interest Period in the interbank eurodollar market where
the eurodollar and foreign currency and exchange operations in respect of
its Eurodollar Loans are then being conducted for delivery on the first day
of such Interest Period for the number of days comprised therein and in an
amount comparable to the amount of its Eurodollar Loan to be outstanding
during such Interest Period.
"Eurodollar Loans" shall mean Loans the rate of interest applicable to
----------------
which is based upon the Eurodollar Rate.
"Eurodollar Rate" shall mean, with respect to each day during each
---------------
Interest Period pertaining to a Eurodollar Loan, a rate per annum
determined for such day in accordance with the following formula (rounded
upward to the nearest 1/100th of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Eurodollar Tranche" shall mean the collective reference to Eurodollar
------------------
Loans the then current Interest Periods with respect to all of which begin
on the same date and end on the same date (whether or not such Loans shall
originally have been made on the same day).
"Event of Default" shall mean a Lease Event of Default or a Credit
----------------
Agreement Event of Default.
"Excepted Payments" shall mean:
-----------------
<PAGE>
12
(a) all indemnity payments (including indemnity payments made
pursuant to Section 11 of the Participation Agreement), whether made by
adjustment to Basic Rent or otherwise, to which any Indemnified Person is
entitled;
(b) any amounts (other than Basic Rent, Termination Value, or
Purchase Option Price) payable under any Operative Agreement to reimburse
the Owner Trustee, the Trust Company, the Investor, or any of their
respective Affiliates (including the reasonable expenses of the Owner
Trustee and the Investor incurred in connection with any such payment) for
performing or complying with any of the obligations of the Lessee under and
as permitted by any Operative Agreement;
(c) any amount payable to the Investor by any transferee of the
interest of the Investor as the purchase price of the Investor's interest
in the Trust Estate (or a portion thereof);
(d) any insurance proceeds (or payments with respect to risks self-
insured or policy deductibles) under liability and title policies other
than such proceeds or payments payable to the Lessee or the Agent;
(e) any insurance proceeds under policies maintained by the Owner
Trustee or the Investor;
(f) Transaction Expenses or other amounts or expenses paid or payable
to or for the benefit of the Owner Trustee, the Trust Company or the
Investor;
(g) all right, title and interest of the Investor or the Owner
Trustee to the Property, any portion thereof or any other property to the
extent any of the foregoing has been released from the Liens of the Deed of
Trust and the Assignment of Lease Pursuant to terms thereof and not
otherwise purchased by the Lessee or a third party pursuant to the terms of
the Lease;
(h) all payments in respect of the Investor Contribution and the
Investor Yield;
(i) any payments in respect of interest to the extent attributable to
payments referred to in clauses (a) through (h) above; and
(j) any rights of the Investor or the Owner Trustee to demand,
collect, sue for or otherwise receive and enforce payment of any of the
foregoing amounts.
<PAGE>
13
"Excepted Rights" shall mean the rights retained by the Owner Trustee
---------------
pursuant to Section 8.3(a)(i) of the Credit Agreement and all right, title
and interest of Owner Trustee in the Shared Rights.
"Exculpated Persons" shall have the meaning defined in Section 9.14 of
------------------
the Credit Agreement.
"Expiration Date" shall mean the final day of the Term.
---------------
"Facility" shall mean a facility used for the treatment, storage or
--------
disposal of Hazardous Substances.
"Fair Market Sales Value" shall mean the amount, which in any event
-----------------------
shall not be less than zero, that would be paid in cash in an arm's-length
transaction between an informed and willing purchaser and an informed and
willing seller, neither of whom is under any compulsion to purchase or
sell, respectively, for the ownership of the Property. Fair Market Sales
Value shall be determined based on the assumption that, except for purposes
of Section 21.3 of the Lease, the Property is in the condition and state of
repair required under Section 10.1 of the Lease and that the Lessee is in
compliance with the other requirements of the Operative Agreements.
"Fixtures" shall have the meaning specified in Section 2.1(d) of the
--------
Lease.
"GAAP" shall mean United States generally accepted accounting
----
principles (including principles of consolidation), in effect from time to
time, consistently applied.
"Governmental Action" shall mean all permits, authorizations,
-------------------
registrations, consents, approvals, waivers, exceptions, variances, orders,
judgments, written interpretations, decrees, licenses, exemptions,
publications, filings, notices to and declarations of or with, or required
by, any Governmental Authority, or required by any Legal Requirement, and
shall include, without limitation, all environmental and operating permits
and licenses that are required for the full use, occupancy, zoning and
operation of the Property.
"Governmental Authority" shall mean any Federal, state, county,
----------------------
municipal or other local governmental authority or judicial or regulatory
agency, board, body, commission, instrumentality, court or quasi-
governmental authority.
"Guarantee" shall mean the guarantee to be executed and delivered by
---------
the Guarantors, substantially in the form of Exhibit B to the Credit
Agreement, as the same may be amended, supplemented or otherwise modified
from time to time.
<PAGE>
14
"Guarantors" shall mean the collective reference to Manor Care, Inc.,
----------
Manor Healthcare Corp., Choice Hotels International, Inc., Quality Hotels
Europe, Inc., Four Seasons Nursing Centers, Inc. MNR Financial Corp. and
Boulevard Motel Corp.
"Hazardous Activity" shall mean any activity, process, procedure or
------------------
undertaking that directly or indirectly (i) produces, generates or creates
any Hazardous Substance, (ii) causes or results in the Release of any
Hazardous Substance into the environment (including air, water vapor,
surface water, groundwater, drinking water, land (including surface or
subsurface), plant, aquatic and animal life); (iii) involves the
containment or storage of any Hazardous Substance, or (iv) would be
regulated as hazardous waste treatment, storage or disposal within the
meaning of any Environmental Law.
"Hazardous Condition" shall mean any condition that violates or that
-------------------
results in noncompliance with any Environmental Law.
"Hazardous Substance" shall mean any of the following: (i) any
-------------------
petroleum or petroleum product, explosives, radioactive materials,
asbestos, formaldehyde, polychlorinated biphenyls, lead and radon gas; or
(ii) any substance, material, product, derivative, compound or mixture,
mineral, chemical, waste, gas, medical waste or pollutant that would
support the assertion of any claim under any Environmental Law, whether or
not defined as hazardous as such under any Environmental Law.
"Impositions" shall mean, except to the extent described in the
-----------
following sentence, any and all liabilities, losses, expenses and costs of
any kind whatsoever for fees, taxes, levies, imposts, duties, charges,
assessments or withholdings ("Taxes") (including (i) real and personal
-----
property taxes, including personal property taxes on any property covered
by the Lease that is classified by Governmental Authorities as personal
property, and real estate or ad valorem taxes in the nature of property
taxes; (ii) sales taxes, use taxes and other similar taxes (including rent
taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate
transfer taxes, conveyance taxes, stamp taxes and documentary recording
taxes and fees; (v) taxes that are or are in the nature of franchise,
income, value added, privilege and doing business taxes, license and
registration fees; and (vi) assessments on the Property, including all
assessments for public improvements or benefits, whether or not such
improvements are commenced or completed within the Term), and in each case
all interest, additions to tax and penalties thereon, which at any time
prior to, during or with respect to the Term or in respect of any period
for which the Lessee shall be obligated to pay Supplemental Rent, may be
levied, assessed or imposed by any Federal, state, city, county or local
authority upon or with respect to (a) the Property or any part thereof or
interest therein; (b) the financing, refinancing, demolition, construction,
renovation, substitution, subleasing, assignment, control, condition,
occupancy, servicing, maintenance, repair, ownership, possession, activity
conducted on, delivery, insuring, use, operation, improvement, transfer of
title,
<PAGE>
15
return or other disposition of the Property or any part thereof or interest
therein; (c) the Notes or other indebtedness with respect to the Property
or any part thereof or interest therein; (d) the rentals, receipts or
earnings arising from the Property or any part thereof or interest therein
during the Term; (e) the Operative Agreements or any payment made or
accrued pursuant thereto; (f) the income or other proceeds received with
respect to the Property or any part thereof or interest therein upon the
sale or disposition thereof; (g) the issuance of the Notes; or (i)
otherwise in connection with the transactions contemplated by the Operative
Agreements.
The term "Imposition" shall not mean or include:
(i) Taxes and impositions (other than Taxes that are, or are in the
nature of, sales, use, rental, value added, transfer or property taxes)
that are imposed on a Tax Indemnitee by the United States federal
government that are based on or measured by the gross or net income
(including taxes based on capital gains and minimum taxes) or any
replacement of net income tax of such Person; provided that this clause (i)
--------
shall not be interpreted to prevent a payment from being made on an After
Tax Basis if such payment is otherwise required to be so made;
(ii) Taxes and impositions (other than Taxes that are, or are in the
nature of, sales, use, rental, value added, transfer or property taxes)
that are imposed by any state or local jurisdiction or taxing authority
within any state or local jurisdiction and that are based upon or measured
by the gross or net income or gross or net receipts from rental (including
any minimum taxes, withholding taxes or taxes on or measured by capital,
net worth, excess profits or items of tax preference or taxes that are
capital stock, franchise or doing business taxes); provided that this
--------
clause (ii) shall not be interpreted to prevent a payment from being made
on an After Tax Basis if such payment is otherwise required to be so made;
(iii) any Tax or imposition to the extent, but only to such extent, it
relates to any act, event or omission that occurs after the termination of
the Lease (but not any Tax or imposition that relates to any period prior
to the termination of the Lease);
(iv) any Tax or imposition for so long as, but only for so long as, it
is being contested in accordance with the provisions of the Participation
Agreement;
(v) any interest or penalties imposed on a Tax Indemnitee as a result
of the failure of such Tax Indemnitee to file any return or report timely
and in the form prescribed by law or to pay any Tax or imposition; provided
--------
that this clause (v) shall not apply (x) if such interest or penalties
arise as a result of a position taken (or requested to be taken) by the
Lessee in a contest controlled by the Lessee under Section 11.2(g) of the
Participation Agreement or (y) to any such interest or penalties that
result
<PAGE>
16
from such Tax Indemnitee's complying with the reporting procedures set
forth in Section 11.2(d) of the Participation Agreement;
(vi) any Taxes or impositions imposed on the Lessor that are a
result of the Lessor not being considered a "United States person" as
defined in Section 7701(a)(30) of the code;
(vii) any Taxes or impositions that are enacted or adopted as a
substitute for any Tax that would not have been indemnified against
pursuant to the terms of Section 11.1 of the Participation Agreement;
(viii) any Taxes which are imposed on a Tax Indemnitee as a result of
a breach of a convenant or representation by such Tax Indemnitee in any
Operative Agreement (unless caused by the Lessee's breach of its
representations, warranties and convenants) or is a result of the gross
negligence or willful misconduct imputed of such Tax Indemnitee itself (as
opposed to gross negligence or willful misconduct imputed to such Tax
Indemnitee itself (as opposed to gross negligence or willful misconduct
imputed to such Tax Indemnitee), but not Taxes imposed as a result of
ordinary negligence of such Tax Indemnitee;
(ix) any Taxes or impositions to the extent that such Taxes are
actually reimbursed to the Lessor by another Person other than an Affiliate
of the Lessor;
(x) any Taxes or impositions imposed upon the Lessor with respect
to any voluntary transfer, sale, financing or other voluntary disposition
by the Lessor (other than a transfer contemplated and permitted by the
Operative Agreements, including any transfer in connection with (1)the
exercise by the Lessee of its Purchase Option, (2) the occurence of a Lease
Event of Default or a Credit Agreement Event of Default (to the extent
arising from a Lease Event of Default), or (3) a Casualty or Condemnation
affecting the Property) of any interest in the Property or any interest in,
or created pursuant to, the Operative Agreements) or any voluntary transfer
of any interest in the Lessor (other than in connection with the existence
of a Lease Event of Default or a Credit Agreement Event of Default (to the
extent arising from a Lease of Default) or any involuntary transfer of any
of the foregoing interests resulting from the bankruptcy or insolvency of
the Lessor (other than in connection with the existence of a Lease Event of
Default or a Credit Agreement Event of Default arising from a Lease Event
of Default);
(xi) any gift, inheritance, franchise or estate Taxes;
(xii) any Taxes or impositions imposed on a Tax Indemnitee, to the
extent such Tax Indemnitee actually receives a credit (or otherwise has a
reduction in a liability for Taxes) in respect thereof against Taxes that
are not indemnified under the Operative
<PAGE>
17
Agreements (but only to the extent such credit is not taken into account in
calculating the indemnity payment on an After Tax Basis);
(xiii) any Tax or imposition to the extent that such Tax or imposition
is imposed on a Tax Indemnitee in respect of a transaction or business in
the jurisdiction imposing such Tax other than the transactions arising out
of the Operative Agreements; or
(xiv) any Tax or imposition imposed on a direct or indirect
transferee, successor or assign of the Lesser to the extent of the excess
of such Taxes over the amount of such Taxes that would have been imposed
had there not been a transfer by the original Lessor of an interest arising
under the Operative Agreement; provided that there shall not be excluded
--------
under this clause
(xiv) any such Tax or imposition if such direct or indirect
transferee, successor or assign of the Lessor acquired its interest as a
result of a transfer in connection with a Lease Event of Default or a
Credit Agreement Event of Default (to the extent arising from a Lease Event
of Default); provided, further, that there shall not be excluded under this
-------- -------
clause (xiv) any amount necessary to make any payment on an After Tax
Basis; or
(xv) any Tax or imposition imposed as a result of any fees paid to
the Trust Company, the Owner Trustee, the Agent, the Lenders or the
Investor in connection with the transactions contemplated by the Operative
Agreements.
Any Tax or imposition excluded from the defined term "Imposition" in any
one of the foregoing clauses (i) through (xv) shall not be construed as
constituting an Imposition by any provision of any other of the
aforementioned clauses.
"Impositions Indemnitee" shall mean each Person entitled to
----------------------
indemnification under Section 11 of the Participation Agreement.
"Improvements" shall mean all buildings, structures, Fixtures,
------------
Equipment, and other improvements of every kind existing at any time and
from time to time on or under the Land, together with any and all
appurtenances to such buildings, structures or improvements, including
sidewalks, utility pipes, conduits and lines, parking areas and roadways,
and including all additions to or changes in the Improvements at any time.
"Indebtedness" shall mean as to any Person, (a) all indebtedness of
------------
such Person for borrowed money, (b) the deferred purchase price of assets
or services which in accordance with GAAP would be shown on the liability
side of the balance sheet of such Person, (c) the face amount of all
letters of credit issued for the account of such Person and, without
duplication, all drafts drawn thereunder, (d) all indebtedness of a second
Person secured by any Lien on any property owned by such first Person,
<PAGE>
18
whether or not such indebtedness has been assumed, (e) all Capitalized
lease Obligations of such Person, (f) all obligations of such Person to pay
a specified purchase price for goods or services whether or not delivered
or accepted, e.g., take-or-pay and similar obligations, (g) all obligations
---
of such Person under Interest Rate Agreements, and (h) without duplication,
all Contingent Obligations of such Person, provided that Indebtedness shall
--------
not include trade payables and accrued expenses relating to employees, in
each case arising in the ordinary course of business.
"Indemnified Person" shall mean the Owner Trustee, in its individual
------------------
and its, trust capacity, the Agent, the Investor, the Lenders and their
respective successors, assigns, directors, shareholders, partners,
officers, employees, agents and Affiliates.
"Insurance Requirements" shall mean all terms and conditions of any
----------------------
insurance policy required by the Lease to be maintained by the Lessee and
all requirements of the issuer of any such policy.
"Investment Company Act" shall mean the Investment Company Act of
----------------------
1940, as amended, together with the rules and regulations promulgated
thereunder.
"Insolvent" shall mean, with respect to any Multiemployer Plan, the
---------
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
"Interest Period" shall mean (a) as to any Eurodollar Loan, the period
---------------
commencing on the date of such Borrowing and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the
last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as
the Lessor may elect, and (b) as to any ABR Loan, the period commencing on
the date of such borrowing and ending on the date 90 days thereafter or, if
earlier, on the Maturity Date or the date of prepayment of such borrowing;
provided, however, that if any Interest Period would end on a day other
-------- -------
than a Business Day, such Interest Period shall de extended to the next
succeeding Business Day unless, in the case of Eurodollar Loans only, such
next succeeding Business Day would fall in the next calendar month, in
which case such Interest Period shall end on the next preceding Business
Day. Interest shall accrue from and including the first day of an Interest
Period to but excluding the last day of such Interest Period.
"Interest Rate Agreement" shall mean any interest rate swap agreement,
-----------------------
interest rate cap agreement, interest rate collar agreement, interest rate
futures contract, interest rate option contract or other similar agreement
or arrangement designed to protect any Person against fluctuations in
interest rates.
<PAGE>
19
"Investor" shall mean Sumitomo Bank Leasing and Finance, Inc., a
--------
Delaware corporation.
"Investor Contribution" shall mean $907,500.
---------------------
"Investor Yield" shall mean an amount, as of any Payment Date,
--------------
sufficient to provide the Investor with an annual pre-tax yield on the
Investor Contribution of 200 basis point in excess of the weighted average
Eurodollar Rate payable to the Lenders on the outstanding Eurodollar Loans.
"Land" shall mean the land described on Schedule A to the Deed of
----
Trust and all Appurtenant Rights attached thereto.
"Lease" shall mean the Lease, dated as of the Closing Date, between
-----
the Lessor and the Lessee.
"Lease Default" shall mean any event or condition which, with the
-------------
lapse of time or the giving of notice, or both, would constitute a Lease
Event of Default.
"Lease Event of Default" shall have the meaning given to such term in
----------------------
Section 17.1 of the Lease.
"Legal Requirements" shall mean all Federal, state, county, municipal
------------------
and other governmental statutes, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions affecting the Property or
the demolition, construction, renovation, use or alteration thereof,
whether now or hereafter enacted and in force, including any that require
repairs, modifications or alterations in or to the Property or in any way
limit the use and enjoyment thereof (including all building, zoning and
fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. (S)
12101 et. seq, and any other similar Federal, state or local laws or
-- ---
ordinances and the regulations promulgated thereunder) and any that may
relate to environmental requirements (including all Environmental Laws),
and all permits, certificates of occupancy, licenses, authorizations and
regulations relating thereto, and all covenants, agreements, restrictions
and encumbrances contained in any instruments which are either of record or
known to the Lessee affecting the Property, the Appurtenant Rights and any
easements, licenses or other agreements entered into pursuant to Section
12.2 of the Lease.
"Lender Financing Statements" shall mean UCC financing statements
---------------------------
appropriately completed and executed for filing in the office of the State
Department of Assessments and Taxation of the State of Maryland and in the
Land Records for Montgomery County in order to perfect a security interest
in favor of the Agent in the Equipment located on the Property.
<PAGE>
20
"Lenders" shall mean the several banks and other financial
-------
institutions from time to time party to the Credit Agreement.
"Lessee" shall mean Manor Care, Inc., a Delaware corporation, as
------
lessee under the Lease.
"Lessor" shall mean The Gaithersburg Realty Trust, a Delaware business
------
trust.
"Lessor Financing Statements" shall mean UCC financing statements
---------------------------
appropriately completed and executed for filing in the office of the
Secretary of State of the State of Maryland and in the office of the County
Clerk for Montgomery County in order to protect the Lessor's interest under
the Lease to the extent the Lease is a security agreement.
"Lessor Lien" shall mean any Lien, true lease or sublease or
-----------
disposition of title arising as a result of (a) any claim against the
Lessor or the Trust Company, not resulting from the transactions
contemplated by the Operative Agreements, (b) any act or omission of the
Lessor or the Trust Company, which is not required by the Operative
Agreements or is in violation of any of the terms of the Operative
Agreements, (c) any claim against the Lessor or the Trust Company, with
respect to Taxes or Transaction Expenses against which the Lessee is not
required to indemnify the Lessor or the Trust Company, pursuant to the
Participation Agreement or (d) any claim against the Lessor arising out of
any transfer by the Lessor of all or any portion of the interest of the
Lessor in the Property, the Trust Estate or the Operative Agreements other
than the transfer of title to or possession of the Property by the Lessor
pursuant to and in accordance with the Lease, the Credit Agreement or the
Participation Agreement or pursuant to the exercise of the remedies set
forth in Article XVII of the Lease.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed
----
of trust, lien, pledge, encumbrance, charge or security interest in or on
such asset, (b) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or title retention agreement relating to such
asset and (c) in the case of securities, any purchase option, call or
similar right of a third party (excluding rights of first refusal) with
respect to such securities.
"Limited Recourse Amount" shall mean, at any time, the amount equal to
-----------------------
the sum of (i) the then outstanding principal amount of the Tranche B
Loans, (ii) all accrued interest on the Tranche B Loans and all other
amounts owing under the Credit Agreement on account of the Tranche B Loans,
(iii) the Investor Contribution and (iv) all accrued amounts due on account
of the Investor Yield and all other amounts owing to the Investor under the
Operative Agreements.
<PAGE>
21
"Loans" shall have the meaning specified in Section 2.1(a) of the
-----
Credit Agreement.
"Marketing Period" shall mean, if the Lessee has not given the
----------------
Maturity Date Election Notice in accordance with Section 20.2 of the Lease,
the period commencing on the date twelve months prior to the Maturity Date
and ending on the Maturity Date.
"Material Adverse Effect" shall mean a material adverse effect on the
-----------------------
business, assets, property or condition, financial or otherwise, of the
Lessee and its Subsidiaries taken as a whole.
"Maturity Date" the day preceding seventh anniversary of the Effective
-------------
Date.
"Maturity Date Election Notice" shall have the meaning specified in
-----------------------------
Section 20.2 of the Lease.
"Maturity Date Purchase Option" shall mean the Lessee's Purchase
-----------------------------
Option to purchase the property on the Maturity Date in accordance with
Section 20.2 of the Lease.
"Maximum Residual Guarantee Amount" shall mean an amount equal to the
---------------------------------
then outstanding principal amount of the Tranche A Loans.
"Modifications" shall have the meaning specified in Section 11.1(a) of
-------------
the Lease.
"Moody's" shall mean Moody's Investors Services, Inc.
-------
"Multiemployer Plan" shall mean a Plan which is a multiemployer plan
------------------
as defined in Section 4001(a)(3) of ERISA.
"Net Proceeds" shall mean all amounts paid in connection with any
------------
Casualty or Condemnation, and all interest earned thereon, less the expense
of claiming and collecting such amounts, including all reasonable costs and
expenses in connection therewith for which the Agent or Lessor are entitled
to be reimbursed pursuant to the lease.
"Net Sale Proceeds Shortfall" shall mean the amount by which the
---------------------------
proceeds of a sale described in Section 21.1 of the Lease (net of all
expenses of sale) are less than the then outstanding principal amount of
the Tranche B Loans if it has been determined that the Fair Market Sales
value of the Property at the expiration of the term of the Lease has been
impaired by greater than expected wear and tear during the term of the
Lease.
<PAGE>
22
"Notes" shall mean the collective reference to the Tranche A Notes and
-----
the Tranche B Notes.
"Obligations" shall mean the collective reference to the unpaid
-----------
principal of and interest on the Notes and all other obligations and
liabilities of the Lessor to the Agent or the Lenders (including, without
limitation, interest accruing at the then applicable rate provided in the
Credit Agreement after the maturity of the Loans and interest accruing at
the then applicable rate provided in the Credit Agreement after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Lessor, whether or not a
claim for post-filing or post-petition interest is allowed in such
proceeding), whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter incurred, which may arise under, out
of, or in connection with, the Credit Agreement or the Notes, whether on
account of principal interest or otherwise (including, without limitation,
all reasonable fees and disbursements of counsel to the Agent or to the
Lenders that are required to be paid by the Lessor pursuant to the terms of
the Credit Agreement).
"Officer's Certificate" shall mean a certificate signed by any
---------------------
individual holding the office of vice president or higher, which
certificate shall certify as true and correct the subject matter being
certified to in such certificate.
"Operative Agreement" shall mean the following:
-------------------
(a) the Participation Agreement;
(b) the Notes;
(c) the Lease;
(d) the Assignment of Lease;
(e) the Consent to Assignments;
(f) the Credit Agreement;
(g) the Deed of Trust;
(h) the UCC Financing Statements;
(i) the Guarantee; and
(j) the Trust Agreement.
"Other Taxes" shall have the meaning specified in Section 2.12(b) of
-----------
the Credit Agreement.
"Overdue Interest" shall mean any interest payable pursuant to Section
----------------
2.7(c) of the Credit Agreement.
"Overdue Rate" shall mean (i) with respect to Tranche A Basic Rent,
------------
Tranche B Basic Rent and any other amount owed under or with respect to the
Credit Agreement
<PAGE>
23
or the Security Documents, the rate specified in Section 2.7(c) of the
Credit Agreement, (ii) with respect to Investor Yield and the Investor
Contribution 2% in excess of the Investor Yield then in effect and (iii)
with respect to any other amount, the amount referred to in clause (y) of
Section 2.7 (c) of the Credit Agreement.
"Owner Trustee" shall mean Wilmington Trust Company, not in its
-------------
individual capacity except as expressly stated in the Trust Agreement, but
solely as Owner Trustee under the Trust Agreement and any sucessor or
replacement Owner Trustee expressly permitted under the Trust Agreement.
"Participation Agreement" shall mean the Participation Agreement,
-----------------------
dated as of the Closing Date, among the Lessee, the Lessor, the Investor,
the Agent and the Lenders.
"Payment Date" shall mean each Scheduled Interest Payment Date and any
------------
other date on which a payment is otherwise due under the terms of the
Credit Agreement or if all amounts due under the Credit Agreement have been
paid in full and the Credit Agreement has been terminated, the first
Business Day of each calendar month during the Term.
"Permitted Exceptions" shall mean: (i) Liens of the types described in
--------------------
clauses (i), (ii), (v) and (viii) of the definition of Permitted Liens;
(ii) Liens for Taxes not yet due; and (iii) all non-monetary encumbrances,
exceptions, restrictions, easements, rights of way, servitudes,
encroachments and irregularities in title, other than Liens which, in the
reasonable assessment of the Agent, materially impair the use of the
Property for its intended purpose.
"Permitted Liens" shall mean:(i) the respective rights and interests
---------------
of the parties to the Operative Agreements as provided in the Operative
Agreements, (ii) the rights of any sublessee or assignee under a sublease
or an assignment expressly permitted by the terms of the Lease; (iii) Liens
for Taxes that either are not yet due or are being contested in accordance
with the provisions of Section 11.2 of the Participation Agreement ;(iv)
Liens arising by operation of Law, materialmen's mechanics', workmen's
repairmen's, employees', carriers', warehousemen's and other like Liens in
connection with any Modifications or arising in the ordinary course of
business for amounts that either are not more than 30 days past due or are
being diligently contested in good faith by appropriate proceedings, so
long as such proceedings satisfy the conditions for the continuation of
proceedings to contest Taxes set forth in Section 11.2(g) of the
Participation Agreement; (v) Liens of any of the types referred to in
clause (iv) above that have been bonded for not less than the full amount
in dispute (or as to which other security arrangements satisfactory to the
Lessor have been made), which bonding (or arrangements) shall comply with
applicable Legal Requirements, and
<PAGE>
24
shall have effectively stayed any execution or enforcement of such Liens;
(vi) Liens arising out of judgments or awards with respect to which appeals
or other proceedings for review are being prosecuted in good faith and for
the payment of which adequate reserves have been provided as required by
GAAP or other appropriate provisions have been made, so long as such
proceedings have the effect of staying the execution of such judgments or
awards and satisfy the conditions for the continuation of proceedings to
contest Taxes set forth in Section 11.2 of the Participation Agreement:
(vii) Permitted Exceptions: and (viii) easements, rights of way and other
encumbrances on title to real property pursuant to Section 12.2 of the
Lease.
"Person" shall mean any individual, corporation, partnership, joint
------
venture, association, joint-stock company, limited liability company,
trust, unincorporated organization, governmental authority or any other
entity.
"Project Costs" shall mean all costs and expenses incurred by the
-------------
Lessee or otherwise expended in connection with the acquisition of the
property, the demolition of any existing Improvements, the construction and
renovation of the Property, any relocation and moving expenses associated
with the acquisition of the Property and any other expenses reasonably
related to the acquisition, construction, use and equipping of the
Property.
"Property" shall have the meaning given to such term in Section 2.1 of
--------
the Lease.
"Purchase Notice" shall have the meaning given to such term in Section
---------------
20.1 of the Lease.
"Purchase Option" shall have the meaning given to such term in Section
---------------
20.1 of the Lease.
"Purchase Option Price" shall have the meaning given to such term in
---------------------
Section 20.1 of the Lease.
"Reconfiguration Agreement" shall mean the Agreement to Adjust
-------------------------
Property Configuration dated as of August 30, 1995 among Lessor,
Gaithersburg Community Associates, L.L.C. and National Geographic Society
and recorded or intended to be recorded among the land Records of
Montgomery County, Maryland.
"Register" shall have the meaning defined in Section 9.5(d) of the
--------
Credit Agreement.
<PAGE>
25
"Required Lenders" shall mean, at any time, Lenders the Commitment
----------------
Percentages of which aggregate at least 51%.
"Release" shall mean any release, pumping, pouring, emptying,
-------
injecting, escaping, leaching, dumping, seepage, spill, leak, flow,
discharge or emission of a Hazardous Substance.
"Rent" shall mean, collectively, the Basic Rent and the Supplemental
----
Rent, in each case payable under the Lease.
"Requesting Party" shall have the meaning specified in Section 25.1 of
----------------
the Lease.
"Requirement of Law" shall mean, as to any Person, the Certificate of
------------------
Incorporation, By-Laws, Articles of Association or other organizational or
governing documents of such Person, and any law, treaty, rule or regulation
or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of
its property or to which such Person or any of its property is subject.
"Revolving Credit Agreement" shall mean the Competitive Advance and
--------------------------
Multi-Currency Revolving Credit Facility Agreement, dated as of November
30, 1994 among Chemical Bank and Nationsbank, as agent, the Guarantors, the
guarantors named therein and the lenders named therein, as amended,
modified or supplement from time to time.
"Scheduled Interest Payment Date" shall mean (a) as to any ABR Loan,
-------------------------------
the last day of each March, June, September and December to occur while
such Loan is outstanding and the Maturity Date, (b) as to any Eurodollar
Loan having an Interest Period of three months or less, the last day of
such Interest Period and (c) as to any Eurodollar Loan having an Interest
Period longer than three months, each day which is three months after the
first day of such Interest Period and the last day of such Interest Period
and, in addition, in each case the date of any refinancing or conversion of
such Loan with or to a Loan of a different Type.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
together with the rules and regulations promulgated thereunder.
"Security Documents" shall mean the collective reference to the Deed
------------------
of Trust and the Assignment of Lease and all other security documents
hereafter delivered to the Agent granting a Lien on any asset or assets of
any Person to secure the obligations and liabilities of the Lessor under
the Credit Agreement and/or under any of the other Credit Documents or to
secure any guarantee of any such obligations and liabilities.
<PAGE>
26
"Shared Rights" shall mean the rights retained by the Lessor, but not
-------------
to the exclusion of the Agent, pursuant to section 8.3(a)(ii) of the Credit
Agreement.
"Single Employer Plan" any Plan which is covered by Title IV or
--------------------
ERISA, but which is not a Multiemployer Plan.
"S&P" shall mean Standard & Poor's Ratings Group, a division of McGraw
---
Hill, Inc.
"Specified Interest Payment Date" shall mean (a) any Scheduled
-------------------------------
Interest Payment Dated and (b) any date on which interest is payable
pursuant to Section 2.7(d)(ii) of the Credit Agreement in connection with
any prepayment of the Loans.
"Statutory Reserves" shall mean a fraction (expressed as a decimal),
------------------
the numerator or which is the number one and the denominator of which is
the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves)
expressed as a decimal established by the Board and any other banking
authority to which the Agent is subject for new negotiable nonpersonal time
deposits in dollars of over $100,000 with maturities approximately equal to
the applicable Interest Period. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"Subsidiary" shall mean, with respect to any person (herein referred
----------
to as the "parent"), any corporation, partnership, association or other
business entity (a) of which securities or other ownership interests
representing more the 50% of the equity or more than 50% of the ordinary
voting power or more than 50% of the general partnership interests are, at
the time any determination is being made, owned, controlled or held, or (b)
which is, at the time any determination is made, otherwise Controlled by
the parent or one or more subsidiaries of the parent or by the parent and
one or more subsidiaries of the parent.
"Supplemented Amounts" shall have the meaning defined in Section 9.14
--------------------
of the Credit Agreement.
"Supplemental Rent" shall mean all mounts, liabilities and obligations
-----------------
(other than Basic Rent) which Lessee assumes or agrees to pay to Lessor or
any other Person under the Lease or under any of the other Operative
Agreements (other than the Guarantee made by the Guarantors in favor of the
Agent).
"Tax Indemnitee" shall mean the Lessor, the Investor, the Owner
--------------
Trustee, the Trust Company, the Agent and each Lender.
<PAGE>
27
"Taxes" shall mean have meaning specified in the definition of
-----
Imposition.
"Term" shall mean the Basic Term.
----
"Termination Date" shall have the meeting specified in Section 16.2
----------------
(a) of the Lease.
"Termination Notice" shall have the meeting specified in Section 16.1
------------------
(a) of the Lease.
"Termination Value" shall mean, as of any Payment Date, an amount
-----------------
equal to the sum of (i) the aggregate outstanding principal of the notes,
accrued and unpaid interest on the Notes and any other amounts due under
the Credit Agreement, plus (ii) the outstanding portion of the Investor
Contribution, all accrued amounts due on account of the Investor Yield and
all other amounts owing to the Investor under the Operative Agreements, in
each case as of the applicable Payment Date.
"Title Company" shall mean Chicago Title Insurance Company, or such
-------------
other title insurance company reasonably acceptable to the Agent and the
Investor.
"Total Condemnation" shall mean a Condemnation that involves a taking
------------------
of Lessor's entire title to the related Land.
"Tranche A Basic Rent" shall mean the interest due the Tranche A Loans
--------------------
on any Payment Date pursuant to the Credit Agreement (but not including
interest on overdue amounts under Section 2.7(c) of the Credit Agreement or
otherwise).
"Tranche A Loan" shall have the meaning defined in Section 2.3 of the
--------------
Credit Agreement.
"Tranche A Maximum Amount" shall mean $25,516,301.65
------------------------
"Tranche A Note" shall have the meaning defined in Section 2.2 of the
--------------
Credit Agreement.
"Tranche A Percentage" shall mean $4.3514%.
--------------------
"Tranche B Basic Rent" shall mean the scheduled interest due on the
--------------------
Tranche B Loans on any Payment Date pursuant to the Credit Agreement (but
not including interest on overdue amounts under Section 2.7(c) of the
Credit Agreement or otherwise).
<PAGE>
28
"Tranche B Loan" shall have the meaning defined in Section 2.3 of the
--------------
Credit Agreement.
"Tranche B Maximum Amount" shall mean $3,826,198.35
------------------------
"Tranche B Note" shall have the meaning defined in Section 2.2 of the
--------------
Credit Agreement.
"Tranche B Precentage" Shall mean 12.6486%.
--------------------
"Tranche Expenses" shall mean:
----------------
(a) one-half of the reasonable out-of-pocket expenses,
disbursement or cost (other than legal fees) of Chemical Bank and
Chemical Securities Inc. incurred in connection with the consummation
of the transactions contemplated by the Operative Agreements:
(b) the reasonable fees and reasonable out-of-pocket expenses of
the Trust Company in connection with the transaction contemplated by
the Operative Agreement, including, without limitation, the initial
and annual Owner Trustee's fee and all reasonable fees and reasonable
out-of-pocket expenses of the Owner Trustee and any necessary
co-trustees (including reasonable counsel fees and expenses) or any
successor owner trustee, for acting as owner trustee under the Trust
Agreement.
(c) the fee payable to Chemical Securities Inc. in connection
with the transactions contemplated by the Operative Agreements.
(d) any and all Taxes (to the extent provided in Section 11.2 of
the Participation Agreement) and fees incurred in recording or filling
any Operative Agreement or any other transaction document,any deed,
declaration, deed of trust, security agreement, notice or financing
statement with any public office, registry or governmental agency in
connection with the transactions contemplated by the Operative
Agreement:
(e) any real estate brokers' fees and any and all stamp,
transfer and other similar taxes, fees and excises, if any, including
any interest and penalties, which are payable in connection with the
acquisition of of the Property:
(f) all reasonable out-of-pocket costs and expenses incurred in
connection with the enforcement or preservation of any rights under
the Operative Agreements, including, without limitation, the fees and
disbursements
<PAGE>
29
of counsel (including the allocated fees and expenses of in-house
counsel) to the Agent, each Lender and the Investor.
(g) all reasonable out-of-pocket costs and expenses incurred in
connection with any amendment, supplement or modification to the
Operative Agreements requested by the Lessee or any Guarantor and any
other documents prepared in connection therewith, and the consummation
and administration of the transactions contemplated thereby,
including, without limitation, the reasonable fees and disbursements
of counsel to the Agent and the Investor and
(h) all reasonable out-of-pocket costs and expenses incurred by
the Lessor, the Lessee, the Investor or the Agent in connection with
any purchase of the Property by the Lessee pursuant to the Lease.
"Transferee" shall have the meaning defined in Section 2.12 of the
----------
Credit Agreement.
"Trust Agreement" shall mean the Trust Agreement dated as of August
---------------
30, 1995 between the Investor and the Trust Company and attached as Exhibit
-------
C to the Participation Agreement.
-
"Trust Company" shall mean Wilmington Trust Company, in its individual
-------------
capacity, and any successor owner trustee under the Trust Agreement in its
individual capacity.
"Trust Estate" shall have the meaning specified in the Trust
------------
Agreement.
"Type" shall mean as to any Loan, its nature as an ABR Loan or a
----
Eurodollar Loan.
"UCC Financing Statements" shall mean collectively the Lender
------------------------
Financing Statements and the Lessor Financing Statements.
"Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial
----------------------- ---
Code as in effect in any applicable jurisdiction.
"Wear and Tear Payment" shall have the meaning defined in Section
---------------------
2.4(b)(ii) of the Credit Agreement.
<PAGE>
EXHIBIT 10.12
GUARANTEE, dated as of August 30, 1995, made by MANOR CARE, INC.,
MANOR HEALTHCARE CORP., CHOICE HOTELS INTERNATIONAL, INC., QUALITY HOTELS
EUROPE, INC., FOUR SEASONS NURSING CENTERS, INC., MNR FINANCIAL CORP. and
BOULEVARD MOTEL CORP. (individually, a "Guarantor", collectively, the
---------
"Guarantors"), in favor of CHEMICAL BANK, as agent (in such capacity, the
- -----------
"Agent") for the lenders (the "Lenders") parties to the Credit Agreement, dated
----- -------
as of the date hereof (as amended, supplemented, extended or otherwise modified
from time to time, the "Credit Agreement"), among THE GAITHERSBURG REALTY TRUST
----------------
(the "Borrower"), the Lenders and the Agent.
--------
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the Credit Agreement, the Lenders have severally
agreed to make loans (the "Loans") to the Borrower upon the terms and subject to
-----
the conditions set forth therein, to be evidenced by the notes issued by the
Borrower under the Credit Agreement;
WHEREAS, the Borrower has entered into the Credit Agreement for the
purpose of facilitating the financing, and with the proceeds of the Loans, will
acquire certain property, which property shall in turn be leased to Manor Care,
Inc. (the "Lessee"), one of the Guarantors;
------
WHEREAS, it is a condition precedent to the obligation of the Lenders
to make their respective Loans to the Borrower under the Credit Agreement that
the Guarantors shall have executed and delivered this Guarantee to the Agent for
the ratable benefit of the Lenders.
NOW, THEREFORE, in consideration of the premises and to induce the
Agent and the Lenders to enter into the Credit Agreement and to induce the
Lenders to make their respective Loans to the Borrower under the Credit
Agreement, the Guarantors hereby agree with the Agent, for the ratable benefit
of the Lenders, as follows:
1. Definitions. Capitalized terms used but not otherwise defined in
-----------
this Guarantee shall have the respective meanings specified in Annex A to this
Guarantee.
2. Guarantee. (a) Subject to the provisions of Section 2(b), each
---------
Guarantor hereby, unconditionally and irrevocably, guarantees to the Agent, for
the ratable benefit of the Lenders and their respective successors, indorsees,
transferees and assigns, the prompt and complete payment and performance by the
Borrower when due (whether at the stated maturity, by acceleration or otherwise)
of the Obligations.
(b) Anything herein or in any other Credit Document to the contrary
notwithstanding:
<PAGE>
2
(i) none of the Guarantors shall at any time be required to make any
payment hereunder in respect of the principal of any Tranche B Loans unless
at such time a Credit Agreement Event of Default has occurred and is
continuing and a Lease Event of Default under Section 17(a), (b), (c), (d),
(e) or (f) of the Lease has occurred and is continuing; and
(ii) if the Lessee has elected not to exercise its Maturity Date
Purchase Option, the Guarantors shall not be required to make any payment
hereunder in respect of the principal of any Tranche B Loans in respect of
any Credit Agreement Event of Default occurring after the date which is
twelve months prior to the Maturity Date (other than a Credit Agreement
Event of Default under Section 6(a), (b), (h) or (i) of the Credit
Agreement).
The maximum liability of any Guarantor hereunder shall in no event exceed the
amount which can be guaranteed by such Guarantor under applicable federal and
state laws relating to the insolvency of debtors.
(c) The Guarantors further agree to pay any and all expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) which may be paid or incurred by the Agent in enforcing or collecting
any or all of the Obligations and/or enforcing any rights with respect to, or
collecting against, any Guarantor under this Guarantee. This Guarantee shall
remain in full force and effect until the Obligations are paid in full.
(d) Each Guarantor agrees that the Obligations may at any time and
from time to time exceed the amount of the liability of the Guarantors hereunder
without impairing this Guarantee or affecting the rights and remedies of the
Agent or any Lender hereunder.
(e) No payment or payments made by the Borrower, the Guarantors, any
other guarantor or any other Person or received or collected by the Agent or any
Lender from the Borrower, the Guarantors, any other guarantor or any other
Person by virtue of any action or proceeding or any set-off or appropriation or
application at any time or from time to time in reduction of or in payment of
the Obligations shall be deemed to modify, release or otherwise affect the
liability of the Guarantors hereunder which shall, notwithstanding any such
payment or payments, remain liable for the Obligations up to the maximum
liability of the Guarantors hereunder until the Obligations and all amounts
owing hereunder are paid in full.
(f) Each Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Agent or any Lender on account of its
liability hereunder, it will notify the Agent in writing that such payment is
made under this Guarantee for such purpose.
3. Right of Set-off. In addition to any rights now or hereafter
----------------
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence of an Event of Default, the Agent and each
Lender is hereby authorized at any time or from time to time, without
presentment, demand, protest or other notice of any kind to any of the
Guarantors or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and apply any and all deposits (general or
special) and any other Indebtedness at any time held or owing by the Agent or
such Lender (including,
<PAGE>
3
without limitation, by branches and agencies of the Agent or such Lender
wherever located) to or for the credit or the account of any Guarantor against
and on account of the obligations and liabilities of the Guarantors hereunder or
under any of the other Operative Agreements, and all other claims against the
Guarantors of any nature or description arising out of or connected with this
Guarantee or any other Operative Agreement, irrespective of whether or not the
Agent or such Lender shall have made any demand hereunder and although said
obligations, liabilities or claims, or any of them, shall be contingent or
unmatured.
4. No Subrogation. Notwithstanding any payment or payments made by
--------------
the Guarantors hereunder or any set-off or application of funds of a Guarantor
by any Lender, none of the Guarantors shall be entitled to be subrogated to any
of the rights of the Agent or any Lender against the Borrower or any other
Person or any collateral security or guarantee or right of offset held by the
Agent or any Lender for the payment of the Obligations, nor shall any Guarantor
seek or be entitled to seek any contribution or reimbursement from the Borrower
or any other Person in respect of payments made by such Guarantor hereunder,
until all amounts owing to the Agent and the Lenders by the Borrower on account
of the Obligations and all amounts owing hereunder are paid in full. If any
amount shall be paid to a Guarantor on account of such subrogation rights at any
time when all of the Obligations and all amounts owing hereunder shall not have
been paid in full, such amount shall be held by such Guarantor in trust for the
Agent and the Lenders, segregated from other funds of such Guarantor, and shall,
forthwith upon receipt by such Guarantor, be turned over to the Agent in the
exact form received by such Guarantor (duly indorsed by such Guarantor to the
Agent, if required), to be applied against the Obligations, whether matured or
unmatured, in such order as the Agent may determine.
5. Amendments, etc. with Respect to the Obligations; Waiver of
-----------------------------------------------------------
Rights. Each Guarantor shall remain obligated hereunder notwithstanding that,
- ------
without any reservation of rights against such Guarantor and without notice to
or further assent by such Guarantor, any demand for payment of any of the
Obligations made by the Agent may be rescinded by such party and any of the
Obligations continued, and the Obligations, or the liability of any other party
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Agent or any Lender, and the Credit Agreement and
the other Operative Agreements and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Agent (or the Required Lenders, as the case may be) may
deem advisable from time to time (to the extent permitted thereby), and any
collateral security, guarantee or right of offset at any time held by the Agent
or any Lender for the payment of the Obligations may be sold, exchanged, waived,
surrendered or released. Neither the Agent nor any Lender shall have any
obligation to protect, secure, perfect or insure any Lien at any time held by it
as security for the Obligations or for this Guarantee or any property subject
thereto. When making any demand hereunder against any Guarantor, the Agent may,
but shall be under no obligation to, make a similar demand on the Borrower, any
other Guarantor or any other guarantor, and any failure by the Agent to make any
such demand or to collect any payments from the Borrower or any such other
guarantor or any release of the Borrower or such other guarantor shall not
relieve any Guarantor in respect of which a demand or collection is not made or
any Guarantor not so released of their several obligations or liabilities
hereunder, and shall not impair or affect the rights and
<PAGE>
4
remedies, express or implied, or as a matter of law, of the Agent or any Lender
against such Guarantor. For the purposes hereof "demand" shall include the
commencement and continuance of any legal proceedings.
6. Guarantee Absolute and Unconditional. Each Guarantor waives any
------------------------------------
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Agent or any Lender upon
this Guarantee or acceptance of this Guarantee; the Obligations, and any of
them, shall conclusively be deemed to have been created, contracted or incurred,
or renewed, extended, amended or waived, in reliance upon this Guarantee; and
all dealings between the Borrower and the Guarantors, on the one hand, and the
Agent and the Lenders, on the other hand, likewise shall be conclusively
presumed to have been had or consummated in reliance upon this Guarantee. The
Guarantors waive diligence, presentment, protest, demand for payment and notice
of default or nonpayment to or upon the Borrower or the Guarantors with respect
to the Obligations. The Guarantors understand and agree that this Guarantee
shall be construed as a continuing, absolute and unconditional guarantee of
payment without regard to (a) the validity, regularity or enforceability of the
Credit Agreement or any other Operative Agreement, the Obligations or any other
collateral security therefor or guarantee or right of offset with respect
thereto at any time or from time to time held by the Agent or any Lender (b) any
defense, set-off or counterclaim (other than a defense of payment or
performance) which may at any time be available to or be asserted by the
Borrower against the Agent or any Lender, or (c) any other circumstance
whatsoever (with or without notice to or knowledge of the Borrower or the
Guarantors) which constitutes, or might be construed to constitute, an equitable
or legal discharge of the Borrower for the Obligations, or of the Guarantors
under this Guarantee, in bankruptcy or in any other instance. When pursuing its
rights and remedies hereunder against the Guarantors, the Agent may, but shall
be under no obligation to, pursue such rights and remedies as it may have
against the Borrower or any other Person or against any collateral security or
guarantee for the Obligations or any right of offset with respect thereto, and
any failure by the Agent to pursue such other rights or remedies or to collect
any payments from the Borrower or any such other Person or to realize upon any
such collateral security or guarantee or to exercise any such right of offset,
or any release of the Borrower or any such other Person or any such collateral
security, guarantee or right of offset, shall not relieve the Guarantors of any
liability hereunder, and shall not impair or affect the rights and remedies,
whether express, implied or available as a matter of law, of the Agent and the
Lenders against the Guarantors. This Guarantee shall remain in full force and
effect and be binding in accordance with and to the extent of its terms upon the
Guarantors and the successors and assigns thereof, and shall inure to the
benefit of the Agent and the Lenders, and their respective successors,
indorsees, transferees and assigns, until all the Obligations and the
obligations of the Guarantors under this Guarantee shall have been satisfied by
payment in full.
7. Reinstatement. This Guarantee shall continue to be effective, or
-------------
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any of the Obligations is rescinded or must otherwise be restored or returned
by the Agent or any Lender upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Borrower or any of the Guarantors, or upon
or as a result of the appointment of a receiver, intervenor or conservator of,
or trustee or similar officer for, the Borrower or any of the
<PAGE>
5
Guarantors or any substantial part of any of their property, or otherwise, all
as though such payments had not been made.
8. Payments. The Guarantors hereby guarantee that payments
--------
hereunder will be paid to the Agent without set-off or counterclaim in U.S.
Dollars at the office of the Agent located at 270 Park Avenue, New York, New
York 10017.
9. Covenants. The Guarantors agree that all of the covenants of the
---------
Guarantors contained in the Revolving Credit Agreement are hereby expressly
incorporated by reference in this Guarantee. If the affirmative and/or negative
covenants contained in the Revolving Credit Agreement are amended, supplemented
or otherwise modified, then such covenants shall be deemed to be automatically
amended, supplemented and modified to conform to the covenants in the Revolving
Credit Agreement, as so amended. If at any time prior to the payment in full of
the Obligations, the Revolving Credit Agreement is no longer outstanding, then
the affirmative and negative covenants in the Revolving Credit Agreement shall
continue to apply with the same force and effect as if the Revolving Credit
Agreement were still outstanding; provided that in the event that the Revolving
--------
Credit Agreement is replaced with a successor facility or a new facility, then
the covenants in such successor facility or new facility shall be deemed to be
incorporated by reference herein in place of the covenants contained in the
Revolving Credit Agreement. The Guarantors agree that, separate and apart from
the obligations of the Guarantors under the Revolving Credit Agreement, the
Agent and the Lenders shall be entitled to enforce the covenants incorporated by
reference herein as if such covenants were fully set forth herein. Nothing
contained herein shall be interpreted or construed to limit the rights of the
Agent to enforce its rights and remedies contained in the Operative Agreements.
10. Authority of Agent. Each Guarantor acknowledges that the rights
------------------
and responsibilities of the Agent under this Guarantee with respect to any
action taken by the Agent or the exercise or non-exercise by the Agent of any
option, right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Guarantee shall, as between the Agent and the
Lenders, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Agent and the Guarantors, the Agent shall be conclusively presumed to be acting
as agent for the Lenders with full and valid authority so to act or refrain from
acting, and the Guarantors shall not be under any obligation, or entitlement, to
make any inquiry respecting such authority.
11. Notices. Unless otherwise specifically provided herein, all
-------
notices, consents, directions, approvals, instructions, requests and other
communications required or permitted by the terms hereof to be given to any
Person shall be given in writing by nationally recognized courier service and
any such notice shall become effective five Business Days after being deposited
in the mails, certified or registered with appropriate postage prepaid or one
Business Day after delivery to a nationally recognized courier service
specifying overnight delivery and shall be directed to the address of such
Person as indicated:
<PAGE>
6
If to the Agent, to it at:
Chemical Agent Bank Services
140 East 45th Street
New York, New York 10017
Attn: Janet Belden
Telecopy No.: 212-622-0002
Telephone No.: 212-622-0691
If to the Guarantors, to it at:
at their addresses or transmission numbers
for notices set forth opposite its signature below.
The Agent, each Lender and the Guarantors may change their address and
transmission numbers for notices by notice in the manner provided in this
Section.
12. Severability. Any provision of this Guarantee which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
13. Integration. This Guarantee represents the agreement of the
-----------
Guarantors with respect to the subject matter hereof and there are no promises
or representations by the Agent or any Lender relative to the subject matter
hereof not reflected herein.
14. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None
-----------------------------------------------------
of the terms or provisions of this Guarantee may be waived, amended,
supplemented or otherwise modified except as provided in Section 9.1 of the
Credit Agreement.
(b) Neither the Agent nor any Lender shall by any act (except by a
written instrument pursuant to Section 14(a) hereof), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any of
the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Agent or any Lender, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Agent or any Lender of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the Agent
or such Lender would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
<PAGE>
7
15. Section Headings. The section headings used in this Guarantee
----------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
16. Successors and Assigns. This Guarantee shall be binding upon the
----------------------
successors and permitted assigns of the Guarantor and shall inure to the benefit
of the Agent and the Lenders and their successors and permitted assigns.
17. SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH GUARANTOR HEREBY
-----------------------------------
IRREVOCABLY AND UNCONDITIONALLY:
(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ALL LEGAL ACTION OR
PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT TO
WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF
THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;
(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT
IN SUCH COURTS AND WAIVES TRIAL BY JURY AND ANY OBJECTION THAT IT MAY NOW
OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH
COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN ANY INCONVENIENT
COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO IT AT ITS ADDRESS SET FORTH HEREIN OR AT SUCH OTHER ADDRESS OF
WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO;
(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION; AND
(v) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING
REFERRED TO IN THIS SECTION ANY SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES.
(b) EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE OR
ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
<PAGE>
8
18. Governing Law. THIS GUARANTEE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
<PAGE>
9
IN WITNESS WHEREOF, the undersigned have caused this Guarantee to be
duly executed and delivered by its duly authorized officer as of the day and
year first above written.
Address for Guarantor:
- ---------------------
MANOR CARE, INC.
10750 Columbia Pike
Silver Spring, Maryland 20901
Attention: General Counsel
(Re: Real Estate) By: /s/ James A. MacCutcheon
-----------------------------------
Name: James A. MacCutcheon
Title: Senior Vice President
MANOR HEALTHCARE CORP.
By: /s/ James A. MacCutcheon
-----------------------------------
Name: James A. MacCutcheon
Title: Senior Vice President
CHOICE HOTELS INTERNATIONAL, INC.
By: /s/ James A. MacCutcheon
-----------------------------------
Name: James A. MacCutcheon
Title: Senior Vice President
QUALITY HOTELS EUROPE, INC.
By: /s/ James A. Rampe
-----------------------------------
Name: James A. Rempe
Title: Senior Vice President
FOUR SEASONS NURSING CENTERS, INC.
By: James A. MacCutcheon
-----------------------------------
Name: James A. MacCutcheon
Title: Senior Vice President
<PAGE>
10
MNR FINANCIAL CORP.
By: /s/ James A. MacCutcheon
-----------------------------------
Name: James A. MacCutcheon
Title: Senior Vice President
BOULEVARD MOTEL CORP.
By: /s/ James A. MacCutcheon
-----------------------------------
Name: James A. MacCutcheon
Title: Senior Vice President
<PAGE>
Annex A
-------
RULES OF USAGE AND DEFINITIONS
Rules of Usage
--------------
The following rules of usage shall apply to this Annex A and the
Operative Agreements (and each appendix, schedule, exhibit and annex to the
foregoing) unless otherwise required by the context or unless otherwise defined
therein:
(a) Except as otherwise expressly provided, any definitions set forth
herein or in any other document shall be equally applicable to the singular
and plural forms of the terms defined.
(b) Except as otherwise expressly provided, references in any
document to articles, sections, paragraphs, clauses, annexes, appendices,
schedules or exhibits are references to articles, sections, paragraphs,
clauses, annexes, appendices, schedules or exhibits in or to such document.
(c) The headings, subheadings and table of contents used in any
document are solely for convenience of reference and shall not constitute a
part of any such document nor shall they affect the meaning, construction
or effect of any provision thereof.
(d) References to any Person shall include such Person, its
successors and permitted assigns and transferees.
(e) Except as otherwise expressly provided, reference to any
agreement means such agreement as amended, modified, extended or
supplemented from time to time in accordance with the applicable provisions
thereof.
(f) Except as otherwise expressly provided, references to any law
includes any amendment or modification to such law and any rules or
regulations issued thereunder or any law enacted in substitution or
replacement thereof.
(g) When used in any document, words such as "hereunder", "hereto",
"hereof" and "herein" and other words of like import shall, unless the
context clearly indicates to the contrary, refer to the whole of the
applicable document and not to any particular article, section, subsection,
paragraph or clause thereof.
<PAGE>
2
(h) References to "including without limiting the generality of any
description preceding such term and for purposes hereof the rule of
ciusdem gereris shall not be applicable to limit a general statement,
------- -------
followed by or referable to an enumeration of specific matters, to matters
similar to those specifically mentioned.
(i) Each of the parties to the Operative Agreements and their counsel
have reviewed and revised, or requested revisions to, the Operative
Agreements, and the usual rule of construction that any ambiguities are to
be resolved against the drafting party shall be inapplicable in the
construing and interpretation of the Operative Agreements and any
amendments or exhibits thereto.
Definitions
-----------
"ABR" shall mean, for any day, a rate per annum (rounded upwards, if
---
necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime
Rate in effect on such day, (b) the Base CD Rate in effect on such day plus
1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2
of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest
----------
per annum publicly announced from time to time by the Agent as its prime
rate in effect at its principal office in New York City; each change in the
Prime Rate shall be effective on the date such change is publicly announced
as effective. "Base CD Rate" shall mean the sum of (a) the product of (i)
------------
the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the
C/D Assessment Rate. "Three-Month Secondary CD Rate" shall mean, for any
-----------------------------
day, the secondary market rate for three-month certificates of deposit
reported as being in effect on such day (or, if such day shall not be a
Business Day, the next preceding Business Day) by the Board through the
public information telephone line of the Federal Reserve Bank of New York
(which rate will, under the current practices of the Board, be published in
Federal Reserve Statistical Release H.15(519) during the week following
such day), or, if such rate shall not be so reported on such day or such
next preceding Business Day, the average of the secondary market quotations
for three months certificates of deposit of major money center banks in New
York City received at approximately 10:00 a.m., New York City time, on such
day (or, if such day shall not be a Business Day, on the next preceding
Business Day) by the Agent from the New York City negotiable certificate of
deposit dealers of recognized national standing selected by it. "Federal
-------
Funds Effective Rate" shall mean, for any day, the weighted average of the
--------------------
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the
average of the quotations
<PAGE>
3
for the day of such transactions received by the Agent from three Federal
funds brokers of recognized national standing selected by it. If for any
reason the Agent shall have determined that it is unable to ascertain the
Base CD Rate or the Federal Funds Effective Rate or both for any reason,
including the inability or failure of the Agent to obtain sufficient
quotations in accordance with the terms thereof, the Alternate Base Rate
shall be determined without regard to clauses (b) or (c) of the first
sentence of this definition, as appropriate, until the circumstances giving
rise to such inability no longer exist. Any change in the Alternate Base
Rate due to a change in the Prime Rate, the Three Month Secondary CD Rate
or the Federal Funds Effective Rate shall be effective on the effective
date of such change in the Prime Rate, the Three Month Secondary CD Rate or
the Federal Funds Effective Rate, respectively.
"ABR Loans" shall mean Loans the rate of interest applicable to which
---------
is based upon the ABR.
"Acceleration" shall have the meaning defined in Section 6 of the
------------
Credit Agreement.
"Account" shall have the meaning defined in Section 8.1(a) of the
-------
Credit Agreement.
"Administrative Questionnaire" shall mean an Administrative
----------------------------
Questionnaire in the form of Exhibit D to the Credit Agreement.
"Advance" shall mean a borrowing by the Lessor under the Credit
-------
Agreement.
"Affiliate" shall mean, when used with respect to a specified person,
---------
another person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control
with the person specified.
"After Tax Basis" shall mean, with respect to any payment to be
---------------
received, the amount of such payment increased so that, after deduction of
the amount of all taxes required to be paid by the recipient (less any tax
savings realized and the present value of any tax savings projected to be
realized by the recipient as a result of the payment of the indemnified
amount) with respect to the receipt by the recipient of such amounts, such
increased payment (as so reduced) is equal to the payment otherwise
required to be made.
"Agent" shall mean Chemical Bank, together with its affiliates, as the
-----
arranger of the Commitments and as the agent for the Lenders under the
Credit Agreement and the other Operative Agreements.
<PAGE>
4
"Applicable Margin" shall mean as to any Loan, the applicable number
-----------------
of basis points per annum set forth below based upon the Applicable Rating
Category, as follows:
<TABLE>
<CAPTION>
Applicable Rating
Category Eurodollar Rate
----------------- ---------------
<S> <C>
Category 1 35.00
Category 2 40.00
Category 3 45.00
Category 4 50.00
Category 5 62.50
Category 6 75.00
</TABLE>
Any change in the Applicable Margin shall be effective as of the date on
which the Applicable Rating Category changes.
"Applicable Rating Category" shall at any time shall be determined as
--------------------------
set forth below based upon the Lessee's senior unsecured long-term debt
ratings by S&P and Moody's (or, if S&P or Moody's does not establish a
rating for the Lessee's senior unsecured long-term debt, the rating
(implied or otherwise) established by such agency for the Lessee's general
senior long-term debt).
<TABLE>
<CAPTION>
S&P/Moody's Ratings Applicable Rating Category
------------------- --------------------------
<S> <C>
A-/A3 or higher Category 1
BBB+/Baa1 Category 2
BBB/Baa2 Category 3
BBB-/Baa3 Category 4
BB+/Ba1 Category 5
BB/Ba2 or lower Category 6
</TABLE>
For purposes of the foregoing, (i) if no rating (implied or otherwise) for
the Lessee's general senior long-term debt shall be available from either
rating agency, such rating agency shall be deemed to have established a
rating of BB/Ba2 or lower, (ii) if the ratings established or deemed to
have been established by Moody's and S&P shall fall within different
Categories, the Applicable Rating Category shall be based upon the lower of
(A) the higher of the two ratings and (B) the rating two Categories
above the lower of the two ratings, (iii) if any rating established or
deemed to have been established by Moody's or S&P shall be changed (other
than as a result of a change in the rating system of either Moody's or
S&P), such change shall be effective as of the date on which such change is
first announced by the rating agency making such change,
<PAGE>
5
and (iv) if there shall be no outstanding general senior long-term debt of
the Lessee and no rating (implied or otherwise) for such debt, the Lessee
and the Agent shall enter into negotiations to determine the Applicable
Rating Category, and pending agreement on another Applicable Rating
Category the Applicable Rating Category most recently in effect shall be
deemed to continue in effect. Each such change shall take effect on the
effective date of such change and shall end on the date immediately
preceding the effective date of the next such change. If the rating system
of either Moody's or S&P shall change prior to the Maturity Date, the
Lessee and the Lenders shall negotiate in good faith to amend the reference
to specific ratings in this definition to reflect such changed rating
system, and pending agreement on another Applicable Rating Category the
Applicable Rating Category most recently in effect shall be deemed to
continue in effect.
"Appraisal" shall mean the appraisal, prepared by Peter A. Moholt,
---------
MAI, of the Property which in the judgment of counsel to the Agent, as of
the Closing Date, complies with all of the provisions of the Financial
Institutions Reforms, Recovery and Enforcement Act of 1989, as amended, at
the rules and regulations adopted pursuant thereto, and all other
applicable Legal Requirements.
"Appraisal Procedure" shall have the meaning given such term in
-------------------
Section 21.4 of the Lease.
"Appurtenant Rights" shall mean (i) all agreements, easements, rights
------------------
of way or use, rights of ingress or egress, privileges, appurtenances,
tenements, hereditaments and other rights and benefits at any time
belonging or pertaining to the Land or the Improvements, including, without
limitation, the use of any streets, ways, alleys, vaults or strips of land
adjoining, abutting, adjacent or contiguous to the Land and (ii) all
permits, licenses and rights, whether or not of record, appurtenant to the
Land.
"Assignment of Lease" shall have the meaning specified in Section 1 of
-------------------
the Participation Agreement.
"Bankruptcy Code" shall have the meaning defined in Section 6(h) of
---------------
the Credit Agreement.
"Basic Rent" shall mean, the sum of (i) the Tranche A Basic Rent, (ii)
----------
the Tranche B Basic Rent and (iii) the Investor Yield, calculated as of the
applicable date on which Basic Rent is due.
"Basic Term" shall mean the period commencing on August 30, 1995 and
----------
ending on August 29, 2002.
<PAGE>
6
"Benefitted Lender" shall have the meaning defined in Section 9.6(a) of
-----------------
the Credit Agreement.
"Board" shall mean the Board of Governors of the Federal Reserve
-----
System of the United States (or any successor).
"Building" shall mean the collective reference to the (i) 400,000
--------
square feet office building and (ii) 200,000 square foot warehouse each
located on the Land.
"Business Day" shall mean any day (other than a day which is a
------------
Saturday, Sunday or legal holiday in the State of New York) on which banks
are open for business in New York City; provided, however, that when used
-------- -------
in connection with a Eurodollar Loan, the term "Business Day" shall also
exclude any day on which banks are not open for dealings in dollar deposits
in the London interbank market.
"Capital Lease" shall mean, as applied to any Person, any lease of any
-------------
property (whether real, personal or mixed) by that Person as lessee which,
in conformity with GAAP, is, or is required to be, accounted for as a
capital lease on the balance sheet of that Person.
"Capitalized Lease Obligations" shall mean all obligations under
-----------------------------
Capital Leases of any Person, in each case taken at the amount thereof
accounted for as liabilities in accordance with GAAP.
"Casualty" shall mean any damage or destruction of all or any portion
--------
of the Property.
"C/D Assessment Rate" shall mean for any date the annual rate (rounded
-------------------
upwards, if necessary, to the next 1/100 of 1%) identified by the Agent
(or, if need be, reasonably estimated by the Agent) as the then current net
annual assessment rate that will be employed in determining amounts payable
by the Agent to the Federal Deposit Insurance Corporation (or any
successor) for insurance by such Corporation (or such successor) of time
deposits made in dollars at the Agent's domestic offices.
"CERCLA" shall mean the Comprehensive Environmental Response,
------
Compensation, and Liability Act of-1980, 42 U.S.C.(S)(S) 9601 et seq., as
-- ---
amended by the Superfund Amendments and Reauthorization Act of 1986.
"Certifying Party" shall have the meaning specified in Section 25.1 of
----------------
the Lease.
<PAGE>
7
"Claims" shall mean any and all actions, suits, penalties, claims and
------
demands and reasonable out-of-pocket liabilities, losses, costs and
expenses (including, without limitation, reasonable attorney's fees and
expenses) of any nature whatsoever, but excluding the fees of counsel to
the Agent and the Investor and one-half of the disbursements and other
charges of counsel to the Agent and the disbursements of the Lenders.
"Closing Date" shall have the meaning specified in Section 4.1 of the
------------
Participation Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time, or any successor statue thereto.
"Collateral" shall mean all assets of the Lessor, now owned or
----------
hereafter acquired, upon which a Lien is purported to be created by the
Security Documents.
"Commitment" shall mean, as to any Lender, the obligation of such
----------
Lender to make Loans to the Lessor under the Credit Agreement in principal
amount equal to the amount set forth opposite such Lender's name on
Schedule 1.1 of the Credit Agreement.
"Commitment Percentage" shall mean, as to any Lender at any time, the
---------------------
percentage which such Lender's Commitment then constitutes of the aggregate
Commitments (or, at any time after the Commitments hall have expired or
terminated, the percentage which the aggregate principal amount of such
Lender's Loans then outstanding constitutes of the aggregate principal
amount of the Loans then outstanding).
"Condemnation" shall mean any taking or sale of the use, access,
------------
occupancy, easement rights or title to the Property or any part thereof,
wholly or partially (temporarily or permanently), by or on account of any
actual eminent domain proceeding or other taking of action by any Person
having the power of eminent domain, including an action by a Governmental
Authority to change the grade of, or widen the streets adjacent to, the
Property or alter the pedestrian or vehicular traffic account of an
eviction by paramount title or any transfer made in lieu of any such
proceeding or action.
"Consent to Assignment" shall have the meaning specified in Section 1
---------------------
of the Participation Agreement.
"Contingent Obligations" shall mean, as to any Person, any obligation
----------------------
of such Person guaranteeing or intended to guarantee any Indebtedness,
leases, dividends or
<PAGE>
8
other monetary obligations ("primary obligations") of any other Person (the
-------------------
"primary obligor") in any manner, whether directly or indirectly,
---------------
including, without Limitation, any obligation of such Person, whether or
not contingent, (a) to purchase any such primary obligation or any property
constituting direct or in direct security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any such primary obligation
or (ii) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, (c) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation or (d)
otherwise to assure or hold harmless the owner of such primary obligation
against loss in respect thereof; provided, however, that the term
-------- -------
Contingent Obligation shall not include (x) endorsement of instruments for
deposit or collection in the ordinary course of business or (y) guarantees
made by a Person of the obligations of a Subsidiary or Affilate of such
Person which do not constitute Indebtedness of such Subdidiary or Affiatee
and are incurred in the ordinary course of business of such Subdidiary or
Affiliate. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determinable amount of the primary obligation
in respect of which such Constingent Obligation is made or, if not stated
or determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such person is required to perform thereunder) as
determined by such Person in good faith.
"Control" shall mean (including the correlative meanings of the terms
-------
"controlled by" and "under common with"), as used with respect to any
person, the possession directly or indirectly, of the power to direct or
cause the direction of the management policies of such Person, whether
through the ownership of voting securities or any contract or otherwise.
"Credit Agreement" shall mean the Credit Agreement, dated as of the
----------------
Closing Date, among the Lessor, the Agent and the Lenders.
"Credit Agreement Default" shall mean any event or condition which,
------------------------
with the laspe of time or the giving of notice, or both, would constitute a
Credit Agreement Event of Default.
"Credit Agreement Event Of Default" shall mean any event or condition
---------------------------------
defined as an "Event of Default" in Section 6 of the Credit Agreement.
"Credit Documents" shall mean the Credit Agreement, the Notes, the
----------------
Guarantee and the Security Documents.
<PAGE>
9
"Deed" shall mean the special warranty deed delivered by The National
----
Geographic Society to the Lessor with respect to the Property in accordance
with the terms and conditions of the Purchase Agreement dated July 11, 1995
between the Lessee and The National Geographic Society.
"Deed of Trust" shall mean the Deed of Trust, dated as of the Closing
-------------
Date, made by the Lessor in favor of the Agent for the benifit of the
Lenders, and in substantially the form of Exhibit A to the Participation
Agreement, which secures the obligations of the Lessor under the Notes.
"Default" shall mean any event or condition which, with the lapse of
-------
time or the giving of notice, or both, would constitute an Event of
Default.
"Dollars" and "$" shall mean dollars in lawful currency of the United
------- -
States of America.
"Effective Date" shall mean August 30, 1995.
--------------
"Employee Benifit Plan" or "Plan" shall mean an employee benifit plan
--------------------- ----
(within the meaning of Section 3(3) of ERISA, including any multiemployer
plan (within the meaning of Section 3(37)(A) of ERISA)), or any "plan" as
defined in Section 4975(e)(l) of the Code and as interpreted by the
Internal Revenue Service and the Department of Labor in rules, regulations,
releases or bulletins in effect on the Closing Date.
"Environmental Audit" shall mean the environmental audit of the
-------------------
Property dated June 1995 and prepared by CRC Environmental Risk Management,
Inc.
"Environmental Law" shall mean, whenever enacted or promulgated, any
-----------------
federal, state, county or local law, statue, ordinance, rule, regulation,
license, permit, authorization, approval, covenant, administrative or court
order, judgement, decree, injunction, code or requirement or any agreement
with a Governmental Authority applicable to the Property.
(x) relating to pollution (or the cleanup, removal, remediation or
encapsulation thereof, or any other response thereto), or the regulation or
protection of human health, safety or the environment, including air, water
vapour, surface water, groundwater, drinking water, land (including surface
or subsurface), plant, aquatic and animal life, or
(y) concerning exposure to, or the use, containment, storage,
recycling, treatment, generation, discharge, emission, Release or
threatened Release.
<PAGE>
10
transportation, processing, handling, labeling, containment,
production, disposal or remediation of any Hazardous Substance,
Hazardous Condition or Hazardous Activity
in each case as amended and as now or hereafter in effect, and any common
law or equitable doctrine (including, without limitation, injunctive relief
and tort doctrines such as negligence, trespass and strict liability) that
may impose liability or obligations for injuries (whether personal or
property) or damages due to or threatened as a result of the presence of,
exposure to, or ingestion of, any Hazardous Substance, whether such common
law or equitable doctrine is now or hereafter recognized or developed.
Applicable laws include, but are not limited to, CERCLA; the Resource
Conservation and Recovery Control Act, of 1976, 42 U.S.C. (S) 6901 et seq.:
-- ---
the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.: the
-- ---
Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq.: the National Environmental
Policy Act, 42 U.S.C. (S) 4321; the Refuse Act, 33 U.S.C. (S)(S) 401 et
--
seq.: the Hazardous Materials Transportation Act of 1975, 49 U.S.C.
---
1801-1812: the Toxic Substances Control Act, 15 U.S.C. 2601 et seq.: the
-- ---
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C (S)(S) 136 et
--
seq.: the Safe Drinking Water Act, 42 U.S.C. (S)(S) 300 f et seq.: and the
--- -- ---
Occupational and Safety and Health Act of 1970, and their state and local
counterparts or equivalents.
"Environmental Violation" shall mean any activity, occurrence or
-----------------------
condition that violates or results in non-compliance with any
Environmental Law.
"Equipment" shall mean equipment, apparatus, furnishings, fittings and
---------
personal property of every kind and nature whatsoever purchased, leased or
otherwise acquired by using the proceeds of the Loans or the Investor
Contribution by the Lease and now or subsequently attached to, contained in
or used or usable in any way in connection with any operation or letting of
the Property, including but without limiting the generality of the
foregoing, all screens, awnings, shades, blinds, curtains, draperies,
artwork, christmas decorations, bidets, toilets, carpets, rugs, storm doors
and windows, shelving, furniture and furnishings, heating, electrical, and
mechanical equipment, lighting, switchboards, plumbing, ventilation, air
conditioning and air-cooling apparatus, refrigerating, and incinerating
equipment, escalators, elevators, loading and unloading equipment and
systems, stoves, ranges, laundry equipment, cleaning systems (including
window cleaning apparatus), telephones, communication systems (including
satellite dishes and antennae), televisions, computers, sprinkler systems
and other fire prevention and extinguishing apparatus and materials,
security systems, motors, engines, machinery, popes, pumps, tanks,
conduits, appliances, fittings and fixtures of every kind and description.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
<PAGE>
"ERISA Affiliate" shall mean each entity required to be aggregated
---------------
with the Lessee pursuant to the requirements of Section 414(b) or (c) of
the Code.
"Eurocurrency Reserve Requirements" shall mean for any day as applied
---------------------------------
to a Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on such
day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board or other Governmental
Authority having jurisdiction with respect thereto) dealing with reserve
requirements prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board) maintained by a
member bank of the Federal Reserve System.
"Eurodollar Base Rate" shall mean, with respect to each day during
--------------------
each Interest Period pretaining to a Eurodollar Loan, the rate per annum
equal to the rate at which Chemical Bank is offered Dollar deposits at or
about 10:00 A.M., New York City time, two Business Days prior to the
beginning of such Interest Period in the interbank eurodollar market where
the eurodollar and foreign currency and exchange operations in respect of
its Eurodollar Loans are then being conducted for delivery on the first day
of such Interest Period for the number of days comprised therein and in an
amount comparable to the amount of its Eurodollar Loan to be outstanding
during such Interest Period.
"Eurodollar Loans" shall mean Loans the rate of interest applicable to
----------------
which is based upon the Eurodollar Rate.
"Eurodollar Rate" shall mean, with respect to each day during each
---------------
Interest Period pertaining to a Eurodollar Loan, a rate per annum
determined for such day in accordance with the following formula (rounded
upward to the nearest 1/100th of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Eurodollar Tranche" shall mean the collective reference to Eurodollar
------------------
Loans the current Interest Periods with respect to all of which begin on
the same date and end on the same later date (whether or not such Loans
shall originally have been made on the same day).
"Event of Default" shall mean a Lease Event of Default or a Credit
----------------
Agreement Event of Default.
"Excepted Payments" shall mean:
-----------------
<PAGE>
12
(a) all indemnity payments (including indemnity payments made
pursuant to Section 11 of the Participation Agreement), whether made
by adjustment to Basic Rent or otherwise, to which any Indemnified
Person is entitled;
(b) any amounts (other than Basic Rent, Termination Value, or
Purchase Option Price) payable under any Operative Agreement to
reimburse the Owner Trustee, the Trust Company, the Investor, or any
of their respective Affiliates (including the reasonable expenses of
the Owner Trustee and the Investor incurred in connection with any
such payment) for performing or complying with any of the obligations
of the Lessee under and as permitted by any Operative Agreement;
(c) any amount payable to the Investor by any transferee of the
interest of the Investor as the purchase price of the Investor's
interest in the Trust Estate (or a portion thereof);
(d) any insurance proceeds (or payments with respect to risks
self-insured or policy deductibles) under liability and title policies
other than such proceeds or payments payable to the Lessee or the
Agent;
(e) any insurance proceeds under policies maintained by the
Owner Trustee or the Investor;
(f) Transaction Expenses or other amounts or expenses paid or
payable to or for the benefit of the Owner Trustee, the Trust Company
or the investor;
(g) all right, title and interest of the Investor or the Owner
Trustee to the Property, and portion thereof or any other property to
the extent any of the foregoing has been released from the Liens of
the Deed of Trust and the Assignment of Lease pursuant to the terms
thereof and not otherwise purchased by the Lessee or a third party
pursuant to the terms of the Lease;
(h) all payments in respect of the Investor Contribution and the
Investor Yield;
(i) any payments in respect of interest to the extent
attributable to payments referred to in clauses (a) through (h) above;
and
(j) any rights of the Investor or the Owner Trustee to demand,
collect, sue for or otherwise receive and enforce payment of any of
the foregoing amounts.
<PAGE>
13
"Excepted Rights" shall mean the rights retained by the Owner Trustee
---------------
pursuant to Section 8.3(a)(i) of the Credit Agreement and all right, title
and interest of Owner Trustee in the Shared Rights.
"Exculpated Persons" shall have the meaning defined in Section 9.14 of
------------------
the Credit Agreement
"Expiration Date" shall mean the final day of the Term.
---------------
"Facility" shall mean a facility used for the treatment, storage or
--------
disposal of Hazardous Substances.
"Fair Market Sales Value" shall mean the amount, which in any event
-----------------------
shall not be less than zero, that would be paid in cash in an arm's-length
transaction between an informed and willing purchaser and an informed and
willing seller, neither of whom is under any compulsion to purchase or
sell, respectively, for the ownership of the Property. Fair Market Sales
Value shall be determined based on the assumption that, except for purposes
of Section 21.3 of the Lease, the Property is in the condition and state of
repair under Section 10.1 of the Lease and that the Lessee is in compliance
with the other requirements of the Operative Agreements.
"Fixtures" shall have the meaning specified in Section 2.1(d) of the
--------
Lease.
"GAAP" shall mean United States generally accepted accounting
----
principles (including principles of consolidation), in effect from time to
time, consistently applied.
"Governmental Action" shall mean all permits, authorizations,
------------------
registrations, consents, approvals, waivers, exceptions, variances, orders,
judgments, written interpretations, decrees, licenses, exemptions,
publications, filings, notices to and declarations of or with, or required
by, any Governmental Authority, or required by any Legal Requirement, and
shall include, without limitation, all environmental and operating permits
and licenses that are required for the full use, occupancy, zoning and
operation of the Property.
"Governmental Authority" shall mean any Federal, state, county,
---------------------
municipal or other local governmental authority or judicial or regulatory
agency, board, body, commission, instrumentality, court or quasi-
governmental authority.
"Guarantee" shall mean the guarantee to be executed and delivered by
---------
the Guarantors, substantially in the form of Exhibit B to the Credit
Agreement, as the same may be amended, supplemented or otherwise modified
from time to time.
<PAGE>
14
"Guarantors" shall mean the collective reference to Manor Care, Inc.
----------
Manor Healthcare Corp., Choice Hotels International, Inc., Quality Hotels
Europe, Inc., Four Seasons Nursing Centers, Inc. MNR Financial Corp. and
Boulevard Motel Corp.
"Hazardous Activity" shall mean any activity, process, procedure or
------------------
undertaking that directly (i) produces, generates or creates any Hazardous
Substance, (ii) causes or results in the Release of any Hazardous Substance
into the environment (including air, water vapor, surface water,
groundwater, drinking water, land (including surface or subsurface), plant,
aquatic and animal life); (iii) involves the containment or storage of any
Hazardous Substance, or (iv) would be regulated as hazardous waste
treatment, storage or disposal within the meaning of any Environmental Law.
"Hazardous Condition" shall mean any condition that violates or that
-------------------
results in noncompliance with any Environmental law.
"Hazardous Substance" shall mean any of the following: (i) any
-------------------
petroleum or petroleum product, explosives, radioactive materials,
asbestos, formaldehyde, polychlorinated biphenyls, lead and ragon gas; or
(ii) any substance, material, product, derivative, compound or mixture,
mineral, chemical, waste, gas, medical waste or pollutant that would
support the assertion of any claim under any Environmental Law, whether or
not defined as hazardous as such under any Environmental Law.
"Impositions" shall mean, except to the extend described in the
-----------
following sentence, any and all liabilities, losses, expenses and costs of
any kind whatsoever for fees, taxes, levies, imposts, duties, charges,
assessments or withholdings ("Taxes") (including (i) real and personal
-----
property taxes, including personal property taxes on any property covered
by the Lease that is classified by Governmental Authorities as personal
property, and real estate or ad valorem taxes in the nature of property
taxes; (ii) sales taxes, use taxes and other simular taxes (including rent
taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate
transfer taxes, conveyance taxes, stamp taxes and documentary recording
taxes and fees; (v) taxes that are or are in the nature of franchise,
income, value added, privilege and doing business taxes, license and
registration fees; and (vi) assessments on the property, including all
assessments for public improvements or benefits, whether or not such
improvements are commenced or completed within the Term), and in each case
all interest, additions to tax and penalties thereon, which at any time
prior to, during or with respect to the Term or in respect of any period
for which the Lessee shall be obligated to pay Supplemental Rent, may be
levied, assessed or imposed by any Federal, state, city, county or local
authority upon or with respect to (a) the Property or any part thereof or
interest therein; (b) the financing, refinancing, demolition, construction,
renovation, substitution, subleasing, assignment, control, condition,
occupancy, servicing, maintenance, repair, ownership, possession, activity
conducted on, delivery, insuring, use, operation, improvement, transfer of
title,
<PAGE>
15
return or other disposition of the Property or any part thereof or interest
therein; (c) the Notes or other indebtedness with respect to the Property
or any part thereof or interest therein; (d) the rentals, receipts or
earnings arising from the Property or any part thereof or interest therein
during the Term; (e) the Operative Agreements or any payment made or
accrued pursuant thereto; (f) the income or other proceeds received with
respect to the Property or any part thereof or interest therein upon the
sale or disposition thereof; (g) the issuance of the Notes; or (i)
otherwise in connection with the transactions contemplated by the Operative
Agreements.
The term "Imposition" shall not mean or include:
(i) Taxes and impositions (other than Taxes that are, or are in the
nature of, sales, use, rental, value added, transfer or property taxes)
that are imposed on a Tax Indemnitee by the United States federal
government that are based on or measured by the gross or net income
(including taxes based on capital gains and minimum taxes) or any
replacement of net income tax of such Person; provided that this clause (i)
--------
shall not be interpreted to prevent a payment from being made on an After
Tax Basis if such payment is otherwise required to be so made;
(ii) Taxes and impositions (other than Taxes that are, or are in the
nature of, sales, use, rental, value added, transfer or property taxes)
that are imposed by any state or local jurisdiction or taxing authority
within any state or local jurisdiction and that are based upon or measured
by the gross or net income or gross or net receipts from rental (including
any minimum taxes, withholding taxes or taxes on or measured by capital,
net worth, excess profits or items of tax preference or taxes that are
capital stock, franchise or doing business taxes); provided that this
--------
clause (ii) shall not be interpreted to prevent a payment from being made
on an After Tax Basis if such payment is otherwise required to be so made;
(iii) any Tax or imposition to the extent, but only to such extent,
it relates to any act, event or omission that occurs after the termination
of the Lease (but not any Tax or imposition that relates to any period
prior to the termination of the Lease);
(iv) any Tax or imposition for so long as, but only for so long as,
it is being contested in accordance with the provisions of the
Participation Agreement;
(v) any interest or penalties imposed on a Tax Indemnitee as a
result of the failure of such Tax Indemnitee to file any return or report
timely and in the form prescribed by law or to pay any Tax or imposition;
provided that this clause (v) shall not apply (x) if such interest or
--------
penalties arise as a result of a position taken (or requested to be taken)
by the Lessee in a contest controlled by the Lessee under Section 11.2(g)
of the Participation Agreement or (y) to any such interest or penalties
that result
<PAGE>
16
from such Tax Indemnitee's complying with the reporting procedures set
forth in Section 11.2(d) of the Participation Agreement:
(vi) any Taxes or impositions imposed on the lessor that are a
result of the Lessor not being considered a "United States person" as
defined in Section 7701(a) (30) of the Code:
(vii) any Taxes or impositions that are enacted or adopted as a
substitute for any Tax that would not have been indemnified against
pursuant to the terms of Section 11.1 of the Participation Agreement:
(viii) any Taxes which are imposed on a Tax Indemnitee as a result of
a breach of a covenant or representation by such Tax Indemnitee in any
Operative Agreement (unless caused by the Lessee's breach of its
representations, warranties and covenants) or is a result of the gross
negligence or willful misconduct of such Tax Indemnitee itself (as opposed
to gross negligence or willful misconduct imputed to such Tax Indemnitee),
but not Taxes imposed as a result of ordinary negligence of such Tax
Indemnitee:
(ix) any Taxes or impositions to the extent that such Taxes are
actually reimbursed to the Lessor by another Person other than an Affiliate
of the Lessor:
(x) any Taxes or impositions imposed upon the Lessor with respect
to any voluntary transfer, sale, financing or other voluntary dispositions
by the Lessor (other than transfer contemplated and permitted by the
Operative Agreements, including any transfer connection with (1) the
exercise by the Lessee of its Purchase Option. (2) the occurrence of a
Lease Event of Default or a Credit Agreement Event of Default (to the
extent arising from a Lease of Default), or (3) a Casualty or Condemnation
affecting the property) of any interest in the Property or any interest in,
or created pursuant to, the Operative Agreements) or any voluntary transfer
of any interest in the Lessor (other than in connection with the existence
of a Lease Event of Default or a Credit Agreement Event of Default (to the
extent arising from a Lease Event of Default) or any involuntary transfer
of any of the foregoing interests resulting from the bankruptcy or
insolvency of the Lessor (other than in connection with the existence of a
Lease Event of Default or a Credit Agreement Event of Default arising from
a Lease Event of Default):
(xi) any gift, inheritance, franchise or estate Taxes:
(xii) any Taxes or impositions imposed on a Tax Indemnitee, to the
extent such Tax Indemnitee actually receives a credit (or otherwise has a
reduction in a liability for Taxes)in respect thereof against Taxes that
are not indemnified under the Operative
<PAGE>
17
Agreements (but only to the extent such credit is not taken into account in
calculating the indemnity payment on an After Tax Basis);
(xiii) any Tax or imposition to the extent that such Tax or
imposition is imposed on a Tax Indemnitee in respect of a transaction or
business in the jurisdiction imposing such Tax other than the transactions
arising out of the Operative Agreements; or
(xiv) any Tax or imposition imposed on a direct or indirect
transferee, successor or assign of the Lessor to the extent of the excess
of such Taxes over the amount of such Taxes that would have been imposed
had there not been a transfer by the original Lessor of an interest arising
under the Operative Agreements; provided that there shall not be excluded
--------
under this clause (xiv) any such Tax or imposition if such direct or
indirect transferee, successor or assign of the Lessor acquired its
interest as a result of a transfer in connection with a Lease Event of
Default or a Credit Agreement Event of Default (to the extent arising from
a Lease Event of Default); provided, further, that there shall not be
-------- -------
excluded under this clause (xiv) any amount necessary to make any payment
on an After Tax Basis; or
(xv) any Tax or imposition imposed as a result of any fees paid to
the Trust Company, the Owner Trustee, the Agent, the Lender or the Investor
in connection with the transactions contemplated by the Operative
Agreements.
Any Tax or imposition excluded from the defined term "Imposition" in any
one of the foregoing clauses (i) through (xv) shall not be construed as
constituting an Imposition by any provision of any other of the
aforementioned clauses.
"Impositions Indemnitee" shall mean each Person entitled to
----------------------
indemnification under Section 11 of the Participation Agreement.
"Improvements" shall mean all buildings, structures, Fixtures,
------------
Equipment, and other improvements of every kind existing at any time and
from time to time on or under the Land, together with any and all
appurtenances to such buildings, structures or improvements, including
sidewalks, utility pipes, conduits and lines, parking areas and roadways,
and including all additions to or changes in the Improvements at any time.
"Indebtedness" shall mean as to any Person, (a) all indebtedness of
------------
such Person for borrowed money, (b) the deferred purchase price of assets
or services which in accordance with GAAP would be shown on the liability
side of the balance sheet of such Person, (c) the face amount of all
letters of credit issued for the account of such Person and, without
duplication, all drafts drawn thereunder, (d) all indebtedness of a second
Person secured by any Lien on any property owned by such first Person,
<PAGE>
18
whether or not such indebtedness has been assumed, (e) all Capitalized
Lease Obligations of such Person, (f) all obligations of such Person to pay
a specified purchase price for goods or services whether or not delivered
or accepted, e.g., take-or-pay and similar obligations, (g) all obligations
-----
of such Person, provided that Indebtedness shall not include trade payables
--------
and accrued expenses relating to employees, in each case arising in the
ordinary course of business.
"Indemnified Person" shall mean the Owner Trustee, in its individual
------------------
and its trust capacity, the Agent, the Investor, the Lenders and their
respective successors, assigns, directors, shareholders, partners,
officers, employees, agents and Affiliates.
"Insurance Requirements" shall mean all terms and conditions of any
----------------------
insurance policy required by the Lease to be maintained by the Lessee and
all requirements of the issuer of any such policy.
"Investment Company Act" shall mean the Investment Company Act of
----------------------
1940, as amended, together with the rules and regulations promulgated
thereunder.
"Insolvent" shall mean, with respect to any Multiemployer Plan, the
---------
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
"Interest Period" shall mean (a) as to any Eurodollar Loan, the period
---------------
commencing on the date of such Borrowing and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the
last day) in the calender month that is 1, 2, 3 or 6 months thereafter, as
the Lessor may elect, and (b) as to any ABR Loan, the period commencing on
the date of such borrowing and ending on the date 90 days thereafter or, if
earlier, on the Maturity Date or the date of prepayment of such borrowing:
provided, however, that if any Interest Period would end on a day other
-------- -------
than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless, in the case of Eurodollar Loans only, such
next succeeding Business Day would fall in the next calender month, in
which case such Interest Period shall end on the next preceding Business
Day, Interest shall accrue from and including the first day of an Interest
Period to but excluding the last day of such Interest Period.
"Interest Rate Agreement" shall mean any interest rate swap agreement,
-----------------------
interest rate cap agreement, interest rate collar agreement, interest rate
futures contract, interest rate option contract or other similar agreement
or arrangement designed to protect any Person against fluctuations in
interest rates.
<PAGE>
19
"Investor" shall mean Sumitomo Bank Leasing and Finance, Inc., a
--------
Delaware corporation.
"Investor Contribution" shall mean $907,500.
---------------------
"Investor Yield" shall mean an amount, as of any Payment Date,
--------------
sufficient to provide the Investor with an annual pre-tax yield on the
Investor Contribution of 200 basis point in excess of the weighted average
Eurodollar Rate payable to the Lenders on the outstanding Eurodollar Loans.
"Land" shall mean the land described on Schedule A to the Deed of
----
Trust and all Appurtenant Rights attached thereto.
"Lease" shall mean the Lease, dated as of the Closing Date, between
-----
the Lessor and the Lessee.
"Lease Default" shall mean any event or condition which, with the
-------------
lapse of time or the giving of notice, or both, would constitute a Lease
Event of Default.
"Lease Event of Default" shall have the meaning given to such term in
----------------------
Section 17.1 of the Lease.
"Legal Requirements" shall mean all Federal, state, county, municipal
------------------
and other governmental statues, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions affecting the Property or
the demolition, construction, renovation, use or alteration thereof,
whether now or hereafter enacted and in force, including any that require
repairs, modifications or alterations in or to the Property or in any way
limit the use and enjoyment thereof (including all building, zoning and
fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. (S)
12101 et. seq. and any other similar Federal, state or local laws or
-- ---
ordinances and the regulations promulgated thereunder) and any that may
relate to environmental requirements (including all Environmental Laws),
and all permits, certificates of occupancy, licenses, authorizations and
regulations relating thereto, and all covenants, agreements, restrictions
and encumbrances contained in any instruments which are either of record or
known to the Lessee affecting the Property, the Appurtenant Rights and any
easements, licenses or other agreements entered into pursuant to Section
12.2 of the Lease.
"Lender Financing Statements" shall mean UCC financing statements
---------------------------
appropriately completed and executed for filing in the office of the State
Department of Assessments and Taxation of the State of Maryland and in the
Land Records for Montgomery County in order to perfect a security interest
in favor of the Agent in the Equipment located on the Property.
<PAGE>
20
"Lenders" shall mean the several banks and other financial
-------
institutions from time to time party to the Credit Agreement.
"Lessee" shall mean Manor Care, Inc., a Delaware corporation, as
------
lessee under the Lease.
"Lessor" shall mean The Gaithersburg Realty Trust, a Delaware business
------
trust.
"Lessor Financing Statements" shall mean UCC financing statements
---------------------------
appropriately completed and executed for filing in the office of the
Secretary of State of the State of Maryland and in the office of the County
Clerk for Montgomery County in order to protect the Lessor's interest under
the Lease to the extent the Lease is a security agreement.
"Lessor Lien" shall mean any Lien, true lease or sublease or
-----------
disposition of title arising as a result of (a) any claim against the
Lessor or the Trust Company, not resulting from the transactions
contemplated by the operative Agreements, (b) any act or omission of the
Lessor or the Trust Company, which is not required by the Operative
Agreement or is in violation of any of the terms of the Operative
Agreements (c) any claim against the Lessor or the Trust Company, with
respect to Taxes or Transaction Expenses against which the Lessee is not
required to indemnify the Lessor or the Trust Company, pursuant to the
Participation Agreement or (d) any claim against the Lessor arising out of
any transfer by the lessor of all or any portion of the interest of the
Lessor in the Property, the Trust estate or the Operative Agreements other
than the transfer of title to or possession of the Property by the Lessor
pursuant to and in accordance with the Lease, the Credit Agreement or the
Participation Agreement or pursuant to the exercise of the remedies set
forth in Article XVII of the Lease.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed
----
of trust, lien, pledge, encumbrance, charge or security interest in or on
such asset, (b) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or title retention agreement relating to such
asset and (c) in the case of securities, any purchase option, call or
similar right of a third party (excluding rights of first refusal) with
respect to such securities.
"Limited Recourse Amount" shall mean, at any time, the amount equal to
-----------------------
the sum of (i) the then outstanding principal amount of the Tranche B
Loans, (ii) all accrued interest on the Tranche B Loans and all other
amounts owing under the Credit Agreement on account of the Tranche B Loans,
(iii) the Investor Contribution and (iv) all accrued amounts due on account
of the Investor Yield and all other amount owing to the Investor under the
Operative Agreements.
<PAGE>
21
"Loans" shall have the meaning specified in Section 2.1(a) of the
-----
Credit Agreement.
"Marketing Period" shall mean, if the Lessee has not given the
----------------
Maturity Date Election Notice in accordance with Section 20.2 of the Lease,
the period commencing on the date twelve months prior to the Maturity Date
and ending on the Maturity Date.
"Material Adverse Effect" shall mean a material adverse effect on the
-----------------------
business, assets, property or condition, financial or otherwise, of the
Lessee and its Subsidiaries taken as a whole.
"Maturity Date" the day preceding seventh anniversary of the Effective
-------------
Date.
"Maturity Date Election Notice" shall have the meaning specified in
-----------------------------
Section 20.2 of the Lease.
"Maturity Date Purchase Option" shall mean the Lessee's Purchase
-----------------------------
Option to purchase the property on the Maturity Date in accordance with
Section 20.2 of the Lease.
"Maximum Residual Guarantee Amount" shall mean an amount equal to the
---------------------------------
then outstanding principal amount of the Tranche A Loans.
"Modifications" shall have the meaning specified in Section 11.1(a) of
-------------
the Lease.
"Moody's" shall mean Moody's Investors Service, Inc.
-------
"Multiemployer Plan" shall mean a Plan which is a multiemployer plan
------------------
as defined in Section 4001(a)(3) of ERISA.
"Net Proceeds" shall mean all amounts paid in connection with any
------------
Casualty or Condemnation, and all interest earned thereon, less the expense
of claiming and collecting such amounts, including all reasonable costs and
expenses in connection therewith for which the Agent or Lessor are entitled
to be reimbursed pursuant to the Lease.
"Net Sale Proceeds Shortfall" shall mean the amount by which the
---------------------------
proceeds of a sale described in Section 21.1 of the Lease (net of all
expenses of sale) are less than the then outstanding principal amount of
the Tranche B Loans if it has been determined that the Fair Market Sales
Value of the Property at the expiration of the term of the Lease has been
impaired by greater than expected wear and tear during the term of the
Lease.
<PAGE>
22
"Notes" shall mean the collective reference to the Tranche A Notes and
-------
the Tranche B Notes.
"Obligation" shall mean the collective reference to the unpaid
------------
principal of and interest on the Notes and all other obligations and
liabilities of the Lessor to the Agent or the Lenders(including,without
limitation, interest accuring at the then applicable rate provided in the
Credit Agreement after the maturity of the Loans and interest accuring at
the then applicable rate provided in the Credit Agreement after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, related to the Lessor, whether or not a
claim for post-filing or post-petition interest is allowed in such
proceeding), whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter incurred, which may arise under, out
of, or in connection with,the Credit Agreement or the Notes, whether on
account of principal, interest or otherwise (including,without limatation,
all reasonable fees and disbursements of counsel to the Agent or to the
Lenders that are required to be paid by the Lessor pursuant to the terms of
the Credit Agreement).
"Officer's Certificate" shall mean a certificate signed by any
---------------------
individual holding the office of vice president or higher, which
certificate shall certify as true and correct the subject matter being
certified to in such certificate.
"Operative Agreements" shall mean the following:
----------------------
(a) the Participation Agreement;
(b) the Notes;
(c) the Lease;
(d) the Assignment of Lease;
(e) the Consent to Assignment;
(f) the Credit Agreement;
(g) the Deed of Trust;
(h) the UCC Financing Statements;
(i) the Guarantee; and
(j) the Trust Agreement.
"Other Taxes" shall have the meaning specified in Section 2.12(b) of
-------------
the Credit Agreement.
"Overdue Interest" shall mean any interest payable pursant to Section
------------------
2.7(c)of the Credit Agreement.
"Overdue Rate" shall mean (i) with respect to Tranche A Basic Rent,
--------------
Tranche B Basic Rent and any other amount owed under or with respect to the
Credit Agreement
<PAGE>
23
or the Security Documents, the rate specified in Section 2.7(c) of the
Credit Agreement,(ii) with respect to Investor Yield and the Investor
Contribution,2% in excess of the Investor Yield then in effect and (iii)
with respect to any other amount, the amount referred to in clause (y) of
Section 2.7(c) of the Credit Agreement.
"Owner Trustee" shall mean Wilmington Trust Company, not in its
-------------
individual capacity except as expressly stated in the Trust Agreement, but
solely as Owner Trustee under the Trust Agreement, and any successor or
replacement Owner Trustee expressly permitted under the Trust Agreement.
"Participation Agreement" shall mean the Participation Agreement,
-----------------------
dated as of the Closing Date, among the Lessee, the Investor, the Agent,and
the Lenders.
"Payment Date" shall mean each Scheduled Interest Payment Date and any
------------
other date on which a payment is otherwise due under the terms of the
Credit Agreement or, if all amounts due under the Credit Agreement have
been paid in full and the Credit Agreement has been terminated, the first
Business Day of each calendar month during the Term.
"Permitted Exceptions" shall mean: (i) Liens of the types described in
--------------------
clauses (i), (ii), (v) and (viii) of the definition of Permitted Liens:
(ii) Liens for Taxes not yet due; and (iii) all non-monetary encumbrances,
exceptions, restrictions, easements, rights of way, servitudes,
encroachments and irregularities in title, other than Liens which, in the
reasonable assessment of the Agent, materially impair the use of the
Property for its intended purpose.
"Permitted Liens" shall mean: (i) the respective rights and interest
---------------
of the parties to the Operative Agreements as provided in the Operative
Agreements; (ii) the rights of any sublessee or assignee under a sublease
or an assignment expressly permitted by the terms of the Lease; (iii) Liens
for Taxes that either are not yet due or are being contested in accordance
with the provisions of Section 11.2 of the Participation Agreement; (iv)
Liens arising by operation of law, materialmen's, mechanics', workmen's,
repairmen's, employee's, carriers', warehousemen's and other like Liens in
connection with any Modifications or arising in the ordinary course of
business for amounts that either are not more than 30 days past due or are
being diligently congested in good faith by appropriate proceedings, so
long as such proceedings satisfy the conditions for the continuation of
proceedings to contest Taxes set forth in Section 11.2(g) of the
Participation Agreement; (v) Liens of any of the types referred to in
clause (iv) above that have been bonded for not less than the full amount
in dispute (or as to which other security arrangements satisfactory to the
Lessor have been made), which bonding (or arrangements) shall comply with
applicable Legal Requirements, and
<PAGE>
24
shall have effectively stayed any execution or enforcement of such Liens;
(vi) Liens arising out of judgments or awards with respect to which appeals
or other proceedings for review are being prosecuted in good faith and for
the payment of which adequate reserves have been provided as required by
GAAP or other appropriate provisions have been made, so long as such
proceedings have the effect of staying the execution of such judgments or
awards and satisfy the conditions for the continuation of proceedings to
contest Taxes set forth in Section 11.2 of the Participation Agreement;
(vii) Permitted Exceptions; and (viii) easements, rights of way and other
encumbrances on title to real property pursuant to Section 12.2 of the
Lease.
"Person" shall mean any individual, corporation, partnership, joint
------
venture, association, joint-stock company, limited liability company,
trust, unincorporated organization, governmental authority or any other
entity.
"Project Costs" shall mean all costs and expenses incurred by the
-------------
Lessee or otherwise expended in connection with the acquisition of the
Property, the demolition of any existing Improvements, the construction and
renovation of the Property, any relocation and moving expenses associated
with the acquisition of the Property and any other expenses reasonably
related to the acquisition, construction, use and equipping of the
Property.
"Property" shall have the meaning given to such term in Section 2.1 of
--------
the Lease.
"Purchase Notice" shall have the meaning given to such term in Section
---------------
20.1 of the Lease.
"Purchase Option" shall have the meaning given to such term in Section
---------------
20.1 of the Lease.
"Purchase Option Price" shall have the meaning given to such term in
---------------------
Section 20.1 of the Lease.
"Reconfiguration Agreement" shall mean the Agreement to Adjust
-------------------------
Property Configuration dated as of August 30, 1995 among Lessor,
Gaithersburg Community Associates, L.L.C. and National Geographic Society
and recorded or intended to be recorded among the land Records of
Montgomery County, Maryland.
"Register" shall have the meaning defined in Section 9.5(d) of the
--------
Credit Agreement.
<PAGE>
25
"Required Lenders" shall mean, at any time, Lenders the Commitment
----------------
Percentages of which aggregate at least 51%.
"Release" shall mean any release, pumping, pouring, emptying,
-------
injecting, escaping, leaching, dumping, seepage, spill, leak, flow,
discharge, disposal or emission of a Hazardous Substance.
"Rent" shall mean, collectively, the Basic Rent and the Supplemental
----
Rent, in each case payable under the Lease.
"Requesting Party" shall have the meaning specified in Section 25.1 of
----------------
the Lease.
"Requirement of Law" shall mean, as to any Person, the Certificate of
------------------
Incorporation, By-Laws, Articles of Association or other organizational or
governing documents of such Person, and any law, treaty, rule or regulation
or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of
its property or to which such Person or any of its property is subject.
"Revolving Credit Agreement" shall mean the Competitive Advance and
--------------------------
Multi-Currency Revolving Credit Facility Agreement, dated as of November
30, 1994 among Chemical Bank and Nationsbank, as agent, the Guarantors, the
guarantors named therein and the lenders named therein, as amended,
modified or supplement from time to time.
"Scheduled Interest Payment Date" shall mean (a) as to any ABR Loan,
-------------------------------
the last day of each March, June, September and December to occur while
such Loan is outstanding and the Maturity Date, (b) as to any Eurodollar
Loan having an Interest Period of three months or less, the last day of
such Interest Period and (c) as to any Eurodollar Loan having an Interest
Period longer than three months, each day which is three months after the
first day of such Interest Period and the last day of such Interest Period
and, in addition, in each case the date of any refinancing or conversion of
such Loan with or to a Loan of a different Type.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
together with the rules and regulations promulgated thereunder.
"Security Documents" shall mean the collective reference to the Deed
------------------
of Trust and the assignment of Lease and all other security documents
hereafter delivered to the Agent granting a Lien on any asset or assets of
any Person to secure the obligations and liabilities of the Lessor under
the Credit Agreement and/or under any of the other Credit Documents or to
secure any guarantee of any such obligations and liabilities.
<PAGE>
26
"Shared Rights" shall mean the rights retained by the Lessor, but not
-------------
to the exclusion of the Agent, pursuant to section 8.3(a)(ii) of the Credit
Agreement.
"Single Employer Plan": any Plan which is covered by Title IV or
--------------------
ERISA, but which is not a Multiemployer Plan.
"S&P" shall mean Standard & Poor's Ratings Group, a division of McGraw
---
Hill, Inc.
"Specified Interest Payment Date" shall mean (a) any Scheduled
-------------------------------
Interest Payment Date and (b) any date on which interest is payable
pursuant to Section 2.7(d)(ii) of the Credit Agreement in connection with
any prepayment of the Loans.
"Statutory Reserves" shall mean a fraction (expressed as a decimal),
------------------
the numerator of which is the number one and the denominator of which is
the number one minus the aggregate of the maximum reserve percentages
(including any marginal, special, emergency or supplemental reserves)
expressed as a decimal established by the Board and any other banking
authority to which the Agent is subject for new negotiable nonpersonal time
deposits in dollars of over $100,000 with maturities approximately equal to
the applicable Interest Period. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"Subsidiary" shall mean, with respect to any person (herein referred
----------
to as the "parent"), any corporation, partnership, association or other
business entity (a) of which securities or other ownership interests
representing more the 50% of the equity or more than 50% of the ordinary
voting power or more than 50% of the general partnership interests are, at
the time any determination is being made, owned, controlled or held, or (b)
which is, at the time any determination is made, otherwise Controlled by
the parent or one or more subsidiaries of the parent or by the parent and
one or more subsidiaries of the parent.
"Supplemented Amounts" shall have the meaning defined in Section 9.14
--------------------
of the Credit Agreement.
"Supplemental Rent" shall mean all amounts, liabilities and
-----------------
obligations (other than Basic Rent) which Lessee assumes or agrees to pay
to Lessor or any other Person under the Lease or under any of the other
Operative Agreements (other than the Guarantee made by the Guarantors in
favor of the Agent).
"Tax Indemnitee" shall mean the Lessor, the Investor, the Owner
--------------
Trustee, the Trust Company, the Agent and each Lender.
<PAGE>
27
"Taxes" shall have the meaning specified in definition of Impositions.
"Term" shall mean the Basic Term.
----
"Termination Date" shall have the meaning specified in Section
----------------
16.2(a) of the Lease.
"Termination Notice" shall have the meaning specified in Section
------------------
16.1(a) of the Lease.
"Termination Value" shall mean, as of any Payment Date, an amount
-----------------
equal to the sum of (i) the aggregate outstanding principal of the Notes,
accrued and unpaid interest on the Notes and any other amounts due under
the Credit Agreement, plus (ii) the outstanding portion of the Investor
Contribution, all accrued amounts due on account of the Investor Yield and
all other amounts owing to the Investor under the Operative Agreements, in
each case as of the applicable Payment Date.
"Title Company" shall mean Chicago Title Insurance Company, or such
-------------
other title insurance company reasonably acceptable to the Agent and the
Investor.
"Total Condemnation" shall mean a Condemnation that involves a taking
------------------
of Lessor's entire title to the related Land.
"Tranche A Basic Rent" shall mean the interest due on the Tranche A
Loans on any Payment Date pursuant to the Credit Agreement (but not
including interest on overdue amounts under Section 2.7(c) of the Credit
Agreement or otherwise).
"Tranche A Loan" shall have the meaning defined in Section 2.3 of the
--------------
Credit Agreement.
"Tranche A Maximum Amount" shall mean $25,516,301.65
------------------------
"Tranche A Note" shall have the meaning defined in Section 2.2 of the
--------------
Credit Agreement.
"Tranche A Percentage" shall mean 84.3514%.
--------------------
"Tranche B Basic Rent" shall mean the scheduled interest due on the
--------------------
Tranche B Loans on any Payment Date pursuant to the Credit Agreement (but
not including interest on overdue amounts under Section 2.7(c) of the
Credit Agreement or otherwise).
<PAGE>
28
"Tranche B Loan" shall have the meaning defined in Section 2.3 of the
--------------
Credit Agreement.
"Tranche B Maximum Amount" shall mean $3,826,198.35.
------------------------
"Tranche B Note" shall have the meaning defined in Section 2.2 of the
--------------
Credit Agreement.
"Tranche B Percentage" shall mean 12.6486%.
--------------------
"Transaction Expenses" shall mean:
--------------------
(a) one-half of the reasonable out-of-pocket expenses,
disbursement or cost (other than legal fees) of Chemical Bank and
Chemical Securities Inc. incurred in connection with the consummation
of the transactions contemplated by the Operative Agreements;
(b) the reasonable fees and reasonable out-of-pocket expenses of
the Trust Company in connection with the transactions contemplated by
the Operative Agreements, including, without limitation, the initial
and annual Owner Trustee's fee and all reasonable fees and reasonable
out-of-pocket expenses of the Owner Trustee and any necessary
co-trustees (including reasonable counsel fees and expenses) or any
successor owner trustee, for acting as owner trustee under the Trust
Agreement;
(c) the fee payable to Chemical Securities Inc. in connection
with the transactions contemplated by the Operative Agreements;
(d) any and all Taxes (to the extent provided in Section 11.2 of
the Participation Agreement) and fees incurred in recording or filing
any Operative Agreement or any other transaction document, any deed,
declaration, deed of trust, security agreement, notice or financing
statement with any public office, registry or governmental agency in
connection with the transactions contemplated by the Operative
Agreement;
(e) any real estate brokers' fees and any and all stamp,
transfer and other similar taxes, fees and excises, if any, including
any interest and penalties, which are payable in connection with the
acquisition of the Property;
(f) all reasonable out-of-pocket costs and expenses incurred in
connection with the enforcement or preservation of any rights under
the Operative Agreements, including, without limitation, the fees and
disbursements
<PAGE>
29
of counsel (including the allocated fees and expenses of in-house
counsel) to the Agent, each Lender and the Investor;
(g) all reasonable out-of-pocket costs and expenses incurred in
connection with any amendment, supplement or modification to the
Operative Agreements requested by the Lessee or any Guarantor and any
other documents prepared in connection therewith, and the consummation
and administration of the transactions contemplated thereby,
including, without limitation, the reasonable fees and disbursements
of counsel to the Agent and the Investor; and
(h) all reasonable out-of-pocket costs and expenses incurred by
the Lessor, the Lessee, the Investor or the Agent in connection
with the any purchase of the Property by the Lessee pursuant to the
Lease.
"Transferee" shall have the meaning defined in Section 2.12 of the
----------
Credit Agreement.
"Trust Agreement" shall mean the Trust Agreement dated as of August
---------------
30, 1995 between the Investor and the Trust Company and attached as
Exhibit C to the Participation Agreement.
---------
"Trust Company" shall mean Wilmington Trust Company, in its individual
-------------
capacity, and any successor owner trustee under the Trust Agreement in its
individual capacity.
"Trust Estate" shall have the meaning specified in the Trust
------------
Agreement.
"Type" shall mean, as to any Loan, its nature as an ABR Loan or a
----
Eurodollar Loan.
"UCC Financing Statements" shall mean collectively the Lender
------------------------
Financing Statements and the Lessor Financing Statements.
"Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial
----------------------- ---
Code as in effect in any applicable jurisdiction.
"Wear and Tear Payment" shall have the meaning defined in Section
---------------------
2.4(b)(ii) of the Credit Agreement.
<PAGE>
EXHIBIT 13
(Annual Report)
<PAGE>
MANOR CARE, INC.
ANNUAL REPORT 1996
[ARTWORK APPEARS HERE]
<PAGE>
Financial
highlights/a/
<TABLE>
<CAPTION>
Years ended May 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
(In thousands of dollars, except per share data)
Healthcare revenues $1,248,197 $1,019,458 $ 923,308 $ 830,968 $755,999
Income from continuing
operations before non-recurring
and extraordinary items /b/ 81,369 77,675 67,369 54,729 35,068
Income from continuing operations
before extraordinary items /b/ 65,471 77,675 68,703 54,729 53,836
Income from discontinued
lodging operations 20,436 16,811 9,659 7,654 12,782
Net income 85,907 94,486 78,362 59,364 62,452
Weighted average shares outstanding /c/ 62,628 62,480 60,524 57,316 57,308
Per share data: /c/
Income from continuing operations before
non-recurring and extraordinary items /b/ 1.30 1.24 1.11 0.95 0.61
Income from continuing operations
before extraordinary items /b/ 1.04 1.24 1.13 .95 .94
Income from discontinued
lodging operations 0.33 0.27 0.16 0.13 0.22
Net income 1.37 1.51 1.29 1.04 1.09
Dividends 0.09 0.09 0.09 0.09 0.09
Market price range:
High 43.50 32.25 29.25 26.63 19.00
Low 27.78 24.25 17.50 15.63 11.75
Cash provided by operating activities 251,989 169,364 173,699 124,309 159,681
Investments in property and equipment 136,332 91,900 72,932 45,227 42,682
Total assets 1,681,840 1,289,817 1,085,636 1,025,230 965,616
Long-term debt 490,575 315,271 223,892 330,189 355,603
Shareholders' equity 707,769 624,873 533,815 361,642 305,622
</TABLE>
(a) Lodging operations are reflected as discontinued in the financial
statements contained herein in light of the Company's previously announced
intention to spin-off its lodging business to shareholders.
(b) Non-recurring items and their impact on net income consist of provisions
for asset impairment and restructuring (negative $15,898 net of tax) in
1996, a net gain on sale of property (positive $4,778 net of tax) and
impact of change in tax rate (negative $3,444) in 1994, and net gain on
sale of stock by a subsidiary (positive $18,768) in 1992. Extraordinary
items and their impact on net income consist of debt redemptions in 1993
(negative $3,019) and 1992 (negative $4,166).
(c) Retroactively adjusted for three-for-two stock split in March 1992.
Revenues (in millions)
92............ $756
93.............. $831
94................ $923
94.................... $1,019
95.........................$1,248
Per share income from continuing operations
before non-recurring and extraordinary items
92.......... $.061
93................. $0.95
94..................... $1.11
95......................... $1.24
96............................ $1.30
<PAGE>
LONG-TERM CARE
Manor Care provides more than five million patient days annually of quality,
long-term skilled nursing care. Long-term care is appropriate for chronically
ill and frail elderly individuals requiring 24-hour skilled nursing and
physical, occupational and speech therapies. With 175 nursing facilities in 28
states, Manor Care is a leading provider of high quality long-term care,
targeting upper income, service sensitive, private paying residents.
ASSISTED LIVING
Assisted living is an attractive option for seniors who need some assistance
with activities of daily living but do not require around-the-clock skilled
nursing care. The Company's rapidly growing assisted living operations consist
of 18 Springhouse facilities serving the needs of the general assisted living
population and seven Arden Courts facilities designed to meet the specialized
needs of individuals with early to middle-stage Alzheimer's disease.
INSTITUTIONAL PHARMACY
Vitalink Pharmacy Services, Inc., an 82%-owned subsidiary of Manor Care, is
listed on the NASDAQ under the symbol VTLK. Vitalink provides pharmaceutical
dispensing of individual medications; infusion therapy products and services;
medical supplies; and pharmacy consulting services to skilled nursing and other
health care facilities through 23 pharmacies serving 29 states.
[ARTWORK APPEARS HERE]
<PAGE>
HOME HEALTH
Manor Care holds a controlling interest in In Home Health, Inc. (IHHI - NASDAQ),
a leading provider of quality comprehensive health care services to clients of
all ages in their own homes. In Home Health provides these services -- including
skilled nursing, infusion therapy, hospice, rehabilitation and personal care --
in 19 markets located in 13 states.
ALZHEIMER'S SERVICES
With over a decade of experience and more than 10% of total skilled nursing beds
devoted to Alzheimer's care, Manor Care is the industry leader in Alzheimer's
disease management. The Company's 118 inpatient skilled nursing facility-based
Arcadia units meet the needs of individuals in the middle to late stages of the
disease, while Arden Courts facilities serve individuals earlier in the disease
process.
HIGH ACUITY
Focusing on short-term, post-hospital care for medically complex patients and
those persons in need of aggressive rehabilitation, Manor Care offers high
acuity services in most of its inpatient skilled nursing and rehabilitation
facilities. In addition, the Company operates 23 dedicated MedBridge high acuity
units featuring high staff-to-patient ratios, sophisticated clinical
capabilities and state-of-the-art rehabilitation departments.
[ARTWORK APPEARS HERE]
<PAGE>
The continuum
of care
1996 operational highlights
. OPENED FOUR ARDEN COURTS AND SIX SPRINGHOUSE FACILITIES, representing
1,364 total assisted living units. These additions bring total
assisted living units to 3,377, making Manor Care one of the nation's
largest operators of assisted living.
. ADDED 1,326 INPATIENT SKILLED NURSING AND REHABILITATION BEDS through
a combination of new development and acquisitions. With the opening
of 21 new Arcadia units and eight wings with specialty lifestyle
amenities, Manor Care increased higher margin specialty beds by 16%,
to 8,508.
. SECURED SITES FOR FUTURE DEVELOPMENT of 23 assisted living and
inpatient skilled nursing and rehabilitation facilities.
. GAINED HOME HEALTH CARE CAPABILITIES in 19 markets through the
acquisition of a controlling interest in Home Health, Inc.
Received Medicare certification to provide hospice services in 11 new
markets.
. ACHIEVED 18% GROWTH IN BEDS SERVICED BY VITALINK as a result of
highly successful marketing efforts in existing Vitalink service
areas and the acquisition of one independent institutional pharmacy.
Posted growth of 26% and 19% in pharmacy revenue and net income,
respectively.
. DEVELOPED FREESTANDING ADULT DAY CARE product offering a full range
of services including transportation, meals, activities, personal
care assistance, health monitoring and on-site therapies. scheduled
for roll-out in several of Manor Care's large cluster markets in
fiscal year 1997.
. ENTERED INTO JOINT VENTURES with Mercy Health System in Philadelphia
and Kettering Medical System in Ohio which resulted in one facility
opening in June 1996 and a second facility slated to open in fall
1996.
<PAGE>
Letter to
shareholders
FISCAL YEAR 1996 MARKS A NEW BEGINNING for Manor Care. In March 1996, we
announced our intention to spin-off our lodging business to shareholders. This
tax-free distribution, which is scheduled to occur in the Fall of 1996, will
result in two separate, publicly-traded and strategically focused companies. The
health care company, Manor Care, Inc., will concentrate exclusively on providing
the support needed by our customers via an integrated network of health care
services. The lodging company, Choice Hotels International, Inc., will focus on
growing its lodging and travel-related businesses.
SATISFIED CUSTOMERS
Manor Care remains dedicated to delivering the highest levels of service quality
and customer satisfaction. Our commitment to unsurpassed quality and
satisfaction begins with understanding the needs of our customers. Towards this
end, Manor Care conducts over 12,000 customer interviews annually. Customer
satisfaction scores from these interviews are a major component of incentive
compensation for all field and corporate managers.
In addition, Manor Care conducts "voice of the customer" research to understand
how current and potential customers seek, select and evaluate our services. In
the assisted living area, research of this type was used to design our Arden
Courts and Springhouse product specifications and operating procedures and
practices. "Voice of the customer" research is also used to structure customer
satisfaction surveys.
"BEST IN CLASS" SERVICES
Manor Care's strategy depends on each element of our continuum of services being
"best in class." Private pay customers want and need state-of-the-art products,
while managed care organizations demand consistent practices and outcomes. To
achieve consistent high quality products, Manor Care has established a product
management organization responsible for the development of best practices and
product integrity standards. This group is also responsible for research and
development efforts relative to new products and service offerings.
MARKET-FOCUSED ORGANIZATION
"Best in class" products and services alone are not enough. In order to meet our
commitment to deliver the highest levels of quality and customer satisfaction,
our "best in class" products and services must be part of a seamless, integrated
continuum of care. To create this seamless continuum, Manor Care is moving
towards a market management organization in which all products and services
within a defined market are united under a single market management team.
A market management structure enables Manor Care to provide customers the right
level and type of support to meet their needs both today and in the future as
their medical and social requirements change. This type of organization
facilitates referrals among elements of the continuum -- from assisted living to
skilled nursing care, from subacute care to home health and so forth -- and
makes Manor Care a more attractive provider to both private pay and managed care
customers.
Page 2
<PAGE>
OUTSTANDING PEOPLE
In the final analysis, an organization is only as good as its people.
Outstanding service, quality and customer satisfaction can only be achieved by a
highly skilled and dedicated workforce. Manor Care's employees are the best in
the industry. Indicative of Manor Care's success in building an outstanding
workforce is the nearly 20% reduction in personnel turnover achieved by the
Company over the last five years. Lower turnover enhances our customer focus and
the continuity of care we are able to provide.
In addition to being surrounded by outstanding employees, I am pleased to be
supported by a talented Board of Directors. During 1996, we were disappointed by
the retirement of our long-time Director, Jack R. Anderson. One of the health
care industry's most well-respected and successful entrepreneurs, Jack has
served on our Board since 1980. His advice and counsel have been invaluable in
shaping Manor Care's direction and strategies. While we are disappointed about
Jack's retirement, we are delighted that another successful health care
entrepreneur, Kennett L. Simmons, has agreed to fill the vacancy created by
Jack's departure.
LODGING LEADERSHIP
From 1981 through 1996, our lodging franchise business grew and prospered under
the astute leadership of Robert C. Hazard, Jr. and Gerald W. Petitt. Bob and
Jerry built Choice Hotels International into an industry-leading organization
with over 3,700 properties, open or under development and a renowned sales and
marketing focus, creating significant shareholder value along the way. Manor
Care recently concluded a purchase of their equity interest in Choice and I am
pleased to announce that Bob and Jerry have agreed to serve on the Board of
Directors of the new publicly-traded lodging company following its spin-off from
Manor Care. On behalf of all the shareholders who have prospered as a result of
Bob and Jerry's successes, I want to take this opportunity to thank them for
their many contributions over the years.
LOOKING FORWARD
Beginning in September 1996, Manor Care will consolidate the elements of its
continuum of care under a single brand name, ManorCare Health Services, and
position these elements around the theme of "The Support You Need." Providing
"The Support You Need" means offering customers a continuum of services and
carefully coordinating these services from level to level and setting to setting
as care needs increase or decrease. The Company will retain Manor Care, Inc. as
its legal name and will continue to be listed on the New York Stock Exchange
under the MNR symbol.
We look forward to our new beginning as a dedicated health care services
organization. With our understanding of customer needs and desires, "best in
class" products and services, market-focused organization and high quality
employee base, we believe that Manor Care is uniquely well-positioned to provide
the support our customers need and the outstanding growth and financial results
that our shareholders have come to expect.
/s/Stewart Bainum, Jr.
Stewart Bainum, Jr.
Chairman, President and Chief Executive Officer Page 3
[PHOTO STEWART BAINUM, JR]
<PAGE>
Inpatient skilled
nursing &
rehabilitation
GENERATING REVENUES OF $1 BILLION ANNUALLY, Manor Care's 175 inpatient skilled
nursing and rehabilitation facilities serve as the foundation for the Company's
continuum of care expansion. these facilities provide three types of services:
long-term care, high acuity services and late-stage Alzheimer's care.
Preferred locations, attractive buildings, enhanced operating systems,
innovative quality improvement programs, leading-edge sales and marketing
efforts and specialty products enable Manor Care to continue to attract a higher
percentage of private pay residents than its competitors. This private pay focus
protects Manor Care from potential changes in government reimbursement practices
and enables the Company to achieve attractive profit margins.
Approximately 36% of Manor Care's inpatient skilled nursing and rehabilitation
beds are dedicated to specialty products. These products are attractive because
they generate higher per patient day revenues and profits than standard long-
term care. In addition to high acuity and late-stage Alzheimer's specialty
products, Manor Care offers high-end specialty lifestyle products in 107 of its
inpatient skilled nursing and rehabilitation facilities. Heritage and
Williamsburg wings in the Company's facilities provide residents beautifully
appointed spacious rooms, a private lounge, exclusive activities and programs,
and, in the case of Williamsburg, concierge services and a private dining area
with a gourmet chef.
Inpatient skilled nursing and rehabilitation expansion plans call for
significant capacity additions in existing cluster markets. During fiscal year
1997, Manor Care expects to continue to grow this core business through both
development and acquisition.
[LOGO]
Page 4
<PAGE>
specialty products
quality
reputation
MANOR CARE'S HIGH QUALITY, PRIVATE PAY FOCUS ENABLES THE
COMPANY TO ACHIEVE ATTRACTIVE PROFIT
MARGINS. IN FISCAL
1996, PRIVATE PAY RESIDENTS AGAIN ACCOUNTED FOR NEARLY 60%
OF REVENUES.
[ARTWORK APPEARS HERE]
<PAGE>
Assisted
living
PROVIDING HIGH QUALITY, COST-EFFECTIVE CARE in a residential setting, assisted
living is emerging as one of the fastest growing segments of the health care
services industry. With 3,377 assisted living units and 25 dedicated Arden
Courts and Springhouse facilities, Manor Care is at the forefront of this
burgeoning industry.
Assisted living is a natural continuum of care extension for Manor Care. By
expanding down the acuity curve into assisted living, Manor Care is able to meet
the needs of its core private pay long-term care customers earlier in their
cycle of care. As the medical requirements of some of these customers become
more intense, movement within the Manor Care continuum to an inpatient skilled
nursing facility may be appropriate.
Manor Care enjoys significant competitive advantages in the assisted living
arena: an outstanding reputation among referral sources, the proven ability to
provide high quality resident care in a cost-effective fashion, unparalleled in-
house real estate development and construction expertise and demonstrated
capabilities relative to operating in regulated environments. Equally important,
Manor Care's assisted living facilities will enjoy the marketing and operational
benefits of being part of an integrated continuum of care in their local
markets.
While assisted living currently accounts for only 3% of the Company's revenues,
continued rapid expansion is expected to make assisted living the fastest-
growing component of the Manor Care continuum. During fiscal year 1997, the
Company's plans call for the opening of seven newly-constructed Arden Courts
facilities. The first prototypical new construction Springhouse facility is
expected to open during the third quarter, while construction is scheduled to
begin on another seven facilities. In total, Manor Care has under contract or
has purchased sites for 42 new assisted living developments.
Page 6
[ARTWORK APPEARS HERE]
<PAGE>
independence
support
IN THE FAST-GROWING ASSISTED LIVING ARENA, MANOR CARE ENJOYS SIGNIFICANT
COMPETITIVE ADVANTAGES INCLUDING AN OUTSTANDING REPUTATION AMONG REFERRAL
SOURCES AND UNSURPASSED EXPERIENCE IN PROVIDING HIGH QUALITY, COST-EFFECTIVE
CARE.
peace-of-mind
page 7
[ARTWORK APPEARS HERE]
<PAGE>
Institutional
pharmacy
THE MISSION OF MANOR CARE'S 82%-OWNED VITALINK Pharmacy Services subsidiary is
to be a high quality, value-added partner with health care providers and payors
across the whole continuum of care. Towards this end, Vitalink is focused on the
development of integrated data systems and care processes essential to affect
and measure outcomes, to reduce the incidence of inappropriate drug use and to
provide and prove the value of Vitalink's services.
Major innovations in the last fiscal year include the development of
VitalCONSULT, an integrated consultant software package, and the initial roll-
out of OPTIMA (Optimizing Patient Therapy in Medication Administration),
Vitalink's state-of-the-art patient care management system. The increased
efficiency, enhanced clinical support and improved outcomes made possible by
these innovations make Vitalink a more attractive partner to providers and
payors alike.
Key industry trends, including the rapidly increasing elderly population, the
shifting of high acuity patients from hospitals to inpatient skilled nursing
facilities and the loss of market share by retail pharmacies, are expected to
continue to fuel strong demand for institutional pharmacy services. Supported by
these favorable trends, Vitalink will pursue multiple avenues for growth
including continued internal expansion, provision of services to new Manor Care
beds, development of additional value-added products and services and completion
of selected acquisitions.
innovation
page 8
[ARTWORK APPEARS HERE]
<PAGE>
Home
health
MANOR CARE ADDED HOME HEALTH to its continuum of services through the
acquisition of a controlling interest in In Home Health, Inc. in October 1995.
Improvements in clinical capabilities and home-based technology have enabled
home health to take the lead as the lowest cost component of the health care
continuum. As such, home health is a critical element in the Manor Care
continuum of services.
While financial performance has not yet met Manor Care's standards, steps are
being taken to implement a strategy for revenue growth. Key elements of this
strategy include expanding higher margin specialty services, strengthening the
overall marketing effort and leveraging the relationship with Manor Care.
Customer relations managers and directors of business development have been
placed in key markets to drive revenue growth. Referral volume from Manor Care
continues to grow, and plans are in place to offer home health care in four new
Manor Care cluster markets.
Emphasizing pain management and palliative care for terminally ill patients,
hospice is an important new area of growth for the company. Since the
acquisition, In Home Health received Medicare certification to offer hospice
services in 11 new markets. In addition, in the seven months since the
acquisition, In Home Health expanded infusion therapy revenues by nearly 30%.
partnership
page 9
[ARTWORK APPEARS HERE]
<PAGE>
Market
management
WHAT DOES IT MEAN TO OFFER A CONTINUUM OF CARE? For Manor Care, it means having
the right set of facilities and services available for our customers across a
wide range of care needs. It's being able to deliver "The Support You Need" in
our cluster markets.
In practice, the continuum of care is different for each Manor Care customer.
For an individual moving through the stages of Alzheimer's disease, the
continuum of care may begin with the support soon to be available in our adult
day care environment, followed by Arden Courts and, ultimately, the Arcadia wing
of a Manor Care inpatient skilled nursing facility. The continuum of care for a
stroke victim, in contrast, might consist of a MedBridge stay followed by
continued rehabilitation at home provided by In Home Health. As a final example,
a relatively healthy resident in a Springhouse facility may at some point
require orthopedic surgery, spend time in a Manor Care skilled nursing facility
or MedBridge unit for rehabilitation, and then return to Springhouse.
The continuum of care must be seamless from the perspective of the customer.
Market management enables Manor Care Health Services to fully integrate the
elements of its continuum of care within a given cluster market. An integrated
continuum of care has value in the eyes of the customer that exceeds the sum of
the values of the individual elements. Traditional private pay customers want to
know that the right level and type of care will be available to them if and when
it is needed, while managed care customers value the convenience of one-stop
shopping.
The Washington, D.C. metropolitan area illustrates how Manor Care's continuum of
care strategy is implemented within a particular market. In all of our cluster
markets, Manor Care is moving to assemble and integrate--via market
management--the elements of the continuum of care.
page 10
<PAGE>
WASHINGTON, D.C. METROPOLITAN AREA MARKET
[MAP APPEARS HERE]
Inpatient Skilled Nursing & Rehabilitation
Arcadia Alzheimer's Unit
MedBridge Subacute Unit
Arden Courts Assisted Living
Springhouse Assisted Living
Adult Day Care
New Facility Under Construction
Road Atlas Map (C) 1995 by Rand McNally, R.L. 96-S-160
page 11
<PAGE>
Business
information
<TABLE>
<CAPTION>
INPATIENT SKILLED NURSING AND REHABILITATION
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues (millions) Patient Revenues (millions) Patient
Pvt./HMO Gov't Total Days(000) Pvt./HMO Gov't Total Days(000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care $379 $216 $ 595 5,476 $354 $198 $552 5,325
High Acuity 119 207 326 1,165 110 177 287 1,091
Alzheimer's Services 92 21 113 957 84 15 99 865
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 590 $444 $1,034 7,598 $548 $390 $938 7,281
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ASSISTED LIVING
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues Patient Revenues Patient
(millions) Days (000) (millions) Days (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arden Courts $ 5 44 $ 1 4
Springhouse 32 544 12 204
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 37 588 $13 208
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF FACILITIES
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Skilled Nursing and Rehabilitation 175 164
MedBridge Units 23 18
Arcadia Units 118 97
Arden Courts 7 3
Springhouse 18 12
Acute Care Hospital 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL PHARMACY
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues (millions)/(1)/ $ 141 $ 112
No. of Beds Serviced
Non-Affiliate 30,600 26,400
Affiliate 19,300 16,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total 49,900 42,400
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes intercompany revenues of $38 million for fiscal year 1996 and $44
million for fiscal year 1995.
<TABLE>
<CAPTION>
HOME HEALTH
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues (millions)/(2)/ $74 $0
- ------------------------------------------------------------------------------------------------------------------------------------
/(2)/ Represents revenues generated since acquisition in October 1995.
</TABLE>
page 12
<PAGE>
Financial
review
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Management's Review of Operating Results................................... 14
Consolidated Financial Statements.......................................... 15
Management's Review of Financial Position
and Cash Flows............................................................. 19
Management's Report........................................................ 20
Report of Independent Public Accountants................................... 20
Notes to Consolidated Financial Statements................................. 21
</TABLE>
page 13
<PAGE>
MANAGEMENT'S REVIEW OF OPERATING RESULTS
Revenues and Margins
Healthcare revenues increased $228.7 million (22%) to $1.2 billion in fiscal
year 1996, while operating expenses increased $193.0 million (25%) to $963.1
million. This compares to an increase in revenues of $96.2 million (10%) and an
increase in operating expenses of $73.8 million (11%) in fiscal year 1995.
Operating margin compression was principally due to the inclusion in fiscal year
1996 of lower margin home health operations relating to the Company's investment
in In Home Health, Inc. as well as a significant level of new assisted living
and skilled nursing development. Operating margins, excluding the results of In
Home Health, Inc., were 23% and 24% for fiscal 1996 and 1995, respectively.
Revenue increases in fiscal year 1996 reflect the Company's continued growth in
the skilled nursing area and increased participation in the assisted living and
home health markets. Fiscal year 1996 revenue growth resulted primarily from
capacity increases ($102.2 million), entry into the home health market through
the investment in In Home Health, Inc. ($74.2 million) and rate increases ($52.3
million). The Company achieved capacity growth through the acquisition of five
nursing centers and six assisted living centers, the development and opening of
five Arden Courts, additional bed development in previously owned nursing
centers and the acquisition of a pharmacy and infusion business by the Company's
82%-owned pharmacy subsidiary, Vitalink Pharmacy Services, Inc. Revenue
increases in fiscal year 1995 were predominantly due to increased rates ($57.4
million) and additional capacity ($33.6) million.
Operating Expenses
The increase in operating expenses of $193.0 million in fiscal year 1996
includes $71.2 million relating to the consolidation of In Home Health, Inc.
Operating expense increases, excluding In Home Health of $121.8 million and
$73.8 million in fiscal year 1996 and 1995, respectively, resulted from
increases in patient acuity, more complex product and service offerings, and
increases in wage rates and healthcare supply costs at the Company's skilled
nursing centers. The Company has generally been successful at maintaining
overall increases in wage rates and healthcare supplies consistent with the
applicable rates of inflation. Additionally, a significant portion of the
expense increases in fiscal year 1996 were due to the Company's recent expansion
to 25 assisted living facilities through both development and acquisition and,
to a lesser extent, an increase in the number of skilled nursing beds and
pharmacy acquisitions.
Other Expenses
General corporate expense remained level at 6% of revenue for fiscal years 1996
and 1995. General corporate expense includes all indirect operating expenses as
well as risk management, information systems, treasury, accounting, legal and
other administrative support for the Company and its various subsidiaries.
Interest expense increased 33% in fiscal year 1996 as a result of additional
borrowings in connection with facility development and acquisitions as discussed
above. Fiscal year 1995 interest expense decreased 17% from the previous year as
a result of the October 1993 redemption of $99.0 million of 6 3/8% convertible
subordinated debentures.
The Company recorded provisions of $26.3 million in fiscal year 1996 related to
the impairment of certain long-lived assets and costs associated with the
Company's restructuring of its healthcare business. The most significant
components of the provisions were non-cash asset impairment charges of $21.2
million relating to writedowns of property, equipment and capitalized system
development costs.
page 14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended May 31 (In thousands of dollars, except per share data) 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 1,248,197 $ 1,019,458 $ 923,308
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Operating expenses 963,081 769,998 696,199
Depreciation and amortization 68,086 54,374 49,019
General corporate 72,322 63,197 53,644
Provisions for asset impairment and restructuring 26,300 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,129,789 887,569 798,862
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
OTHER INCOME AND EXPENSES AND INCOME TAXES 118,408 131,889 124,446
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest income from advances to
discontinued lodging segment 19,673 15,492 10,665
Interest income and other 5,416 7,348 5,288
Minority interest expense (1,688) (2,129) (1,752)
Gain on sale of property -- -- 7,978
Interest expense (30,338) (22,769) (27,441)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses, net (6,937) (2,058) (5,262)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 111,471 129,831 119,184
INCOME TAXES 46,000 52,156 50,481
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 65,471 77,675 68,703
DISCONTINUED LODGING OPERATIONS
Income from discontinued lodging operations (net of income
taxes of $14,966, $13,144 and $8,019, respectively) 20,436 16,811 9,659
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 85,907 $ 94,486 $ 78,362
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 62,628 62,480 60,524
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME PER SHARE OF COMMON STOCK
Income from continuing operations $ 1.04 $ 1.24 $ 1.13
Discontinued lodging operations 0.33 0.27 0.16
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share of common stock $ 1.37 $ 1.51 $ 1.29
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
page 15
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31 (In thousands of dollars) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 62,533 $ 72,972
Receivables (net of allowances of $24,311 and $18,797) 107,267 74,203
Inventories 18,734 16,849
Current deferred income tax benefit 40,420 28,005
Other 6,107 3,895
- --------------------------------------------------------------------------------
Total current assets 235,061 195,924
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST, NET OF DEPRECIATION 918,207 736,635
- --------------------------------------------------------------------------------
GOODWILL 54,646 26,493
- --------------------------------------------------------------------------------
ADVANCES TO DISCONTINUED LODGING SEGMENT 225,723 198,522
- --------------------------------------------------------------------------------
NET INVESTMENT IN DISCONTINUED LODGING SEGMENT 159,537 65,829
- --------------------------------------------------------------------------------
OTHER ASSETS 88,666 66,414
- --------------------------------------------------------------------------------
$1,681,840 $1,289,817
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 23,984 $ 4,829
Accounts payable 85,804 48,172
Accrued expenses 113,426 79,366
Income taxes payable 8,614 --
- --------------------------------------------------------------------------------
Total current liabilities 231,828 132,367
- --------------------------------------------------------------------------------
MORTGAGES AND OTHER LONG-TERM DEBT 490,575 315,271
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES ($151,410 AND $139,075) AND OTHER 251,668 217,306
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock $.10 par, 160.0 million shares authorized;
65.8 million and 65.5 million shares issued 6,581 6,553
Contributed capital 174,364 168,699
Retained earnings 571,925 491,520
Cumulative translation adjustment (1,362) 709
Treasury stock, 3.0 million shares, at cost (43,739) (42,608)
- --------------------------------------------------------------------------------
Total shareholders' equity 707,769 624,873
- --------------------------------------------------------------------------------
$1,681,840 $1,289,817
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance
sheets.
</TABLE>
page 16
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands of dollars, Common Stock Contributed Retained Translation
except common shares) Shares Amount Capital Earnings Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1993 60,470,832 $ 6,047 $ 68,471 $ 329,532 $ 352
Net income -- -- -- 78,362 --
Exercise of stock options 222,380 23 2,186 -- --
Cash dividends -- -- -- (5,374) --
Debenture conversion 4,743,522 475 96,432 -- --
Other -- -- 227 -- (383)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1994 65,436,734 6,545 167,316 402,520 (31)
Net income -- -- -- 94,486 --
Exercise of stock options 77,000 8 833 -- --
Cash dividends -- -- -- (5,489) --
Other -- -- 550 3 740
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1995 65,513,734 6,553 168,699 491,520 709
Net income -- -- -- 85,907 --
Exercise of stock options 269,156 28 3,279 -- --
Cash dividends -- -- -- (5,502) --
Other -- -- 2,386 -- (2,071)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1996 65,782,890 $ 6,581 $174,364 $ 571,925 $(1,362)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
page 17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 31 (In thousands of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 85,907 $ 94,486 $ 78,362
Reconciliation of net income to net cash
provided by operating activities:
Income from discontinued lodging operations (20,436) (16,811) (9,659)
Depreciation and amortization 68,086 54,374 49,019
Provisions for asset impairment and
restructuring 26,300 -- --
Amortization of debt discount 455 499 940
Provision for bad debts 16,190 12,587 10,563
(Decrease) increase in deferred taxes (1,805) (4,086) 3,005
Gain on sale of facilities -- -- (7,978)
Changes in assets and liabilities (excluding
sold facilities and acquisitions):
Change in receivables (39,551) (20,128) (16,269)
Change in inventories and other current assets (1,569) (9,115) (587)
Change in current liabilities 48,366 15,839 7,374
Change in income taxes payable 12,879 (12,681) 7,427
Change in other liabilities 4,485 5,796 8,624
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY CONTINUING OPERATIONS 199,307 120,760 130,821
NET CASH PROVIDED BY DISCONTINUED LODGING OPERATIONS 52,682 48,604 42,878
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 251,989 169,364 173,699
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (136,332) (91,900) (72,932)
Acquisition of assisted living facilities (19,050) -- --
Acquisition of healthcare facilities (32,369) (56,745) --
Acquisition of pharmacies (6,270) (2,451) (7,217)
Purchase of home health business (22,950) -- --
Proceeds from the sale of property -- -- 15,630
Sale of (investment in) healthcare business -- 13,334 (10,000)
Other items, net (14,882) (2,563) 450
- --------------------------------------------------------------------------------------------------------
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (231,853) (140,325) (74,069)
NET CASH UTILIZED BY INVESTING ACTIVITIES
OF DISCONTINUED LODGING OPERATIONS (169,641) (92,422) (69,127)
- --------------------------------------------------------------------------------------------------------
NET CASH UTILIZED BY INVESTING ACTIVITIES (401,494) (232,747) (143,196)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of long-term debt 149,000 207,254 --
Principal payments of debt (23,030) (122,496) (52,479)
Advances to discontinued lodging operations (27,201) (51,461) (68,361)
Proceeds from exercise of stock options 2,112 841 2,209
Dividends paid (5,502) (5,489) (5,374)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (UTILIZED) BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 95,379 28,649 (124,005)
NET CASH PROVIDED BY FINANCING ACTIVITIES
OF DISCONTINUED LODGING OPERATIONS 43,687 50,008 71,447
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (UTILIZED) BY FINANCING ACTIVITIES 139,066 78,657 (52,558)
- --------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (10,439) 15,274 (22,055)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 72,972 57,698 79,753
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 62,533 $ 72,972 $ 57,698
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE>
MANAGEMENT'S REVIEW OF FINANCIAL POSITION AND CASH FLOWS
Liquidity And Capital Resources
The Company maintains adequate capital resources, including strong operating
cash flows and committed lines of credit, to support ongoing operations and
fulfill capital requirements in the foreseeable future.
On March 7, 1996, the Company announced its intention to proceed with a
separation of its lodging business from its healthcare business via a spin-off
of the lodging division. The Board of Directors voted to approve, in principle,
the transaction subject to receipt of regulatory and other approvals and
consents and satisfactory implementation of the arrangements for the separation.
The Company anticipates that the transaction will be completed during the Fall
of 1996. The Company has received a ruling from the Internal Revenue Service
that such a spin-off will be tax-free. Management believes that debt and equity
capital-raising efficiency will be enhanced by the spin-off transaction. As of
May 31, 1996, the Company had cash advances totaling $225.7 million outstanding
to the lodging segment. The cash advances are to be repaid within three years
from the date of the proposed spin-off. Interest is charged at an annual rate of
9% on the indebtedness.
In November 1994, the Company entered into a $250.0 million competitive advance
and multi-currency revolving credit facility provided by a group of eighteen
banks. This facility replaced a $165.0 million credit facility. The new facility
expires in November 1999. At May 31, 1996, bank lines totaled $315.0 million of
which $20.4 million remained unused. In June 1996, the Company completed a
public offering of senior unsecured notes in the amount of $150.0 million, the
proceeds of which were used to repay bank debt. The notes are due in 10 years
and carry a 7 1/2% interest rate.
The Company maintains adequate debt capacity and the Company's senior debt
carries investment grade ratings from both of the major debt rating agencies.
The Company's long-term debt to equity ratio was .7 to 1 at May 31, 1996 and .5
to 1 at May 31, 1995. In evaluating leverage and debt capacity, the Company
considers cash flow and interest coverage. The Company's consolidated interest
coverage ratio and consolidated debt ratio, as defined by the Company's bank
agreement, were 6.54 to 1 and .42 to 1, respectively, for fiscal year 1996. The
Company's bank agreement requires a consolidated interest coverage ratio minimum
of 3 to 1 and prohibits a consolidated debt ratio in excess of .67 to 1.
Furthermore, a significant portion of the Company's property and equipment
remains unencumbered.
The Company's working capital ratio was 1.0 at May 31, 1996 and 1.5 at May 31,
1995. The Company attempts to minimize its investment in net current assets, and
believes that the maintenance of minimal working capital is an appropriate
objective given the stability of the Company's operating cash flows and the
depth of its financial resources.
Property and Acquisitions
Investment in property and equipment includes routine capital expenditures and
specialty product conversions. During fiscal year 1996, investment in property
and equipment utilized in continuing operations amounted to $136.3 million.
Additionally, during fiscal year 1996, $51.4 million was spent to acquire five
nursing centers and six assisted living facilities, with five attached skilled
nursing units. The Company also purchased two pharmacy businesses for $6.3
million. In October 1995, the Company purchased approximately 43% of In Home
Health, Inc.'s common stock for $22.9 million and invested another $20 million
for 100% of its outstanding voting convertible preferred stock and for warrants
to purchase an additional 6 million shares of common stock.
Long-Term Debt
Long-term debt was $490.6 million at May 31, 1996, compared to $315.3 million
at May 31, 1995. The amounts exclude debt related to discontinued lodging
operations of $68.5 million at May 31, 1996 and $52.1 million at May 31, 1995.
The increase in long-term debt is mainly attributable to the Company's
acquisition of the above mentioned nursing and assisted living facilities, the
In Home Health, Inc. stock purchase and additional advances to the lodging
segment for the acquisition of hotels. The current portion of debt as of May 31,
1996 amounted to $24.0 million.
Shareholders' Equity
Shareholders' equity increased to $707.8 million at May 31, 1996 from $624.9
million at May 31, 1995. This increase was primarily due to net income
of $85.9 million, reduced by dividend payments amounting to $5.5 million.
Treasury share purchases amounted to $1.1 million.
page 19
<PAGE>
MANAGEMENT'S REPORT
The Company has developed and maintains internal control systems designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed and recorded in accordance with management authorization. Control
systems are supported by written policies and are regularly evaluated by the
Company's internal auditors.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which require
that business judgments be applied. While management is responsible for the
preparation of financial statements, the Company's outside auditors have
examined the financial statements as described in their report.
The Audit Committee of the Company's Board of Directors is comprised of two
external directors. This Committee meets periodically with management, the
internal auditors and the external auditors. The Committee monitors and reviews
the audit programs conducted by both the Company's internal audit department and
the external auditors. Audit Committee meetings are scheduled so as to
facilitate any private communications with the Committee desired by either the
internal or external auditors.
/s/ Stewart Bainum, Jr.
Stewart Bainum, Jr.
Chairman, President and
Chief Executive Officer
/s/ James A. MacCutcheon
James A. MacCutcheon
Senior Vice President, Chief Financial Officer
and Treasurer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Manor Care, Inc.:
We have audited the accompanying consolidated balance sheets of Manor Care, Inc.
(a Delaware Corporation) and subsidiaries as of May 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended May 31, 1996. These financial
statements are the responsibility of the Company's management. Our responsibi-
lity is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (appearing on pages
15-18 and 21-26) present fairly, in all material respects, the financial
position of Manor Care, Inc. and subsidiaries as of May 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended May 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Anderson LLP
Washington, D.C.
June 28, 1996
page 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Manor Care, Inc.
and its subsidiaries (the "Company"). As a result of the Company's intention to
spin-off its lodging operations, the accompanying financial statements reflect
the lodging segment as a discontinued operation. All significant intercompany
transactions have been eliminated, except for advances to the discontinued
lodging segment and the related interest income.
Cash
The Company considers all highly liquid securities purchased with a maturity of
three months or less to be cash equivalents.
Property and Equipment
The components of property and equipment at May 31, were:
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Land $ 92,884 $ 78,092
Building and improvements 887,184 746,961
Capitalized leases 12,747 12,747
Furniture, fixtures and
equipment 209,035 163,278
Facilities in progress 49,067 23,956
- -------------------------------------------------------
1,250,917 1,025,034
Less: Accumulated
depreciation and
amortization (332,710) (288,399)
- -------------------------------------------------------
$ 918,207 $ 736,635
_______________________________________________________
</TABLE>
Depreciation has been computed for financial reporting purposes using the
straight-line method. A summary of the ranges of estimated useful lives upon
which depreciation rates have been based follows:
Building and improvements 10-40 years
Furniture, fixtures and equipment 3-20 years
Accumulated depreciation includes $6.0 million at May 31, 1996 and $5.6 million
at May 31, 1995 relating to capitalized leases. Capitalized leases are amortized
on a straight-line basis over the lesser of the lease term or the remaining
useful lives of the leased properties.
Capitalization Policies
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is taken into income. Maintenance, repairs and minor replacements are
charged to expense.
Construction overhead and costs incurred to ready a project for its intended use
are capitalized for major development projects and are amortized over the lives
of the related assets.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1996, $3.1 million; 1995,
$1.8 million; 1994, $0.6 million.
Goodwill
Goodwill primarily represents an allocation of the excess purchase price of
certain acquisitions over the recorded fair value of the net assets. Goodwill
is being amortized over 40 years. Such amortization amounted to $1.0 million,
$0.7 million and $0.6 million in each of the years ended May 31, 1996, 1995 and
1994, respectively.
Minority Interest
The Company has controlling investments in certain entities which are not wholly
owned. Amounts reflected as minority interest represent the minority owners'
share of income in these entities. As of May 31, 1996 and 1995, the Company had
a minority interest liability of $31.9 million and $13.9 million, respectively,
included in other liabilities on the balance sheets.
Self-Insurance Programs
The Company self-insures for certain levels of general and professional
liability, automobile liability and workers' compensation coverage. The
estimated costs of these programs are accrued at present values based on
actuarial projections for known and incurred but not reported claims.
Net Income Per Common Share
Net income per common share has been computed based on the weighted average
number of shares of common stock outstanding. The effect of outstanding and
unexercised stock options on the computation is insignificant.
page 21
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported or disclosed in the financial statements and the notes
related thereto. Actual results could differ from those estimates.
INCOME TAXES
The income tax provisions for fiscal years 1996, 1995 and 1994 were accounted
for under the provision of Statement of Financial Accounting Standards No. 109.
Included in the 1994 tax provision was a charge of $3.4 million due to the
impact on prior periods of the change in the tax rates. Income tax provisions
were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 41,427 $ 41,432 $ 40,292
State 8,887 9,145 9,882
Deferred tax expense:
Federal (3,450) 1,296 1,594
State (864) 283 (1,287)
- --------------------------------------------------------------------------------
$ 46,000 $ 52,156 $ 50,481
________________________________________________________________________________
Deferred tax assets (liabilities) are comprised of the following at May 31:
(In thousands of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Depreciation and amortization $ (83,237) $ (80,554) $ (74,849)
Purchased tax benefits (45,527) (46,212) (47,506)
Other (31,410) (29,852) (12,710)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (160,174) (156,618) (135,065)
- --------------------------------------------------------------------------------
Tax deposit 5,754 12,000 --
Reimbursement reserve 16,882 5,064 3,354
Reserve for doubtful accounts 10,206 8,309 7,087
Deferred compensation 9,526 9,476 7,631
Other 6,816 8,030 2,041
- --------------------------------------------------------------------------------
Gross deferred tax assets 49,184 42,879 20,113
- --------------------------------------------------------------------------------
Net deferred tax $(110,990) $(113,739) $(114,952)
________________________________________________________________________________
</TABLE>
A reconciliation of income tax expense at the statutory rate to income tax
expense included in the consolidated statements of income follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
- --------------------------------------------------------------------------------
Federal taxes at statutory rate $39,015 $45,441 $41,715
- --------------------------------------------------------------------------------
State income taxes, net of Federal
tax benefit 5,215 6,128 5,587
Minority interest 499 1,521 1,084
Effect of tax rate changes -- -- 3,444
Tax credits (19) (910) (910)
Other 1,290 (24) (439)
- --------------------------------------------------------------------------------
Income tax expense $46,000 $52,156 $50,481
________________________________________________________________________________
</TABLE>
Income taxes paid on a consolidated basis for the years ended May 31, 1996, 1995
and 1994 were $54.3 million, $69.7 million and $48.0 million, respectively.
page 22
<PAGE>
ACCRUED EXPENSES
Accrued expenses at May 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Payroll $ 53,986 $44,711
Taxes, other than income 12,302 10,406
Insurance 22,310 8,209
Interest 1,875 1,456
Other 22,953 14,584
- --------------------------------------------------------------------------------
$113,426 $79,366
================================================================================
</TABLE>
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1996 were as follows:
<TABLE>
<CAPTION>
Fiscal Year (In thousands of dollars)
- --------------------------------------------------------------------------------
<S> <C>
1997 $ 23,984
1998 16,632
1999 9,050
2000 7,874
2001 6,765
2002 to 2024 450,254
- --------------------------------------------------------------------------------
$514,559
================================================================================
</TABLE>
Long-term debt, consisting of mortgages, capital leases and subordinated debt,
was net of discount of $1.0 million and $1.5 million at May 31, 1996 and 1995,
respectively. Amortization of discount was $.5 million in 1996, $.5 million in
1995 and $.9 million in 1994, including the write-off associated with debt
redemptions.
During fiscal year 1996, interest rates on subordinated debt ranged from 4.75%
to 9.5%; interest rates on mortgages and other long-term debt ranged from 3.1%
to 17.3%. The weighted average interest rate in fiscal years 1996 and 1995 was
7.4% and 9.2%, respectively.
In June 1996, the Company issued $150.0 million of 7 1/2% senior notes due 2006.
These notes are redeemable at the option of the Company at any time at a price
equal to the greater of (a) the principal amount or (b) the sum of the present
values of the remaining scheduled payments of principal and interest, discounted
with an applicable treasury rate plus 15 basis points, plus accrued interest to
the date of redemption.The proceeds of this offering were used to repay
borrowings under the Company's competitive advance and multi-currency revolving
credit facility.
In fiscal year 1994, the Company redeemed the $99.0 million of 6 3/8%
convertible subordinated debentures due 2011. Approximately $3.0 million were
redeemed for cash, at a premium, while the remaining debentures were converted
into common stock at $20.31 per share which resulted in 4,743,522 shares being
issued.
In fiscal year 1995, the Company entered into a $250.0 million competitive
advance and multi-currency revolving credit facility provided by a group of
eighteen banks. This credit facility replaced the previously existing bank
facilities amounting to $165.0 million. The facility provides that up to $75.0
million is available for borrowings in foreign currencies. Borrowings under the
facility are, at the option of the Company, at one of several rates including
LIBOR plus 26.25 basis points. In addition, the Company has the option to
request participating banks to bid on loan participation at lower rates than
those contractually provided by the facility. The facility presently requires
the Company to pay fees of 3/16 of 1% on the entire loan commitment. The
facility will terminate on November 30, 1999. At May 31, 1996, outstanding
revolver borrowings amounted to $195.0 million, including $50.6 million in
foreign currency borrowings included in net investment in discontinued lodging
operations as the foreign currency borrowings are directly attributable to the
lodging segment.
Various debt agreements impose, among other restrictions, restrictions regarding
financial ratios and payment of dividends. Pursuant to such restrictions, owned
property with a net book value of $217.8 million was pledged or mortgaged and
approximately $151.0 million of retained earnings were not available for cash
dividends.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options, that expire at various dates through 2023. Future minimum
lease payments are as follows:
<TABLE>
<CAPTION>
Operating Capitalized
(In thousands of dollars) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 9,551 $2,606
1998 7,976 1,767
1999 6,862 1,115
2000 5,979 716
2001 5,177 299
Thereafter 44,714 2,196
- --------------------------------------------------------------------------------
Total minimum
lease payments $80,259 8,699
================================================================================
Less: Amount representing
interest 2,039
- --------------------------------------------------------------------------------
Present value of lease payments 6,660
Less: Current portion 2,184
- --------------------------------------------------------------------------------
Lease obligations
included in long-term debt $4,476
================================================================================
</TABLE>
page 23
<PAGE>
Rental expense under noncancellable operating leases was $8.0 million in 1996,
$4.9 million in 1995 and $4.4 million in 1994.
INTEREST RATE HEDGING
The Company has entered into multiple interest rate swap agreements to hedge its
exposure to fluctuations in interest rates on long-term debt and operating
leases. At May 31, 1996, the Company had four interest rate swap agreements
outstanding, having a total notional principal amount of $80.3 million. Three of
those agreements effectively change the Company's interest rate exposure on an
operating lease to a fixed interest rate of 5.60% and mature simultaneously with
the relevant operating lease in 2002. A fourth interest rate swap agreement,
having a notional principal amount of $50.0 million, requires the Company to pay
a floating rate of interest equivalent to the 90 day LIBOR rate through year
2006, while receiving a fixed rate of 7.2%. While the Company is exposed to
credit loss in the event of nonperformance by other parties to outstanding
interest rate swap agreements, the Company does not anticipate any such credit
losses.
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2% senior
notes, the Company also entered into a series of interest rate swap and treasury
lock agreements having a total notional principal amount of $100.0 million.
These agreements were terminated concurrent with the pricing of the notes
offering on May 30, 1996 with a $2.7 million cash gain. The gain on the
termination of the agreements will be deferred and amortized against interest
expense over the life of the 7 1/2% senior notes.
CAPITAL STOCK
There are 5.0 million shares of authorized but unissued preferred stock with a
par value of $1.00 per share. The rights of the preferred shares will be
determined by the Board of Directors when the shares are issued.
During fiscal year 1996, the Company acquired 30,208 shares of its common stock
for a total cost of $1.1 million. A total of 8.3 million shares of common stock
have been authorized, under various stock option plans, to be granted to key
executive officers and key employees. At May 31, 1996, options for the purchase
of an aggregate of 3,667,527 shares were outstanding at prices equal to the
market value of the stock at date of grant. Options totaling 1,448,212 are
presently exercisable and 2,219,315 will become exercisable from 1996 to 2002
and will expire at various dates to December 2005. In addition, 35,000 options
have been granted to non-employee directors. These options will become
exercisable from 1996 to 2000 and will expire at various dates to March 2001.
Option activity under the above plans was as shown in the table below:
<TABLE>
<CAPTION>
Options 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Granted: No. of shares 582,168 110,000 476,500
Avg. Option Price $30.89 $27.50 $22.42
Exercised: No. of shares 269,156 77,000 222,380
Avg. Option Price $12.34 $10.92 $9.93
Cancelled: No. of shares 148,735 -- 149,700
Avg. Option Price $20.57 $ -- $7.38
Outstanding
at May 31: No. of shares 3,702,527 3,538,250 3,505,250
Avg. Option Price $16.87 $14.36 $14.26
Available
for grant
at May 31: No. of shares 1,089,899 1,603,500 1,563,500
- --------------------------------------------------------------------------------
</TABLE>
In connection with the spin-off of the Company's lodging segment, the
outstanding options held by current and former employees of the Company will be
redenominated in both Company and lodging company stock and the number and
exercise prices of the options will be adjusted based on the relative trading
prices of shares of the common stock of the two companies in order to retain the
intrinsic value of the options.
ACQUISITIONS AND DIVESTITURES
During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was cash
and the remainder was assumed liabilities. Additionally, six assisted living
facilities, with five attached skilled nursing units, were purchased for $74.3
million, of which $19.0 million was cash and the remainder was assumed
liabilities. The Company's 82%-owned pharmacy subsidiary, Vitalink Pharmacy
Services, Inc., purchased a pharmacy servicing 2,200 institutional beds and an
infusion therapy business for a total of $6.3 million. In October 1995, the
Company purchased for $22.9 million approximately 41% of the common stock of In
Home Health, Inc. (IHHI), a provider of home health services. The Company paid
an additional $20.0 million to IHHI for 100% of its outstanding voting
convertible preferred stock and for warrants to purchase an additional 6 million
shares of common stock. As a
page 24
<PAGE>
result of this transaction, the Company currently has effective control of
approximately 63% of the voting stock of IHHI. This transaction is accounted for
as a purchase. IHHI is consolidated in the Company's financial statements.
During fiscal year 1995, the Company purchased nine nursing centers and assisted
living facilities for approximately $56.7 million. Vitalink Pharmacy Services,
Inc. purchased a pharmacy servicing 1,300 institutional beds for $2.5 million.
In March 1995, the Company sold its investment in a physicians' practice
management business for $13.3 million. The physicians' practice management
investment was made in fiscal year 1994 in the amount of $10.0 million.
During fiscal year 1994, the Company sold three nursing centers for $15.6
million. The after tax gain recognized from this sale was $4.8 million. Also,
during fiscal year 1994, Vitalink Pharmacy Services, Inc. purchased two
pharmacies servicing over 7,400 institutional beds for a total of $7.2 million.
Unless otherwise noted, acquisitions are accounted for as purchases. Acquisition
costs in excess of fair market value of the assets acquired are allocated to
goodwill.
PROVISIONS FOR ASSET IMPAIRMENT AND RESTRUCTURING
The Company recorded provisions of $26.3 million in fiscal year 1996 related to
the impairment of certain long-lived assets and costs associated with the
Company's restructuring of its healthcare business. The most significant
components of the provisions were non-cash asset impairment charges of $21.2
million relating to writedowns of property, equipment and capitalized system
development costs. The Company periodically reviews the net realizable value of
its long-term assets and makes adjustments accordingly. The impairment of the
property and equipment was recorded in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
DISCONTINUED OPERATIONS
On March 7, 1996, the Company announced its intention to proceed with a
separation of its lodging business from its healthcare business. The spin-off of
the lodging division will be effected by a distribution to the Company's
shareholders of all of the common stock of Choice Hotels International, Inc., a
wholly owned subsidiary of the Company, which as of the date of the spin-off,
will own and operate all of the Company's lodging operations. The Board of
Directors voted in March 1996 to approve in principle the transaction subject to
receipt of regulatory and other approvals and consents and satisfactory
implementation of the arrangements for the separation. The Company anticipates
that the transaction will be completed during the Fall of 1996. The Company has
received a ruling from the Internal Revenue Service that such a spin-off will
not constitute a taxable event.
The revenues, income from operations before income taxes and net income from
discontinued lodging operations for the years ended May 31, 1996, 1995, and
1994, were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $374,873 $302,535 $239,764
================================================================================
Income from
discontinued
lodging operations
before taxes $ 35,402 $ 29,955 $ 17,678
================================================================================
Net income from
discontinued
lodging
operations $ 20,436 $ 16,811 $ 9,659
================================================================================
</TABLE>
Net income from discontinued lodging operations includes the results of
operations of the lodging segment through March 7, 1996, the measurement date.
During the period from the measurement date through May 31, 1996, the lodging
segment would have incurred a net loss of $12.0 million. The net loss was
primarily the result of provisions for asset impairment and costs and expenses
directly associated with the spin-off totaling $33.3 million. The non-cash
provision for asset impairment in the discontinued lodging segment reflects
primarily the write down of European hotel assets based on expected future cash
flows. This non-cash provision was recorded in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." No loss on the
disposal of the discontinued lodging operations has been recognized as the
Company estimates that the discontinued lodging segment will generate income
between the measurement date and the date of the spin-off.
Included in discontinued lodging operations is interest expense charged by the
continuing healthcare segment relating to cash advances provided to the lodging
segment for the acquisition and renovation of lodging assets. For the years
ended May 31, 1996, 1995 and 1994, interest so allocated amounted to $19.7
million, $15.5 million and
page 25
<PAGE>
$10.7 million, respectively. The indebtedness related to lodging acquisitions
and renovations is reflected as advances to discontinued lodging segment in the
consolidated balance sheets. Such advances amounted to $225.7 million and $198.5
million at May 31, 1996 and 1995, respectively. The indebtedness is to be repaid
within three years of the date of the proposed spin-off. Interest is charged at
an annual rate of 9% on the indebtedness.
General corporate expenses of $7.4 million, $6.3 million and $5.5 million,
respectively, were charged to discontinued lodging operations for the years
ended May 31, 1996, 1995 and 1994. Allocation of general corporate charges was
principally determined based on time allocations.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and counsel to the Company, the
ultimate outcome of such litigation will not have a material adverse effect on
the Company's financial position or results of operations.
Revenues recorded under Federal and state medical assistance programs are
subject to adjustment upon audit by appropriate government agencies. For fiscal
years 1996, 1995 and 1994 these revenues amounted to $549.1 million, $431.0
million and $377.3 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant.
As of May 31, 1996, the Company had contractual commitments of $62.4 million
relating to its internal construction program.
PENSION, PROFIT SHARING AND
INCENTIVE PLANS
The Company has various pension and profit sharing plans, including a
supplemental executive retirement plan, and contributes to certain union welfare
plans. The provisions for these plans amounted to $11.6 million in 1996, $11.0
million in 1995 and $9.3 million in 1994. All vested benefits under retirement
plans are funded or accrued.
The Company sponsors a defined contribution profit sharing plan covering
substantially all of its employees. Contributions of up to 6% of each covered
employee's salary are determined based on the employee's level of contribution
to the plan, years of service and Company profitability. The cost of the plan
totaled $5.8 million in 1996, $4.8 million in 1995 and $4.1 million in 1994.
Also included in the Company's retirement plans is a defined benefit pension
plan covering substantially all of its employees. The benefits are based on
service credits for years of participation after January 1, 1992. In addition,
there is a prior benefit equal to the accrued benefit at December 31, 1991 for
certain individuals who were participants in a predecessor plan. No new
participants will be eligible to enter this plan after August 15, 1996 and
service credits for all participants will be frozen after December 31, 1996.
Service cost benefits earned during fiscal years 1996, 1995 and 1994
approximated the plan's annual costs of $2.8 million, $2.7 million and $2.8
million, respectively. As of February 28, 1996, 1995 and 1994, plan assets of
approximately $14.4 million, $11.0 million and $7.5 million compared to vested
benefit obligations of $12.4 million, $8.7 million and $8.1 million,
respectively. Projected benefit obligations were not significantly different
from accumulated benefit obligations of $16.3 million, $11.0 million and $10.0
million as of the same dates. Liabilities recorded on the Company's balance
sheets as of May 31, 1996, 1995 and 1994 were $2.0 million, $.5 million and $2.6
million, respectively. Projected benefit obligations were determined using an
assumed discount rate of 7.0% for 1996, 8.5% for 1995 and 8.0% for 1994, an
assumed rate of return on plan assets of 8.25% and an assumed compensation
increase of 4.5%.
The Company also has various incentive compensation plans for certain personnel.
Incentive compensation accrued was $4.4 million in 1996, $4.1 million in 1995
and $3.7 million in 1994.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of long-term debt instruments were determined by discounting future
cash flows using the Company's current market rates and do not vary
substantially from the amounts recorded on the balance sheet.
The balance sheet carrying amounts of cash, cash equivalents and receivables
approximate fair value due to the short-term nature of these items. Management
believes that the fair value of the advances to the discontinued lodging segment
approximates the carrying value.
Total fair market value for the four outstanding interest rate swap agreements
at May 31, 1996 was $1.8 million. Fair values were determined based on quoted
rates.
page 26
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY RESULTS
(Unaudited)
Income from
Quarters Ended Continuing Net Per
(In thousands of dollars, except per share data) Revenues Operations* Income Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1995
August $ 242,974 $ 31,527 $ 24,363 $ .39
November 247,118 31,787 25,007 .40
February 258,255 32,434 18,741 .30
May 271,111 36,141 26,375 .42
- -----------------------------------------------------------------------------------------------------------------------------------
$1,019,458 $131,889 $ 94,486 $ 1.51
===================================================================================================================================
FISCAL 1996
August $ 273,992 $ 30,512 $ 28,426 $ .45
November 299,722 38,050 28,788 .46
February 334,404 36,844 22,302 .36
May 340,079 13,002 6,391 .10
- -----------------------------------------------------------------------------------------------------------------------------------
$1,248,197 $ 118,408 $ 85,907 $ 1.37
===================================================================================================================================
*Before other income and (expenses) and income taxes.
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK AND DIVIDENDS PAID
(Unaudited)
Cash Dividends
Quarters Ended Market Price Per Share Paid Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
High Low Amount Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1994
August $24.00 $17.50 $.022 8/27/93
November $23.25 $19.38 $.022 11/26/93
February $28.00 $20.88 $.022 2/25/94
May $29.25 $23.25 $.022 5/27/94
FISCAL 1995
August $27.88 $24.25 $.022 8/26/94
November $29.63 $25.25 $.022 11/25/94
February $31.25 $27.00 $.022 2/27/95
May $32.25 $27.50 $.022 5/26/95
FISCAL 1996
August $34.25 $27.78 $.022 8/25/95
November $35.58 $30.50 $.022 11/27/95
February $40.25 $32.75 $.022 2/27/96
May $43.50 $36.50 $.022 5/24/96
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
page 27
<PAGE>
Lodging
AS DISCUSSED ELSEWHERE, THE COMPANY'S CURRENT INTENTION is to spin-off its
lodging business to shareholders in the Fall of 1996. This planned distribution,
which will be tax-free to shareholders, remains subject to the receipt of
various regulatory approvals. The spun-off lodging entity, to be called Choice
Hotels International, Inc. ("Choice"), will include all existing lodging
operations and assets owned directly or indirectly by Manor Care, Inc.
Application has been made to the New York Stock Exchange for Choice to trade
under the symbol CHH.
Choice is a leading international hotel franchisor with 3,052 hotels in more
than 30 countries and a major owner and manager of hotel properties with over 75
owned and managed properties in the U.S. and abroad. Franchised, owned and
managed hotel properties principally operate under one of Choice's seven brand
names: Comfort, Quality, Clarion, Sleep, Rodeway, Econo Lodge and MainStay
Suites. In addition, Choice is the franchisor of Choice Picks, a multi-brand
food court concept for use in hotels and other venues.
Choice's mission is to develop, package and deliver "success systems" to
entrepreneurs serving the traveling public, making Choice profitable by making
its franchisees profitable. Choice's strength lies in its nucleus of core
competencies -- innovation, service, marketing and technology. Together these
competencies generate a powerful competitive advantage for Choice and its
franchisee partners. Choice's value-adding partnership with franchisees is the
key to its history of long-term profitable growth.
[ARTWORK APPEARS HERE]
page 28
<PAGE>
CHOICE PICKS food courts is a profitable, customized, modular food-service
system offering customers a "choice pick" of nationally-known branded food
items, such as Pizzeria Uno, Nathan's Famous and Coca-Cola.
SLEEP INNS serve the limited-service market with standardized, new construction,
state-of-the-art rooms and amenities at sensible prices. All properties offer a
100 percent satisfaction guarantee. (89 properties)
COMFORT INNS AND COMFORT SUITES are leading limited-service brands which excel
in meeting customers' basic needs -- spacious rooms, a complimentary deluxe
continental breakfast and friendly service at an affordable price. Comfort is
backed by a 100 percent customer satisfaction guarantee. (1,427 properties)
QUALITY INNS, HOTELS & SUITES offer consumers well located, mid-priced lodging
with rooms and amenities specifically designed for business travelers. (575
properties)
CLARION HOTELS & RESORTS are upscale full-service hotels providing outstanding
value to corporate and leisure resort travelers and the mid-sized meeting
market. (94 properties)
RODEWAY is a mid-priced chain specializing in meeting the full and limited-
service needs of the senior travel market. (209 properties)
ECONO LODGE is one of the strongest roadside names in its
category, offering clean, affordable economy lodging for travelers who want to
"Spend a Night, Not a Fortune." (658 properties)
MAINSTAY SUITES, Choice's newest lodging concept, is one of the industry's first
mid-market, extended-stay hotels with residential amenities designed to serve
professionals on extended assignments. The first property is scheduled to open
outside of Dallas in the Fall of 1996.
[ARTWORK APPEARS HERE]
page 29
<PAGE>
Financial
review
Choice Hotels International
<TABLE>
<CAPTION>
SELECTED INCOME STATEMENT INFORMATION
Fiscal Year Ending May 31 (In thousands of dollars) 1996 1995 1994
................................................................................
<S> <C> <C> <C>
Revenues
Franchise $219,164 $188,021 $165,581
Hotel operations 155,709 114,514 74,183
................................................................................
Total revenues 374,873 302,535 239,764
................................................................................
Operating expenses
Franchise 85,335 74,248 72,058
Hotel operations 106,120 84,711 60,062
Selling, general and administration 83,267 69,676 57,081
Depreciation and amortization 26,026 21,841 17,521
Provisions for asset impairment
and restructuring 33,335 -- --
................................................................................
Total operating expenses 334,083 250,476 206,722
................................................................................
Other expenses(1) 24,932 22,104 15,364
................................................................................
Pre-tax income 15,858 29,955 17,678
................................................................................
Net income $ 8,458 $ 16,811 $ 9,659
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes interest on notes payable to Manor Care, Inc. of $19.7 million in
1996, $15.5 million in 1995 and $10.7 million in 1994.
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET INFORMATION
May 31 (In thousands of dollars) 1996 1995
<S> <C> <C>
................................................................................
Current assets $ 41,002 $ 28,085
Property, plant & equipment 299,527 257,156
Other assets 150,775 106,234
................................................................................
Total assets $491,304 $391,475
- --------------------------------------------------------------------------------
Current liabilities $ 48,608 $ 62,748
Debt payable to Manor Care 225,723 198,522
Other debt 69,414 64,376
................................................................................
Total liabilities $343,745 $325,646
- --------------------------------------------------------------------------------
Net assets $147,559 $ 65,829
- --------------------------------------------------------------------------------
</TABLE>
page 30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Lodging revenues grew by 24% in fiscal year 1996, driven by a 17% increase in
franchise revenues and a 36% increase in revenues from owned and managed hotels.
Franchise fees increased as a result of improved rates and RevPAR (revenue per
available room) at Choice's franchise hotels. Domestic franchise occupancies
remained constant at 64%, while both rates and RevPAR increased by 5%. Also
contributing to franchise revenue growth were continued increases in the average
royalty rate charged to franchisees, from 3.2% to 3.5% of gross room revenues
domestically. Finally, the Choice franchise system grew by 217 hotels, further
increasing franchise revenue.
Revenue increases from Choice's owned and managed hotels were driven by rate and
RevPAR improvements, as well as by the continued acquisition of undervalued
hotel properties. Occupancies at Choice's domestic owned and managed hotels
remained constant at 67%, while rates increased 9% and RevPAR grew 8%. In
addition, Choice spent $49.6 million in fiscal year 1996 to acquire an
additional 16 domestic hotels containing over 1,900 rooms. Revenues from these
newly acquired hotels contributed significantly to the 36% increase in owned and
managed hotel revenues achieved during the year.
Earnings before interest, taxes, depreciation, amortization and provisions for
asset impairment and restructuring increased by $26 million, or 36%, from $74 to
$100 million. Increases were the result of revenue growth and operating margin
improvements from 24% to 27% of revenues. These higher margins, in turn, were
attributable to the operating leverage that characterizes the franchise lodging
industry and to operating improvements made at hotels acquired during prior
fiscal years.
Non-recurring charges totalling $33 million pretax were recorded during fiscal
year 1996 relating to the planned spin-off and associated corporate
restructuring ($5 million pretax) and the write-down of certain impaired assets,
principally European hotels. Asset write-downs were calculated in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
As of May 31, 1996, long-term indebtedness at Choice totalled $294 million.
Notes payable to Manor Care, Inc. accounted for approximately $226 million of
this indebtedness. Amounts owed to Manor Care represent funds advanced to Choice
by the Company to finance the purchase of undervalued hotel properties. Notes
payable to Manor Care bear interest at a rate of 9% and must be repaid within
three years following the completion of the proposed spin-off.
page 31
<PAGE>
Directors and
officers
BOARD OF DIRECTORS
Stewart Bainum, Jr.
Chairman of the Board
Director: Vitalink Pharmacy Services, Inc.
Stewart Bainum
Vice Chairman of the Board
Regina E. Herzlinger
Nancy R. McPherson Professor of Business
Administration, Harvard Business School
Director: C.R. Bard, Inc., Cardinal Health, Inc.,
Deere & Company and Schering-Plough
Corporation
William H. Longfield
Chairman, Chief Executive Officer, C.R. Bard, Inc.
Director: Atlantic Health System, C.R. Bard, Inc.,
Centenary College, Horizon Mental Health
Hospital Management, Inc., The West Company
and United Dental Care, Inc.
Frederic V. Malek
Chairman, Thayer Capital Partners
Co-Chairman, CB Commercial Real Estate
Group, Inc.
Director: American Management Systems, Inc.,
Avis, Inc., Automatic Data Processing Corp.,
FPL Group, Inc., ICF Kaiser International, Inc.,
Intrav Inc., National Education Corporation,
Northwest Airlines and various Paine Webber
mutual funds
Jerry E. Robertson, Ph.D.
Retired Executive Vice President, 3M Life
Sciences Sector and Corporate Services
Director: Allianz Life Insurance Company of
North America, Cardinal Health, Inc., Coherent,
Inc., Haemonetics Corporation, Life
Technologies, Inc., Medwave, Inc., Project Hope
and Steris Corporation
Kennett L. Simmons
Senior Advisor, E.M. Warburg, Pincus Company
Director: Health Vision, Inc., United Health
Care Corporation and Virginia Health Care
Foundation
DIRECTOR EMERITUS
David W. Moore
EXECUTIVE OFFICERS
Stewart Bainum, Jr.
Chairman of the Board, President and Chief
Executive Officer
Joseph R. Buckley
Executive Vice President
Donna L. DeNardo
President and Chief Operating Officer, Vitalink
Pharmacy Services, Inc.
Mark L. Gildea
Chief Executive Officer, In Home Health, Inc.
Donald J. Landry
President, Choice Hotels International, Inc.
James A. MacCutcheon
Senior Vice President, Chief Financial Officer
and Treasurer
James H. Rempe
Senior Vice President, General Counsel and
Secretary
Margarita A. Schoendorfer
Vice President, Controller
Donald C. Tomasso
President, Manor HealthCare Corp.
Scott J. Van Hove
Senior Vice President and Chief Administrative
Officer
page 32
<PAGE>
Corporate
information
STOCK LISTING
Manor Care, Inc. common stock trades on the
New York Stock Exchange under the ticker
symbol MNR.
TRANSFER AGENT & REGISTRAR
ChaseMellon Shareholder Services
450 West 33rd Street
New York, NY 10001
INDEPENDENT AUDITORS
Arthur Andersen LLP
Washington, D.C.
ANNUAL MEETING DATE
Manor Care, Inc. will hold its Annual Meeting
of Shareholders on Monday, September 30,
1996 at 9:00 A.M. EST at its corporate
headquarters.
FORM 10-K
A shareholder may receive without charge a
copy of the Form 10-K Annual Report filed
with the Securities and Exchange Commission
by written request addressed to Investor
Relations at the corporate headquarters.
CORPORATE HEADQUARTERS
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
301-979-4000
<PAGE>
Manor Care, Inc.
11555 Darnestown Road
Gaithersburg, MD 20878-3200
301-979-4000
<PAGE>
EXHIBIT 21
MANOR CARE, INC.
SUBSIDIARIES OF THE COMPANY
The following list sets forth the principal subsidiaries of the Company and
the place of their incorporation. Except as otherwise noted, all of these
subsidiaries are directly or indirectly wholly-owned by the Company.
l. Manor Healthcare Corp., a Delaware corporation - includes 56 active omitted
subsidiaries operating in the United States.
2. Four Seasons Nursing Facilities, Inc., a Delaware corporation.
3. Vitalink Pharmacy Services, Inc., a Delaware corporation, of which the
Company owns 82.3% of the Common Stock - includes 3 active omitted
subsidiaries operating in the United States.
4. In Home Health, Inc., a Minnesota corporation, of which the Company
effectively owns approximately 64% of the voting capital stock.
5. Choice Hotels International, Inc., a Delaware corporation, of which the
Company owns 100% of the Preferred Stock and Common Stock - includes 6
active omitted subsidiaries operating in foreign countries and 2 active
omitted subsidiaries operating in the United States.
6. Quality Hotels Europe, Inc., a Delaware corporation.
7. QH Europe Partnership, a Maryland partnership - includes 8 active omitted
subsidiaries operating in foreign countries.
8. Boulevard Motel Corp., a Maryland corporation - includes 23 active omitted
subsidiaries operating in the United States engaged in the hospitality and
related businesses.
9. Comfort California, Inc., a California corporation.
10. Sunburst Hotel Corp., a Texas corporation.
11. Cactus Hotel Corp., an Arizona corporation.
12. Gulf Hotel Corp., a Louisiana corporation.
13. MNR Finance Corp., a Delaware corporation.
14. Community Hospital of Mesquite, Inc., a Texas Corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated June 28, 1996, included and incorporated by
reference in Manor Care, Inc.'s Form 10-K for the year ended May 31, 1996, into
the Company's previously filed Registration Statement File Nos. 2-80129, 2-
73420, 33-9766, 33-20241, 33-27834, 33-36213, 2-78242, 33-52734, 33-64680, 33-
67850, 33-58903, 33-58907 and 33-63965.
ARTHUR ANDERSEN LLP
Washington, D.C.,
August 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> $62,533
<SECURITIES> 0
<RECEIVABLES> 137,368
<ALLOWANCES> 24,311
<INVENTORY> 18,734
<CURRENT-ASSETS> 235,061
<PP&E> 1,250,917
<DEPRECIATION> 332,710
<TOTAL-ASSETS> 1,681,840
<CURRENT-LIABILITIES> 231,828
<BONDS> 490,575
0
0
<COMMON> 6,581
<OTHER-SE> 701,188
<TOTAL-LIABILITY-AND-EQUITY> 1,681,840
<SALES> 0
<TOTAL-REVENUES> 1,248,197
<CGS> 0
<TOTAL-COSTS> 1,014,977
<OTHER-EXPENSES> 26,300
<LOSS-PROVISION> 16,190
<INTEREST-EXPENSE> 30,338
<INCOME-PRETAX> 111,471
<INCOME-TAX> 46,000
<INCOME-CONTINUING> 65,471
<DISCONTINUED> 20,436
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,907
<EPS-PRIMARY> 1.37<F1>
<EPS-DILUTED> 1.37<F1>
<FN>
<F1>The Company presents simple earnings per share (EPS) on the face of its
income statement as fully dilutive EPS is within 97% of simple EPS. The figures
presented above are simple EPS.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99
1996 Proxy Statement
dated August 28, 1996
<PAGE>
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
[LOGO OF MANOR CARE, INC. APPEARS HERE]
ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 30, 1996
<PAGE>
MANOR CARE, INC.
11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878
301-979-4000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 30, 1996
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Manor Care,
Inc. (the "Company"), will be held in the Auditorium of Manor Care's corporate
headquarters, 11555 Darnestown Road, Gaithersburg, Maryland, on September 30,
1996, at 9:00 a.m., to consider and vote upon the following matters:
1. To elect a Board of Directors consisting of seven persons to serve until
the next Annual Meeting of Stockholders of the Company and until their
successors are duly elected and qualified.
2. To approve a proposal to adopt the Manor Care, Inc. 1996 Non-Employee Di-
rector Stock Compensation Plan.
3. To transact such other business as may properly come before such meeting
or any adjournment thereof.
The close of business on August 1, 1996, has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting or any adjournment thereof.
Your management sincerely desires the presence in person of every stockholder
able to attend the meeting; however, in order to be assured of the representa-
tion of the greatest number of stockholders either in person or by proxy, it
is requested that you date and sign the accompanying proxy and return it as
promptly as possible in the enclosed self-addressed envelope. No postage is
required if mailed in the United States.
If you attend the meeting in person, you may revoke your proxy at such meet-
ing and cast your vote in person. If you receive more than one proxy because
your shares are held in various names or accounts, each proxy should be com-
pleted and returned.
By Order of the Board of Directors:
/s/ James H. Rempe
James H. Rempe Secretary
Silver Spring, Maryland August 28, 1996
<PAGE>
MANOR CARE, INC.
11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878
301-979-4000
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 30, 1996
INTRODUCTION
The enclosed proxy is solicited by and on behalf of the Board of Directors of
Manor Care, Inc. (the "Company"), a Delaware corporation, to be used at the
1996 Annual Meeting of Stockholders to be held on Monday, September 30, 1996,
at 9:00 a.m., in the Auditorium of Manor Care's corporate headquarters, 11555
Darnestown Road, Gaithersburg, Maryland, and at any and all adjournments
thereof. All shares represented by proxies will be voted at the meeting in ac-
cordance with the specifications marked thereon, or if no specifications are
made, proxies will be voted FOR all matters set forth in the attached Notice
of Meeting and in the discretion of the proxy holder as to any other business
which comes before the meeting. Any stockholder giving a proxy may revoke the
same at any time prior to the voting of such proxy by giving written notice of
revocation to the Secretary, by submitting a later dated proxy or by attending
the meeting and voting in person. The Proxy Statement is first being mailed to
stockholders on or about August 28, 1996.
The Company's Annual Report (including certified financial statements) for
the fiscal year ended May 31, 1996, is accompanying this Proxy Statement. The
Annual Report is not a part of the proxy soliciting material.
Except where the context requires otherwise, the term "Company" includes
Manor Care, Inc. and its subsidiaries.
VOTING AT THE ANNUAL MEETING
The Board of Directors has fixed August 1, 1996 (the "Record Date") as the
record date for determination of stockholders entitled to notice of and to
vote at the Annual Meeting. On that date, there were outstanding 62,867,418
shares of Common Stock, par value $.10 per share (the "Common Stock"). Each
such share of Common Stock is entitled to one vote. The presence in person or
by proxy of the holders of a majority of the Company's outstanding shares of
Common Stock will constitute a quorum.
A plurality of the shares of Common Stock present and voting at the Annual
Meeting, in person or by proxy, will be necessary for the election of direc-
tors. The affirmative vote of a majority of the Company's outstanding shares
of Common Stock present and voting at the Annual Meeting, in person or by
proxy, will be necessary for the approval of the proposal to adopt the Manor
Care, Inc. 1996 Non-Employee Director Stock Compensation Plan ("Non-Employee
Director Stock Compensation Plan"), and for the taking of all other action at
the Annual Meeting.
A stockholder who is present in person or by proxy at the Annual Meeting and
who abstains from voting on any or all proposals will be included in the num-
ber of stockholders present at the meeting for the purpose of determining the
presence of a quorum. However, an abstention with respect to any matter will
not be counted either in favor of or against such matter.
Brokers who hold shares for the account of their clients may vote such shares
either as directed by their clients or in their own discretion if permitted by
the exchange or other organization of which they are members. Members of the
New York Stock Exchange are permitted to vote their clients' proxies in their
own discretion as to the election of directors but not as to the Company's
proposal relating to the approval of the proposal to adopt the Non-Employee
Director Stock Compensation Plan. Shares held by a broker who does not receive
instructions on these matters will not be voted. Proxies which are voted by
brokers on some but not all of the proposals are referred to as "broker non-
votes." Broker non-votes will be included in determining the presence of a
quorum. However, a broker non-vote is not treated as being in favor of or
against the particular proposal under consideration.
If any nominee for election to the Board of Directors named in this Proxy
Statement shall become unavailable for election for any reason, the proxy will
be voted for a substitute nominee selected by the Board of Directors, or the
Board of Directors may elect not to fill the vacancy and reduce the number of
directors.
SOLICITATION OF PROXIES
The cost of the proxy solicitations will be borne by the Company. In addition
to the use of the mails, proxies may be solicited by the directors, officers
and employees of the Company without additional compensation, by personal
1
<PAGE>
interview, telephone, telegram or otherwise. Arrangements may also be made
with brokerage firms and other custodians, nominees and fiduciaries for the
forwarding of soliciting material to the beneficial owners of Common Stock
held of record by such persons, and the Company will reimburse such respective
brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Ex-
change Act") requires the Company's reporting officers and directors, and per-
sons who own more than ten percent of the Company's Common Stock, to file re-
ports of ownership and changes in ownership on Forms 3, 4 and 5 with the Secu-
rities and Exchange Commission (the "Commission"), the New York Stock Exchange
and the Company. Based solely on the Company's review of the forms filed with
the Commission and written representations from reporting persons that they
were not required to file Form 5 for certain specified years, the Company be-
lieves that all of its reporting officers, directors and greater than ten per-
cent beneficial owners complied with all filing requirements applicable to
them during the fiscal year ended May 31, 1996.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth as of the Record Date the amount of the
Company's Common Stock beneficially owned by (1) each director and nominee,
(2) the chief executive officer and the four other most highly compensated ex-
ecutive officers, (3) all officers and directors as a group, and (4) all per-
sons who own beneficially more than 5% of the Company's Common Stock. Unless
otherwise specified, the address for each of them is:
<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER TOTAL OF CLASS(1)
------------------------ ---------- -----------
<S> <C> <C>
Stewart Bainum 12,591,070(2) 20.02%
Stewart Bainum, Jr. 12,255,602(3) 19.29%
Regina E. Herzlinger 3,500(4) *
William H. Longfield 4,166(5) *
Frederic V. Malek 2,666(6) *
Jerry E. Robertson, Ph. D. 15,980(7) *
Kennett L. Simmons (8) 0
Donald C. Tomasso 71,218(9) *
Robert C. Hazard, Jr. 32,384(10) *
Gerald W. Petitt 77,964(11) *
Donald J. Landry 37,278(12) *
All Directors and Officers
as a Group (18 persons) 25,501,468(13) 39.87%
Ronald Baron 4,345,184(14) 6.9%
</TABLE>
- ---------------
*Less than 1% of class.
(1) Percentages are based on 62,867,418 shares outstanding on the Record Date
plus shares which would be issued assuming that the person exercises all
options which are exercisable within 60 days thereafter.
(2) Includes 4,036,278 shares held directly or indirectly by the Stewart
Bainum Declaration of Trust, the sole trustee of which is Mr. Bainum; his
joint interest in 1,069,032 shares owned by Bainum Associates Limited
Partnership ("Bainum Associates"), and 1,397,581 shares owned by MC
Investments Limited Partnership ("MC Investments"), each of which is a
limited partnership in which Mr. Bainum has joint ownership with his wife
as a limited partner and as such has the right to acquire at any time a
number of shares equal in value to the liquidation preference of their
limited partnership interest; 3,567,869 shares held direct by Realty
Investment Company, Inc. ("Realty Investment") and its subsidiaries, a
real estate investment and management company controlled by Mr. Bainum and
his wife; and 40,305 shares held by the Commonweal Foundation of which Mr.
Bainum is Chairman of the Board of Directors and has shared voting
authority. Also includes 1,679,628 shares owned by Mid Pines Associates
Limited Partnership ("Mid Pines") in which Mr. Bainum has shared voting
authority. Also includes 798,711 shares held by the Jane L. Bainum
Declaration of Trust, the sole trustee of which is Mr. Bainum's wife. Also
includes 1,666 shares which Mr. Bainum has the right to acquire pursuant to
stock options which
2
<PAGE>
are presently exercisable or which become exercisable within 60 days after
the Record Date. Does not include shares owned beneficially by Stewart
Bainum, Jr., Mr. Bainum's son, whose interests are stated in the above
table, except shares owned by Bainum Associates, MC Investments and Mid
Pines in which Mr. Bainum has a beneficial interest. Also does not include
195,513 shares held by his other three adult children.
(3) Includes 91,752 shares owned directly by Mr. Bainum, Jr. Also includes
5,417,761 shares owned by Bainum Associates and 4,415,250 shares owned by
MC Investments, in both of which Mr. Bainum, Jr. is managing general
partner with the sole right to dispose of the shares. Authority to vote
such shares is held by the voting general partner, Mr. B. Houston McCeney.
Also includes 1,679,628 shares owned by Mid Pines, in which Mr. Bainum, Jr.
is managing general partner and has shared voting authority, and 1,500
shares owned by the Foundation for Maryland's Future, in which Mr. Bainum,
Jr. is the sole director. Mr. Bainum, Jr. has a direct or indirect
pecuniary interest in 1,168,068 shares, 810,546 shares and 348,777 shares
owned respectively by Bainum Associates, MC Investments and Mid Pines. Also
includes 647,500 shares which Mr. Bainum, Jr. has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date, and 1,504 shares and 707
shares, respectively, which Mr. Bainum, Jr. has the right to receive upon
termination of his employment with the Company pursuant to the terms of the
Manor Care, Inc. Retirement Savings and Investment Plan (the "401(k) Plan")
and the Manor Care, Inc. Nonqualified Retirement Savings and Investment
Plan (the "Nonqualified Savings Plan"). Does not include shares owned by
Realty Investment Co. Inc. and its subsidiaries, a real estate investment
and management company in which Mr. Bainum, Jr. owns, directly or
indirectly, 25.0% of the outstanding common stock which represents a
pecuniary interest in 843,868 shares owned by Realty.
(4) Includes 1,666 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date. Also includes 200 shares
held by spouse as custodian for a minor. Beneficial ownership of such
shares is disclaimed.
(5) Includes 1,666 shares which Mr. Longfield has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date.
(6) Includes 1,666 shares which Mr. Malek has the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after the Record Date.
(7) Includes 1,666 shares which Mr. Robertson has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date.
(8) Kennett L. Simmons was appointed by the Board of Directors in March, 1996
to fill the vacancy of Jack R. Anderson, who retired in March, 1996.
(9) Includes 40 shares held as custodian for children of Mr. Tomasso.
Beneficial ownership of such shares is disclaimed. Also includes 64,500
shares which Mr. Tomasso has the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60 days
after the Record Date, and 82 shares and 96 shares, respectively, which Mr.
Tomasso has the right to receive upon termination of his employment with
the Company pursuant to the terms of the 401(k) Plan and the Nonqualified
Savings Plan.
(10) Includes 113 shares and 415 shares, respectively, which Mr. Hazard has the
right to receive upon termination of his employment with the Company
pursuant to the terms of the 401(k) Plan and the Nonqualified Savings
Plan.
(11) Includes 8,661 shares held in trust for minor children for which Mr.
Petitt is trustee. Beneficial ownership of such shares is disclaimed.
(12) Includes 37,000 shares which Mr. Landry has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after the Record Date, and 108 shares and 170
shares, respectively, which Mr. Landry has the right to receive upon
termination of his employment with the Company pursuant to the terms of
the 401(k) Plan and the Nonqualified Savings Plan.
(13) Includes a total of 1,090,271 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable or which become exercisable within 60 days
after the Record Date, and a total of 3,728 shares and 1,616 shares,
respectively, which such directors and officers have the right to receive
upon termination of their employment with the Company pursuant to the
terms of the 401(k) Plan and the Nonqualified Savings Plan.
(14) As of June 18, 1996, based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission. Mr. Baron's address is
450 Park Avenue, Suite 2800, New York, New York 10022.
3
<PAGE>
NOMINATION AND ELECTION OF DIRECTORS
The entire Board of Directors, which consists of seven (7) members, will be
elected to serve until the next Annual Meeting of Stockholders of the Company
and until their successors are duly elected and qualified.
Stewart Bainum, Jr. is Stewart Bainum's son. Aside from the foregoing, no nom-
inee has any family relationship with any other director or executive officer
of the Company.
The following table sets forth information with respect to each nominee for
election as a Director of the Company. All of the nominees, except Kennett L.
Simmons, have previously been elected by the stockholders of the Company.
<TABLE>
<CAPTION>
SERVED AS POSITIONS WITH THE COMPANY; BUSINESS
NAME AND AGE DIRECTOR SINCE EXPERIENCE: OTHER DIRECTORSHIPS
------------ -------------- ---------------------------------------------------------------
<S> <C> <C>
Stewart Bainum, Jr. (50) 1976 Chairman of the Board and Chief Executive Officer since March
1987; also President since June 1989; Vice Chairman from June
1982 to March 1987. Director: Vitalink Pharmacy Services, Inc.
Stewart Bainum (77) 1968 Vice Chairman of the Board since March 1987; Chairman of the
Board from 1968 to March 1987; President from December 1980
through October 1981, and May 1982 through July 1985; Chairman
of the Board of Realty Investment Company, Inc. (private real
estate investment company) since 1965.
Regina E. Herzlinger 1992 Nancy R. McPherson Professor of Business Administration, Har-
(52) vard Business School, since 1971. Director: C. R. Bard, Inc.
(medical devices), Deere & Company, Cardinal Health Care, Inc.
and Schering-Plough Corporation.
William H. Longfield 1989 Chairman and Chief Executive Officer of C. R. Bard, Inc. (medi-
(58) cal devises) since September 1995; President and Chief Execu-
tive Officer from June 1994 to September 1995; President and
Chief Operating Officer of C. R. Bard, Inc. from September 1991
to June 1994; Executive Vice President and Chief Operating Of-
ficer of C. R. Bard, Inc. from February 1989 to September 1991.
Director: C. R. Bard, Inc., Horizon Mental Health Management,
Inc., United Dental Care, Inc., The West Company and Atlantic
Health Systems.
Frederic V. Malek (59) 1990 Chairman, Thayer Capital Partners since March 1993; Co-chairman
of CB Commercial Real Estate Group, Inc. since April 1989; Cam-
paign Manager, Bush-Quayle '92 Campaign from January 1992 to
December 1992; Vice Chairman of NWA, Inc. (airlines) from July
1990 to December 1991. Director: American Management Systems,
Inc., Avis, Inc., Automatic Data Processing Corp., FPL Group,
Inc., ICF Kaiser International, Inc., Intrav, Inc., National
Education Corporation, Northwest Airlines and various Paine
Webber mutual funds.
Jerry E. Robertson, 1989 Retired; Executive Vice President of 3M Life Sciences Sector
Ph.D. (63) and Corporate Services from November 1984 to March 1994.
Director: Allianz Life Insurance Company of North America,
Cardinal Health, Inc., Coherent, Inc., Haemonetics Corporation,
Life Technologies, Inc., Medwave, Inc., Project Hope and Steris
Corporation.
Kennett L. Simmons (54) 1996 Chairman and Chief Executive Officer of the Metra Health
Companies from June 1994 to October 1995; Senior Advisor to E.
M. Warburg, Pincus & Co. from 1991 to 1994; Chairman and Chief
Executive Officer of United Healthcare Corporation from October
1987 to February 1991. Director: United Healthcare Corporation.
</TABLE>
4
<PAGE>
STRUCTURE AND FUNCTIONING OF THE BOARD OF DIRECTORS
The Board of Directors held four meetings during the fiscal year ended May
31, 1996. During such fiscal year, each incumbent attended 75% or more of the
aggregate of (1) the total number of meetings of the Board of Directors and
(2) the total number of meetings of all Committees on which such director
served. The standing committees of the Board include the Audit Committee, the
Finance Committee, the Compensation/Key Executive Stock Option Plan Committee,
the Compensation/Key Executive Stock Option Plan Committee No. 2, and the Nom-
inating Committee, the current members of which are as follows:
Compensation/Key Executive
Stock Option Plan Committee Finance Committee
--------------------------- -----------------
Jerry E. Robertson, Chairman Stewart Bainum, Chairman
Stewart Bainum Stewart Bainum, Jr.
William H. Longfield Frederic V. Malek
Frederic V. Malek Jerry E. Robertson
Compensation/Key Executive Stock Audit Committee
Option Plan Committee No. 2 ---------------
--------------------------------
Regina E. Herzlinger, Chairwoman
Jerry E. Robertson, Chairman Kennett L. Simmons
William H. Longfield
Frederic V. Malek
Nominating Committee
--------------------
Frederic V. Malek, Chairman
Regina E. Herzlinger
The Compensation/Key Executive Stock Option Plan Committee held three meet-
ings during the 1996 fiscal year. Except with respect to the CEO and the four
most highly compensated officers in a particular fiscal year, the Committee
administers the Company's stock option plans and grants stock options thereun-
der, reviews compensation of officers and key management employees, recommends
development programs for employees such as training, bonus and incentive
plans, pensions and retirement, and reviews other employee fringe benefit pro-
grams.
The Compensation/Key Executive Stock Option Plan Committee No. 2, which held
no meetings in fiscal year 1996, was formed in fiscal year 1996 to comply with
certain provisions of the Omnibus Budget Reconciliation Act of 1993 and Rule
16b-3 under the Exchange Act. The Committee administers the Company's stock
option plans, grants stock options thereunder and reviews the compensation of
the CEO and the four most highly compensated officers (and others potentially
in that classification) for each fiscal year.
The Finance Committee, which held three meetings during the 1996 fiscal year,
reviews the financial affairs of the Company and recommends financial objec-
tives, goals and programs to the Board of Directors and to management.
The Audit Committee, which held one meeting during the 1996 fiscal year, re-
views the scope and results of the annual audit, reviews and approves the
services and related fees of the Company's independent public accountants, re-
views the Company's internal accounting controls and reviews the Company's In-
ternal Audit Department and its activities.
The Nominating Committee, which held one meeting during the 1996 fiscal year,
recommends to the Board of Directors the members to serve on the Board of Di-
rectors during the ensuing year. The Committee does not consider nominees rec-
ommended by stockholders.
Directors who are full-time employees of the Company receive no separate re-
muneration for their services as directors. Prior to fiscal year 1997, the re-
muneration of all non-employee directors was $12,650 per annum and $2,185 per
diem for Board meetings attended and $1,610 per diem for Committee meetings
attended, except where the Committee meeting is on the same day as a Board
meeting. In addition, directors are also reimbursed for travel expenses and
other out-of-pocket costs incurred in attending meetings.
5
<PAGE>
If the proposed Non-Employee Director Stock Compensation Plan is approved by
the stockholders at the Annual Meeting, eligible non-employee directors will
receive, in lieu of cash, restricted stock, the fair market value of which
will be equal to $30,000, which will represent the Board retainer and meeting
fees. Committee meeting fees will continue to be paid in cash. The purpose of
the Non-Employee Director Stock Compensation Plan is to encourage stock owner-
ship by directors and to further align the interests of directors and stock-
holders.
Simultaneous with the Board of Directors' approval of the Non-Employee Direc-
tor Stock Compensation Plan, the Board of Directors terminated the Directors
Retirement Plan adopted in September 1990, except with respect to former di-
rector, Jack R. Anderson. The Director's Retirement Plan provided that a non-
employee director who retires after serving as director for at least ten years
is entitled to an annual benefit for the remainder of his or her lifetime or
five years, whichever is less, which equals 75% of the annual retainer payable
to directors on the date of retirement plus 5% for each year served as a non-
employee director in excess of ten years, but not to exceed 100% of the annual
retainer payable to the director on the date of retirement. Unpaid benefits
would be forfeited if such director becomes an owner, director, officer, em-
ployee or consultant either of a nursing home facility located within 25 miles
of a Company nursing home facility or of a lodging facility located within 10
miles of a Company-owned or franchised lodging facility, provided that such
other facility is, in the opinion of the Board, in competition with the busi-
ness of the Company.
In June 1992, Stewart Bainum, a director, retired from full-time employment
with the Company. Mr. Bainum is subject to a non-competition covenant similar
to that described in the preceding paragraph. During the 1996 fiscal year, Mr.
Bainum received consulting fees totalling $30,750 in addition to Directors'
fees as indicated above.
Pursuant to the Manor Care, Inc. Non-Employee Director Stock Option and De-
ferred Compensation Stock Purchase Plan, approved by the stockholders on Sep-
tember 9, 1994 ("1994 Plan"), eligible non-employee directors may elect, prior
to May 31 of each year, to defer a minimum of 25% of Board and committee fees
earned during the ensuing fiscal year. The fees which are so deferred will be
used to purchase Common Stock on the open market within 15 days after December
1, February 28 and May 31 of such fiscal year. Pending such purchases, the
funds are credited to an Interest Deferred Account, which will be interest
bearing. Stock which is so purchased is deposited in a Stock Deferred Account
pending distribution in accordance with the Plan. Three of the incumbent Di-
rectors (Professor Herzlinger and Messrs. Robertson and Longfield) have
elected to participate in the 1994 Plan for the 1997 fiscal year. Mr.
Longfield has elected to participate only to the extent of his Board retainer
fee, which, if the Non-Employee Director Stock Compensation Plan is approved
by the Stockholders, would only be effective as to that portion of the Board
retainer fee paid prior to the Annual Meeting. After the Annual meeting, the
Board retainer fee would not be paid in cash. The amount of compensation that
will accrue to such participating directors is not currently determinable. If
the proposed Non-Employee Director Stock Compensation Plan is approved by
stockholders at the Annual Meeting, only committee fees may be deferred under
the 1994 Plan.
In addition, pursuant to the 1994 Plan, eligible non-employee directors will
be granted options to purchase 5,000 shares of Common Stock on their date of
initial election and will be granted options to purchase 1,000 shares on the
date of election in subsequent calendar years. Pursuant to the 1994 Plan, on
September 28, 1995, Messrs. Bainum, Longfield, Malek, and Robertson and Pro-
fessor Herzlinger were granted options to purchase 1,000 shares at $33.94. Al-
so, pursuant to the Plan, Mr. Simmons was granted, on March 4, 1996, options
to purchase 5,000 shares at $38.69. The amount of compensation that will ac-
crue to such directors is not currently determinable.
6
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the annual and
long term compensation for services in all capacities to the Company for the
fiscal years ended May 31, 1996, 1995 and 1994, of the chief executive officer
and the four other most highly compensated executive officers in the Company's
employ at May 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ----------------------------
STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER SHARES(#) COMPENSATION(1)
- --------------------------- ---- -------- -------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. 1996 $625,102 $337,555 (3) 60,000 $33,543
Chairman, President and 1995 572,308 343,385 (3) - 9,000
Chief Executive Officer 1994 457,867(2) 274,720 (3) 40,000 14,150
Donald C. Tomasso 1996 400,005 145,602 (3) 50,000 5,750
President, 1995 345,737 190,155 (3) - 2,250
Manor Healthcare Corp. 1994 316,187 173,903 (3) 35,000 3,538
Robert C. Hazard, Jr.
(4) 1996 403,489 201,745 (3) - 20,932
Co-Chairman, 1995 373,709 186,855 (3) - 9,000
Choice Hotels
International, Inc. 1994 346,124 173,062 (3) - 14,150
Gerald W. Petitt (4) 1996 330,129 165,065 (3) - 18,770
Co-Chairman, 1995 323,553 161,776 (3) - 9,000
Choice Hotels
International, Inc. 1994 283,193 141,596 (3) - 14,150
Donald J. Landry (5) 1996 366,702 201,686 (3) - 5,250
President, 1995 311,635 171,399 (3) 40,000 2,250
Choice Hotels
International, Inc. 1994 275,712 144,059 (3) 25,000 3,537
</TABLE>
- ----------------
(1) Represents amounts contributed by the Company for fiscal 1996, 1995 and
1994 for the five individuals named in the above Summary Compensation
Table (the "Named Officers") under the 401(k) Plan and the Nonqualified
Savings Plan, which provide retirement and other benefits to eligible
employees, including the Named Officers. Amounts contributed in cash or
stock by the Company during fiscal 1996 under the 401(k) Plan for the
Named Officers were as follows: Mr. Bainum, Jr. $9,000; Mr. Tomasso,
$1,885; Mr. Hazard, $5,161; Mr. Petitt, $5,916; and Mr. Landry, $1,752.
Amounts contributed in cash or stock by the Company during fiscal 1996
under the Nonqualified Savings Plan for the Named Officers were as
follows: Mr. Bainum, $24,543; Mr. Tomasso, $3,865; Mr. Hazard, $15,771;
Mr. Petitt, $12,854; and Mr. Landry, $3,498.
(2) Mr. Bainum took an unpaid leave of absence during April and May 1994 while
he devoted a substantial portion of his time exploring the possibility of
seeking an elective governmental position.
(3) The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any
of the Named Officers.
(4) Mr. Hazard and Mr. Petitt served as Co-Chairmen of Choice Hotels
International, Inc. ("CHI") from January 1995 to May 31, 1996. Prior to
January 1, 1995, Mr. Hazard served as Chairman and Chief Executive Officer
of CHI and Mr. Petitt served as President and Chief Operating Officer of
CHI.
(5) Prior to January 1, 1995, Mr. Landry served as President of the Manor Care
Hotel Division. On January 1, 1995, he also became President of CHI.
7
<PAGE>
The following tables set forth certain information at May 31, 1996, and for
the fiscal year then ended concerning stock options granted to the Named Offi-
cers. All Common Stock figures and exercise prices have been adjusted to re-
flect stock dividends and stock splits effective in prior fiscal years.
STOCK OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
----------------------------------------------- ---------------------
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF GRANTED TO ALL EXERCISE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL 1996 PER SHARE DATE 5%(3) 10%(4)
---- --------- -------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. 60,000 (2) 10.5% $30.31 6/21/2005 $1,143,600 $2,898,600
Donald C. Tomasso 50,000 (2) 8.8% $30.31 6/21/2005 $ 953,000 $2,415,500
Robert C. Hazard, Jr. - - - - - -
Gerald W. Petitt - - - - - -
Donald J. Landry - - - - - -
</TABLE>
- ----------------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast future possible appreciation, if
any, of the Company's stock price. Since options are granted at market
price, a zero percent gain in the stock price will result in no realizable
value to the optionees.
(2) The options granted to Mr. Bainum, Jr. and Mr. Tomasso vest at the rate of
20% per year commencing on the first through the fifth anniversary of the
date of the stock option grant.
(3) A 5% per year appreciation in stock price from $30.31 per share yields
$49.37.
(4) A 10% per year appreciation in stock price from $30.31 per share yields
$78.62.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT MAY 31, 1996
VALUE OF UNEXERCISED
SHARES ACQUIRED VALUE IN-THE-MONEY OPTIONS AT
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE MAY 31, 1996 (1)
--------------- -------- ----------- ------------- -------------------------
# $ # $ EXERCISABLE UNEXERCISABLE
--------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. - - 635,500 229,500 $17,236,482 $4,688,063
Donald C. Tomasso - - 54,500 180,500 1,262,028 3,164,179
Robert C. Hazard, Jr. - - 78,000 34,500 2,281,770 1,034,130
Gerald W. Petitt 18,300 $398,868 39,500 34,500 1,184,330 1,034,130
Donald J. Landry - - 37,000 185,000 810,190 2,666,945
</TABLE>
- ----------------
(1) The closing price of the Company's Common Stock as reported by the New
York Stock Exchange on May 31, 1996, was $39.00. The value is calculated
on the basis of the difference between the option exercise price and such
closing price multiplied by the number of shares of Common Stock
underlying the option.
8
<PAGE>
EMPLOYMENT AGREEMENTS
Under the terms of an employment agreement among Mr. Landry, the Company and
CHI, his annual salary is presently $404,250 with annual cost-of-living in-
creases. The agreement extends through November 30, 1999. Mr. Landry serves as
President of the Manor Care Hotel Division and President of CHI. The agreement
provides for an annual bonus of up to 55% of his base compensation based in
part on performance of the Company and based in part on performance (including
a customer satisfaction component) of the Lodging Division, which consists of
both the Manor Care Hotel Division and CHI.
As of June 1, 1996, each of Mr. Hazard and Mr. Petitt has entered into an
agreement with CHI pursuant to which each of Mr. Hazard and Mr. Petitt will
remain an unpaid employee of CHI until May 31, 1997, and options to purchase
up to 5,000 shares of the Company's Common Stock, which were previously
granted and are presently outstanding, will vest ratably beginning June 1,
1996, and ending May 31, 1997.
RETIREMENT PLANS
In February 1985, the Board of Directors adopted the Supplemental Executive
Retirement Plan (the "SERP"). Participants are selected by the Board and are
at the level of Senior Vice President or above. A total of ten officers of the
Company, including all of the Named Officers have been selected to participate
in the SERP.
Participants in the SERP will receive a monthly benefit for life based upon
final average salary and years of service. Final average salary is the average
of the monthly base salary, excluding bonuses or commissions, earned in a 60
month period out of the 120 months of employment, which produces the highest
average, prior to the first occurring of the early retirement date or the nor-
mal retirement date. The normal retirement age is 65, and participants must
have a minimum of 15 years of service. Participants may retire at age 60 and
may elect to receive reduced benefits commencing prior to age 65, each subject
to Board approval. All of the Named Officers who are participants, except for
Mr. Hazard, are age 55 or younger, so that none of their compensation reported
above would be included in the final average salary calculation.
Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service would be as follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ------------- ----------------
<S> <C> <C>
Stewart Bainum, Jr. 22.5 38
Donald C. Tomasso 5 19
Donald J. Landry 4 22
</TABLE>
The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for Social Security and other
amounts.
<TABLE>
<CAPTION>
YEARS OF SERVICE/BENEFIT AS
PERCENTAGE OF FINAL AVERAGE SALARY
---------------------------------------------------------------
25 OR
REMUNERATION 15/15% 20/22.5% MORE/30%
------------ ---------- ------------ ------------
<S> <C> <C> <C>
$300,000 $ 45,000 $ 67,500 $ 90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>
Effective January 1, 1992, the Company established the Manor Care, Inc. Re-
tirement Savings and Investment Plan (the "401(k) Plan"), a defined contribu-
tion retirement, savings and investment plan for its employees and the employ-
ees of its participating affiliated companies. The 401(k) Plan is qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and includes a cash or deferred arrangement under Section 401(k) of
the
9
<PAGE>
Code. All employees age 21 or over and who have worked for the Company for a
twelve month period during which such employee completed at least 1,000 hours
are eligible to participate. Subject to certain non-discrimination require-
ments, each employee may contribute an amount to the 401(k) Plan on a pre-tax
basis up to 15% of the employee's salary, but not more than the current fed-
eral limit of $9,500. The Company will match contributions made by its employ-
ees subject to certain limitations described in greater detail below. The
amount of the match will be equal to a percentage of the amount of salary re-
duction contribution made on behalf of a participant during the plan year
based upon a formula that involves the profits of the Company for the year and
the number of years of service of the participant. In no event will the Com-
pany make a matching contribution which exceeds 6% of a participant's salary.
Amounts contributed by the Company pursuant to the 401(k) Plan for the Named
Officers for the three fiscal years ended May 31, 1996, 1995 and 1994 are in-
cluded in the Summary Compensation Table under the column headed "All Other
Compensation".
Effective January 1, 1992, the Company adopted the Manor Care, Inc. Nonquali-
fied Retirement Savings and Investment Plan (the "Nonqualified Savings Plan").
Certain select highly compensated members of management of the Company are el-
igible to participate in the Plan. The Nonqualified Savings Plan mirrors the
provisions of the 401(k) Plan, to the extent feasible, and is intended to pro-
vide the participants with a pre-tax savings vehicle to the extent that pre-
tax savings are limited under the 401(k) Plan as a result of various govern-
mental regulations, such as non-discrimination testing. All of the Named Offi-
cers have elected to participate in the Nonqualified Savings Plan. Amounts
contributed by the Company under the Nonqualified Savings Plan for fiscal
years ended May 31, 1996, 1995 and 1994 for the Named Officers are included in
the Summary Compensation Table under the column headed "All Other Compensa-
tion."
The Company match under the 401(k) Plan and the Nonqualified Savings Plan is
limited to a maximum aggregate of 6% of the annual salary of a participant.
Effective December 1993, participants were given the right to elect to receive
the Company matching contribution either in Company stock or cash or a combi-
nation. Likewise, participant contributions under the two plans may not exceed
the aggregate of 15% of the annual salary of a participant.
Effective January 1, 1992, the Company adopted a non-contributory Cash Accu-
mulation Retirement Plan (the "CARP") maintained by the Company for its em-
ployees and those employees of its participating affiliated companies. The
CARP is qualified under Section 401(a) of the Code. All employees age 21 or
over and who have worked for the Company for a twelve month period during
which such employee completed at least 1,000 hours are automatically members
of the CARP. Each year the account of each employee is adjusted to reflect in-
terest at a rate calculated in accordance with the CARP. Amounts accrued under
the CARP become fully vested after five years of service. On July 2, 1996, the
Board of Directors voted to not allow any new participants in the CARP after
August 15, 1996, and to discontinue the annual benefit accrual by the Company
after December 31, 1996. However, the interest will continue on the balance of
a participating employee's account. Until December 31, 1996, the annual bene-
fit accrual made by the Company will continue to be based on salary as fol-
lows:
<TABLE>
<CAPTION>
BASE PERCENTAGE BASE PERCENTAGE BASE PERCENTAGE
IF AGE PLUS SERVICE IF AGE PLUS SERVICE IF AGE PLUS SERVICE
ANNUAL SALARY IS LESS THAN 45 IS 45 TO 54 IS 55 OR MORE
- ------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
First $12,000 3% 3.5% 4%
Next $6,000 2% 2.5% 3%
Additional
Compensation up
to $100,000 1% 1.5% 2%
</TABLE>
10
<PAGE>
COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation philosophy of Manor Care, Inc. (the "Company") is to be com-
petitive with the leading service companies and selected direct competitors in
the marketplace, to attract, retain and motivate a highly qualified workforce,
and to provide career opportunities. The Company uses various compensation
surveys, primarily conducted and evaluated by independent consultants, to pro-
vide data to support the development of competitive compensation plans which
reinforce this philosophy. Summary data on service companies of similar size
participating in each survey are utilized as the basis for the evaluations.
This is the same philosophy applied by the Compensation/Key Executive Stock
Option Plan Committee and the Compensation/Key Executive Stock Option Plan
Committee No. 2 ("Committee No. 2") of the Board of Directors (collectively,
the "Committee") in determining compensation for the CEO and executive offi-
cers. In evaluating the CEO's performance, the Committee, in addition to fi-
nancial performance, considers factors important to the Company such as ethi-
cal business conduct, progress against the Company's strategic plan objec-
tives, management succession planning, customer service satisfaction and the
general overall perception of the Company by financial leaders and customers.
The Committee is responsible for setting and administering the policies which
govern executive compensation and the stock based programs of the Company. The
members of the Committee are Messrs. Robertson (Chairman), Bainum (not a mem-
ber of Committee No. 2), Longfield and Malek. Mr. Bainum served as Chairman
and CEO prior to March 1987.
Compensation of the Company's officers is reviewed annually by the Committee.
Changes proposed for these employees are evaluated and approved by the Commit-
tee on an individual basis.
There are three components in the Company's executive compensation program:
1. Base salary
2. Cash bonus
3. Long-term incentive compensation
The Committee continues to believe that compensation for the CEO and other
executive officers should be weighted in favor of more "pay at risk" or "vari-
able pay."
BASE SALARY
Base salary is the only component that is not variable. Scope and complexity
of the position as well as external market factors are used to determine base
salary levels. Salary changes are based on guidelines established for all em-
ployees using individual performance to determine the change. Mr. Bainum,
Jr.'s base salary paid in fiscal 1996 is shown under the heading "Salary" in
the Summary Compensation Table.
CASH BONUS
A cash bonus based on return on beginning equity or business unit profit and
on customer satisfaction surveys of the business unit is used to focus manage-
ment's attention on profits and the effective use of Company assets.
LONG-TERM INCENTIVE COMPENSATION
Long-term compensation has been established to:
a.Focus attention on the Company's and stockholders' long term goals;
b.Increase ownership and retention in the Company's stock.
The Manor Care, Inc. 1995 Long-Term Incentive Plan ("Long-Term Incentive
Plan") provides the Committee with the discretion to grant Restricted Shares,
Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights
or Performance Shares as it may determine to be desirable in order to recruit
and retain management and to focus the optionees on the long term goals of the
Company to be more closely aligned with the interests of stockholders.
The Committee believes the Company has an overall compensation plan which
fulfills current Company philosophy and, in addition, promotes increased
stockholder value through performance-based compensation.
11
<PAGE>
EXECUTIVE STOCK OWNERSHIP PROGRAM
Effective June 1, 1995, the Company established an Executive Stock Ownership
program for the Chairman and the officers who report directly to the Chairman.
The program requires the relevant officers to own qualifying Common Stock as a
condition of employment in order to ensure a direct relationship between such
executives and the stockholders. The relevant officers will be required to
reach and maintain ownership of a specified amount of Common Stock within five
years from the effective date of the program, or upon the fifth anniversary of
employment as Chairman or a direct report officer, whichever is later. The
amount of shares of Common Stock required to be owned by each officer is de-
termined by the beginning base salary times a multiple which varies, depending
upon the level of responsibility of the particular officer. The multiples
originally varied from 1.5 to 4, but on July 2, 1996, the Board of Directors
increased the multiples to 2.5 to 6 to further align the interests of the of-
ficers and the stockholders.
IMPACT OF INTERNAL REVENUE CODE SECTION 162(M)
The Omnibus Budget Reconciliation Act of 1993 disallows, effective January 1,
1994, a federal income tax deduction for compensation, other than certain per-
formance-based compensation, in excess of $1 million annually paid by the Com-
pany to any currently serving Named Officer identified in the Summary Compen-
sation Table. Stock option awards under the Key Executive Stock Option Plan of
1969, which expired in 1993, and under the Key Executive Stock Option Plan of
1993, which has been terminated, qualify as performance-based compensation and
are exempt from consideration for purposes of calculating the one million dol-
lar limit. With respect to the 1995 Long-Term Incentive Plan, appropriate
steps have been and will continue to be taken to qualify awards made thereun-
der as performance-based compensation and thus be exempt from consideration
for purposes of calculating the one million dollar limit. No individual named
in the Summary Compensation Table is likely to receive compensation, not in-
cluding performance-based compensation, in fiscal 1997 which would be in ex-
cess of $1 million. The Committee intends to monitor the Company's compensa-
tion programs with respect to such laws.
COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
Jerry E. Robertson, Ph.D., Chairman
Stewart Bainum (not a member of Committee No. 2)
William H. Longfield
Frederic V. Malek
12
<PAGE>
PERFORMANCE GRAPH-STOCKHOLDER RETURN
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock against the cumulative
total return on the S&P Composite-500 Stock Index and a peer group selected by
the Company for the five fiscal years ended May 31, 1996, assuming reinvest-
ment of dividends.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG MANOR CARE, INC., S&P500 AND PEER GROUP
LOGO
Assumes $100 invested on June 1, 1991 in the Common Stock of Manor Care, Inc.,
the S&P500 Index and Peer Group Companies (weighted by market capitalization).
Total return assumes reinvestment of dividends.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Manor Care, Inc. 100 114 151 185 210 281
S&P 500 100 110 123 128 154 197
Peer Group (Weighted Average) 100 98 123 179 194 260
</TABLE>
The peer group consists of thirteen other companies primarily involved in the
Company's lines of business. Nine of the companies are involved in ownership
and operation of nursing homes: Beverly Enterprises, Inc., Geriatric and Medi-
cal Centers, Inc., Grancare Inc., Healthsouth Corp., Horizon/CMS Healthcare,
Corp., Integrated Health Services, Inc., Mariner Health Group, Inc., National
HealthCare, L.P. and Vencor, Inc. Three companies are involved in hotel fran-
chising, management or ownership: Doubletree Corp., LaQuinta Motor Inns, Inc.
and Red Lion Inns L.P. One company is involved in the institutional pharmacy
business: Omnicare, Inc. Vencor, Inc. replaces Hillhaven Corp., which was in
the peer group last year, due to the acquisition of Hillhaven Corp. by Vencor,
Inc. in September. Doubletree Corp., an owner, manager and franchisor of ho-
tels, replaces HFS Incorporated, which was in the peer group last year, due to
the expansion by HFS Incorporated into non-lodging businesses.
13
<PAGE>
PROPOSED APPROVAL OF MANOR CARE, INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION COMPENSATION PLAN
GENERAL
During fiscal year 1996, the Compensation/Key Executive Stock Option Plan
Committee and the Board of Directors undertook a review of director compensa-
tion with the objective of increasing the stock-based components of total com-
pensation. The Committee and the Board of Directors believe that increasing
the stock-based components of director compensation serves to encourage stock
ownership by directors and to further align the interests of directors and
stockholders. Based on this review, the Board of Directors adopted on July 2,
1996, the Non-Employee Director Stock Compensation Plan, subject to approval
of the Non-Employee Director Stock Compensation Plan by the affirmative vote
of the holders of a majority of the number of shares of Common Stock present
in person or by proxy at the Annual Meeting.
The Non-Employee Director Stock Compensation Plan authorizes the awarding of
a maximum of 40,000 shares of Common Stock (subject to adjustment for stock
splits and similar capital changes) to non-employee directors. Beginning in
Fiscal Year 1997, and each year thereafter, each non-employee director shall
be granted a number of shares of Common Stock equal to $30,000 fair market
value (determined as described below). Such award shall be in lieu of all
Board of Director retainer and attendance fees and shall vest 1/3 following
each of the three years from the date of the award. Each award under the Non-
Employee Director Stock Compensation Plan shall be evidenced by an agreement
in such form as the Board of Directors shall prescribe.
Because each of the non-employee director nominees, if elected, will partici-
pate in and benefit from the Non-Employee Director Stock Compensation Plan,
each of them has a personal interest in the adoption of this proposal.
The following description of the Non-Employee Director Stock Compensation
Plan is qualified in its entirety by reference to the Manor Care, Inc. 1996
Non-Employee Director Stock Compensation Plan, a copy of which is attached as
Exhibit A to this Proxy Statement and is incorporated herein by reference.
ADMINISTRATION
The Non-Employee Director Stock Compensation Plan provides that it will be
administered by the Board of Directors, which, through a majority of its di-
rectors, shall have the power to construe and determine all questions arising
under the Non-Employee Director Stock Compensation Plan. It shall also have
the authority to adopt and amend such rules and regulations for the adminis-
tration of the Non-Employee Director Stock Compensation Plan as it shall deem
desirable.
ELIGIBILITY
The Non-Employee Director Stock Compensation Plan is available only to direc-
tors of the Company who are not employees or officers of the Company or any of
its subsidiaries. The number of participants will vary with the number of non-
employee directors.
RESTRICTIONS; VESTING
At the award date, a certificate representing the shares awarded will be reg-
istered in the director's name but held by the Company in a custodial account
until such shares have vested (the "Restriction Period"). Subject to transfer
restrictions described below, the director will have the right to vote such
shares during the Restriction Period. Cash and non-cash dividends will accrue
in the custodial account during the Restriction Period. The shares shall vest
1/3 after each of the three years after the award date. Except in the case of
death, disability or retirement (65 years of age or failure to be re-elected
at the annual meeting of shareholders), if a participant ceases to be a non-
employee director for any reason prior to vesting, the unvested shares shall
be forfeited and ownership shall revert to the Company. Any shares subject to
an award which are forfeited or for any other reason are not issued to a di-
rector will automatically be available again for use under the Non-Employee
Director Stock Compensation Plan to the extent permitted under applicable se-
curities laws.
During the Restriction Period, the shares held in the custodial account may
not be transferred, assigned, pledged or hypothecated in any way and will not
be subject to execution, attachment or similar process.
DEFERRAL
A participant may irrevocably elect to defer payment on all or a portion of
the shares held in the custodial account prior to any vesting. Any deferral
shall be for a period of time which ends no sooner than the earlier of (i) a
date at
14
<PAGE>
least 24 months from the date of such vesting or (ii) cessation of services as
a non-employee director. During such deferral period, the participant will not
be entitled to vote the shares or receive dividends.
FAIR MARKET VALUE
In each fiscal year, each non-employee director shall be granted a number of
shares of Common Stock equal to $30,000 fair market value. For purposes of the
Non-Employee Director Stock Compensation Plan, fair market value is the mean
of the high and low prices at which the Common Stock was sold on the market on
the date of the award, or, if no sales occurred on such date, the mean of the
high and low prices at which the Common Stock sold on the market on the next
preceding date for which Common Stock was so sold.
INCOME TAX CONSEQUENCES
The grant of restricted shares of Common Stock ("Restricted Shares") under
the Non-Employee Director Stock Compensation Plan does not immediately produce
taxable income to the director or a tax deduction to the Company. However,
when the restrictions on ownership and transferability lapse and the Re-
stricted Shares vest, the director will recognize taxable income in an amount
equal to the fair market value of the Restricted Shares on that date and the
Company will be entitled to a corresponding income tax deduction. However, a
director may make an election within 30 days of the grant date (or within 30
days of stockholder approval of the Non-Employee Director Stock Compensation
Plan for shares granted subject to such approval) under Section 83(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), to recognize the fair
market value of the Restricted Shares as taxable income at the time of the
grant. If, however, the restrictions on ownership and transferability are not
satisfied and the shares are forfeited, no taxable loss will be recognized.
The director's tax basis in these shares will be the amount of income recog-
nized. Dividends paid to a director are taxable income in the year received.
At the time of any subsequent sale or other disposition of the shares, the
director will realize capital gain (or loss) equal to the difference between
the amount received for the shares and his or her tax basis in such shares.
The capital gain or loss will be long-term or short-term, depending on the di-
rector's tax holding period for such shares.
AMENDMENT AND TERMINATION
The Board of Directors may amend, modify or terminate the Non-Employee Direc-
tor Stock Compensation Plan at any time, except that (i) no such amendment
shall be effective without stockholder approval if such approval is required
by applicable securities laws or the applicable rules of any securities ex-
change, and (ii) to the extent prohibited by applicable securities laws or the
applicable rules of any securities exchange, the Non-Employee Director Stock
Compensation Plan may not be amended more than once every six months, other
than to comport with changes in the Internal Revenue Code of 1986, as amended
or the Employee Retirement Income Security Act of 1974, as amended.
VOTE REQUIRED
Approval of the Non-Employee Director Stock Compensation Plan requires ap-
proval by the holders of a majority of the shares of Common Stock present in
person or by proxy at the Annual Meeting.
The Board of Directors recommends a vote FOR the proposal to adopt the Manor
Care, Inc. 1996 Non-Employee Director Stock Option Compensation Plan. Proxies
received by the Board of Directors will be so voted unless stockholders spec-
ify a contrary choice.
CERTAIN TRANSACTIONS
On September 1, 1994, Manor Care, Inc. entered into a Master Aircraft Lease
Agreement with Wilderness Investment Company, Inc. ("Wilderness"), a corpora-
tion which is solely owned by Stewart Bainum. The lease, which permits the
Company to lease from time to time a Cessna Citation VI owned by Wilderness at
the rate of $1,150 per flight hour. During the 1996 fiscal year, the Company
incurred a total of $100,631 for aircraft usage pursuant to the Lease.
As of May 31, 1995, the Company purchased from Messrs. Hazard and Petitt 25
shares each, representing one-half of their shares, of CHI Common Stock. In
accordance with a formula contained in an agreement dated December 20, 1994,
the Company paid Messrs. Hazard and Petitt the sum of $13,683,704 each for
such shares. After the transaction, Messrs. Hazard and Petitt each owned 25
shares of CHI Common Stock and the Company owned 850 shares of CHI Common
Stock. As of May 31, 1996, the Company purchased from each of Mr. Hazard and
Mr. Petitt his remaining 25 shares for a price of $15,197,946 to each of them.
In the opinion of management, the foregoing transactions were on terms at
least as advantageous to the Company as could have been obtained from non-af-
filiated persons.
15
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RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen & Co. has been the Company's independent public accountants
since June 1976. In the Spring of 1997, the Board of Directors will select the
Company's independent public accountants to audit the accounts of the Company
for the current fiscal year. Representatives of Arthur Andersen & Co. are ex-
pected to be present at the Meeting, and will have an opportunity, if they so
desire, to make a statement and will be available to respond to appropriate
questions.
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
The Company's 1997 Annual Meeting is presently scheduled to be held on Sep-
tember 29, 1997. Stockholder proposals must be submitted to the Secretary no
later than April 29, 1997, in order to be eligible for inclusion in the
Company's proxy materials for such meeting.
OTHER BUSINESS
As of the date of the Proxy Statement, management does not know of any busi-
ness other than that mentioned above which will be presented for considera-
tion. However, if any other matter should properly come before the Meeting, it
is the intention of the persons named in the accompanying form of proxy to
vote the proxies in accordance with their judgment on such matter.
After the business session and a report to the stockholders on the progress
of the Company, a discussion period will take place during which stockholders
will have an opportunity to discuss matters of interest concerning the Compa-
ny.
- ----------------
A COPY OF THE COMPANY'S 1996 FORM 10-K (EXCLUDING EXHIBITS) FILED WITH THE SE-
CURITIES AND EXCHANGE COMMISSION WILL BE MADE AVAILABLE TO STOCKHOLDERS, WITH-
OUT CHARGE, UPON WRITTEN REQUEST TO THE INVESTOR RELATIONS DEPARTMENT OF MANOR
CARE, INC., 11555 DARNESTOWN ROAD, GAITHERSBURG, MARYLAND 20878. THE REPRODUC-
TION COST WILL BE CHARGED IF EXHIBITS ARE REQUESTED.
16
<PAGE>
EXHIBIT A
MANOR CARE, INC.
1996 NON-EMPLOYEE DIRECTOR
STOCK COMPENSATION PLAN
Manor Care, Inc. has adopted and established a stock compensation plan for
Non- Employee Directors in accordance with the following terms and conditions.
SECTION ONE
DESIGNATION AND PURPOSE OF THE PLAN
A. Designation. This Plan is designated the "Manor Care, Inc. Non-Employee
Director Stock Compensation Plan."
B. Purpose. The purpose of this Plan is to increase the stock-based component
of Non-Employee Director compensation so as to encourage stock ownership by
Non-Employee Directors and to further align the interest of Non-Employee Di-
rectors and stockholders.
SECTION TWO
DEFINITIONS
As used in the Plan, the following terms mean:
A. "Award" means restricted stock granted hereunder.
B. "Board" means the Board of Directors of the Company.
C. "Company" means Manor Care, Inc.
D. "Custodial Account" means the account described in Section 7(A) herein.
E. "Disability" means a permanent and total disability within the meaning of
Section 22(e)(3) of the Internal Revenue Code of 1986 as amended.
F. "Non-Employee Director" means a member of the Board of the Company who is
not an employee of the Company or any of its subsidiaries.
G. "Participant" means any Non-Employee Director who is granted an Award as
provided in this Plan.
H. "Plan" means this Non-Employee Director Stock Compensation Plan.
I. "Retirement" means termination of service as a Director for either of the
following reasons: (i) after attaining 65 years of age or (ii) failure to be
re-elected as a Director by the shareholders of the Company at the Annual
Meeting of Stockholders.
J. "Stock" means the common stock of Manor Care, Inc.
SECTION THREE
EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL
The Plan shall be effective upon the approval of the Plan by a majority of
the outstanding shares of Stock voted at the 1996 Annual Meeting of Stockhold-
ers ("Stockholder Approval").
SECTION FOUR
ADMINISTRATION OF THIS PLAN
This Plan shall be administered by the Board. The Board shall have all the
powers vested in it by the terms of this Plan, such powers to include author-
ity (within the limitation described herein) to prescribe the form of the
agreement embodying Awards made under this Plan. Subject to the provisions of
this Plan, the Board shall have the power to construe this Plan, to determine
all questions arising thereunder, and to adopt and amend such rules and regu-
lations for the administration of this Plan as it may deem desirable. Any de-
cision of the Board in the administration of this Plan, as described herein,
shall be final and conclusive. The Board may act only by a majority of its
members in office, except that the members thereof may authorize any one or
more of their number or the Secretary or any other officer of the Company to
execute and deliver documents on behalf of the Board.
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<PAGE>
SECTION FIVE
GRANT OF AWARDS AND LIMITATION OF
NUMBER OF SHARES SUBJECT TO AWARD
A. Compensation in Common Stock. Subject to stockholder approval, effective
as of the 1996 Annual Meeting of Stockholders and as of each annual meeting
thereafter, upon election as a Non-Employee Director at each such meeting,
each Non-Employee Director shall be granted a number of shares equal to
$30,000 fair market value (as determined in accordance with Section 5(B) be-
low) of Stock on the date of each annual meeting. Such Award shall be in lieu
of all Board retainer and Board attendance fees.
B. Determination of Fair Market Value. The fair market value of the Stock on
the date of granting an Award shall be the mean of the high and low prices at
which the Stock was sold on the market on such date. In the event no such
sales of Stock occurred on such date, the fair market value of the Stock shall
be determined by the mean of the high and low prices at which the Stock was
sold on the market on the next preceding date for which the Stock was so sold.
C. Fractions of Shares. Whenever under the terms of the Plan fractional
shares would be required to be issued, the fractional shares shall be rounded
up to the next full share.
D. Total Number of Shares. Subject to any adjustment pursuant to Section 8,
the total number of shares of Stock which may be awarded under this Plan is
40,000 shares. The maximum number of shares authorized may be increased from
time to time by approval of the Board and, if required pursuant to Rule 16-3
of the Securities and Exchange Commission or its successors or the applicable
rules of any stock exchange, the stockholders of the Company.
To the extent that an Award lapses or the rights of the Participant to whom
it was granted terminate, expire or are cancelled for any other reason, in
whole or in part, shares of Stock (or remaining shares) subject to such Award
shall again be available for the grant of an Award under the Plan. Shares de-
livered by the Company under the Plan may be authorized and unissued Stock,
Stock held in the treasury of the Company or Stock purchased on the open mar-
ket (including private purchases) in accordance with applicable securities
laws.
E. Insufficient Number of Shares. In the event that the number of shares of
Stock available for future Awards under this Plan is insufficient to make all
Awards required to be made on any date, then all Participants entitled to an
Award on such date shall share ratably in the number of shares of Stock which
may be included in Awards granted to Participants under this Plan.
SECTION SIX
ELIGIBILITY
Each Non-Employee Director shall be eligible to receive an Award in accor-
dance with Section Five. Each Award granted under this Plan shall be evidenced
by an agreement in such form as the Board shall prescribe from time to time in
accordance with this Plan and shall comply with the terms and conditions set
forth in Section 7. Such an agreement shall incorporate the provisions of this
Plan by reference.
SECTION SEVEN
RESTRICTIONS ON SHARES
A. Custodial Account. The shares shall be held by the Company in a Custodial
Account on behalf of the Participant until such time as the shares have vested
pursuant to the terms of Section 7(B) of this Plan.
B. Vesting. The shares held by the Company shall remain in the Custodial Ac-
count until vesting which shall occur (a) to the extent of one-third of the
total number of shares, subject to an Award following the expiration of one
year from the date of the Award, (b) to the extent of an additional one-third
following the expiration of two years from the date of the Award, and (c) to
the extent of an additional one-third following the expiration of three years
from the date of the Award.
Upon vesting, the shares shall be distributed to the Participant within a
reasonable period of time not to exceed ninety (90) days from the date of
vesting and the Custodial Account shall be terminated as to such shares.
C. Forfeiture. Subject to Section 7(E) below, if the Participant ceases to be
a Non-Employee Director for any reason prior to vesting, the Participant shall
forfeit the shares, and the Custodial Account shall be terminated. Ownership
of the forfeited shares shall revert back to the Company.
D. No Assignment. The shares granted under the Plan, while held by the Com-
pany pursuant to the Custodial Account, shall not be transferred, assigned,
pledged, or hypothecated in any way (whether by operation of law or other-
wise), and shall not be subject to execution, attachment, or similar process.
Upon any attempt to so transfer,
A-2
<PAGE>
assign, pledge, hypothecate, or otherwise dispose of the shares, or of any
right or privilege conferred thereby, contrary to the provisions hereof, or
upon the levy of any attachment or similar process upon such rights and privi-
leges, the Participant shall forfeit the shares and ownership of the forfeited
shares shall revert back to the Company.
E. Death, Disability and Board Retirement. A Participant who ceases to serve
on the Board by reason of (i) death, (ii) Disability, or (iii) Retirement,
shall be vested in his or her entire Award notwithstanding the limitation of
Section 7(B) above.
SECTION EIGHT
CHANGES IN CAPITAL STRUCTURE
In the event of any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of the Com-
pany, the Board shall make adjustments, determined by the Board in its discre-
tion to be appropriate, as to the number and kind of securities subject to
this Plan and specified in Section 5 of this Plan and as to the number and
kind of securities covered by each outstanding Award and, where applicable,
the price per share thereunder.
SECTION NINE
RIGHTS AS A STOCKHOLDER
The Participant shall be entitled to vote the shares held by the Company in
the Custodial Account. Any cash or non-cash dividend payable with respect to
shares held in the Custodial Account will remain in the Custodial Account sub-
ject to risk of forfeiture until such time as the shares with respect to which
such cash or non-cash dividend, as the case may be, was declared is either
distributed to the Participant or forfeited by the Participant.
Notwithstanding anything to the contrary contained herein, no Stock or cash
dividends shall be transferred by the Company to a Custodial Account prior to
the date of Stockholder Approval, and no Non-Employee Director shall be enti-
tled to any rights as a stockholder with respect to any Stock granted hereun-
der, including, without limitation voting rights until such Stock has been
transferred to a Custodial Account.
SECTION TEN
TITLE
Subject to Section 13 herein, the shares held by the Company in a Custodial
Account shall be held in the name of the Participant, is either distributed to
the Participant or forfeited by the Participant.
Notwithstanding anything to the contrary contained herein, no Stock or cash
dividends shall be transferred by the Company to a Custodial Account prior to
the date of Stockholder Approval, and no Non-Employee Director shall be enti-
tled to any rights as a stockholder with respect to any Stock granted hereun-
der, including, without limitation voting rights until such Stock has been
transferred to a Custodial Account.
SECTION TEN
TITLE
Subject to Section 13 herein, the shares held by the Company shall be held in
the name of the Participant. Such shares shall at all times remain in the Com-
pany Custodial Account until they have been (i) forfeited by the Participant,
(ii) distributed to the Participant, or (iii) transferred to a grantor "Rabbi
Trust" in accordance with the provisions of Section 13.
SECTION ELEVEN
RISK OF LOSS
The Participant agrees to assume all risks in connection with any decrease in
the value of the shares granted to the Participant placed into the Custodial
Account for the benefit of the Participant.
SECTION TWELVE
NOTICE TO COMPANY
The Participant shall notify the Company immediately if he or she elects to
make an election under Section 83(b) of the Internal Revenue Code or upon the
occurrence of any other event resulting in the value of the shares being in-
cluded in the Participant's gross income prior to vesting.
A-3
<PAGE>
SECTION THIRTEEN
DEFERRAL
Participant, provided he or she has not made the election referred to in Sec-
tion 12 herein, may elect by written notice to defer payment on all or a por-
tion of the shares held in the Custodial Account prior to any vesting, subject
to the following conditions:
A. Such election shall be irrevocable. An election to defer payment shall be
made at least sixty (60) days prior to any vesting for which the election to
defer payment is made. Participant may elect to defer the receipt of the
shares held in the Custodial Account prior to any vesting for a period of time
which ends no sooner than the earlier of (i) a date at least twenty-four (24)
months from the date of any such vesting or (ii) cessation of service as a
Non-Employee Director. During such deferral period, Participant shall not be
entitled to (i) vote the shares granted to him or her for which a deferral has
been elected, and (ii) currently receive cash dividends or non-cash dividends.
B. The Company shall establish a grantor "Rabbi Trust" and shall establish
thereunder on behalf of the Participant upon a deferral election a liability
account (the "Deferred Compensation Account") which shall be credited with any
shares, cash dividends, and non-cash dividends subject to such deferral elec-
tion. Any shares transferred from the Custodial Account to the Deferred Com-
pensation Account shall be retitled and held in the name of the trustee of the
grantor "Rabbi Trust".
C. There shall be credited to the Deferred Compensation Account an additional
amount with respect to the cash dividends (i.e., in addition to the items
credited pursuant to paragraph (B) hereof) equal to the earnings generated
through the investment of the cash dividends by the trustee of the grantor
trust.
D. The Company will provide an annual statement of the Deferred Compensation
Account to the Participant showing amounts credited to his or her account in
accordance with paragraph (C).
E. Nothing contained in this Plan and no action taken pursuant to the provi-
sions of this Plan shall create or be construed to create a trust of any kind
other than a grantor "Rabbi Trust", or a fiduciary relationship between the
Company and the Participant, his or her designated beneficiary or any other
person. Any amounts deferred under the provisions of this Plan shall continue
for all purposes to be a part of the general assets of the Company. To the ex-
tent that Participant acquires a right to receive payment from the Company un-
der this Plan, such right shall be no greater than the right of any unsecured
general creditor of the Company.
F. The right of the Company or any other person to the payment of deferred
compensation or other benefits under this Plan shall not be assigned, trans-
ferred, pledged, or encumbered except by will or by the laws of descent and
distribution.
SECTION FOURTEEN
GENDER
Where applicable, words in the feminine shall include the masculine, words in
the neuter shall include the masculine and feminine, and words in the singular
shall include the plural, and vice versa.
SECTION FIFTEEN
SUCCESSORS
This Plan shall be binding upon and inure to the benefit of the Company and
its subsidiaries, its successors and assigns and the Participant and his or
her heirs, executors, administrators and legal representatives.
SECTION SIXTEEN
NO RIGHT TO CONTINUE AS A DIRECTOR
Neither the Plan, nor the granting of an Award, nor any other action taken
pursuant to the Plan, shall constitute or be evidence of any agreement or un-
derstanding, express or implied, that the Company will retain aNon-Employee
Director for any period of time, or at any particular rate of compensation.
Nothing in this Plan shall in any way limit or affect the right of the Board
or the stockholders of the Company to remove any Non-Employee Director or oth-
erwise terminate his or her service as a director of the Company.
A-4
<PAGE>
SECTION SEVENTEEN
MISCELLANEOUS PROVISIONS
A. Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as amended ("Act"), any of the shares of Stock is-
sued, delivered or paid in settlement under the Plan. If Stock awarded under
the Plan may in certain circumstances be exempt from registration under the
Act, the Company may restrict its transfer in such manner as it deems advis-
able to ensure such exempt status.
B. Governing Law. All matters relating to the Plan or to Awards granted here-
under shall be governed by the laws of the State of Maryland, without regard
to its principles of conflict of laws.
C. Titles and Headings. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles and headings, shall control.
SECTION EIGHTEEN
AMENDMENT AND TERMINATION
This Plan may be terminated or amended at any time and from time to time by
the Board as the Board shall deem advisable provided, however, that (a) no
such amendment shall be effective without approval of the stockholders of the
Company, if stockholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Securities Exchange Act of 1934 or its successors, or the
applicable rules of any securities exchange, and (b) to the extent prohibited
by such Rule 16b-3 or its successors, the Plan may not be amended more than
once every six months, other than to comport with changes in the Internal Rev-
enue Code of 1986, as amended, or the regulations thereunder, or the Employee
Retirement Income Security Act of 1974, as amended, or the regulations there-
under. No modification or amendment of this Plan shall, without the written
consent of the Participant, materially and adversely affect his or her rights
under this Plan.
A-5
<PAGE>
MANOR CARE, INC.
11555 Darnestown Road, Gaithersburg, Maryland 20878
This Proxy is Solicited on Behalf of the Board of Directors
PROXY FOR ANNUAL MEETING SEPTEMBER 30, 1996
This undersigned hereby appoints JERRY E. ROBERTSON and FREDERIC V. MALEK,
and each of them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Stockholders of MANOR CARE, INC.
to be held in the Auditorium of the Manor Care Corporate offices, 11555
Darmestown Road, Gaithersburg, Maryland, on Monday, September 30, 1996 at 9:00
a.m. and at any adjournment thereof, and to vote all shares of common stock held
of record which the undersigned could vote, with all the powers the undersigned
would possess if personally present at such meeting, as designated on the
reverse side.
(Continued and to be signed on the reverse side)
*FOLD AND DETACH HERE*
<PAGE>
The Board of Directors recommends a vote FOR items (1) and (2).
1. ELECTION OF DIRECTORS
FOR all nominees WITHHOLD AUTHORITY
listed below to vote FOR all nominees listed below
S. BAINUM, JR., S. BAINUM, R.E. HERZLINGER, W.H. LONGFIELD, F.V. MALEK,
J.E. ROBERTSON, Ph.D., KENNETT L. SIMMONS
(Instructions: to withhold authority to vote for any individual nomiee, write
that nomiee's name in the space provided below.)
________________________________________________________________________________
FOR AGAINST ABSTAIN
(2) Approval of the Manor Care, Inc. 1996
Non-Employee Director Stock Compensation
Plan
(3) In their discretion, upon such other business as may properly come before
the meeting.
If you plan to attend the Annual Meeting of Stockholders, please mark the
following box and promptly return this Proxy Card.
This proxy, when properly executed, will be used in
the manner directed herein by the undersigned
stockholder. If not otherwise specified, the shares
represented by this proxy will be voted FOR items
(1) and (2), and for and in accordance with the
discretion of the persons named as proxies as to
-------- such other matters as may properly come before the
| meeting, or at any and all adjournments therof.
|
| Dated:________________________________________, 1996
____________________________________________________
Signature
____________________________________________________
Signature
(Signature should agree exactly with the name or
names appearing above. Joint owners should both
sign. In signing as attorney, administrator,
executor, guardian or trustee, please set forth
your full title. If the signer is a corporation,
please sign the full corporate name by a duly
authorized officer.)
*FOLD AND DETACH HERE*
