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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, 1998
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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
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Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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7-1/2% Senior Notes due June 15, 2006
_____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
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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 any amendment
to this Form 10-K. [X]
The aggregate market value of the Manor Care Common Stock held by non-
affiliates was approximately $1,479,527,673 as of August 10, 1998, based on a
closing price of $33.75 per share.
The number of shares of Manor Care Common Stock outstanding as of August 10,
1998 was 63,720,035.
PART I
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ITEM 1. BUSINESS.
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General
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Manor Care, Inc. ("Manor Care" or "the Company"), a Delaware corporation
organized in August 1981, is a holding company that conducts its business
through its principal subsidiary, ManorCare Health Services, Inc. ("MCHS").
MCHS and its subsidiaries have been engaged since October 1968 in the business
of developing, owning and managing skilled nursing facilities and assisted
living facilities, which provide skilled nursing and convalescent care ans
assisted living services principally for residents over the age of 65. As of
May 31, 1998, MCHS owned approximately 50% of Vitalink Pharmacy Services, Inc.
("Vitalink"), a public company that owns and operates institutional pharmacies,
and approximately 63% of the voting stock of In Home Health, Inc. ("In Home
Health"), a public company which specializes in providing comprehensive health
care services to clients of all ages in their home. MCHS also owns and operates
an acute care general hospital.
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In fiscal year 1998, Manor Care derived approximately 66% 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 June 10, 1998, Manor Care, Health Care and Retirement Corporation, a
Delaware corporation ("HCR"), and Catera Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of HCR ("Merger Sub"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger
Sub will merge with and into Manor Care. The Merger Agreement provides that each
outstanding share of Manor Care's common stock, par value $.10 per share, shall
be converted into the right to receive one share of common stock of HCR, par
value $.01 per share. Upon completion of the transaction, Manor Care will
become a wholly owned subsidiary of HCR, the stockholders of Manor Care will
become stockholders of HCR, and HCR will change its name to "HCR Manor Care."
The consummation of the transactions contemplated by the Merger Agreement is
subject to the approval of the stockholders of each of Manor Care and HCR, the
receipt of certain regulatory approvals and the expiration of antitrust waiting
periods.
On November 1, 1996, Manor Care separated its lodging business from the
health care business via a tax-free spin-off of the lodging division.
Industry Segments
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Reference is made to Manor Care's Consolidated Statements of Income and the
information under the headings "Discontinued Pharmacy Operations", "Discontinued
Lodging Operations" and "Business Segment Information", set forth under Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
ManorCare Health Services, Inc. - Operations
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Manor Care, through MCHS and its subsidiaries, owns, operates or manages 171
skilled nursing and rehabilitation facilities and 39 assisted living facilities,
which provide high acuity services, long-term skilled-nursing care, Alzheimer's
services and assisted living services, principally for residents over the age of
65. Manor Care and its subsidiaries also own and operate an acute care hospital,
60 pharmacies and provide home health services in 19 markets.
Nursing Center Operations
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MCHS's nursing facilities provide, in general, three types of services:
-- High acuity services - focuses on short-term, post hospital care for
medically complex residents in need of aggressive rehabilitation. Manor Care
offers high acuity services in most of its skilled nursing and rehabilitation
facilities and operates 8 dedicated MedBridge high acuity units. MedBridge
units offer post-acute care for patients in need of aggressive rehabilitation.
These units feature high staff-to-patient ratios, sophisticated clinical
capabilities, on-staff physicians and state-of-the-art rehabilitation
departments.
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-- Long-term care - focuses on chronically ill and frail individuals who
require 24-hour-a-day skilled nursing services and physical, occupational and
speech therapies. Through this core business, Manor Care provided nearly eight
million patient days in fiscal year 1998.
-- Alzheimer's services - focuses on meeting the needs of individuals in
the middle to late stages of Alzheimer's disease or related memory impairment.
With almost 15 years of Alzheimer's disease management, Manor Care operates 147
Arcadia special-care units in the Company's nursing centers, 6 of which opened
during the 1998 fiscal year.
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 skilled 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 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 skilled nursing and rehabilitation facilities range in bed
capacity from 53 to 255 beds and have an aggregate bed capacity of 24,170 beds,
and its assisted living facilities have an aggregate bed capacity of 3,935 beds,
which together achieved an average occupancy rate of 88% during the 1998 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. Eight MedBridge units
within skilled nursing facilities currently operate in New Jersey, Ohio, and
Pennsylvania.
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 gym. Many of Manor Care's nursing facilities have specialized
wings for assisted living, 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.
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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 programs 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 or through insurance 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 1998:
<TABLE>
<CAPTION>
Gross Contractual Net
Revenues Adjustment* Revenues
-------- ----------- --------
<S> <C> <C> <C>
Medicare $430,611,000 $126,586,000 $304,025,000
Medicaid 462,208,000 137,515,000 324,693,000
</TABLE>
*Represents the estimated difference between private billing rates and
amounts recoverable under government programs.
Assisted Living Operations
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Assisted living is an attractive option for seniors who need some assistance
with the activities of daily living but do not require around-the-clock skilled
nursing care. Manor Care's assisted living operations during fiscal year 1998
consisted of 20 Springhouse facilities serving the needs of the general assisted
living population and 19 Arden Courts assisted living facilities meeting the
needs of individuals with early to middle-stage Alzheimer's disease or related
memory impairment. These Springhouse facilities are located in Arizona,
California, Florida, Indiana, Illinois, Maryland, Ohio and Pennsylvania. The 19
Arden Courts are located in Connecticut, Delaware, Florida, Georgia, Illinois,
Maryland, Michigan, New Jersey, Ohio, Pennsylvania and Virginia, seven of which
opened in fiscal year 1998.
Nursing Center and Assisted Living Operations Highlights
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During fiscal year 1998, Manor Care opened two newly constructed skilled
nursing facilities located in California and 10 assisted living facilities
ranging in bed capacity from 55 to 129 located in Connecticut, Virginia,
Maryland (2), Delaware, Georgia (2) and Florida (3). The Company sold two
Springhouse facilities located in Florida and Michigan. As of May 31, 1998,
Manor Care had 31 nursing and assisted living facilities with a total of 2,438
beds under construction in Arizona, California, Colorado, Connecticut, Florida,
Georgia, Illinois, Kansas, Maryland, Nevada, New Jersey, North Carolina, Ohio,
Pennsylvania and Texas. Additions to six existing facilities with a total of
149 beds are also under construction. With its Arcadia units and its Arden
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Courts assisted living facilities, Manor Care devoted 15% of its beds to
Alzheimer's care during the fiscal year.
The following table sets forth certain information concerning occupancy and
revenues of Manor Care's nursing and assisted living facilities and hospital
during fiscal year 1998:
<TABLE>
<CAPTION>
Nursing and
Assisted Living Facilities Hospital
-------------------------- ---------
% of % of % of % of
Occupancy Revenues Occupancy Revenues
------------ --------- --------- --------
<S> <C> <C> <C> <C>
Private patients 54% 56% 30% 58%
Medicaid patients 36% 19% 17% 15%
Medicare patients 10% 25% 53% 27%
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100% 100% 100% 100%
===== ===== ==== ====
</TABLE>
Pharmacy Operations
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MCHS owns approximately 50% of Vitalink, a publicly-traded company that owns
and operates 60 pharmacies located in California, Colorado, Florida, Illinois,
Indiana, Iowa, Kentucky, Maryland, Michigan, New Jersey, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia,
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, 1998, Vitalink had contracts to serve 23,910
Manor Care beds and 146,090 beds not affiliated with Manor Care, resulting in
revenues of $94,770,000 and $404,587,000, respectively, for fiscal 1998.
On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger
(the "Vitalink Merger Agreement") with Genesis Health Ventures, Inc., a
Pennsylvania corporation ("Genesis"), and V Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Genesis ("Acquisition
Corporation"). Pursuant to the
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Vitalink Merger Agreement, Vitalink will merge (the "Vitalink Merger") with and
into Acquisition Corporation and Acquisition Corporation will survive the
Vitalink Merger. In accordance with the Vitalink Merger Agreement, holders of
the common stock of Vitalink will receive for each share of Vitalink common
stock held, at the election of the holder, either cash consideration in the
amount of $22.50, or 0.045 shares of Series G Cumulative Convertible Preferred
Stock of Genesis (the "Genesis Preferred Stock") or a combination thereof.
The obligations of the parties to consummate the Vitalink Merger are
contingent on the approval of the stockholders of Genesis and Vitalink and the
satisfaction or waiver of other customary closing conditions.
Manor Care, which owns approximately 50% of the outstanding shares of
Vitalink common stock, and Genesis have entered into a Voting Agreement, dated
as of April 26, 1998 (the "Voting Agreement"), pursuant to which Manor Care
agreed to vote all of its shares of Vitalink common stock in favor of the
adoption and approval of the Vitalink Merger, the Vitalink Merger Agreement and
the transactions contemplated thereby. Manor Care has also agreed to elect to
receive Genesis Preferred Stock as consideration with respect to all of its
Vitalink common stock. Upon closing of the Vitalink Merger, it is anticipated
that Manor Care will own approximately 18% of the voting securities of Genesis,
assuming the Vitalink shareholders other than Manor Care elect to receive cash
for their Vitalink shares.
As a result of the Vitalink Merger, the consolidated financial statements in
Item 8 reflect the pharmacy segment as a discontinued operation for all periods
presented.
During fiscal year 1998, Vitalink purchased certain assets of a pharmacy
business for $5.6 million and acquired another pharmacy business in Oklahoma
City, Oklahoma for $0.1 million plus 351,318 shares of Vitalink common stock.
On February 12, 1997, Vitalink completed a merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. Vitalink issued 11.4 million shares in
exchange for all of the outstanding shares of GranCare, Inc.
Home Health Care Operations
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MCHS owns effective control of approximately 63% of the voting stock of In
Home Health, Inc., a publicly-traded company which provides services in 19
markets located in 14 states. In Home Health offers its clients a broad range
of professional and support services to meet medical and personal needs at home,
including skilled nursing, infusion therapy, hospice, rehabilitation, personal
care and homemaking.
In Home Health 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
infusion pharmacies which provide pharmaceutical drugs, fluids and supplies.
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Hospital Operations
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A subsidiary of Manor Care is the general partner and a limited partner of
Mesquite Community Hospital, L.P., which 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. Renovation of 14,300 square feet of
existing hospital space was completed in October, 1996.
Regulation
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Manor Care's health care 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.
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
health care 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.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, medications, biologicals,
supplies, and surgical, ancillary diagnostic and other necessary services of the
type provided by extended care or acute care facilities.
On August 5, 1997, Congress enacted the Balanced Budget Act of 1997 ("Budget
Act"), which seeks to achieve a balanced federal budget by, among other things,
reducing federal spending on the Medicare and Medicaid programs. The law
contains numerous changes affecting Medicare payments to skilled nursing
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facilities, home health agencies, hospices, and therapy providers, among others.
Medicare reimbursement for skilled nursing facilities currently operates on a
retrospective payment system in which each facility receives an interim payment
during the year, which is later adjusted to reflect actual allowable direct and
indirect costs of services based on the submission of a cost report at the end
of each year. The Budget Act will result in a shift to a prospective Medicare
payment system in which skilled nursing facilities will be reimbursed at a per
diem rate for specific covered services regardless of actual cost.
Specifically, the Budget Act provides that, over three cost reporting periods
beginning on or after July 1, 1998, the Medicare program will phase in this
prospective payment system. During the first reporting period, skilled nursing
facilities will receive 75% of their reimbursement based on 1995 actual costs
and 25% based on a federally scheduled per diem rate. In the second reporting
period, reimbursement will be 50% cost-based and 50% rate-based, in the third,
25% cost-based and 75% rate-based. Thereafter, skilled nursing facilities will
be reimbursed by Medicare solely based on a prospective payment system. A
similar prospective payment system is required to be established for home health
services, beginning October 1, 1999. The Budget Act also reduces payments to
many providers and suppliers, including therapy providers and hospices and gives
states greater flexibility in the administration of their Medicaid programs by
repealing the requirement that payment be reasonable and adequate to cover the
costs of "efficiently and economically operated" nursing facilities. There can
be no assurance that additional federal, state or local laws or regulations will
not be imposed or expanded in a manner that would have a material adverse effect
on Manor Care.
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 either cost reimbursement principles or on a
fixed per diem basis or based on the acuity of the patient.
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 health care
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 health care 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
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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.
Employees
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As of May 31, 1998, Manor Care employed approximately 31,481 full and part-
time employees, 30,530 of whom were employed in health care 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 health care facilities.
Manor Care insures most 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.
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ITEM 2. PROPERTIES.
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As of May 31, 1998, Manor Care owned, leased or managed 171 skilled nursing
and rehabilitation facilities and 39 assisted living facilities in 29 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 191 25,680
Leased 14 1,730
Managed 1 201
Partnership 4 494
Acute Care Hospital 1 172
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TOTALS 211 28,277
=== ======
</TABLE>
As of May 31, 1998, Vitalink leased 60 pharmacies in 20 states and its
corporate offices in Naperville, Illinois, and In Home Health leased 37 offices
and its corporate offices in Minnetonka, Minnesota.
As of May 31, 1998, Manor Care owned one office building in Silver Spring,
Maryland which was leased to third parties, and which was subsequently sold. On
August 30, 1995, Manor Care leased a 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 also owns several undeveloped parcels. Manor Care also leases office space
as needed to accommodate regional employees.
Twenty-three (23) 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 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 MCHS 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
MCHS's acquisition of Cenco. Environmental proceedings such as the Actions may
involve owners and/or operators of the hazardous
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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 defendant in the latter suit. Based upon a settlement that has
been reached with the United States, the State of New Jersey and the defendants,
which is pending court approval, 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. Manor Care believes
that the settlement will be approved. If the settlement is not approved, 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.
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, 1998.
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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 and the frequency and amount of dividends declared during
the past two years is set forth in the table below.
<TABLE>
<CAPTION>
Market Price Per Share Cash Dividends Paid Per Share
Quarters ended High Low Amount Date
- ----------------------------------------------------------------------------
FISCAL 1998
<S> <C> <C> <C> <C>
August $34.13 $28.13 $.022 8/27/97
November $36.44 $30.31 $.022 11/26/97
February $37.94 $33.06 $.022 2/27/98
May $40.19 $29.19 $.022 5/27/98
FISCAL 1997
August $39.63* $31.50* $.022 8/27/96
November $42.25* $23.75 $.022 11/27/96
February $28.00 $24.13 $.022 2/27/97
May $28.38 $21.88 $.022 5/27/97
</TABLE>
- ----------------------------------------------------------------------------
* Market prices prior to November 1, 1996, are reflective of the stock value
prior to the spin-off of the discontinued lodging business.
As of August 10, 1998, there were approximately 4,976 record holders of
Manor Care Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
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<TABLE>
<CAPTION>
Fiscal Years Ended May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $1,359,329 $1,294,574 $1,141,911 $946,761 $859,394
Expenses:
Operating expenses 1,063,683 1,012,799 883,459 719,780 650,637
Depreciation and amortization 79,275 70,851 63,723 50,621 45,662
General corporate and other 60,721 68,563 72,322 63,197 45,666
Provisions for asset impairment and
restructuring 13,500 - 26,300 - -
---------- ---------- ---------- -------- --------
Total expenses 1,217,179 1,152,213 1,045,804 833,598 741,965
---------- ---------- ---------- -------- --------
Income from continuing operations before
other income and (expenses) and income
taxes 142,150 142,361 96,107 113,163 117,429
---------- ---------- ---------- -------- --------
Other income and (expenses):
Interest income from advances to
discontinued lodging segment 4,093 21,221 19,673 15,492 10,665
Interest expense (31,541) (40,599) (31,259) (23,534) (27,519)
Other income, net 20,352 11,098 6,125 7,195 1,504
---------- ---------- ---------- -------- --------
Income from continuing operations before
income taxes 135,054 134,081 90,646 112,316 102,079
Income taxes 50,831 51,186 36,694 44,338 44,214
---------- ---------- ---------- -------- --------
Income from continuing operations $ 84,223 $ 82,895 $ 53,952 $ 67,978 $ 57,865
========== ========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $1,741,277 $1,640,978 $1,656,927 $1,276,175 $1,073,487
Long-term debt 533,729 491,600 490,575 315,271 223,892
Shareholders' equity 779,460 690,431 707,769 624,873 533,815
</TABLE>
<TABLE>
<CAPTION>
Fiscal Years Ended May 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided by continuing operating
activities $130,732 $ 77,614 $186,848 $106,416 $ 123,104
Cash used in continuing investing
activities 141,131 115,324 247,404 177,015 67,304
Cash provided by (used in) continuing
financing activities 29,840 (6,541) 122,698 80,093 (123,241)
Investment in property and equipment and
systems development 270,456 178,821 132,795 89,737 71,365
</TABLE>
14
<PAGE>
ITEM 7.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On June 10, 1998, Manor Care, Inc., ("Manor Care") or (the "Company"),
Health Care & Retirement Corporation, a Delaware corporation ("HCR"), and Catera
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of HCR
("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Merger Sub will merge with and into the Company
(the "Merger"). The Merger Agreement provides that each outstanding share of the
Company's common stock, par value $.10 per share, shall be converted into the
right to receive one share of common stock of HCR, par value $.01 per share.
Upon completion of the transaction, the Company will become a wholly owned
subsidiary of HCR and the stockholders of the Company will become stockholders
of HCR.
The consummation of the transactions contemplated by the Merger Agreement
are subject to the approval of the stockholders of Manor Care and HCR, the
receipt of certain regulatory approvals and the expiration of antitrust waiting
periods. The transaction is expected to be completed during the fourth quarter
of calendar year 1998. If completed, the transaction will be accounted for as a
pooling of interests. Due to the impending Merger, the Company no longer plans
to separate its skilled nursing facility management, assisted living and home
health businesses from its skilled nursing facility ownership, real estate and
health care facility development businesses.
A number of significant factors, which are discussed below, affected the
consolidated results of operations, financial condition and liquidity of the
Company during the three fiscal years ended May 31, 1998, May 31, 1997 and May
31, 1996. This discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto for such fiscal years, included under
Item 8 in this Form 10-K. The Consolidated Financial Statements include the
results of operations of In Home Health, Inc. ("In Home Health") and Manor
Care's assisted living and skilled nursing operations.
OVERVIEW AND OUTLOOK
The Company owns and operates skilled nursing and assisted living
facilities serving primarily the private pay elderly market. The Company's
skilled nursing facilities provide high acuity, long-term care and Alzheimer's
services principally to residents over the age of 65. The Company's assisted
living facilities operate under the brand names "Springhouse" and "Arden
Courts." Springhouse facilities serve the general assisted living population of
frail elderly, while Arden Courts facilities are specifically focused on
providing care to persons suffering from early to middle-stage Alzheimer's
disease and related memory impairment. These assisted living facilities provide
housing, personalized support and health care services in a non-institutional
setting designed to address the individual needs of the elderly or Alzheimer's
afflicted requiring assistance with activities of daily living, such as eating,
bathing, dressing and personal hygiene, but who do not require the level of care
provided by a skilled nursing facility.
15
<PAGE>
The Company also owns approximately 50% of Vitalink Pharmacy Services, Inc.
("Vitalink"), 63% of the voting stock of In Home Health and an acute care
hospital. Vitalink is a publicly traded institutional pharmacy company which
provides medications, consulting, infusion and other ancillary services to
approximately 170,000 institutional beds as well as to home infusion patients
through 60 pharmacies. As a result of the anticipated merger of Vitalink with
and into Genesis Health Ventures, Inc. ("Genesis"), a Pennsylvania corporation,
the accompanying consolidated financial statements reflect the pharmacy
operations as a discontinued operation.
In Home Health is a publicly traded company which provides a broad range of
professional and support services to clients requiring medical and personal
assistance in their homes. Services provided include nursing care, infusion
therapy, rehabilitation, and personal care.
The Company has increased skilled nursing capacity by approximately 1.9%
annually over the last five fiscal years. Overall occupancy has remained
relatively stable during this period. Occupancy for mature facilities, those
facilities owned by the Company for a full two-year period, increased from 89.8%
to 90.0%, between fiscal year 1997 and fiscal year 1998. During the five-year
period from fiscal year 1994 to fiscal year 1998, the Company has increased
assisted living capacity substantially, from 6 facilities with 560 beds to 41
facilities with 4,047 beds.
Despite increasing competition for private pay customers, Manor Care has
consistently maintained a high ratio of private pay revenues. The slight
decline in Manor Care's private pay mix over the past four years can be
attributed primarily to the inroads that assisted living providers have achieved
in this market segment.
The health care industry is highly regulated by Federal, state and local
law. Certain of these regulations apply to the relationships between Manor Care,
Vitalink and In Home Health, including the provisions of the Medicare related
party rule and the federal and state anti-remuneration laws. The Medicare
related party rule limits the amount the Medicare program will reimburse for
products and services provided by a related party. The Company has treated
Vitalink and In Home Health as related parties in compliance with this rule. The
Company intends to continue to treat Vitalink and In Home Health as related
parties. Accordingly, the Company does not expect that the Medicare related
party rule will have a material effect on the conduct of its business. The anti-
remuneration laws govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. The Company has treated, and will continue to treat, Vitalink
and In Home Health as separate entities, capable of referring or recommending
patients to, or receiving referrals or recommendations from, the Company for
purposes of the anti-remuneration laws. Accordingly, the Company believes that
its business arrangements with Vitalink and In Home Health are in compliance
with the anti-remuneration laws.
Certain matters discussed in this Form 10-K constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company which, although believed by
management of the Company to be reasonable, are inherently subject to risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those
16
<PAGE>
anticipated, estimated, projected or expected. Therefore, investors should not
place undue reliance upon such estimates and forward-looking statements.
Risk factors that could cause the Company's actual results, performance or
achievements to be different from any future results, performance or
achievements expressed or implied by such forward-looking statements include,
without limitation: (i) the Company's success in implementing its business
strategy, including its success in completing the Merger, (ii) the Company's
success in arranging financing where required, (iii) the nature and extent of
future competition, (iv) the extent of future health care reform and regulation,
including cost containment measures, (v) significant changes in the Company's
shareholder base, (vi) increases in the Company's cost of borrowing, (vii) costs
associated with the planned Merger, (viii) changes in the mix of payment sources
for patient services, including any decrease in the amount and percentage of
revenues derived from private payors, (ix) the ability of the Company to
continue to deliver high quality care and to attract private pay residents,
and/or (x) changes in general economic conditions (including the labor market)
and/or in the markets in which the Company may from time to time compete. Many
of such risk factors are beyond the control of the Company and its management.
Other risk factors that could cause the actual results, performance or
achievements of the Company to be different from any future results, performance
or achievements are also detailed from time to time in the Company's public
statements and/or filings with the Securities and Exchange Commission.
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 1998, 1997 and 1996, these revenues amounted to $628.7 million, $596.0
million and $502.0 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant. The Company does not anticipate a material effect on revenues as a
result of the Balanced Budget Act of 1997. However, because the regulations
pertaining to this Act have neither been proposed nor implemented, this
preliminary conclusion is subject to change as a result. If the regulations do
have a material effect on the Company, the Company will disclose any such
material effect as may be required.
Fiscal Year 1998 compared to Fiscal Year 1997
SKILLED NURSING FACILITIES. Skilled nursing revenues increased $73.8
million (6.9%) to $1.1 billion for the fiscal year ended May 31, 1998 as
compared to the same period in the prior year. The increase in revenues is
principally attributable to increases in rates (3.4%) and capacity. The growth
in bed capacity is attributable to the construction of one skilled nursing
facility (120 beds) and additions or renovations at existing facilities (175
beds).
Operating expenses increased $52.1 million (6.5%) to $854.9 million for the
fiscal year ended May 31, 1998 as compared to the prior year. The increase in
operating expenses is attributable to additional capacity and increased staffing
necessitated by higher patient acuity and more complex product and service
offerings. As a result, the operating profit associated with the
17
<PAGE>
operation of the skilled nursing facilities for the fiscal year ended May 31,
1998 increased to 25.0% from 24.7% in the prior year.
ASSISTED LIVING BUSINESS. Assisted living revenues increased by $15.4
million or 27.3% for fiscal year 1998 from $56.5 million in the prior year due
to capacity ($7.5 million), rate ($5.6 million) and occupancy ($2.3 million)
increases. The increase in capacity is due to the opening of nine Arden Courts
facilities and one Springhouse facility.
Operating expenses increased by $9.5 million or 21.0% in fiscal year 1998
compared to fiscal year 1997 as a result of increases in capacity and occupancy.
HOME HEALTH. Home health revenues decreased $28.8 million for fiscal year
1998 over the prior year, primarily due to adjustments to Medicare receivables
in connection with recent Medicare reimbursement decisions related to the
allowability of community liaison costs and required documentation to support
allowable costs. Revenues recorded under the Medicare program are subject to
adjustment upon audit by government intermediaries. As a result of these
decisions, In Home Health increased recorded reserves for other unresolved cost
disputes by approximately $15.5 million.
Operating expenses decreased $12.4 million or 10.0% for fiscal year 1998 as
compared to the prior year. The decrease in operating expenses is primarily due
to a plan to restructure In Home Health's field operations and reduce its cost
structure.
The majority of In Home Health's revenues is derived from services provided
to Medicare beneficiaries. Currently, Medicare reimburses participating Medicare
certified home health agencies for the reasonable costs incurred to provide
covered visits to eligible beneficiaries, subject to certain cost limits. Due to
certain limitations on the nature and amount of the costs that are reimbursable,
In Home Health incurs a loss on the Medicare business. During 1997, several cost
reimbursement issues that were in dispute for several years were resolved
through decisions by the Provider Reimbursement Review Board ("PRRB") and the
U.S. District Court. As a result of these decisions and other communications
from the Health Care Financing Administration ("HCFA"), it became clear that
some costs incurred by In Home Health would not be reimbursed by Medicare.
Although In Home Health has restructured its operations and eliminated a portion
of these nonreimbursable costs, In Home Health will continue to incur some costs
that are not reimbursed by Medicare, as management believes they constitute a
necessary function to the conduct of its business.
The Balanced Budget Act of 1997 requires HCFA to implement a prospective
payment system for home health agencies by October 1, 1999, with up to a four-
year phase-in period. Prospective rates determined by HHS would reflect a 15%
reduction to the cost limits and per patient limits as of September 30, 1999.
In the event the implementation deadline is not met, the reduction will be
applied to the reimbursement system then in place. The impact of such a change,
if implemented, on In Home Health's results of operations cannot be predicted
with any certainty at this time and would depend, to a large extent, on the
reimbursement rates for home nursing established on an interim basis and under
the prospective payment system. There can be no assurances that such
reimbursement rates, if enacted, would cover the costs incurred by In Home
Health to provide home nursing services. Until the prospective payment system
takes
18
<PAGE>
effect on October 1, 1999, the Budget Act sets up an interim payment system (the
"IPS") that provides for lowering of reimbursement limits for home health
visits. Cost limit increases for fiscal 1995 and 1996 have been eliminated. In
addition, for cost reporting periods beginning on October 1, 1997, home health
agencies' cost limits will be determined at the lesser of (i) their actual
costs, (ii) cost limits based on 105% of median costs of free-standing home
health agencies or (iii) an agency-specific per patient cost cap, based on 98%
of 1994 costs adjusted for inflation. In Home Health is unable to determine the
effect of IPS until HCFA finalizes related regulatory guidance on the
implementation of IPS. The new cost limits will apply to In Home Health for the
cost reporting period beginning October 1, 1997. A reduction in these cost
limits could have a significant effect on In Home Health's results of
operations; however, the effect of such reductions cannot be predicted with any
level of certainty.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $8.4
million for the fiscal year 1998 due to increases in property and equipment
resulting from additions and renovations to existing facilities as well as new
construction during the past twelve months.
General corporate and other expenses for fiscal year 1998 decreased $7.8
million when compared to the same period last year. This decrease was due to
reengineering efforts in both organizational and financial systems.
Additionally, a gain of $6.8 million from the sale of three corporate office
buildings and a loss of $2.0 million on the sale of two Springhouse facilities
are included in general corporate and other expenses for fiscal year 1998. For
fiscal year 1997, a gain of $7.3 million from the sale of four nursing centers
and charitable contributions expense of $5.0 million are included in general
corporate and other expenses. General corporate and other expenses represented
4.5% of revenues during fiscal year 1998, compared to 5.3% for the prior year.
General corporate and other expenses include risk management, information
systems, treasury, accounting, legal, human resources and other administrative
support functions.
Interest income from advances to discontinued lodging operations decreased
by $17.1 million for fiscal year 1998 as compared to the prior year. This
reduction was attributable to the prepayment of $110.0 million of indebtedness
in the fourth quarter of fiscal year 1997 and the prepayment of the remaining
$115.7 million in the second quarter of fiscal year 1998.
Interest expense decreased $9.1 million for fiscal year 1998 over the prior
year. The decrease in interest expense resulted primarily from the retirement of
the 9 1/2% Senior Subordinated Debt Notes in November, 1997. Interest
capitalized in conjunction with construction programs amounted to $6.8 million
for fiscal year 1998 and $4.6 million for fiscal year 1997.
Income from continuing operations before income taxes for fiscal year 1998
was $135.1 million. This compares to income from continuing operations before
income taxes in the prior year of $134.1 million.
During fiscal year 1998, the Company recorded a restructuring charge of
$13.5 million in connection with the Company's plan to separate its skilled
nursing, assisted living and home health businesses from its skilled nursing
facility management, real estate and healthcare facility development business.
The charge includes $5.3 million of severance costs related to corporate staff
reductions, $4.6 million of consulting, legal and accounting fees incurred, and
$3.6 million
19
<PAGE>
of printing, mailing, travel, relicensing and other miscellaneous expenses
related to the transaction and the related public filings. Due to the impending
Merger, the Company no longer plans to complete this transaction.
The decrease in income from discontinued pharmacy operations from $42.2
million in fiscal year 1997 to $12.1 million in fiscal year 1998 is due to the
$30.4 million after tax gain resulting from the issuance of 11.4 million shares
of Vitalink common stock in connection with Vitalink's merger with TeamCare, the
pharmacy subsidiary of GranCare, Inc. in February 1997.
On November 20, 1997, a consensus was reached by the Emerging Issues Task
Force regarding reengineering costs (Issue 97-13) providing that all
reengineering costs be expensed as incurred based on the fair value of the
services rendered. As a result, in November 1997, Manor Care expensed $3.2
million of reengineering costs (net of taxes) as the cumulative effect of a
change in accounting principle.
Fiscal Year 1997 Compared to Fiscal Year 1996
SKILLED NURSING FACILITIES. Skilled nursing revenues increased from $989.0
million to $1.1 billion ($77.1 million or 7.8%) in fiscal 1997 compared to the
prior year. The increase in revenues is attributable to an increase in average
daily rates of approximately 6.0% ($61 million) and an increase in bed capacity
of approximately 5.7%. The increase in average rates includes the incremental
impact of settlements with government agencies related to prior period cost
reports of approximately $4 million. The growth in bed capacity is attributable
to the purchase of two nursing facilities (279 beds), openings of newly
constructed facilities (398 beds) and additional bed development at existing
centers (467 beds), and is net of the sale of four facilities (498 beds) in the
second quarter of 1997.
Skilled nursing operating expenses increased from $746.1 million in 1996 to
$802.8 million in 1997 ($56.7 million or 7.6%). Additional capacity accounts
for $20.5 million of this increase. The remainder of the increase is caused by
additional staffing necessitated by higher patient acuity and more complex
product and service offerings. Gross margin as a percentage of revenue
increased from 24.6% in fiscal year 1996 to 24.7% in fiscal year 1997.
ASSISTED LIVING. Assisted living revenues increased for fiscal year 1997 by
45.5% or $17.7 million due to increases in rates at existing facilities ($5.3
million), capacity increases ($11.1 million) and occupancy increases ($1.3
million). Capacity increases resulted from the opening of five Arden Courts and
one Springhouse facility.
Operating expenses increased $12.4 million to $45.3 million or 80.1% of net
revenues in fiscal year 1997 compared to $32.8 million or 84.4% of net revenues
in fiscal year 1996 as a result of increases in capacity and inflation.
HOME HEALTH. Home health revenues increased 67.7% or $50.2 million for the
fiscal year 1997, reflecting a full year of home health operations. The Company
entered into the home health business with the acquisition of In Home Health in
October 1995. Home health revenues of $74.2 million for fiscal year 1996
represent revenues contributed by In Home Health from its acquisition in October
1995 through May 1996.
20
<PAGE>
Operating expenses increased $50.6 million to $124.5 million or 100.1% of
net revenues in fiscal year 1997 compared to $73.9 million or 99.6% of net
revenues in fiscal year 1996. The increase from 1996 to 1997 represents the
impact of a full year of expenses in fiscal year 1997 versus eight months of
expenses for fiscal year 1996.
OTHER RESULTS OF OPERATIONS. Depreciation and amortization increased $7.1
million for fiscal year 1997 due to increases in property and equipment
resulting from additions and renovations to existing facilities as well as
openings as a result of construction during the fiscal year.
General corporate and other expenses represented 5.3% of revenue in fiscal
year 1997 and 6.3% of revenue in fiscal year 1996. General corporate and other
expenses include all indirect operating expenses as well as risk management,
information systems, treasury, accounting, legal and other administrative
support for Manor Care and its various subsidiaries. The reduction of general
corporate and other expenses is partially due to a reduction in employees
related to the discontinued lodging segment and reengineering efforts in both
organizational and financial systems. Additionally, general corporate and other
expenses for fiscal year 1997 included a gain of $7.3 million from the sale of
four nursing centers and charitable contributions expense of $5.0 million.
Interest expense increased 29.9% in fiscal year 1997 primarily as a result
of additional borrowings in connection with newly developed facilities and
acquisitions, as discussed above.
On November 1, 1996, Manor Care completed the spin-off of its lodging
segment by contributing its net investment in discontinued lodging operations
totaling $164.2 million to Choice Hotels International, Inc. Manor Care
shareholders of record on October 10, 1996, received one share of Choice Hotels
International, Inc. common stock for each outstanding share of Manor Care common
stock. Accordingly, lodging results are reported as discontinued operations for
all periods presented. Fiscal year 1997 results contain five months of income
versus a full year of income in fiscal year 1996.
Manor Care recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long lived assets and costs associated with Manor
Care's restructuring of its healthcare business. The most significant components
of the provisions were non-cash asset impairment charges of $21.2 million
relating to writedowns of property, equipment and capitalized system development
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains adequate capital resources, including strong
operating cash flows and committed lines of credit, to support ongoing
operations and to fulfill capital requirements in the foreseeable future.
On November 1, 1996, the Company separated its lodging business from its
healthcare business via a tax-free spin-off of the lodging division. In
conjunction with this spin-off, the Company received a three-year, $225.7
million 9% note from its lodging segment. In April
21
<PAGE>
1997, Manor Care received a prepayment of $110.0 million on the advances to the
discontinued lodging segment. In October 1997, the Company received prepayment
of the remaining $115.7 million. All proceeds were used to repay borrowings
under the $250 million competitive advance and multi-currency revolving credit
facility (the "Credit Facility").
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased $9.9
million of the 9 1/2 % Senior Subordinated Notes for $10.5 million. In November
1997, the Company redeemed all outstanding 9 1/2% Senior Subordinated Notes due
2002 at a redemption price of 103.56% with the proceeds of borrowings under the
Facility. The Company recorded an extraordinary item of $3.2 million after taxes
representing the premium paid on redemption.
In September 1996, the Company amended its Credit Facility to provide for
the spin-off of the lodging division. The Credit Facility expires in September
2001. At May 31, 1998, bank lines totaled $350.0 million, of which $28.5 million
remained unused.
In June 1996, the Company completed a public offering of unsecured Senior
Notes in the amount of $150.0 million, the proceeds of which were used to repay
borrowings under the Credit Facility. The notes are due in June 2006 and carry
a 7 1/2% interest rate.
The Company's working capital ratio was 1.7 at May 31, 1998 and 1.2 at May
31, 1997.
ACQUISITIONS, OPENINGS, DIVESTITURES AND SALES OF PROPERTY
During fiscal year 1998, investment in property and equipment utilized in
continuing operations and systems development amounted to $270.5 million. In
addition, Manor Care opened one newly constructed skilled nursing facility
located in California and ten assisted living facilities located in Connecticut,
Virginia, Maryland (2), Delaware, Georgia (2) and Florida (3). The Company sold
two Springhouse facilities located in Florida and Michigan for $4.7 million.
Three corporate office buildings located in Maryland were also sold for $18.4
million.
During fiscal year 1997, investment in property and equipment utilized in
continuing operations and systems development amounted to $178.8 million. In
addition, the Company acquired a nursing center in California for $4.4 million
and a nursing center in Michigan for $13.4 million. Through new construction,
the Company opened four skilled nursing centers and six assisted living
facilities. The Company sold four nursing centers in Indiana, Iowa, Illinois,
and Texas for $17.3 million and transferred an assisted living facility with an
approximate net book value of $4.9 million to the discontinued lodging segment.
During fiscal year 1996, investment in property and equipment utilized in
continuing operations and systems development amounted to $132.8 million.
Additionally, 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. In October 1995, the Company purchased approximately 41% of In
Home Health's common stock for $22.9 million and invested another $20.0 million
for 100% of its outstanding voting convertible preferred stock
22
<PAGE>
and for warrants to purchase an additional 6.0 million shares of common stock.
On April 13, 1998 the Company entered into a Preferred Stock Modification
Agreement with In Home Health. Under this agreement, the Company agreed, with
respect to 70,000 shares (the "Modified Shares") of the preferred stock, to
waive the right to give notice on or after October 24, 2000 requiring the
Registrant to redeem the Modified Shares. The remaining 130,000 shares may be
redeemed in cash at the option of the Company on and after October 24, 2000. The
In Home Health redeemable preferred stock ranks senior to the In Home Health
common stock, has voting rights on an as-if converted basis, and is initially
convertible into 10 million shares of In Home Health common stock at a
conversion price of $2.00 per share. The In Home Health redeemable preferred
stock bears dividends at 12% per annum and has a liquidation preference of
$100.00 per share. The In Home Health redeemable preferred stock will accrete
over five years from its fair value of $18,500,000 on the date of issuance to
its redemption price of $20 million as of the redemption date. The In Home
Health warrants purchased by the Company have an exercise price of $3.75 per
share and expire in October 1998.
DISCONTINUED PHARMACY OPERATIONS
On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger
(the "Vitalink Merger Agreement") with Genesis. Pursuant to the Vitalink Merger
Agreement, Vitalink will merge with and into Genesis (the "Vitalink Merger").
In accordance with the Vitalink Merger Agreement, holders of the common stock of
Vitalink will receive for each share of Vitalink common stock held, at the
election of the holder, either cash consideration in the amount of $22.50, or
0.045 shares of Series G Cumulative Convertible Preferred Stock of Genesis (the
"Genesis Preferred Stock").
The Vitalink Merger Agreement may be terminated (i) by either party, if the
Board of Directors of the other has withdrawn, changed or modified its
recommendation that its stockholders vote in favor of the Vitalink Merger; (ii)
by Vitalink prior to the approval of its stockholders of the Vitalink Merger, if
it receives a Superior Proposal (as defined in the Vitalink Merger Agreement)
which was not solicited after the date of the Vitalink Merger Agreement; (iii)
by either party if any court of competent jurisdiction or other governmental
body has issued a final and nonappealable order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Vitalink
Merger; and (iv) upon the occurrence of certain other events specified in the
Vitalink Merger Agreement. Under certain circumstances, Vitalink would be
obligated to pay Genesis a $20 million fee if the Vitalink Merger Agreement is
terminated.
Manor Care, the beneficial owner of approximately 50% of the outstanding
shares of Vitalink common stock, and Genesis have entered into a Voting
Agreement, dated April 26, 1998 (the "Voting Agreement"), pursuant to which
Manor Care agreed to vote all of its shares of Vitalink common stock in favor of
the adoption and approval of the Vitalink Merger, the Vitalink Merger Agreement
and the transactions contemplated thereby. Manor Care has also agreed to elect
to receive Genesis Preferred Stock as Vitalink Merger consideration with respect
to all of its Vitalink common stock.
The Genesis Preferred Stock will bear cash dividends at the initial annual
rate of 5.9375%. Genesis Preferred Stockholders will be initially entitled to
13.441 votes per share of Genesis Preferred Stock, and will vote together with
the holders of Genesis common stock as a single
23
<PAGE>
class on all matters to be voted on by holders of Genesis common stock, and as a
separate class on matters as to which the Pennsylvania Business Corporation Law
requires a separate class vote.
At the option of Manor Care, each share of Genesis Preferred Stock will be
convertible at any time into Genesis common stock at the conversion price of
$37.20 per share, subject to adjustment under certain circumstances. Beginning
April 26, 2001, Genesis may under certain circumstances, force conversion of the
Genesis Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per
share of Genesis common stock. Dividends will cease to accrue in respect of the
Genesis Preferred Stock as of the date of the conversion thereof.
THE YEAR 2000 ISSUE
The Company has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue,
which affects most corporations, concerns the inability of information systems,
primarily computer software programs, to properly recognize and process data
sensitive information relating to the year 2000 and beyond. The Company is in
the process of determining the costs and expenditures associated with the Year
2000 Issue and has several information system improvement initiatives underway
to ensure that the Company's computer systems will be Year 2000 compliant. The
Company is expected to incur expenditures of approximately $13 million over the
next few years to address this issue. The failure by third party payors, such as
private insurers, managed care organizations, health maintenance organizations,
preferred provider organizations and federal and state government agencies that
administer Medicare and/or Medicaid, to adequately address their Year 2000 Issue
could adversely affect the Company.
LONG-TERM DEBT
Total long-term debt was $539.8 million at May 31, 1998 compared to $504.3
million at May 31, 1997. The increase in long-term debt is mainly attributable
to the increased investment in property and equipment. The current portion of
debt as of May 31, 1998 amounted to $6.1 million.
SHAREHOLDERS' EQUITY
Shareholders' equity increased to $779.5 million at May 31, 1998 from
$690.4 million at May 31, 1997. The increase was primarily due to net income of
$89.9 million, the tax benefit of common stock transactions related to employee
benefits plans of $4.7 million, and stock options exercised of $2.4 million,
offset by dividends paid of $5.6 million. Shareholders' equity decreased to
$690.4 million at May 31, 1997 from $707.8 million at May 31, 1996 primarily due
to the $164.2 million dividend of the discontinued lodging segment and $6.1
million of cash dividends paid, offset by net income of $136.9 million and stock
options exercised of $12.3 million.
24
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities,"
which requires start-up activities to be expensed as incurred. The Company has
until June 2000 to adopt this statement. The Company has not determined when it
will adopt this statement nor has it determined the impact of adoption.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" ("SFAS 130"), which is effective for fiscal years
beginning after December 15, 1997. The statement establishes standards for
reporting and display of comprehensive income and its components. The Company is
in the process of determining the timing and the impact of adoption.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS 131 in
fiscal year 1999 and has not determined the impact of adoption to be
significant.
During the quarter ended February 28, 1998, the Company adopted SFAS No. 128,
"Earnings Per Share" issued by the FASB, ("SFAS 128"). The statement requires
restatement of all prior-period earnings per share data presented after the
effective date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee entitled
"International Accounting Standards, Earnings Per Share."
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
Company has until fiscal year 2000 to adopt this statement. The Company has not
determined when it will adopt this statement nor has it determined the impact of
adoption.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Postretirement Benefits" ("SFAS 132"), which is effective for
fiscal years beginning after December 31, 1997. This statement revises
employers' disclosures about pension and other postretirement benefit plans;
however, it does not change the measurement or recognition of those plans. The
Company will adopt the statement in fiscal year 1999 and has not determined the
impact to be significant.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Hedging Activities" ("SFAS 133"), which addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This statement is effective for fiscal years
beginning after June 15, 1999. The Company has not determined when it will
adopt the statement nor has it determined the impact of adoption.
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Manor Care, Inc.:
We have audited the accompanying consolidated balance sheets of Manor Care,
Inc. (a Delaware corporation) and subsidiaries as of May 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1998. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with 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
27-50) present fairly, in all material respects, the financial position of Manor
Care, Inc. and subsidiaries as of May 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index in Item 14, Schedule II is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
consolidated financial statements. This 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.
As explained in the footnote to the consolidated financial statements entitled
"Summary of Significant Accounting Policies-Impact of New Accounting
Pronouncements", effective November, 1997, the Company changed its method of
accounting for reengineering costs as prescribed by the Emerging Issues Task
Force Issue 97-13.
/s/ Arthur Andersen LLP
Washington, D.C.
July 3, 1998
26
<PAGE>
MANOR CARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of May 31,
------------------------------
1998 1997
------------------------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,663 $ 29,222
Receivables (net of allowances for doubtful accounts of
$30,604 and $36,621) 167,222 135,446
Inventories 12,795 12,531
Income taxes 41,619 32,266
Other 4,831 7,988
---------- ----------
Total current assets 275,130 217,453
---------- ----------
PROPERTY AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 1,132,427 1,004,663
---------- ----------
GOODWILL 28,777 29,576
----------- ----------
INVESTMENT IN DISCONTINUED PHARMACY SEGMENT 193,398 178,079
---------- ---------
ADVANCES TO DISCONTINUED LODGING SEGMENT - 115,723
---------- ----------
OTHER ASSETS 111,545 95,484
---------- ----------
TOTAL ASSETS $1,741,277 $1,640,978
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 6,104 $ 12,680
Accounts payable 55,599 59,590
Accrued expenses 96,395 109,540
---------- ----------
Total current liabilities 158,098 181,810
---------- ----------
MORTGAGES AND OTHER LONG-TERM DEBT 533,729 491,600
---------- ----------
DEFERRED INCOME TAXES ($198,132 AND $187,585)
AND OTHER 265,992 261,624
---------- ----------
MINORITY INTEREST 3,998 15,513
---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.10 par, 160.0 million shares
authorized; 67.1 million and 66.8 million shares issued
and outstanding 6,712 6,682
Contributed capital 201,895 194,640
Retained earnings 622,661 538,630
Treasury stock, 3.2 million shares, at cost (51,808) (49,521)
---------- ----------
Total shareholders' equity 779,460 690,431
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,741,277 $1,640,978
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE>
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended May 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
(In thousands of dollars, except per share data)
<S> <C> <C> <C>
REVENUES $1,359,329 $1,294,574 $1,141,911
---------- ---------- ----------
EXPENSES
Operating expenses 1,063,683 1,012,799 883,459
Depreciation and amortization 79,275 70,851 63,723
General corporate and other 60,721 68,563 72,322
Provisions for asset impairment and restructuring 13,500 - 26,300
---------- ---------- ----------
Total expenses 1,217,179 1,152,213 1,045,804
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE OTHER
INCOME AND (EXPENSES) AND INCOME TAXES 142,150 142,361 96,107
---------- ---------- ----------
OTHER INCOME AND (EXPENSES)
Interest income from advances to discontinued lodging
segment 4,093 21,221 19,673
Interest income and other 8,292 8,499 5,385
Minority interest 12,060 2,599 740
Interest expense (31,541) (40,599) (31,259)
---------- ---------- ----------
Total other income and (expenses), net (7,096) (8,280) (5,461)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 135,054 134,081 90,646
INCOME TAXES 50,831 51,186 36,694
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 84,223 82,895 53,952
DISCONTINUED OPERATIONS
Income from discontinued pharmacy operations (net of
taxes of $19,732, $33,514 and $9,306, respectively) 12,070 42,218 11,519
Income from discontinued lodging operations (net of
taxes of $0, $8,734 and $14,966, respectively) - 11,829 20,436
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 96,293 136,942 85,907
EXTRAORDINARY ITEM, NET OF TAXES OF $2,150 (3,216) - -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAXES OF $2,115 (3,173) - -
---------- ---------- ----------
NET INCOME $ 89,904 $ 136,942 $ 85,907
========== ========== ==========
WEIGHTED AVERAGE SHARES OF COMMON STOCK-BASIC 63,794 63,257 62,628
---------- ---------- ----------
NET INCOME PER SHARE OF COMMON STOCK-BASIC
Income from continuing operations $ 1.32 $ 1.31 $ 0.86
Income from discontinued pharmacy operations (net of taxes) 0.19 0.67 0.18
Income from discontinued lodging operations (net of taxes) - 0.19 0.33
Extraordinary item (net of taxes) (.05) - -
Cumulative effect of change in accounting principle (net of
taxes) (.05) - -
----------- ---------- ----------
Net income per share of common stock - basic $ 1.41 $ 2.16(a) $ 1.37
========== ========== ==========
WEIGHTED AVERAGE SHARES OF COMMON STOCK - ASSUMING DILUTION 64,671 63,979 63,136
---------- ---------- ----------
NET INCOME PER SHARE OF COMMON STOCK - ASSUMING DILUTION
Income from continuing operations $ 1.30 $ 1.30 $ 0.85
Income from discontinued pharmacy operations (net of taxes) 0.19 0.66 0.18
Income from discontinued lodging operations (net of taxes) - 0.18 0.32
Extraordinary item (net of taxes) (.05) - -
Cumulative effect of change in accounting principle (net of
taxes) (.05) - -
----------- ---------- ----------
Net income per share of common stock - assuming dilution $ 1.39 $ 2.14 $ 1.36(a)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(a) Does not add due to rounding.
28
<PAGE>
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Contributed Retained Translation Treasury Stock
(In thousands of dollars, except share information) Shares Amount Capital Earnings Adjustment Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 65,513,734 $6,553 $168,699 $ 491,520 $ 709 2,989,264 $42,608
Net income - - - 85,907 - - -
Exercise of stock options 269,156 28 3,279 - - - -
Treasury shares acquired - - - - - 30,208 1,131
Cash dividends - - - (5,502) - - -
Other - - 2,386 - (2,071) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1996 65,782,890 6,581 174,364 571,925 (1,362) 3,019,472 43,739
Net income - - - 136,942 - - -
Exercise of stock options 1,011,951 101 12,153 - - - -
Treasury shares acquired - - - - - 134,118 5,782
Cash dividends - - - (6,108) - - -
Dividend of discontinued -
lodging segment - - - (164,225) 1,362 - -
Tax benefit of common
stock transactions
related to employee
benefit plans - - 6,818 - - - -
Other - - 1,305 96 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1997 66,794,841 6,682 194,640 538,630 - 3,153,590 49,521
Net income - - - 89,904 - - -
Exercise of stock options 296,361 30 2,415 - - - -
Treasury shares acquired - - - - - 71,890 2,287
Cash dividends - - - (5,600) - - -
Tax benefit of common
stock transactions
related to employee
benefit plans - - 4,738 - - - -
Other - - 102 (273) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 67,091,202 $6,712 $201,895 $ 622,661 $ - 3,225,480 $51,808
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
MANOR CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended May 31,
--------------------------------------
1998 1997 1996
--------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 89,904 $ 136,942 $ 85,907
Reconciliation of net income to net cash provided by operating activities:
Income from discontinued pharmacy operations (12,070) (42,218) (11,519)
Income from discontinued lodging operations - (11,829) (20,436)
Depreciation and amortization 79,275 70,851 63,723
Cumulative effect of change in accounting principle 5,288 - -
Provisions for asset impairment and restructuring 13,500 - 26,300
Write-off of In Home Health Medicare receivables 15,451 - -
Amortization of debt discount 271 513 455
Provisions for bad debts 26,189 15,930 13,778
Increase (decrease) in deferred taxes 1,194 26,354 (4,949)
Gain on sale of facilities (4,811) (7,322) -
Gain on sale of investments (315) - -
Minority interest (12,060) (2,599) (740)
Changes in assets and liabilities (excluding sold facilities and
acquisitions):
Change in receivables (50,708) (64,864) (30,890)
Change in inventories and other current assets 2,846 (3,783) 44
Change in current liabilities (17,043) (21,829) 46,807
Change in income taxes payable - (5,444) 13,062
Change in other liabilities (6,179) (13,088) 5,306
--------- ----------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 130,732 77,614 186,848
--------- ----------- ---------
NET CASH PROVIDED (UTILIZED) BY DISCONTINUED PHARMACY OPERATIONS 5,051 (234) 11,768
--------- ----------- ---------
NET CASH PROVIDED BY DISCONTINUED LODGING OPERATIONS - 40,599 52,682
--------- ----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 135,783 117,979 251,298
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (237,516) (163,068) (118,359)
Acquisition of assisted living facilities - - (19,050)
Investment in systems development (32,940) (15,753) (14,436)
Acquisition of skilled nursing facilities - (17,793) (32,369)
Acquisition of Vitalink stock - (30,000) -
Purchase of home health business - - (22,950)
Proceeds from sale of facilities 23,180 17,283 -
(Advances to) receipts from discontinued pharmacy segment (9,373) (15,857) 22
Receipts from (advances to) discontinued lodging segment 115,723 113,267 (27,201)
Other items, net (205) (3,403) (13,061)
--------- ---------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS (141,131) (115,324) (247,404)
--------- ---------- ---------
NET CASH PROVIDED (UTILIZED) BY INVESTING ACTIVITIES OF DISCONTINUED
PHARMACY OPERATIONS 15,687 (93,911) (11,714)
NET CASH UTILIZED BY INVESTING ACTIVITIES OF DISCONTINUED LODGING --------- ----------- ---------
OPERATIONS - (29,424) (169,641)
--------- ----------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES (125,444) (238,659) (428,759)
CASH FLOWS FROM FINANCING ACTIVITIES: --------- ----------- ---------
Borrowings of long-term debt 260,380 179,981 149,000
Principal payments of long-term debt (78,998) (176,986) (22,976)
Proceeds from exercise of stock options 2,445 12,254 3,307
Treasury stock acquired (2,287) (5,782) (1,131)
Retirement of debentures (146,100) (9,900) -
Dividends paid (5,600) (6,108) (5,502)
--------- ----------- ---------
NET CASH PROVIDED (UTILIZED) BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS 29,840 (6,541) 122,698
--------- ----------- ---------
NET CASH (UTILIZED) PROVIDED BY FINANCING ACTIVITIES OF DISCONTINUED
PHARMACY OPERATIONS (20,738) 94,145 (54)
--------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
DISCONTINUED LODGING OPERATIONS - 654 43,687
--------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,102 88,258 166,331
--------- ----------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 19,441 (32,422) (11,130)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,222 61,644 72,774
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,663 $ 29,222 $ 61,644
========= =========== =========
NON-CASH ACTIVITIES:
Liabilities assumed in connection with acquisition of property $ - $ - $ 68,250
========= =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
MANOR CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUBSEQUENT EVENT - MERGER
On June 10, 1998, Manor Care, Inc. ("Manor Care") or (the "Company"), Health
Care & Retirement Corporation, a Delaware corporation ("HCR"), and Catera
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of HCR
("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Merger Sub will merge with and into Manor Care.
The Merger Agreement provides that, with certain limited exceptions, each
outstanding share of Manor Care's common stock, par value $.10 per share, shall
be converted into the right to receive one share of common stock of HCR, par
value $.01 per share. Upon completion of the transaction, Manor Care will
become a wholly owned subsidiary of HCR and the stockholders of Manor Care will
become stockholders of HCR. The consummation of the transactions contemplated
by the Merger Agreement are subject to the approval of the stockholders of Manor
Care and HCR, the receipt of certain regulatory approvals and the expiration of
antitrust waiting periods.
The transaction is expected to be completed during the fourth quarter of
calendar year 1998. If completed, the transaction will be accounted for as a
pooling of interests. Due to the impending Merger, the Company no longer plans
to separate its skilled nursing facility management, assisted living and home
health businesses from its skilled nursing facility ownership, real estate and
healthcare facility development businesses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Manor Care, Inc.
and its subsidiaries (the "Company"). As a result of the Company's spin-off of
its lodging operations, and the anticipated merger of Vitalink Pharmacy
Services, Inc. ("Vitalink") with and into Genesis Health Ventures, Inc.
("Genesis"), the accompanying consolidated financial statements reflect the
lodging and pharmacy segments as discontinued operations. 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.
31
<PAGE>
PROPERTY AND EQUIPMENT
The components of property and equipment at May 31, were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands of dollars)
<S> <C> <C>
Land $ 102,601 $ 97,569
Building and improvements 1,034,109 969,660
Capitalized leases 12,747 12,747
Furniture, fixtures and equipment 231,145 214,239
Facilities in progress 138,839 58,200
---------- ----------
1,519,441 1,352,415
Less: Accumulated depreciation and amortization (387,014) (347,752)
---------- ----------
$1,132,427 $1,004,663
========== ==========
</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 $9.9 million and $9.4 million at May 31,
1998 and 1997, respectively, relating to capitalized leases. Capitalized leases
are amortized on a straight-line basis over the lesser of the lease term or the
remaining useful life of the leased property.
CAPITALIZATION POLICIES
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is taken into income. Maintenance, repairs, and minor replacements are
charged to expense.
Construction overhead and costs incurred to ready a project for its intended
use are capitalized for major development projects and are amortized over the
lives of the related assets.
The Company capitalizes interest on borrowings applicable to facilities in
progress. Interest has been capitalized as follows: 1998, $6.8 million; 1997,
$4.6 million; 1996, $3.1 million.
ACCOUNTING FOR CAPITALIZED SYSTEMS DEVELOPMENT COSTS
Costs incurred for systems development include direct payroll and consulting
costs. These costs are capitalized and are amortized over the lesser of the
estimated useful lives of the related systems or ten years.
32
<PAGE>
ACCOUNTING FOR INVESTMENTS IN JOINT VENTURES
The Company uses the equity method to account for investments in entities in
which it has less than a majority interest but can exercise significant
influence. These investments are classified on the accompanying balance sheets
as other long-term assets. Under the equity method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses of the affiliate as they occur. Losses are limited to the
extent of the Company's investments in, advances to and guarantees for the
investee.
GOODWILL
Goodwill primarily represents an allocation of the excess purchase price of
certain acquisitions over the recorded fair value of the net assets. Goodwill
is amortized over 40 years. Amortization expense amounted to $0.8 million, $0.3
million and $0.2 million in each of the years ended May 31, 1998, 1997 and 1996,
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. Minority interest liability
represents the cumulative minority owners' share of income in these entities.
INSURANCE PROGRAMS
The Company was self-insured for general, professional and automobile
liability as well as workers' compensation coverage in prior fiscal years. On
April 20, 1998, the Company paid $17.9 million to Hartford Insurance Company in
order to effect a loss portfolio transfer, transferring all workers'
compensation, professional, general and automobile liabilities prior to June 1,
1997, except for certain liabilities relating to the discontinued lodging and
pharmacy segments. These liabilities continue to be self-insured. The estimated
costs of these programs are accrued at a discount rate of 6% based on actuarial
projections for known and incurred but not reported claims. The balance of the
Company's exposure for general and professional liability, automobile liability
and workers' compensation coverage is fully insured.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company has disclosed herein pro
forma net income and pro forma earnings per share in the footnotes using the
fair value based method. Refer to the "Capital Stock" footnote for further
information.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). The Company adopted this statement effective
for the quarter ended
33
<PAGE>
February 28, 1998. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share pursuant to Accounting Principles Board Opinion
("APB") No. 15, "Earnings Per Share," with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is computed similarly to fully diluted earnings per share.
Earnings per share amounts for all years have been presented in conformity with
SFAS 128.
Basic and diluted earnings per common share are computed by dividing income
from continuing operations, income from discontinued pharmacy and lodging
operations, extraordinary item (loss on extinguishment of debt), cumulative
effect of change in accounting principle, and net income by the weighted average
number of shares of common stock outstanding. The weighted average number of
shares outstanding was 63,794,000, 63,257,000 and 62,628,000 for basic earnings
per share and 64,671,000, 63,979,000 and 63,136,000 for earnings per share
assuming dilution for fiscal years 1998, 1997, and 1996 respectively. The
difference between the weighted average number of shares of common stock
outstanding used in the basic and diluted earnings per share computations is
entirely due to the assumed exercise of outstanding stock options for diluted
earnings per common share.
REVENUE RECOGNITION
Revenues are recognized at the time the service is provided to the resident.
The Company records revenue for services to Medicare beneficiaries at the time
the services are rendered and based on the Medicare cost reimbursement
principles. Under those principles, Medicare reimburses the Company for the
reasonable costs (as defined) incurred in providing care to Medicare
beneficiaries. The Company reports as reimbursable costs in the Medicare cost
reports only those costs it believes to be reimbursable under the applicable
Medicare cost reimbursement principles. In determining the amount of revenue to
be recorded, those costs are reduced for costs that are in excess of
reimbursable cost limits, and for costs for which reimbursement may be
questionable based on the Company's understanding of reimbursement principles in
effect at that time. Accordingly, this process results in recording revenue only
for the costs that the Company believes are reasonably assured of recovery.
Refer to the "Commitments and Contingencies" footnote for additional
information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported or disclosed in its financial statements and the notes
related thereto. Actual results could differ from those estimates.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
which requires start-up activities
34
<PAGE>
to be expensed as incurred. The Company has until June 2000 to adopt this
statement. The Company has not determined when it will adopt this statement nor
the impact of adoption.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which is effective for
fiscal years beginning after December 15, 1997. The statement establishes
standards for reporting and display of comprehensive income and its components.
The Company is in the process of determining the timing and impact of adoption.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. The Company plans to adopt SFAS 131 in
fiscal year 1999 and has not determined the impact of adoption to be
significant.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
Company has until fiscal year 2000 to adopt this statement. The Company has not
determined when it will adopt this statement nor has it determined the impact of
adoption.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Postretirement Benefits" ("SFAS 132"), which is effective for
fiscal years beginning after December 31, 1997. This statement revises
employers' disclosures about pension and other postretirement benefit plans;
however, it does not change the measurement or recognition of those plans. The
Company will adopt the statement in fiscal year 1999 and has not determined the
impact to be significant.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Hedging Activities" ("SFAS 133"), which addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This statement is effective for fiscal years
beginning after June 15, 1999. The Company has not determined when it will adopt
the statement nor has it determined the impact of adoption.
On November 20, 1997 a consensus was reached by the Emerging Issues Task Force
regarding reengineering costs (Issue 97-13) providing that all reengineering
costs be expensed as incurred based on the fair value of the services rendered.
As a result, in November 1997, the Company expensed $3.2 million of
reengineering costs (net of taxes) as the cumulative effect of a change in
accounting principle.
LONG-TERM RECEIVABLES
Long-term receivables of $1.2 million and $22.0 million at May 31, 1998 and
1997, respectively, represent accounts receivable from Medicare at In Home
Health, Inc. ("In Home
35
<PAGE>
Health"), relating primarily to the reimbursement of disputed costs from prior
years, and are included in Other Assets on the Consolidated Balance Sheets.
Approximately 51% of In Home Health's revenue is derived from services
provided to Medicare beneficiaries through cost reimbursement programs.
Virtually all of the payments for these services are based on the Medicare
program's reimbursable costs incurred in rendering the services. Cost reports
are filed annually and are subject to audit and retroactive adjustment. In Home
Health reports revenue for those costs that it believes are probable of recovery
under applicable Medicare statutes and regulations.
Over the years Medicare auditors have claimed that certain costs were not
reimbursable under the Medicare program. These positions are based on
interpretations promulgated after the period covered by the cost reports that
are contrary to In Home Health's interpretation or on what In Home Health
believes is the misapplication of specific reimbursement principles.
As of May 31, 1998 and 1997, total In Home Health accounts receivable due from
Medicare were approximately $9.3 million and $40.5 million, respectively,
including disputed costs of $4.7 million and $37.7 million. On a consolidated
basis, In Home Health has established reserves against these disputed costs of
$3.5 million and $9.8 million for fiscal years 1998 and 1997. The Company does
not believe that the resolution of these disputed costs will be accomplished in
the next year. Therefore, they have been classified as non-current assets.
Additionally, as of May 31, 1998 and 1997, In Home Health had received
approximately $9.3 million and $12.5 million in payment from Medicare for
disputed costs. Because Medicare may require repayment of these amounts, the
potential liability is recorded as an offset to Receivables on the Consolidated
Balance Sheets. In August 1997, In Home Health received three court decisions
relating to certain of these amounts. In Home Health evaluated these decisions
on its recorded accounts receivable and, accordingly, recorded a reserve of
$15.5 million in fiscal year 1998. The net impact to the Company after taxes
and minority interest was approximately $3.8 million.
As of May 31, 1997, In Home Health had received reports challenging $18.9
million of these costs. An additional $18.8 million of costs similar to the
costs which had been challenged had been incurred through May 31, 1997 related
to open cost reporting years. Of this $37.7 million, approximately $22.5
million related to the treatment of certain community liaison personnel costs,
which Medicare alleged were unreimbursable sales costs. Other significant
disputed costs related to physical therapists employed by In Home Health and
certain other branch and corporate expenses.
36
<PAGE>
ACCRUED EXPENSES
Accrued expenses at May 31, 1998 and 1997 were as follows.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Payroll $55,723 $ 55,120
Taxes, other than income 14,175 14,125
Insurance - 17,346
Interest 5,790 7,457
Other 20,707 15,492
------- --------
$96,395 $109,540
======= ========
</TABLE>
LONG-TERM DEBT
Maturities of long-term debt at May 31, 1998 were as follows.
<TABLE>
<CAPTION>
Fiscal year
-----------------------------------------------
(In thousands of dollars)
<S> <C>
1999 $ 6,104
2000 5,822
2001 5,285
2002 5,402
2003 8,524
2004 to 2024 508,696
-------
$539,833
=======
</TABLE>
Long-term debt, consisting of mortgages, capital leases, Senior Notes, Senior
Subordinated Notes, borrowings under the Company's $250.0 million
competitive advance and multi-currency revolving credit facility (the
"Facility"), and borrowings under two lines of credit, was net of discount of
$0.9 million and $1.2 million at May 31, 1998 and 1997, respectively.
Amortization of discount was $0.3 million in 1998 and $0.5 million in 1997 and
1996. At May 31, 1998, the Company had mortgages and capital leases of $68.9
million.
Interest paid was $33.2 million in 1998, $34.1 million in 1997 and $29.8
million in 1996. During fiscal year 1998, the interest rate on the Senior Notes
was 7.5%. Interest rates on mortgages and other long-term debt ranged from 3.0%
to 12.0%. The weighted average interest rate in fiscal year 1998 was 6.4%.
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 Facility.
37
<PAGE>
In November 1992, the Company issued $150.0 million of 9 1/2% Senior
Subordinated Notes due November 2002. In July 1996, the Company repurchased $9.9
million of the 9 1/2% Senior Subordinated Notes for $10.5 million. In November
1997, the Company redeemed all outstanding 9 1/2% Senior Subordinated Notes due
2002 at a redemption price of 103.56% with the proceeds of borrowings under the
Facility. The Company recorded an extraordinary item of $3.2 million after taxes
representing the premium paid on redemption.
In September 1996, the Company amended the Facility provided by a group of
sixteen banks. The Facility provides that up to $75.0 million is available for
borrowings in foreign currencies. Borrowings under the Facility are, at the
option of the Company, at one of several rates including LIBOR plus 20 basis
points. In addition, the Company has the option to request participating banks
to bid on loan participation at lower rates than those contractually provided by
the Facility. The Facility presently requires the Company to pay fees of 1/10
of 1% on the entire loan commitment. The Facility will terminate on September
6, 2001. At May 31, 1998, outstanding revolver borrowings amounted to $245.0
million. The Company also has $76.5 million in borrowings under two lines of
credit with an available limit totaling $100.0 million. These lines of credit
expire on September 1, 1998 and on December 31, 1998, and are expected to be
refinanced prior to their expiration dates. Therefore, the outstanding
borrowings are classified as long-term on the Consolidated Balance Sheet at May
31, 1998.
Various debt agreements impose, among other restrictions, restrictions
regarding financial ratios. Pursuant to such restrictions, owned property with
a net book value of $121.4 million was pledged or mortgaged.
LEASES
The Company operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2035. Future minimum
lease payments from continuing operations are as follows.
<TABLE>
<CAPTION>
Operating Capitalized
Leases Leases
------ ------
Fiscal Year (In thousands of dollars)
-----------
<S> <C> <C>
1999 $ 9,126 $1,176
2000 8,115 741
2001 7,297 313
2002 6,302 292
2003 33,977 292
Thereafter 11,417 1,612
------- ------
Total minimum lease payments $76,234 4,426
Less: Amount representing interest ======= 1,007
------
Present value of lease payments 3,419
Less: Current portion 1,176
------
Lease obligations included in long-term debt $2,243
======
</TABLE>
38
<PAGE>
Rental expense from continuing operations under noncancelable operating leases
was $10.5 million in 1998, $8.0 million in 1997, and $6.3 million in 1996.
INTEREST RATE HEDGING
The Company has entered into multiple interest rate swap agreements to hedge
its exposure to fluctuations in interest rates on its long-term debt and
operating leases. At May 31, 1998, the Company had six interest rate swap
agreements outstanding, with a total notional principal amount of $380.3
million. Three of these agreements effectively convert the Company's interest
rate exposure on a floating rate operating lease to a fixed interest rate of
5.60% and mature simultaneously with the relevant operating lease in 2002. The
remaining three interest rate swap agreements have a notional principal amount
of $350.0 million and effectively convert the Company's interest rate exposure
on certain floating rate debt to a weighted average fixed rate of 6.53%. These
agreements mature on August 4, 2008. While the Company is exposed to credit loss
in the event of nonperformance by other parties to outstanding interest rate
swap agreements, the Company does not anticipate any such credit losses.
In conjunction with the June 1996 issuance of $150.0 million of 7 1/2% Senior
Notes, the Company also entered into a series of interest rate swap and treasury
lock agreements having a total notional principal amount of $150.0 million.
Agreements with a total notional principal amount of $100.0 million were
terminated concurrent with the pricing of the notes offering on May 30, 1996
with a $2.7 million cash gain. The remaining agreement, with a total notional
principal amount of $50.0 million was terminated on October 23, 1996 with a $1.4
million cash gain. The gains on the termination of the agreements have been
deferred and are being amortized against interest expense over the life of the
7 1/2% Senior Notes, effectively reducing the interest rate on the notes to
7.1%. The effect of the agreements on interest expense during the period that
the agreements were outstanding was to reduce interest expense to 6.9%.
INCOME TAXES
The Company files a separate income tax return for In Home Health. The
consolidated tax provision, therefore, is based upon the separate tax provisions
of each of the companies. Income tax provisions were as follows for the year
ended May 31.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
(In thousands of dollars)
<S> <C> <C> <C>
Current tax expense:
Federal $17,761 $20,239 $33,968
State 3,361 4,237 7,165
Deferred tax expense:
Federal 23,417 21,513 (3,614)
State 6,292 5,197 (825)
------- ------- -------
$50,831 $51,186 $36,694
======= ======= =======
</TABLE>
39
<PAGE>
Deferred tax (liabilities) assets are comprised of the following at May 31.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -----------
(In thousands of dollars)
<S> <C> <C> <C>
Depreciation and amortization $(115,056) $(98,185) $ (81,906)
Purchased tax benefits (39,892) (44,110) (45,527)
Gain on stock issuance (31,778) (37,187) (11,896)
Other (24,345) (22,400) (18,916)
--------- --------- ---------
Gross deferred tax liabilities (211,071) (201,882) (158,245)
--------- --------- ---------
Tax deposit - 5,754 5,754
Reimbursement reserve 229 9,550 16,882
Reserve for doubtful accounts 11,450 12,454 9,242
Deferred compensation 11,323 13,982 9,526
Other 4,338 4,675 6,629
--------- --------- ---------
Gross deferred tax assets 27,340 46,415 48,033
--------- --------- ---------
Net deferred tax $(183,731) $(155,467) $(110,212)
========= ========= =========
</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>
1998 1997 1996
---------------- ---------------- ----------------
(In thousands of dollars)
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
======= ======= =======
Federal taxes at statutory rate $47,269 $46,928 $31,726
State income taxes, net of Federal
tax benefit 6,274 6,132 4,121
Minority interest (4,221) (910) (259)
Tax credits (709) (143) (19)
Other 2,218 (821) 1,125
------- ------- -------
Income tax expense $50,831 $51,186 $36,694
======= ======= =======
</TABLE>
Income taxes paid on a consolidated basis for the years ended May 31, 1998,
1997, and 1996 were $45.1 million, $41.7 million, and $48.2 million,
respectively.
CAPITAL STOCK
There are 5.0 million shares of authorized but unissued preferred stock with a
par value of $1.00 per share. The rights of the preferred shares will be
determined by the Board of Directors if the shares are issued.
During fiscal years 1998 and 1997, the Company acquired 71,890 and 134,118
shares of its common stock for a total cost of $2.5 million and $5.8 million,
respectively. A total of 8.9 million shares of common stock have been
authorized, under various stock option plans, to be granted to key executive
officers and key employees. At May 31, 1998 and 1997, options for the purchase
of an aggregate of 3,328,106 and 3,041,807 shares were outstanding at prices
equal
40
<PAGE>
to the market value of the stock at date of grant. Options totaling 1,136,015
are presently exercisable and 2,192,091 will become exercisable from fiscal year
1999 to 2003 and will expire at various dates to April 2008. In addition, 52,291
options are outstanding for non-employee directors. Options totaling 18,593 are
presently exercisable and 33,698 options will become exercisable from fiscal
year 1999 to 2002 and will expire at various dates to September 2002. Pursuant
to the Merger Agreement, each holder of stock options granted by the Company,
whether vested or not vested, shall receive (subject to any applicable income
tax withholding) HCR Common Stock having a value equal to the fair market value
of the option.
Option activity under the above plans was as shown in the table below.
<TABLE>
<CAPTION>
Options 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year:
No. of shares 3,091,764 3,702,527 3,538,250
Avg. Option price $ 14.87 $ 16.87 $ 14.36
Granted: No. of shares 767,850 956,400 582,168
Avg. Option Price $ 32.78 $ 38.82 $ 30.89
Adjustment as a result of the
spin-off: No. of shares - 1,454,915 -
Exercised: No. of shares 296,361 1,011,951 269,156
Avg. Option Price $ 8.89 $ 8.45 $ 12.34
Canceled: No. of shares 182,856 2,010,127 148,735
Avg. Option Price $ 26.39 $ 22.42 $ 20.57
Outstanding, end of year:
No. of shares 3,380,397 3,091,764 3,702,527
Avg. Option Price $ 18.83 $ 14.87 $ 16.87
Available for grant at
May 31: No. of shares 1,070,683 1,680,826 1,089,899
</TABLE>
In connection with the spin-off of the Company's lodging segment, the
outstanding options held by current and former employees of the Company as of
November 1, 1996 were redenominated in both Company and lodging company stock
and the number and exercise prices of the options were adjusted based on the
relative trading prices of shares of the common stock of the two companies to
retain the intrinsic value of the options. The total number of options
outstanding increased by 1,454,915 as a result of this adjustment.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its various stock option plans and employee
stock purchase plan and, accordingly, no compensation expense has been
recognized for options granted and shares purchased under the provisions of
these plans. Had compensation expense for options granted and shares purchased
under the stock-based compensation plans been determined based on the fair value
at the grant dates, net income and earnings per share would have been as follows
for the years ended May 31.
41
<PAGE>
<TABLE>
<CAPTION>
(In thousands of dollars,
except per share data) 1998 1997 1996
- ------------------------------------- -------- --------- --------
<S> <C> <C> <C>
Net income:
As reported $89,904 $136,942 $85,907
Pro forma $82,922 $128,141 $81,697
Earnings per share:
As reported, basic $ 1.41 $ 2.16 $ 1.37
As reported, assuming dilution $ 1.39 $ 2.14 $ 1.36
Pro forma, basic $ 1.30 $ 2.03 $ 1.30
Pro forma, assuming dilution $ 1.28 $ 2.00 $ 1.29
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not likely
to be representative of the effects on reported net income for future years.
SFAS 123 does not apply to awards granted prior to fiscal year 1996 and
additional awards are anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the Company has assumed a risk-free interest rate equal to
approximately 5.55%, 6.36% and 6.37% for fiscal years 1998, 1997 and 1996,
respectively, expected volatility of 25.5%, dividend yields based on historical
dividends of $.088 per share annually and expected option lives of eight years.
The average fair values of the options granted during 1998, 1997 and 1996, as
measured on the dates of the grants, are estimated to be $15.07, $15.12 and
$11.96, respectively.
ACQUISITIONS & DIVESTITURES
During fiscal year 1998, Manor Care opened one newly constructed skilled
nursing facility located in California and ten assisted living facilities
located in Connecticut, Virginia, Maryland (2), Delaware, Georgia (2) and
Florida (3). The Company sold two Springhouse facilities located in Florida and
Michigan for $4.7 million and three corporate office buildings located in
Maryland for $18.4 million.
During fiscal year 1997, the Company acquired a nursing center in California
for $4.4 million and a nursing center in Michigan for $13.4 million. Through new
construction, the Company opened four skilled nursing centers and six assisted
living facilities. The Company sold four nursing centers in Indiana, Iowa,
Illinois, and Texas for $17.3 million and transferred an assisted living
facility with an approximate net book value of $4.9 million to the discontinued
lodging segment.
During fiscal year 1996, the Company acquired four nursing centers and an
operating lease for approximately $45.4 million, of which $32.4 million was cash
and the remainder was assumed liabilities. Additionally, six assisted living
facilities, with five attached skilled nursing units, were purchased for $74.3
million, of which $19.0 million was cash and the remainder was assumed
liabilities. In October 1995, the Company purchased for $22.9 million
approximately 41% of the common stock of In Home Health, a provider of home
health services. The Company paid an additional $20.0 million to In Home Health
for 100% of its outstanding voting
42
<PAGE>
convertible preferred stock and for warrants to purchase an additional 6.0
million shares of common stock. On April 13, 1998 the Company entered into a
Preferred Stock Modification Agreement with In Home Health. Under this
agreement, the Company agreed, with respect to 70,000 shares (the "Modified
Shares") of the preferred stock, to waive the right to give notice on or after
October 24, 2000 requiring the Registrant to redeem the Modified Shares. The
remaining 130,000 shares may be redeemed in cash at the option of the Company on
and after October 24, 2000. The In Home Health redeemable preferred stock ranks
senior to the In Home Health common stock, has voting rights on an as-if
converted basis, and is initially convertible into 10 million shares of In Home
Health common stock at a conversion price of $2.00 per share. The In Home Health
redeemable preferred stock bears dividends at 12% per annum and has a
liquidation preference of $100.00 per share. The In Home Health redeemable
preferred stock will accrete over five years from its fair value of $18,500,000
on the date of issuance to its redemption price of $20 million as of the
redemption date. The In Home Health warrants purchased by the Company have an
exercise price of $3.75 per share and expire in October 1998. As a result of the
purchase of In Home Health common and preferred stock, the Company currently has
effective control of approximately 63% of the voting stock of In Home Health. In
Home Health is consolidated in the Company's financial statements.
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 periodically reviews the net realizable value of its long-term
assets based on certain circumstances which indicate the carrying amount of an
asset may not be recoverable. If the carrying amount exceeds the net realizable
value, an impairment loss is recorded in the period the impairment is
determined.
During fiscal year 1998, the Company recorded $13.5 million in restructuring
charges in connection with the Company's abandoned plan to separate its skilled
nursing facility management, assisted living and home health businesses from its
skilled nursing facility ownership, real estate and healthcare facility
development businesses. The charge includes $5.3 million of severance costs
related to corporate staff reductions as a result of the Merger, $4.6 million of
consulting, legal and accounting fees incurred, and $3.6 million of printing,
mailing, travel, relicensing and other miscellaneous expenses related to the
transaction and the related public filings. Due to the impending Merger, the
Company no longer plans to complete this transaction.
The Company recorded provisions of $26.3 million in fiscal year 1996 related
to the impairment of certain long-lived assets and costs associated with the
Company's restructuring. The most significant components of the provision were
non-cash impairment charges of $21.2 million relating to writedowns of property,
equipment and capitalized systems development costs and $5.1 million related to
the spin-off of the lodging segment in fiscal year 1996.
43
<PAGE>
In fiscal year 1996, the Company determined that it incurred costs in excess
of the original amount expected to complete a systems development project for
billing and receivables which began in fiscal year 1995. Intensive testing
during a six month pilot identified over 100 major system problems. At this
time, it was determined that the newly developed system was not functional and
that a major system re-write was needed. Therefore, the Company compared the
estimated net realizable value of the systems, based on the fair value of
similar assets, to the carrying amount of these costs. The carrying amount was
determined to be in excess of the fair value and accordingly, the related assets
were written down by $13 million to the net realizable value.
44
<PAGE>
DISCONTINUED LODGING OPERATIONS
On November 1, 1996, the Company completed the spin-off of its lodging
segment. The Company's shareholders of record on October 10, 1996 received one
share of Choice Hotels International, Inc. common stock for each outstanding
share of Manor Care common stock. Accordingly, lodging results are reported as
discontinued operations for all periods presented.
The revenues, income from discontinued lodging operations before income taxes,
and net income from discontinued lodging operations for the years ended May 31,
1997 and 1996 were as follows.
<TABLE>
<CAPTION>
1997 1996
------------ ---------------
(In thousands of dollars)
<S> <C> <C>
Revenues $89,849 $374,873
Income from discontinued operations before
income taxes $20,563 $ 35,402
Net income from discontinued operations $11,829 $ 20,436
</TABLE>
Income from discontinued lodging operations for the year ended May 31, 1996
includes the results of operations of the lodging segment through March 7, 1996,
the measurement date. During the period from the measurement date through May
31, 1996, the lodging segment incurred a net loss of $12.0 million. The net loss
was primarily the result of provisions for asset impairment and costs and
expenses directly associated with the spin-off totaling $33.3 million.
The non-cash provision for asset impairment in the discontinued lodging
segment reflects primarily the writedown of European hotel assets based on
expected future cash flows. This non-cash provision was recorded in accordance
with SFAS 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 was recognized as the discontinued lodging
segment generated income between the measurement date and the date of the spin-
off.
Included in discontinued lodging operations is interest expense charged by the
continuing healthcare segment to the discontinued lodging segment relating to
cash advances provided to the discontinued lodging segment for the acquisition
and renovation of lodging assets. For the years ended May 31, 1997 and 1996,
interest so allocated amounted to $3.4 million and $19.7 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 $115.7 million at May 31, 1997. The Company received a
prepayment of $110.0 million of indebtedness in the fourth quarter of fiscal
year 1997 and the prepayment of the remaining $115.7 million in the second
quarter of fiscal year 1998. These payments were subject to prepayment penalties
of $1.9 million.
General corporate expenses of $5.5 million and $7.4 million, respectively,
were charged to discontinued lodging operations for the years ended May 31, 1997
and 1996. Allocation of general corporate charges was principally determined
based on time allocations.
45
<PAGE>
For purposes of providing an orderly transition after the spin-off, the
Company entered into various agreements with the discontinued lodging segment,
including, among others, a Tax Sharing Agreement, Corporate Services Agreement,
Employee Benefits Allocation Agreement and Support Services Agreement. These
agreements provide, among other things, that the Company (i) will provide
certain corporate and support services, such as accounting, tax, and computer
systems support and (ii) will provide certain risk management services and other
miscellaneous administrative services. These agreements extend for a period of
30 months from the spin-off date or until such time as the discontinued lodging
segment has arranged to provide such services in-house or through another
unrelated provider of such services.
DISCONTINUED PHARMACY OPERATIONS
On April 26, 1998, Vitalink entered into an Agreement and Plan of Merger (the
"Vitalink Merger Agreement") with Genesis. Pursuant to the Vitalink Merger
Agreement, Vitalink will merge with and into Genesis (the "Vitalink Merger"). In
accordance with the Vitalink Merger Agreement, holders of the common stock of
Vitalink will receive for each share of Vitalink common stock held, at the
election of the holder, either cash consideration in the amount of $22.50, or
0.045 shares of Series G Cumulative Convertible Preferred Stock of Genesis (the
"Genesis Preferred Stock").
The Vitalink Merger Agreement may be terminated (i) by either party, if the
Board of Directors of the other has withdrawn, changed or modified its
recommendation that its stockholders vote in favor of the Vitalink Merger; (ii)
by Vitalink prior to the approval of its stockholders of the Vitalink Merger, if
it receives a Superior Proposal (as defined in the Vitalink Merger Agreement)
which was not solicited after the date of the Vitalink Merger Agreement; (iii)
by either party if any court of competent jurisdiction or other governmental
body has issued a final and nonappealable order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Vitalink
Merger; and (iv) upon the occurrence of certain other events specified in the
Vitalink Merger Agreement. Under certain circumstances, Vitalink would be
obligated to pay Genesis a $20 million fee if the Vitalink Merger Agreement is
terminated.
Manor Care, the beneficial owner of approximately 50% of the outstanding
shares of Vitalink common stock, and Genesis have entered into a Voting
Agreement, dated April 26, 1998 (the "Voting Agreement"), pursuant to which
Manor Care agreed to vote all of its shares of Vitalink common stock in favor of
the adoption and approval of the Vitalink Merger, the Vitalink Merger Agreement
and the transactions contemplated thereby. Manor Care has also agreed to elect
to receive Genesis Preferred Stock as Vitalink Merger consideration with respect
to all of its Vitalink common stock.
The Genesis Preferred Stock will bear cash dividends at an initial annual rate
of 5.9375%. Genesis Preferred Stockholders will be initially entitled to 13.441
votes per share of Genesis Preferred Stock, and will vote together with the
holders of Genesis common stock as a single class on all matters to be voted on
by holders of Genesis common stock, and as a separate class on matters as to
which the Pennsylvania Business Corporation Law requires a separate class vote.
46
<PAGE>
At the option of Manor Care, each share of Genesis Preferred Stock will be
convertible at any time into Genesis common stock at a conversion price of
$37.20 per share, subject to adjustment under certain circumstances. Beginning
April 26, 2001, Genesis may under certain circumstances, force conversion of the
Genesis Preferred Stock, at conversion prices ranging from $37.20 to $38.87 per
share of Genesis common stock. Dividends will cease to accrue in respect of the
Genesis Preferred Stock as of the date of the conversion thereof. The revenues
from discontinued pharmacy operations for fiscal years 1998, 1997 and 1996
(including sales to the Company's skilled nursing and assisted living facilities
of $44,715, $41,365 and $34,829) are $499,307, $274,038 and $141,115,
respectively.
The income from discontinued pharmacy operations before income taxes and net
income from discontinued pharmacy operations for the years ended May 31, 1998,
1997 and 1996 were as follows.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
(In thousands of dollars)
<S> <C> <C> <C>
Income from discontinued pharmacy operations
before income taxes $31,802 $75,732(a) $20,825
Net income from discontinued pharmacy operations $12,070 $42,218 $11,519
</TABLE>
(a) Income from discontinued pharmacy operations before income taxes includes a
$50.3 million pretax gain resulting from the issuance of 11.4 million
shares of Vitalink common stock in connection with Vitalink's merger with
TeamCare, the pharmacy subsidiary of GranCare, Inc. in February 1997.
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 1998, 1997, and 1996 these revenues amounted to $628.7 million, $596.0
million, and $502.0 million, respectively. In the opinion of management, any
difference between revenues recorded and final determination will not be
significant. The Company does not anticipate a material effect on revenues as a
result of the Balanced Budget Act of 1997. However, the regulations pertaining
to this act have neither been proposed nor implemented and therefore, this
preliminary conclusion may change as a result.
47
<PAGE>
In fiscal year 1996, the Health Care Financing Administration issued a
modification to regulations governing the treatment of interest expense and
investment income offsets for Medicare reimbursement purposes. As a result of
this modification the Company recognized revenues of approximately $20 million
in fiscal year 1997, which had been reserved in prior years.
As of May 31, 1998, the Company had contractual commitments of $112.0 million
relating to its internal construction program.
One or more subsidiaries or affiliates of the Company have been identified as
potentially responsible parties ("PRPs") in a variety of actions (the "Actions")
relating to waste disposal sites which allegedly are subject to remedial action
under the Comprehensive Environmental Response Compensation Liability Act, as
amended, 42 U.S.C. (S)(S)9601 ET SEQ. ("CERCLA") and similar state laws. CERCLA
imposes retroactive, strict joint and several liability on PRPs for the costs of
hazardous waste clean-up. The Actions arise out of the alleged activities of
Cenco Incorporated and its subsidiary and affiliated companies ("Cenco"). Cenco
was acquired in 1981 by a wholly-owned subsidiary of the Company. The Actions
allege that Cenco transported and/or generated hazardous substances that came to
be located at the sites in question. The Company believes that the waste
disposal activities at issue occurred prior to the Manor Care subsidiary's
acquisition of Cenco. Environmental proceedings such as the Actions may involve
owners and/or operators of the hazardous waste site, multiple waste generators
and multiple waste transportation disposal companies. Such proceedings typically
involve efforts by governmental entities and/or private parties to allocate or
recover site investigation and clean-up costs, which costs may be substantial.
The potential liability exposure for currently pending environmental claims and
litigation, without regard to insurance coverage, cannot be quantified with
precision because of the inherent uncertainties of litigation in the Actions and
the fact that the ultimate cost of the remedial actions for some of the waste
disposal sites where the Company is alleged to be a potentially responsible
party has not yet been quantified. The Company believes that the potential
environmental liability exposure, after consideration of insurance coverage, is
approximately $3 million. Future liabilities for the pending environmental
claims and litigation, without regard to insurance, currently are not expected
to exceed approximately $46 million. The Company estimated future liabilities
without regard to insurance based on counsel's evaluation of the range of
potential liability and cost of defense in each of the Actions. The Company has
accrued the liabilities based on its estimate of the likely outcome of the
Actions, taking into account insurance coverage available for the liabilities.
48
<PAGE>
BUSINESS SEGMENT INFORMATION
The Company operates principally in three segments: skilled nursing
operations, assisted living operations and home health operations. Income (loss)
from operations consists of total revenues less operating, depreciation and
amortization, and general corporate and other expenses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Skilled Assisted Home
(In thousands of dollars) Nursing(a) Living Health Eliminations Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenues $1,191,811 $ 71,937 $ 95,581 - $1,359,329
Income (loss) from operations 157,586(c) 969 (20,455) 4,050 142,150
Identifiable assets 1,295,635 213,456 38,788 - 1,547,879(d)
Depreciation and amortization 68,049 8,521 2,705 - 79,275
Capital expenditures 133,101 136,578 777 - 270,456
- --------------------------------------------------------------------------------------------------------
1997
Revenues $1,113,690 $ 56,530 $124,354 - $1,294,574
Income (loss) from operations 144,836 (2,710) (2,928) 3,163 142,361
Identifiable assets 1,223,317 180,228 60,407 - 1,463,952(d)
Depreciation and amortization 60,943 6,848 3,060 - 70,851
Capital expenditures 122,812 55,967 42 - 178,821
- --------------------------------------------------------------------------------------------------------
1996
Revenues $1,028,901 $ 38,857 $ 74,153 - $1,141,911
Income (loss) from operations 99,189(b) (6,997)(b) 67 3,848 96,107
Identifiable assets 1,381,516 148,713 72,598 - 1,602,827(d)
Depreciation and amortization 56,242 5,733 1,748 - 63,723
Capital expenditures 109,063 23,170 562 - 132,795
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes skilled nursing operations, hospital and corporate operations.
(b) Includes total provisions for asset impairment and restructuring of $26.3
million, of which $25.1 million relates to skilled nursing operations and
$1.2 million relates to assisted living operations.
(c) Includes total provisions for restructuring of $13.5 million.
(d) Does not include investment in discontinued pharmacy segment of $193,398,
$178,079 and $71,010 or advances from discontinued pharmacy segment of $0,
$1,053 and $16,910 at May 31, 1998, 1997 and 1996, respectively.
PENSION, PROFIT SHARING AND INCENTIVE PLANS
The Company has various pension and profit sharing plans, including a
supplemental executive retirement plan, and contributes to certain union welfare
plans. The provision for these plans amounted to $9.9 million in 1998, $11.8
million in 1997, and $11.6 million in 1996. 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 $5.7 million in 1998, $7.2 million in 1997, and $5.8 million in 1996.
49
<PAGE>
Also included in the Company's retirement plans are two defined benefit
pension plans. The benefits for the first plan are based on service credits for
years of participation after January 1, 1992. In addition, there is a prior
benefit equal to the accrued benefit at December 31, 1991 for certain
individuals who were participants in a predecessor plan. No new participants
were eligible to enter this plan after August 15, 1996 and service credits for
all participants were frozen as of December 31, 1996. The second plan is a
supplemental executive retirement plan based on years of service.
Service cost benefits earned during fiscal years 1998, 1997, and 1996
approximated the plans' annual costs of $0.2 million, $4.0 million, and $2.8
million, respectively. As of February 28, 1998, 1997, and 1996, plan assets of
approximately $22.5 million, $20.3 million, and $14.4 million, compared to
vested benefit obligations of $20.4 million, $17.0 million, and $12.4 million,
respectively.
Projected benefit obligations were not significantly different from
accumulated benefit obligations of $24.9 million, $21.0 million, and $16.3
million, as of the same dates. Liabilities recorded on the Company's
Consolidated Balance Sheets as of May 31, 1998, 1997, and 1996 were $4.5
million, $2.3 million, and $2.0 million, respectively. Projected benefit
obligations were determined using an assumed discount rate of 7.0% for 1998,
7.5% for 1997, and 7.0% for 1996, an assumed rate of return on plan assets of
8.25%, and an assumed compensation increase of 4.5%.
In fiscal years 1997 and 1996, Vitalink participated in the various pension
and profit sharing plans of the Company. The Company charged Vitalink $0.5
million and $0.4 million, respectively, for fiscal year 1997 and 1996 to
participate in these plans. Vitalink had its own pension and profit sharing
plans in fiscal year 1998.
The Company also has various incentive compensation plans for certain
personnel. Incentive compensation expense was $4.6 million in 1998, $3.8 million
in 1997, and $3.4 million in 1996.
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 consolidated balance sheets.
The balance sheet carrying amounts of cash, cash equivalents, receivables and
payables approximate fair value due to the short-term nature of these items.
Management believes that the fair value of the advances to the discontinued
lodging segment approximates the carrying value.
Total fair market value for the outstanding interest rate swap agreements
at May 31, 1998 and 1997 was ($11.0) million and $1.4 million, respectively.
Fair values were determined based on quoted rates.
SUMMARY OF QUARTERLY RESULTS
(Unaudited)
<TABLE>
<CAPTION>
INCOME FROM
CONTINUING
OPERATIONS
QUARTERS ENDED BEFORE OTHER
(IN THOUSANDS OF INCOME AND
DOLLARS EXCEPT PER (EXPENSES) AND
SHARE DATA) REVENUES INCOME TAXES NET INCOME PER SHARE-BASIC
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1998
August $ 325,071 $ 24,018 $ 19,860 $ 0.31
November 340,451 40,520 19,317 0.30
February 349,459 42,765 28,029 0.44
May* 344,348 34,847 22,698 0.36
---------- --------- --------- ---------
$1,359,329 $ 142,150 $ 89,904 $ 1.41
========== ========= ========= =========
FISCAL 1997
August $ 306,445 $ 30,161 $ 23,685 $ 0.38
November 317,080 35,449 32,444 0.51
February 332,631 39,046 61,392 0.97
May 338,418 37,705 19,421 0.31
---------- --------- --------- ---------
$1,294,574 $ 142,361 $ 136,942 $ 2.16**
========== ========= ========= =========
</TABLE>
* Income from continuing operations before other income and (expenses) and
income taxes, net income and per share amounts for the quarter ended May,
1998 and fiscal year 1998 reflect provision for restructuring charge of
$13,500 ($8,100 after-tax).
** Does not add due to rounding.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
DIRECTORS
The name, age, and business experience for the past five years of each
director of Manor Care are set forth below.
Stewart Bainum, Jr. (52) Served as a Director of Manor Care since 1976; as
-------------------
Chairman of the Board since March 1987; and as Vice Chairman from June 1982 to
March 1987. Director: Choice Hotels International, Inc., Sunburst Hospitality
Corporation (until July 1998), and Vitalink Pharmacy Services, Inc. Also see
the biographical information set forth under "Executive Officers" below.
Stewart Bainum. (79) Served as a Director of Manor Care since 1968; Vice
---------------
Chairman of the Board since March 1987; Chairman of the Board from 1968 to March
1987; President from December 1980 through October 1981, and May 1982 through
July 1985; Chairman of the Board of Realty Investment Company, Inc. (private
real estate investment company) since 1965. Director: Choice Hotels
International, Inc. (until July 1998), and Sunburst Hospitality Corporation.
Regina E. Herzlinger. (54) Served as a Director of Manor Care since 1992.
---------------------
Nancy R. McPherson Professor of Business Administration, Harvard Business
School, since 1971. Director: C. R. Bard, Inc., Deere & Company, Cardinal
Health, Inc., Schering-Plough Corporation and Total Renal Care, Inc.
William H. Longfield. (60) Served as a Director of Manor Care since 1989.
---------------------
Chairman and Chief Executive Officer of C. R. Bard, Inc. (medical devices) since
September 1995; President and Chief Executive Officer from June 1994 to
September 1995; President and Chief Operating Officer of C. R. Bard, Inc. from
September 1991 to June 1994; Executive Vice President and Chief Operating
Officer of C. R. Bard, Inc. from February 1989 to September 1991. Director: C.
R. Bard, Inc., Horizon Health Corporation, United Dental Care, Inc., and The
West Company.
Frederic V. Malek. (61) Served as a Director of Manor Care since 1990.
------------------
Chairman, Thayer Capital Partners since March 1993; Co-chairman of CB Commercial
Real Estate Group, Inc. since April 1989; Campaign Manager, Bush-Quayle '92
Campaign from January 1992 to December 1992; Vice Chairman of NWA, Inc.
(airlines) from July 1990 to December 1991. Director: American Management
Systems, Inc., Automatic Data Processing Corp., CB Richard Ellis Services, Inc.,
Choice Hotels International, Inc., FPL Group, Inc., Northwest Airlines, Inc.,
Sunburst Hospitality Corporation, and various Paine Webber mutual funds.
Jerry E. Robertson, Ph.D. (65) Served as a Director of Manor Care since
-------------------------
1989. Retired; Executive Vice President of 3M Life Sciences Sector and
Corporate Services from November 1984 to March 1994. Director: Allianz Life
Insurance Company of North America, Cardinal Health, Inc., Choice Hotels
International, Inc., Coherent, Inc., Haemonetics Corporation, Medwave, Inc., and
Steris Corporation.
51
<PAGE>
Kennett L. Simmons. (56) Served as a Director of Manor Care since 1996.
-------------------
Private Investor; 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.
EXECUTIVE OFFICERS
The name, age, title, and business experience for the past five years of
each of the executive officers of Manor Care are set forth below. The business
address of each executive officer is 11555 Darnestown Road, Gaithersburg,
Maryland 20878-3200.
Stewart Bainum, Jr. (52) Chairman of the Board of Manor Care and MCHS
------------------
since March 1987; Chief Executive Officer of Manor Care since March 1987 and
President since June 1989; Chairman of the Board of Vitalink since February
1997; Chairman of the Board and Chief Executive Officer of Vitalink from
September 1991 to February 1995; Vice Chairman of the Board of Vitalink from
February 1995 to February 1997; Chairman of the Board of Choice Hotels
International, Inc. ("Choice") since October 1997; Chairman of the Board of
Sunburst Hospitality Corporation from November 1996 to July 1998.
Donald C. Tomasso. (53) Executive Vice President of Manor Care and
-----------------
President of MCHS from September 1996 through May 1998; President, Long-Term
Care Division, of MCHS from February 1995 to August 1996 and a Director of MCHS
from June 1991 through May 1998; President and Chief Operating Officer of MCHS
from May 1991 to February 1995; Chairman and Chief Executive Officer of Vitalink
from February 1995 to February 1997 and Vice Chairman from September 1991 to
February 1995.
James H. Rempe. (68) Senior Vice President, General Counsel and Secretary
--------------
of Manor Care since August 1981, of Choice and its predecessors from February
1981 to November 1996, and of MCHS since December 1980; Secretary of Vitalink
from January 1983 to January 1997.
Joseph R. Buckley. (50) Executive Vice President of Manor Care and MCHS
-----------------
since March 1996; President, Assisted Living Division, of MCHS from February
1995 to March 1996; Senior Vice President-Information Resources and Development
of Manor Care from June 1990 to February 1995; Chairman of the Board of In Home
Health, Inc. since June 1997.
Scott J. Van Hove. (41) Senior Vice President and Chief Administrative
-----------------
Officer of Manor Care since December 1995; Executive Vice President, Operations
of MCHS since February 1997; Senior Vice President of MCHS from December 1995 to
January 1997; Vice President of Operations, of Manor Care from March 1990 to
December 1995.
Wolfgang von Maack. (58) President and Chief Executive Officer of In Home
------------------
Health, Inc. since May 1997; and Senior Vice President, Healthcare Services of
MCHS since June 1990.
52
<PAGE>
Leigh C. Comas. (32) Vice President, Finance and Treasurer of Manor Care
--------------
and MCHS since September 1996; Vice President, Finance and Assistant Treasurer
of Manor Care from September 1995 to September 1996; Assistant Treasurer of
Manor Care and MCHS from September 1993 to September 1995.
Margarita A. Schoendorfer. (49) Vice President-Controller of Manor Care
-------------------------
and MCHS since November 1990; Vice President-Controller of Choice from November
1990 to November 1996.
Stewart Bainum, Jr. is Stewart Bainum's son. Aside from the foregoing, no
director or executive officer has any family relationship with any other
director or executive officer of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's reporting officers and directors, and
persons who own more than ten percent of the Company's Common Stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission (the "Commission"), the New York Stock
Exchange and the Company. Based solely on the Company's review of the forms
filed with the Commission and representations from reporting persons, the
Company believes that all of its reporting officers, directors and greater than
ten percent beneficial owners complied with all filing requirements applicable
to them during the fiscal year ended May 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
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, 1998, 1997 and 1996, of the chief executive officer
and the four other most highly compensated executive officers in the Company's
employ on May 31, 1998.
53
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------- ----------------------
Restricted
Stock Stock Option All Other
Name and Principal Position Year Salary Bonus Other Awards(#) Shares(#)(1) Compensation(2)
--------------------------- ---- -------- ------- ----- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. 1998 $516,890 $305,792 (3) - 60,000 $30,267
Chairman, Chief 1997 568,062 340,827 (3) - 60,000 (4) 35,074
Executive Officer 1996 625,102 337,555 (3) - 60,000 (4) 33,543
Donald C. Tomasso 1998 447,799 241,543 (3) - 45,000 (5) 20,283
Executive Vice President 1997 428,002 235,401 (3) - 35,000 (6) 18,760
President, ManorCare Health 1996 400,005 145,602 (3) - 50,000 (7) 5,750
Services, Inc.
James H. Rempe 1998 293,592 140,038 (3) - 27,000 17,706
Senior Vice President, 1997 281,507 140,754 (3) $271,250 15,000 (8) 16,727
General Counsel and Secretary 1996 269,048 121,072 (3) - 15,000 (9) 15,969
Joseph R. Buckley 1998 273,000 147,256 (3) - 30,000 16,147
Executive Vice President 1997 255,154 140,335 (3) - 20,000 (10) 15,466
1996 233,617 69,209 (3) - 30,000 (11) 13,406
Scott Van Hove 1998 263,501 128,378 (3) - 25,000 15,595
Senior Vice President and 1997 240,192 116,753 (3) - 50,000 (12) 14,542
Chief Administrative Officer 1996 210,310 89,754 (3) - 40,000 (13) 8,690
Executive Vice President-Operations,
ManorCare Health Services, Inc.
</TABLE>
- -----------------------------------------------
(1) On November 1, 1996, the Company distributed the shares of its wholly-owned
subsidiary, Choice Hotels International, Inc. ("Choice"), to its
shareholders via a tax-free spin-off (the "Choice Spin-off"). In connection
with the Choice Spin-off, outstanding options to purchase Company Common
Stock were converted into options to purchase Company Common Stock and
options to purchase Choice common stock. In all cases, however, the
exercise prices of the converted options were adjusted to maintain the same
financial value to option holder before and after the Choice Spin-off.
(2) Represents amounts contributed by the Company for fiscal 1998, 1997 and
1996 for the five individuals named in the above Summary Compensation Table
(the "Named Officers") under the the Company's 401(k) Plan and Nonqualified
Retirement Savings and Investment 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 1998 under the
401(k) Plan for the Named Officers were as follows: Mr. Bainum, Jr. $9,500;
Mr. Tomasso, $7,125; Mr. Buckley, $8,089; Mr. Rempe, $8,853 and Mr. Van
Hove, $7,812. Amounts contributed in cash or stock by the Company during
fiscal 1998 under the Nonqualified Savings and Investment Plan for the
Named Officers were as follows: Mr. Bainum, $20,767; Mr. Tomasso, $13,158;
Mr. Buckley, $8,058; Mr. Rempe, $8,853; and Mr. Van Hove, $7,783.
(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) In connection with the Choice Spin-off, these options were converted on a
pro rata basis into options to purchase Company Common Stock and options to
purchase Choice common stock.
54
<PAGE>
(5) A total of 18,000 of these options were subsequently canceled in connection
with Mr. Tomasso's resignation which became effective on May 31, 1998.
(6) In connection with the Choice Spin-off, these options were converted into
options to purchase 55,272 shares of Company Common Stock at an adjusted
exercise price of $25.0505 per share, 11,054 of which were subsequently
canceled in connection with Mr. Tomasso's resignation which became
effective on May 31, 1998.
(7) In connection with the Choice Spin-off, these options were converted into
options to purchase 74,617 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 7,500 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(8) In connection with the Choice Spin-off, these options were converted into
options to purchase 20,430 shares of Company Common stock at an adjusted
exercise price of $25.0505 per share and 5,625 shares of Choice common
stock at an adjusted exercise price of $14.5095.
(9) In connection with the Choice Spin-off, these options were converted into
options to purchase 19,036 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 7,568 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(10) In connection with the Choice Spin-off, these options were converted into
options to purchase 27,239 shares of Company Common stock at an adjusted
exercise price of $25.0505 per share and 7,500 shares of Choice common
stock at an adjusted exercise price of $14.5095.
(11) In connection with the Choice Spin-off, these options were converted into
options to purchase 39,557 shares of Company Common stock at an adjusted
exercise price of $19.1932 per share and 13,500 shares of Choice common
stock at an adjusted exercise price of $11.1168.
(12) In connection with the Choice Spin-off, 25,000 of these options were
converted into options to purchase 39,480 shares of Company Common stock at
an adjusted exercise price of $25.0505 per share.
(13) In connection with the Choice Spin-off, these options were converted into
options to purchase 37,309 shares and 22,385 shares of Company Common stock
at an adjusted exercise price of $21.4918 and $19.1932, respectively, per
share and 3,750 shares and 2,250 shares of Choice common stock at adjusted
exercise prices of $12.4482 and $11.1168, respectively, per share.
The following tables set forth certain information as of May 31, 1998, and
for the fiscal year then ended concerning stock options granted to the Named
Officers. All Common Stock figures and exercise prices have been adjusted to
reflect stock dividends and stock splits effective in prior fiscal years. In
connection with the Choice Spin-off, existing options to purchase Company Common
Stock were converted into options to purchase Company Common Stock and Choice
common stock.
55
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of
Stock Price Appreciation for
Individual Grants Option Term (1)
-------------------------------------------------------- -------------------------
Percentage of
Total Options
Number of Granted to all Exercise
Options Employees in Base Price Expiration
Name Granted Fiscal 1998 Per Share Date 5%(2) 10%(3)
- ------------------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(4) 60,000 7.9% $32.19 6/23/07 $1,214,400 $3,078,000
Donald C. Tomasso(4)(5) 45,000 5.9% $32.19 6/23/07 $ 546,480 $1,385,100
James H. Rempe(4) 27,000 3.5% $32.19 6/23/07 $ 546,480 $1,385,100
Joseph R. Buckley(4) 30,000 3.9% $32.19 6/23/07 $ 607,200 $1,539,000
Scott Van Hove(4) 25,000 3.3% $32.19 6/23/07 $ 506,000 $1,282,500
</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) A 5% per year appreciation in stock price from $32.19 per share yields
$52.43 per share.
(3) A 10% per year appreciation in stock price from $32.19 per share yields
$83.49 per share.
.
(4) The options granted to the officers vest at the rate of 20% per year
commencing on the first through the fifth anniversary of the date of the
stock option grant.
(5) A total of 18,000 of these options were subsequently canceled in connection
with Mr. Tomasso's resignation from the Company which became effective on
May 31, 1998.
56
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of
Acquired Value Options at May 31, 1998 Unexercised in-the-money
on Exercise Realized Exercisable Unexercisable Options at May 31, 1998 (1)
----------- ---------- --------------------------- ---------------------------
# $ # # Exercisable Unexercisable
----------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr. 110,000 $3,079,427 128,000 217,000 $2,482,627 $2,218,626
Donald C. Tomasso -- -- 181,782 210,981 3,483,260 2,805,868
James H. Rempe 27,454 504,279 24,510 80,752 495,768 793,838
Joseph R. Buckley 11,250 302,255 121,701 116,932 2,699,248 1,260,110
Scott Van Hove 600 16,341 117,618 180,818 2,258,039 2,106,396
</TABLE>
____________________
(1) The closing price of the Company's Common Stock as reported by the New York
Stock Exchange on May 29, 1998, was $31.5625. The value of the options 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.
EMPLOYMENT AGREEMENTS
Certain officers (the "Manor Care Executives") of Manor Care, including two
of its named executive officers (Joseph R. Buckley and James H. Rempe) have
entered into employment agreements with Manor Care and Health Care & Retirement
Corporation ("HCR") (the "Manor Care Employment Agreements") pursuant to which
they are entitled to receive their base salaries and to participate in Manor
Care's annual bonus program. Pursuant to the Manor Care Employment Agreements,
a Manor Care Executive is entitled to certain benefits if Manor Care terminates
the Manor Care Executive's employment without Cause or if the Manor Care
Executive terminates employment for Good Reason. Such benefits generally
include a lump sum payment of two times the sum of the Manor Care Executive's
base salary, maximum bonus opportunity and car allowance; a pro rata portion of
the maximum annual bonus for the year of termination of employment; benefits to
reflect continued coverage under certain Manor Care benefit programs for a
period of time; outplacement assistance; and, in the case of certain Manor Care
Executives (including one named executive officer), subject to certain
limitations, if any of these benefits are subject to the federal excise tax on
"excess parachute payments", a gross-up payment designed to put the Manor Care
Executive in the same after-tax position as if the excise tax and any related
interest and penalties had not been imposed (a "Manor Care Gross-Up Payment").
"Cause" means (i) a Manor Care Executive's willfully engaging in conduct which
is materially and demonstrably injurious to Manor Care, or (ii) a Manor Care
Executive's willfully engaging in an act or acts of dishonesty resulting in
material personal gain at the expense of Manor Care. "Good Reason" means (i) a
significant reduction in the scope of a Manor Care Executive's authority,
position, title, functions, duties or
57
<PAGE>
responsibilities, (ii) the relocation of a Manor Care Executive's office
location to a location more than 25 miles away from Manor Care's corporate
offices in Gaithersburg, Maryland, (iii) any reduction in a Manor Care
Executive's base salary, (iv) a significant change in Manor Care's annual bonus
program adversely affecting a Manor Care Executive, or (v) a significant
reduction in the other Manor Care Executive benefits provided to a Manor Care
Executive. If a Manor Care Executive remains in employment with Manor Care until
December 31, 1998 (or is terminated without Cause or terminates with Good Reason
before that date), such Manor Care Executive will be entitled to receive, within
30 days thereafter, in a lump sum, a special bonus in an amount equal to the sum
of (i) his or her annual rate of base salary on December 31, 1998 (or at earlier
termination of employment), (ii) the maximum bonus that such Manor Care
Executive could receive under Manor Care's annual bonus program for Manor Care's
fiscal year ending May 31, 1999 (or the fiscal year of termination of
employment), and (iii) such Manor Care Executive's car allowance for the fiscal
year ending May 31, 1999 (or the fiscal year of termination of employment). One
of the executive officers has certain additional benefits under an employment
agreement previously entered into with Manor Care, including country or lunch
club dues, payment of his share of employment taxes on certain supplemental
retirement benefits (grossed up for taxes thereon), security for the payment of
nonqualified deferred compensation benefits upon termination of employment (plus
a gross-up payment for any accelerated taxes), and accelerated vesting of
restricted stock upon termination of employment (other than by Manor Care for
Cause or by him without Good Reason). If Messrs. Buckley and Rempe were each
terminated immediately upon the Merger, they would receive $999,930 and
$1,059,588, respectively, without giving effect to any Manor Care Gross-Up
Payment.
Manor Care and HCR have entered into a Retention Agreement and a
Noncompetition Agreement with Stewart Bainum, Jr. dated as of June 10, 1998.
Pursuant to the Retention Agreement, Mr. Bainum, Jr. is entitled to a stay bonus
of $838,724 if he remains in employment with Manor Care until December 31, 1998
or if he is terminated without Cause or terminates for Good Reason before that
date. "Cause" and "Good Reason" are defined as described above, except that a
change in Mr. Bainum, Jr.'s position from Chairman of the Board, President, and
Chief Executive Officer to Special Consultant to HCR Manor Care effective as of
the effective time of the merger of Manor Care and a subsidiary of HCR (the
"Effective Time") will not constitute Good Reason. Under the Retention
Agreement, Mr. Bainum, Jr. is also entitled, upon termination of employment by
Manor Care without Cause or by Mr. Bainum, Jr. for Good Reason, to a pro rata
portion of the maximum annual bonus for the year of termination of employment
and additional benefits under Manor Care's supplemental executive retirement
plan and nonqualified retirement savings and investment plan designed to reflect
continued coverage under those plans for a period of two years (or, if greater,
the period from termination of employment until June 9, 2001). Pursuant to the
Noncompetition Agreement, Mr. Bainum, Jr. agrees not to accept a position with a
competitor in the skilled nursing, assisted living, institutional pharmacy
and/or home health care industry or induce employees of Manor Care or HCR Manor
Care to leave employment on behalf of a competitor for the period beginning on
June 10, 1998 and continuing for a period of two years following termination of
Mr. Bainum, Jr.'s employment (or, if later, until June 9, 2001). In exchange for
Mr. Bainum, Jr.'s agreement to those terms, he will receive pursuant to the
Noncompetition Agreement a lump sum payment within 30 days after consummation of
the merger in an amount equal to two (or, if greater, the number of years and
portions thereof from termination of employment to June 9, 2001) times the sum
of $840,000. HCR has entered into a Chairman's Service Agreement with Mr.
Bainum, Jr., the current Chairman, President, and Chief Executive Officer of
Manor Care, pursuant to which Mr. Bainum, Jr. will serve as Chairman of the
Board of HCR Manor Care for the period beginning as of the Effective Time of the
merger
58
<PAGE>
and continuing until the third anniversary thereof or until such earlier date as
determined by the Board of Directors consistent with their fiduciary duties.
Under this agreement, Mr. Bainum, Jr. will receive, commencing as of the
Effective Time, fees at the same rate as other directors of HCR Manor Care;
certain insurance and other benefits; and other benefits generally available to
HCR Manor Care directors.
SEVERANCE ARRANGEMENTS
Manor Care adopted the Manor Care Severance Plan for Selected Employees on
June 1, 1998 covering certain designated employees not covered by Manor Care
Employment Agreements. Under this Plan, a covered employee is entitled to
certain benefits if Manor Care terminates the employee's employment without
Cause or if the employee terminates employment for Good Reason. ("Cause" and
"Good Reason" are defined in the same manner as in the Manor Care Employment
Agreements described above.) Such benefits include a lump sum payment of one-
half, one or two times the sum of the employee's base salary, maximum bonus
opportunity and car allowance; a pro rata portion of the maximum annual bonus
for the year of termination of employment; benefits to reflect continued
coverage under certain Manor Care benefit programs for a period of time;
outplacement assistance; and, in the case of one covered employee and subject to
certain limitations, if any of these benefits are subject to the federal excise
tax on "excess parachute payments", a gross-up payment designed to put the
employee in the same after-tax position as if the excise tax and related
interest and penalties had not been imposed.
On June 4, 1998, Manor Care entered into an agreement with Donald C. Tomasso
in connection with the termination of Mr. Tomasso's employment with the Company
which became effective on May 31, 1998. Pursuant to this agreement, the Company
agreed to pay Mr. Tomasso his base salary in effect as of May 31, 1998 ($447,799
per year) for a period of 18 months, commencing June 1, 1998. In addition, the
Company agreed to continue to provide Mr. Tomasso with a car allowance and
country club dues allowance during the severance period.
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 six 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 normal
retirement date. The normal retirement age is 65, and participants must have a
minimum of 15 years of service. Participants may retire at age 60 and may elect
to receive reduced benefits commencing prior to age 65, each subject to Board
approval. All of the Named Officers who are participants, except for Mr. Rempe,
are age 55 or younger, so that none of their compensation reported above would
be included in the final average salary calculation.
59
<PAGE>
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. 24.5 38
Joseph R. Buckley 18 33
Scott Van Hove 11 35
</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.
Retirement Savings and Investment Plan (the "401(k) Plan"), a defined
contribution retirement, savings and investment plan for its employees and the
employees of its participating affiliated companies. The 401(k) Plan is
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 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
requirements, 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
federal limit of $10,000. The Company will match contributions made by its
employees 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
reduction 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 Company
make a matching contribution which exceeds 6% of a participant's salary. Amounts
contributed by the Company pursuant to the 401(k) Plan for the Named Officers
for the three fiscal years ended May 31, 1998, 1997 and 1996 are included in the
Summary Compensation Table under the column headed "All Other Compensation".
60
<PAGE>
Effective January 1, 1992, the Company adopted the Manor Care, Inc.
Nonqualified Retirement Savings and Investment Plan (the "Nonqualified Savings
Plan"). Certain select highly compensated members of management of the Company
are eligible to participate in the Nonqualified Savings Plan. The Nonqualified
Savings Plan mirrors the provisions of the 401(k) Plan, to the extent feasible,
and is intended to provide the participants with a pre-tax savings vehicle to
the extent that pre-tax savings are limited under the 401(k) Plan as a result of
various governmental regulations, such as non-discrimination testing. All of the
Named Officers have elected to participate in the Nonqualified Savings Plan.
Amounts contributed by the Company under the Nonqualified Savings Plan for
fiscal years ended May 31, 1998, 1997 and 1996 for the Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation."
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.
Prior to January 1, 1997, participants were given the right to elect to receive
the Company matching contribution either in Company stock or cash or a
combination. After January 1, 1997, the Company matching contribution has been
made only in Company Stock. Participant contributions under the two plans may
not exceed the aggregate of 15% of the annual salary of a participant.
Effective January 1, 1992, the Company adopted a non-contributory Cash
Accumulation Retirement Plan (the "CARP") maintained by the Company for its
employees and those employees of its participating affiliated companies. The
CARP is 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 interest 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 benefit
accrual was made by the Company based on salary as follows:
<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>
Directors who are full-time employees of the Company receive no separate
remuneration for their services as directors. Beginning in fiscal year 1997, the
remuneration of all non-employee directors for Board meetings attended is a
grant of restricted stock, the fair market value of which is equal to $30,000,
pursuant to the Manor Care, Inc. Non-Employee Director Stock Compensation Plan.
Non-employee directors also receive $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.
61
<PAGE>
The purpose of the Non-Employee Director Stock Compensation Plan is to
encourage stock ownership by directors and to further align the interests of
directors and stockholders.
Pursuant to the Manor Care, Inc. Non-Employee Director Stock Option and
Deferred Compensation Stock Purchase Plan, approved by the stockholders on
September 9, 1994 ("1994 Plan"), eligible non-employee directors may elect,
prior to May 31 of each year, to defer a minimum of 25% of committee fees earned
during the ensuing fiscal year. The fees which are so deferred will be used to
purchase Common Stock on the open market within 15 days after December 1,
February 28 and May 31 of such fiscal year. Pending such purchases, the funds
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. Two of the incumbent Directors
(Messrs. Longfield and Malek) have elected to participate in the 1994 Plan for
the 1999 fiscal year. The amount of compensation that will accrue to such
participating directors is not currently determinable.
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 15, 1997, each non-employee director was granted options to purchase
1,000 shares of Common Stock for $33.88 per share.
COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation philosophy of Manor Care, Inc. (the "Company") is to be
competitive with the leading service companies and selected direct competitors
in the marketplace, to attract, retain and motivate a highly qualified
workforce, and to provide career opportunities. The Company uses various
compensation surveys, primarily conducted and evaluated by independent
consultants, to provide data to support the development of competitive
compensation plans which reinforce this philosophy. Summary data on service
companies of similar size participating in each survey are utilized as the basis
for the evaluations along with comparable data from peer group companies. 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 officers. In
evaluating the CEO's performance, the Committee, in addition to financial
performance, considers factors important to the Company such as ethical business
conduct, progress against the Company's strategic plan objectives, management
succession planning, customer service satisfaction and the general overall
perception of the Company by financial leaders and customers.
The Committee is responsible for setting and administering the policies
which govern executive compensation and the stock based programs of the Company.
The members of the Committee are Messrs. Robertson (Chairman), Bainum (not a
member of Committee No. 2), Longfield (not a member of Committee No. 2) and
Malek. Mr. Bainum served as Chairman and CEO of the Company prior to March
1987.
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<PAGE>
Compensation of the Company's officers is reviewed annually by the
Committee. Changes proposed for these employees are evaluated and approved by
the Committee on an individual basis.
There are three components in the Company's executive compensation program:
1. Base salary
2. Cash bonus
3. Long-term incentive compensation
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
"variable 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. The base salary practice is to target pay at the 55th percentile
of the market range among the comparison group. Salary changes are based on
guidelines established for all employees using individual performance to
determine the change. Mr. Bainum, Jr.'s base salary paid in fiscal 1998 is shown
under the heading "Salary" in the Summary Compensation Table.
CASH BONUS
Awards under the Annual Cash Bonus Program for fiscal year 1998 were based
on certain performance measurements consisting of return on beginning equity,
business unit quality revenue and profit and customer satisfaction surveys of
the business unit. These measurements were used to focus management's attention
on customer services, financial results, profits and the effective use of
Company assets. For fiscal year 1998, the performance measurements were met or
exceeded.
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. In July
1996, the Compensation Committee reviewed and approved a Stock Option Guidechart
to be used to determine stock option awards for executives. The Stock Option
Guidechart utilized a market based salary multiple based on performance of the
Company.
63
<PAGE>
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.
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
determined by the beginning base salary times a multiple which varies from 2.5
to 6 depending upon the level of responsibility of the particular officer.
IMPACT OF INTERNAL REVENUE CODE SECTION 162(M)
The Omnibus Budget Reconciliation Act of 1993 disallows, effective January
1, 1994, a federal income tax deduction for compensation, other than certain
performance-based compensation, in excess of $1 million annually paid by the
Company to any currently serving Named Officer identified in the Summary
Compensation Table. Stock option awards under the Key Executive Stock Option
Plan of 1969, which expired in 1993, and under the Key Executive Stock Option
Plan of 1993, which has been terminated, qualify as performance-based
compensation and are exempt from consideration for purposes of calculating the
$1 million limit. With respect to the 1995 Long-Term Incentive Plan, appropriate
steps have been and will continue to be taken to qualify awards made thereunder
as performance-based compensation which are exempt from consideration for
purposes of calculating the $1 million limit. No individual named in the Summary
Compensation Table is likely to receive compensation, not including performance-
based compensation, in fiscal 1999 which would be in excess of $1 million. The
Committee intends to monitor the Company's compensation programs with respect to
such laws.
COMPENSATION/KEY EXECUTIVE STOCK OPTION PLAN COMMITTEE
Jerry E. Robertson, Ph.D., Chairman
Stewart Bainum (not a member of Committee No. 2)
William H. Longfield (not a member of Committee No. 2)
Frederic V. Malek
64
<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, 1998, assuming reinvestment
of dividends.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG MANOR CARE, INC., S&P 500 AND PEER GROUP
[GRAPH APPEARS HERE]
Assumes $100 invested on June 1, 1993 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>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Manor Care, Inc. 100 122 139 185 215 237
S&P 500 100 104 125 161 208 272
Peer Group (Weighted Average) 100 126 134 161 183 192
</TABLE>
65
<PAGE>
The Peer Group consists of eight other companies involved in the Company's
lines of business. Seven of the companies are involved in ownership and
operation of nursing homes: Beverly Enterprises, Inc., Integrated Health
Services, Inc., Mariner Health Group, Inc., National HealthCare, L.P., Paragon
Health Network, Inc., Sun Healthcare Group, Inc. and Vencor, Inc. One company,
Omnicare, Inc., is involved in the institutional pharmacy business. Paragon
Health Network, Inc., an owner and operator of nursing homes, has replaced
GranCare Inc., which was in the Peer Group last year, due to the acquisition of
GranCare Inc. by Paragon Health Network, Inc. in October 1997. Horizon/CMS
Healthcare Corp. and Regency Health Services, which were in the Peer Group last
year, were excluded this year because they were acquired in October 1997.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- --------------------------------------------------------------
The following table sets forth as of August 10, 1998 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 executive
officers, (3) all such executive officers and directors as a group, and (4) all
persons who own beneficially more than 5% of the Company's Common Stock. Unless
otherwise specified, the address for each of them is 11555 Darnestown Road,
Gaithersburg, Maryland 20878.
<TABLE>
<CAPTION>
Percent
Name of Beneficial Owner Total of Class(1)
------------------------ --------------- -----------
<S> <C> <C>
Stewart Bainum 10,174,503 (2) 15.59%
Stewart Bainum, Jr. 15,346,903 (3) 23.52%
Regina E. Herzlinger 13,929 (4) *
William H. Longfield 13,910 (5) *
Frederic V. Malek 8,984 (6) *
Jerry E. Robertson 24,783 (7) *
Kennett L. Simmons 4,837 (8) *
Donald C. Tomasso 225,714 (9) *
Joseph R. Buckley 143,078 (10) *
James H. Rempe 89,191 (11) *
Scott J. Van Hove 157,714 (12) *
All Directors and Officers
as a Group (11 persons) 20,632,014 (13) 31.62%
Ronald Baron 12,794,486 (14) 19.61%
Barbara Bainum 5,524,815 (15) 8.47%
Bruce Bainum 5,521,302 (15) 8.46%
</TABLE>
________________________
* Less than 1% of class.
(1) Percentages are based on 63,720,035 shares outstanding on August 10, 1998
plus shares which would be issued upon the exercise of all options which are
exercisable within 60 days thereafter.
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<PAGE>
(2) Includes 3,717,542 shares held directly or indirectly by the Stewart Bainum
Declaration of Trust, the sole trustee of which is Mr. Bainum (the "SB
Trust"); 904,473 shares owned by Bainum Associates Limited Partnership
("Bainum Associates"), and 1,099,190 shares owned by MC Investments Limited
Partnership ("MC Investments"), each of which is a limited partnership in
which the SB Trust is 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 its limited partnership interest; 3,567,869 shares owned by
Realty Investment Company, Inc. ("Realty Investment"), a real estate
investment and management company in which Mr. Bainum and his wife have
shared voting authority with other family members; and 79,305 shares held
by the Commonweal Foundation of which Mr. Bainum is Chairman of the Board
of Directors and has shared voting authority; 798,711 shares held by the
Jane L. Bainum Declaration of Trust, the sole trustee of which is Mr.
Bainum's wife; and 5,999 shares which Mr. Bainum has the right to acquire
pursuant to stock options which are exercisable within 60 days after August
10, 1998.
(3) Includes 5,417,761 shares owned by Bainum Associates and 4,415,250 shares
owned by MC Investments, in both of which the Stewart Bainum, Jr.
Declaration of Trust, the sole trustee of which is Stewart Bainum, Jr. (the
"SB, Jr. Trust"), is managing general partner with the sole right to
dispose of the shares. Authority to vote such shares is held by the voting
general partner, Mr. B. Houston McCeney. Also includes 1,779,628 shares
owned by Mid-Pines Associates, L.P. ("Mid-Pines"), in which the SB, Jr.
Trust is managing general partner and has shared voting authority;
3,567,869 shares held by Realty Investment in which the SB, Jr. Trust has
shared voting authority; and 164,000 shares which Mr. Bainum, Jr. has the
right to acquire pursuant to stock options which are exercisable within 60
days after August 10, 1998.
(4) Includes 6,845 shares which Professor Herzlinger has the right to acquire
pursuant to stock options which are exercisable within 60 days after August
10, 1998. Also includes 200 shares held by Professor Herzlinger's spouse as
custodian for a minor.
(5) Includes 9,478 shares which Mr. Longfield has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(6) Includes 5,999 shares which Mr. Malek has the right to acquire pursuant to
stock options which are exercisable within 60 days after August 10, 1998.
(7) Includes 13,500 shares held by the JJ Robertson Limited Partnership, of
which Mr. Robertson and his wife are the general partners with shared
voting authority; also includes 2,333 shares which Mr. Robertson has the
right to acquire pursuant to stock options which are exercisable within 60
days after August 10, 1998.
(8) Includes 3,159 shares which Mr. Simmons has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(9) Includes 217,629 shares which Mr. Tomasso has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(10) Includes 141,320 shares which Mr. Buckley has the right to acquire pursuant
to stock options which are exercisable within 60 days after August 10,
1998.
(11) Includes 38,082 shares which Mr. Rempe has the right to acquire pursuant to
stock options which are exercisable within 60 days after August 10, 1998.
(12) Includes 154,992 shares which Mr. Van Hove has the right to acquire
pursuant to stock options which are exercisable within 60 days after August
10, 1998.
(13) Includes a total of 749,836 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are exercisable within 60 days after August 10, 1998. A total of
5,571,532 shares are counted in the total number of shares beneficially
owned by both of Stewart Bainum and Stewart Bainum, Jr.; such shares are
only counted once for purposes of this item.
(14) Includes 1,033,620 shares as to which Mr. Baron has sole voting and
dispositive power, and 11,760,866 shares as to which Mr. Baron has shared
voting and dispositive power; 880,000 shares as to which Baron Capital
Group, Inc. ("BCG") has sole voting and dispositive power, and 11,760,866
shares as to which BCG has shared voting and dispositive power; 880,000
shares as to
67
<PAGE>
which Baron Capital Management, Inc. ("BCM"), a registered investment
adviser, has sole voting and dispositive power, and 1,305,866 shares as to
which BCM has shared voting and dispositive power; 10,455,000 shares as to
which BAMCO, Inc., a registered investment adviser, has shared voting and
dispositive power; and 9,730,000 shares as to which Baron Asset Fund, an
investment company registered under the Investment Company Act of 1940, has
shared voting and dispositive power. The business address of Mr. Baron and
the foregoing entities is 767 Fifth Avenue, 24th Floor, New York, New York
10153. All of the foregoing information was reported in Amendment No. 11 to
Schedule 13D dated February 24, 1998 filed by Mr. Baron and the foregoing
entities.
(15) Includes 3,567,869 shares held by Realty Investment, 1,779,628 shares held
by Mid-Pines, and 79,305 shares held by the Commonweal Foundation, in each
of which Barbara Bainum and Bruce Bainum have shared voting authority.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
CHOICE/SUNBURST AGREEMENTS
On November 1, 1996, Manor Care spun off the shares of Choice Hotels
International, Inc. ("Old Choice"). In October 1997, Old Choice changed its name
to Sunburst Hospitality Corporation ("Sunburst") and spun off the shares of a
corporation now named Choice Hotels International, Inc. ("Choice"). In November
1996, Manor Care entered into certain agreements with Old Choice/Sunburst, which
agreements were amended in October 1997 to add Choice as an additional party
thereto and as a guarantor of certain obligations of Sunburst.
Stewart Bainum served as a director of Choice during the fiscal year ended
May 31, 1998 and is Chairman of the Board of Sunburst. Stewart Bainum, Jr. is
Chairman of the Board of Choice and served as Chairman of the Board of Sunburst
during the fiscal year ended May 31, 1998. Mr. Bainum and Mr. Bainum, Jr. each
own beneficially more than 10% of the outstanding common stock of both of Choice
and Sunburst.
LEASE AGREEMENTS
In connection with the spinoff by Manor Care of Sunburst, Manor Care and
Sunburst entered into a lease agreement (the "Silver Spring Lease") with respect
to the office complex in Silver Spring, Maryland at which Sunburst's principal
executive offices are located. Sunburst leases from Manor Care for a period of
30 months certain office space (approximately 38% of the complex initially, with
provisions to allow Sunburst to use additional square footage as needed) at a
monthly rental rate equal to one-twelfth of the operating expenses (as defined
therein) of the complex, net of third party rental income paid to Manor Care by
other tenants of the complex, less a pro rata portion of the operating expenses
attributable to the space occupied by Manor Care (initially approximately 29% of
the complex; 0% as of May 31, 1998). Operating expenses include all of the
costs associated with operating and maintaining the complex including, without
limitation, supplies and materials used to maintain the complex, wages and
salaries of employees who operate the complex, insurance for the complex, costs
of repairs and capital improvements to the complex, the fees of the property
manager (which may be Manor Care), costs and expenses associated with leasing
space at the complex and renovating space rented to tenants, costs of
environmental inspection, testing or cleanup, principal and interest payable on
indebtedness secured by mortgages against the complex, or any portion thereof,
and charges for utilities, taxes and facilities services.
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Sunburst and Manor Care also entered into (i) a sublease agreement with
respect to certain office space in Gaithersburg, Maryland (the "Gaithersburg
Lease") pursuant to which Sunburst is obligated to rent from Manor Care, on
terms similar to the Silver Spring Lease, certain additional space as such space
becomes available during the 30 month period commencing November 1, 1996, and
(ii) a sublease agreement with respect to the Comfort Inn N.W., Pikesville,
Maryland, pursuant to which Sunburst subleases the property from Manor Care on
the same terms and conditions that govern Manor Care's rights and interests
under the lease relating to such property.
During the fiscal year ended May 31, 1998, Manor Care charged Sunburst a
total of approximately $5.05 million under the Silver Spring Lease and the
Gaithersburg Lease. Manor Care has now sold all three of the office buildings
covered by the Silver Spring Lease.
LOAN AGREEMENT
On November 1, 1996, Sunburst and a subsidiary of Manor Care entered into a
loan agreement governing the repayment by Sunburst of an aggregate of $225.7
million previously advanced by Manor Care to Sunburst. On April 23, 1997,
Sunburst prepaid approximately $110 million of the principal amount of the loan.
Sunburst made a yield maintenance payment of approximately $1.9 million to Manor
Care as a result of such prepayment. On October 15, 1997, Sunburst repaid the
entire outstanding balance of the loan (approximately $115.7 million).
CORPORATE SERVICES AGREEMENT
Sunburst, Choice and Manor Care entered into the Corporate Services Agreement
under which Manor Care provides certain corporate services, including
administrative, corporate travel, payroll, accounting, information technology,
telecommunications systems, and facilities services on a time and materials
and/or fixed fee basis. In the fiscal year ended May 31, 1998, Manor Care
charged Choice and Sunburst a total of approximately $1.7 million for such
services. In addition Manor Care provides certain consulting services to
Sunburst under the Corporate Services Agreement for a fixed annual fee of $1
million. The term of the Corporate Services Agreement runs until April 30, 1999,
provided that Sunburst or Choice may terminate any services provided thereunder,
other than the Consulting Services, at any time upon 60 days prior written
notice.
RISK MANAGEMENT CONSULTING SERVICES
Pursuant to the Risk Management Consulting Services Agreements between Manor
Care, Sunburst and Choice, Manor Care provided Sunburst and Choice with risk
management consulting services during the fiscal year ended May 31, 1998 for an
annual fee of $394,200 and $43,800, respectively. The term of each of the
agreements runs until April 30, 1999, provided that any party may terminate its
agreement at any time upon 60 days prior written notice.
TIME SHARING AGREEMENT
Manor Care, Sunburst and Choice were parties to a Time Sharing Agreement
pursuant to which Sunburst and Choice were entitled to lease Manor Care's
corporate aircraft. For fiscal year 1998, Sunburst
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and Choice paid a total of $204,981 for aircraft usage under the Time Sharing
Agreement. The term of the agreement runs until April 30, 1999, provided that
any party may terminate its obligations under the agreement at any time upon 60
days prior written notice. Manor Care terminated the Time Sharing Agreement with
respect to Sunburst in March 1998.
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-
affiliated persons.
In addition, during the fiscal year ended May 31, 1998, Manor Care purchased
from vendors, in connection with the Company's Employee Purchase Program, home
furnishings and other personal property with a net cost of approximately
$316,000 on behalf of Stewart Bainum, Jr. Mr. Bainum, Jr. reimbursed the Company
in full in May 1998, and, in accordance with Manor Care's standard policy, paid
an administrative fee to the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- ----------------------------------------------------------------
(a) Financial Statement Schedules
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
(b) Exhibits
2.1 - Amended and Restated Agreement and Plan of Merger among Manor
Care, Inc., Health Care and Retirement Corporation and Catera
Acquisition Corp.
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 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.
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4.2 - 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.
4.3 - Indenture dated as of November 22, 1996 between Manor Care,
Inc. and Chase Manhattan Bank. Exhibit 4.1 to Report on Form
8-K dated November 22, 1996 is incorporated herein by
reference.
4.4 - Rights Agreement, dated as of February 25, 1998, between Manor
Care, Inc. and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent (incorporated by reference to Exhibit 4.1 to Manor
Care's Report on Form 8-K filed March 12, 1998).
4.5 - Amendment to Rights Agreement between Manor Care, Inc. and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
dated June 10, 1998 (incorporated by reference to Exhibit 4.2
to Manor Care's Report on Form 8-K filed June 16, 1998).
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 which is Exhibit 99 to Form 10-K for the year
ended May 31, 1995 is incorporated herein by reference.
10.5 - Non-Employee Director Stock Compensation Plan. Exhibit A to
Proxy Statement dated August 28, 1996 which is Exhibit 99 to
the Report on Form 10-K for the year ended May 31, 1997 is
incorporated herein by reference.
10.6 - 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.
10.7 - Lease dated as of August 30, 1995 between The Gaithersburg
Realty Trust and Manor Care, Inc. Exhibit 10.11 to Form 10-K
for the year ended May 31, 1996 is incorporated herein by
reference.
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10.8 - Guarantee dated as of August 30, 1995 made by Manor Care, Inc.,
ManorCare Health Services, Inc., Choice Hotels International,
Inc., Quality Hotels Europe, Inc., Four Seasons Nursing Center,
Inc., MNR Financial Corp., Boulevard Motel Corp. and Chemical
Bank. Exhibit 10.12 to Form 10-K for the year ended May 31,
1996 is incorporated herein by reference.
10.9 - Loan Agreement dated as of November 1, 1996 between MNR Finance
Corp. and Choice Hotels International, Inc. Exhibit 2.6 to
Report on Form 8-K dated November 5, 1996 is incorporated
herein by reference.
10.10 - Amended and Restated Competitive Advance and Multi-Currency
Revolving Credit Facility Agreement dated as of November 30,
1994, as amended and restated as of September 6, 1996 between
Manor Care, Inc. and Chase Manhattan Bank. Exhibit 10.1 to the
Report on Form 8-K dated November 5, 1996 is incorporated
herein by reference.
10.11 - Manor Care Severance Plan for Selected Employees
10.12 - Noncompetition Agreement made as of June 10, 1998 among Manor
Care, HCR and Stewart Bainum, Jr.
10.13 - Retention Agreement made as of June 10, 1998 among Manor Care,
HCR and Stewart Bainum, Jr.
10.14 - Employment Agreement made as of June 10, 1998 among Manor Care,
HCR and Margarita A. Schoendorfer.
10.15 - Employment Agreement made as of June 10, 1998 among Manor Care,
HCR and Leigh C. Comas.
10.16 - Employment Agreement made as of June 10, 1998 among Manor Care,
HCR and Joseph R. Buckley.
10.17 - Employment Agreement made as of October 27, 1997 between Manor
Care and James H. Rempe.
10.18 - Amendment to Employment Agreement made as of June 10, 1998
among Manor Care, HCR and James H. Rempe.
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
(c) Reports on Form 8-K.
Manor Care filed a report on Form 8-K on March 12, 1998 to report under
Item 5 thereof the adoption of Manor Care's Shareholder Rights Plan.
Manor Care filed a report on Form 8-K on June 16, 1998 to report under
Item 5 thereof the execution of the Merger Agreement and the issuance of
a joint press release by Manor Care and HCR relating thereto, as well as
the amendment of Manor Care's Shareholder Rights Plan in connection
therewith.
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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.
Date: August 17, 1998 MANOR CARE, INC.
By:/s/ James H. Rempe
-------------------------------
James H. Rempe
Senior Vice President,
General Counsel & Secretary
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 17, 1998
- ----------------------------
Stewart Bainum, Jr. President and Chief
Executive Officer
/s/ Stewart Bainum Vice Chairman August 17, 1998
- ----------------------------
Stewart Bainum and Director
/s/ Kennett L. Simmons Director August 17, 1998
- ----------------------------
Kennett L. Simmons
/s/ Regina E. Herzlinger Director August 17, 1998
- ----------------------------
Regina E. Herzlinger
/s/ William H. Longfield Director August 17, 1998
- ----------------------------
William H. Longfield
/s/ Frederic V. Malek Director August 17, 1998
- ----------------------------
Frederic V. Malek
/s/ Jerry E. Robertson Director August 13, 1998
- ----------------------------
Jerry E. Robertson
/s/ Margarita Schoendorfer Vice President- August 17, 1998
- ----------------------------
Margarita Schoendorfer Corporate Controller
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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, 1998
Allowance for doubtful accounts $36,621 $26,189 $- 0 - $(32,206) $30,604
Year ended May 31, 1997
Allowance for doubtful accounts $22,148 $15,930 $- 0 - $( 1,457) $36,621
Year ended May 31, 1996
Allowance for doubtful accounts $17,419 $13,778 $ 1,030/(A)/ $(10,079) $22,148
</TABLE>
/(A)/Represents reserves of acquired companies.
74
<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
for the Fiscal Year Ended May 31, 1998
________
MANOR CARE, INC.
__________________________________________________________________
__________________________________________________________________
75
<PAGE>
EXHIBIT INDEX
-------------
2.1 - Amended and Restated Agreement and Plan of Merger among Manor Care,
Inc., Health Care and Retirement Corporation and Catera Acquisition
Corp.
10.11 - Manor Care Severance Plan for Selected Employees
10.12 - Noncompetition Agreement made as of June 10, 1998 among Manor Care,
HCR and Stewart Bainum, Jr.
10.13 - Retention Agreement made as of June 10, 1998 among Manor Care, HCR
and Stewart Bainum, Jr.
10.14 - Employment Agreement made as of June 10, 1998 among Manor Care, HCR
and Margarita A. Schoendorfer.
10.15 - Employment Agreement made as of June 10, 1998 among Manor Care, HCR
and Leigh C. Comas.
10.16 - Employment Agreement made as of June 10, 1998 among Manor Care, HCR
and Joseph R. Buckley.
10.17 - Employment Agreement made as of October 27, 1997 between Manor Care
and James H. Rempe
10.18 - Amendment to Employment Agreement made as of June 10, 1998 among
Manor Care, HCR and James H. Rempe.
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
76
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- --------------------------------------------------------------------------------
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMONG
MANOR CARE, INC.,
HEALTH CARE AND RETIREMENT CORPORATION
AND
CATERA ACQUISITION CORP.
DATED AS OF JUNE 10, 1998
- --------------------------------------------------------------------------------
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. THE MERGER................................................ 4
1.1. Effective Time of the Merger............................... 5
1.2. Effect of the Merger....................................... 5
1.3. Certificate of Incorporation; Bylaws....................... 5
1.4. Directors and Officers..................................... 5
ARTICLE II. CONVERSION OF SECURITIES................................. 5
2.1. Conversion of Capital Stock................................ 5
2.2. Exchange of Certificates................................... 6
ARTICLE III. CLOSING................................................. 8
3.1. Generally.................................................. 8
3.2. Deliveries at the Closing.................................. 8
ARTICLE IV. REPRESENTATIONS AND WARRANTIES........................... 8
4.1. Representations and Warranties of Manor Care............... 8
4.2. Joint and Several Representations and Warranties
of HCR and Merger Sub.......................................... 18
ARTICLE V. CONDUCT OF BUSINESS BEFORE THE EFFECTIVE TIME............. 27
5.1. Conduct of Manor Care...................................... 27
5.2. Conduct of HCR............................................. 29
5.3. Cooperation................................................ 31
ARTICLE VI. ADDITIONAL COVENANTS..................................... 31
6.1. No Solicitation............................................ 31
6.2. Joint Proxy Statement; Registration Statement.............. 32
6.3. Access to Information...................................... 33
6.4. Stockholders' Meetings..................................... 33
6.5. Legal Conditions to Merger................................. 33
6.6. Tax-Free Reorganization.................................... 34
6.7. Pooling Accounting......................................... 34
6.8. Affiliate Agreements....................................... 34
6.9. NYSE Listing............................................... 34
6.10. Restricted Stock Plans.................................... 34
At the Effective Time, each outstanding Manor Care
Award, whether vested or unvested, shall be assumed
by HCR, except that each Manor Care Award shall
apply to that number of whole shares of HCR Common
Stock equal to the product of the number of shares
of Manor Care Common Stock that were subject to such
award immediately prior to the Effective Time
multiplied by the Exchange Ratio and rounded to the
next highest whole number of shares of HCR Common
Stock........................................................ 34
6.11. Consents; Other Approvals................................. 35
6.12. Reports................................................... 35
6.13. Additional Agreements; Reasonable Best Efforts............ 35
6.14. Confidentiality Agreement................................. 35
6.15. Stock Option Agreements................................... 35
6.16. Stockholder Litigation.................................... 35
6.17. Pooling Letters........................................... 35
6.18. Post-Merger HCR Corporate Governance...................... 36
6.19. Name Change............................................... 36
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VII. CONDITIONS PRECEDENT........................... 37
7.1. Conditions to Each Party's Obligation To Effect
the Merger............................................ 37
7.2. Additional Conditions to Obligations of HCR and
Merger Sub............................................ 38
7.3. Additional Conditions to Obligations of Manor
Care.................................................. 38
ARTICLE VIII. CONDUCT AND TRANSACTIONS AFTER THE EFFECTIVE
TIME...................................................... 39
8.1. Employee Matters.................................. 39
8.2. Indemnification................................... 40
8.3. Directors and Officers Liability Insurance........ 40
ARTICLE IX. TERMINATION..................................... 40
9.1. Termination....................................... 40
9.2. Effect of Termination............................. 41
9.3. Fees and Expenses................................. 42
ARTICLE X. MISCELLANEOUS PROVISIONS......................... 43
10.1. Termination of Representations and Warranties.... 43
10.2. Amendment and Modification....................... 43
10.3. Waiver of Compliance; Consents................... 43
10.4. Press Releases and Public Announcements.......... 44
10.5. Notices.......................................... 44
10.6. Assignment....................................... 44
10.7. Interpretation; Glossary......................... 44
10.8. Governing Law.................................... 47
10.9. Counterparts..................................... 47
10.10. Headings; Internal References................... 47
10.11. Entire Agreement................................ 47
10.12. Severability.................................... 47
10.13. Equitable Remedies.............................. 47
10.14. Disclosure Schedules............................ 48
</TABLE>
EXHIBITS
A Form of Voting Agreement
B-1 Form of HCR Stock Option Agreement
B-2 Form of Manor Care Stock Option Agreement
C Form of Manor Care Affiliate Agreement
D Form of HCR Affiliate Agreement
E Form of Registration Rights Agreement
F Amendment to Manor Care Rights Agreement
G Amendment to HCR Rights Agreement
3
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the "Agreement") is
dated as of June 10, 1998, among MANOR CARE, INC., a Delaware corporation
("Manor Care"), HEALTH CARE AND RETIREMENT CORPORATION, a Delaware corporation
("HCR"), and CATERA ACQUISITION CORP., a Delaware corporation and wholly owned
subsidiary of HCR ("Merger Sub").
RECITALS
WHEREAS, the Board of Directors of each of the parties deems it desirable
and in the best interests of the respective corporations and its stockholders
that HCR and Manor Care combine to advance the long-term business interests of
Manor Care and HCR and has approved this Agreement and the transactions
contemplated hereby;
WHEREAS, the strategic combination of Manor Care and HCR shall be effected
by the terms of this Agreement through a transaction in which Merger Sub will
merge with and into Manor Care, Manor Care will become a wholly owned subsidiary
of HCR, and the stockholders of Manor Care will become stockholders of HCR (the
"Merger");
WHEREAS, it is intended that HCR will be renamed HCR Manor Care, Inc. upon
consummation of the Merger for a period of one year and, thereafter, Manor Care,
Inc. unless and until such name is changed by resolution of its Board of
Directors;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code");
WHEREAS, for accounting purposes, it is intended that the Merger will be
accounted for as a pooling of interests;
WHEREAS, contemporaneous with the execution of this Agreement, certain of
the stockholders of Manor Care (the "Key Stockholders") have entered into an
agreement in substantially the form of Exhibit A hereto (the "Voting Agreement")
to vote all of their shares of Manor Care Common Stock in favor of the Merger;
WHEREAS, contemporaneous with the execution of this Agreement, Manor Care
and HCR are entering into Stock Option Agreements in substantially the form of
Exhibit B-1 and Exhibit B-2 hereto (the "Stock Option Agreements" and, together
with the Voting Agreement and the Registration Rights Agreement attached hereto
as Exhibit E, the "Ancillary Agreements"), pursuant to which each of Manor Care
and HCR will grant the other an option to purchase shares of Manor Care Common
Stock and HCR Common Stock, respectively, under certain circumstances; and
WHEREAS, the Board of Directors of each of HCR and Manor Care have approved
this Agreement and each of the Ancillary Agreements to which such company is a
party.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants, and agreements set forth herein and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, the parties hereby agree as
follows:
ARTICLE I.
THE MERGER
1.1. Effective Time of the Merger. Subject to the provisions of this
Agreement, a certificate of merger in such form as is required by the relevant
provisions of the Delaware General Corporation Law ("DGCL") (the "Certificate of
Merger") shall be duly prepared, executed and acknowledged by the Surviving
Corporation and thereafter delivered to the Secretary of State of the State of
Delaware for filing, as provided in the DGCL, as early as practicable on the
Closing Date. The Merger shall become effective upon the filing of the
4
<PAGE>
Certificate of Merger with the Secretary of State of the State of Delaware or
such later date and time as set forth in the Certificate of Merger (the
"Effective Time").
1.2. Effect of the Merger. As a result of the Merger, Merger Sub shall be
merged with and into Manor Care and the separate corporate existence of Merger
Sub shall cease and Manor Care shall continue as the surviving corporation (the
"Surviving Corporation"). Upon becoming effective, the Merger shall have the
effects set forth in the DGCL. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all properties, rights, privileges,
powers and franchises of Manor Care and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Manor Care and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.3. Certificate of Incorporation; Bylaws. At the Effective Time, (i) the
Certificate of Incorporation of Manor Care shall be amended to read in its
entirety as the Certificate of Incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, and shall be the Certificate of
Incorporation of the Surviving Corporation, and (ii) the Bylaws of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation, in each case until duly amended in accordance with
applicable law.
1.4. Directors and Officers. The officers of Manor Care immediately prior
to the Effective Time shall be the initial officers of the Surviving
Corporation. The directors of Merger Sub immediately prior to the Effective Time
shall be the initial directors of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
ARTICLE II.
CONVERSION OF SECURITIES
2.1. Conversion of Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of any of the parties hereto or the
holders of any shares of Manor Care Common Stock or capital stock of Merger Sub:
(a) Capital Stock of Merger Sub. Each issued and outstanding share of the
capital stock of Merger Sub shall be converted into and become one fully paid
and nonassessable share of common stock, par value $.01 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Stock and HCR-Owned Stock. All shares of
common stock, par value $.10 per share, of Manor Care ("Manor Care Common
Stock") that are owned by Manor Care as treasury stock and any shares of Manor
Care Common Stock owned by HCR, Merger Sub or any other wholly-owned Subsidiary
of HCR shall be canceled and retired and shall cease to exist and no stock of
HCR or other consideration shall be delivered in exchange therefor. All shares
of common stock, par value $.01 per share, of HCR ("HCR Common Stock") owned by
Manor Care shall be unaffected by the Merger.
(c) Exchange Ratio for Manor Care Common Stock. Subject to Section 2.2,
each issued and outstanding share of Manor Care Common Stock (other than shares
to be canceled in accordance with Section 2.1(b)) shall be converted into the
right to receive 1.0 share (the "Exchange Ratio") of HCR Common Stock. All such
shares of Manor Care Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate which, immediately prior to the
Effective Time, represented any such shares shall cease to have any rights with
respect thereto, except the right to receive the shares of HCR Common Stock and
any cash in lieu of fractional shares of HCR Common Stock to be issued or paid
in consideration therefor upon the surrender of such certificate in accordance
with Section 2.2, without interest.
(d) Exchange Of Options. As of the Effective Time, each holder of any
outstanding stock options or stock appreciation rights granted by Manor Care or
any of its subsidiaries (the "Exchange Awards"), whether or not vested, shall
receive (subject to withholding or for other settlement of obligations
concerning income taxes), in exchange for his other rights under such Exchange
Awards, HCR Common Stock having a fair market value equal to the fair market
value (as determined by Manor Care's outside auditor pursuant to a Black-Scholes
based pricing formula using the risk free rate at the Effective Time, 27 1/2%
volatility and
5
<PAGE>
without giving consideration to the lack of transferability and the risk of
forfeiture, and otherwise consistent with the methodology of the schedule
provided by Manor Care to HCR on June 9, 1998 with respect to such matters) of
his other Exchange Awards on the Effective Time. From and after the Effective
Time, all such Exchange Awards shall be deemed canceled pursuant to this
subsection (d).
2.2. Exchange of Certificates. The procedures for exchanging certificates
which, immediately prior to the Effective Time, represented outstanding shares
of Manor Care Common Stock for HCR Common Stock pursuant to the Merger are as
follows:
(a) Exchange Agent. As of the Effective Time, HCR shall deposit with a bank
or trust company designated by HCR and Manor Care (the "Exchange Agent"), for
the benefit of the holders of shares of Manor Care Common Stock, for exchange in
accordance with this Section 2.2, through the Exchange Agent, certificates
representing the shares of HCR Common Stock and the cash payable under Section
2.2(e) (such shares of HCR Common Stock, together with any dividends or
distributions with respect thereto and any amounts to be paid pursuant to
Section 2.2(e), being hereinafter referred to as the "Exchange Fund") issuable
pursuant to Section 2.1 in exchange for outstanding shares of Manor Care Common
Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Manor Care Common Stock (the "Certificates")
whose shares were converted pursuant to Section 2.1 into the right to receive
shares of HCR Common Stock (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as HCR and Manor Care may reasonably
specify) and (ii) instructions for effecting the surrender of the Certificates
in exchange for certificates representing shares of HCR Common Stock (plus cash
in lieu of fractional shares, if any, of HCR Common Stock as provided below).
Upon surrender of a Certificate for cancellation to the Exchange Agent, together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of HCR Common Stock which such holder has the right
to receive pursuant to the provisions of this Article II (and cash in lieu of
fractional shares), and the Certificate so surrendered shall immediately be
canceled. In the event of a transfer of ownership of Manor Care Common Stock
which is not registered in the transfer records of Manor Care, a certificate
representing the proper number of shares of HCR Common Stock may be issued to a
transferee if the Certificate formerly representing such Manor Care Common Stock
is presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.2, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of HCR Common Stock and cash in lieu of any fractional
shares of HCR Common Stock as contemplated by this Section 2.2.
(c) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to HCR
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of HCR Common
Stock issuable upon surrender thereof and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to subsection (e) below until
the holder of record of such Certificate shall surrender such Certificate.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of HCR Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of any cash
payable in lieu of a fractional share of HCR Common Stock to which such holder
is entitled pursuant to subsection (e) below and the amount of dividends or
other distributions with respect to such whole shares of HCR Common Stock with a
record date after the Effective Time and a payment date prior to their date of
issuance to such holder, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of HCR Common Stock. Notwithstanding anything in
this Agreement to the contrary, HCR agrees that from and after the Effective
Time it will treat the shares of HCR
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Common Stock issuable in connection with the Merger as outstanding for purposes
of notice, quorum and voting.
(d) No Further Ownership Rights in Manor Care Common Stock. All shares of
HCR Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to subsection
(c) or (e) of this Section 2.2) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Manor Care Common Stock,
subject, however, to the Surviving Corporation's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which may have been declared or made by Manor Care on such shares of Manor Care
Common Stock in accordance with the terms of this Agreement (to the extent
permitted under Section 5.1) prior to the date hereof and which remain unpaid at
the Effective Time, and from and after the Effective Time there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Manor Care Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 2.2.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of HCR Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to any other rights of a stockholder of HCR. Notwithstanding
any other provision of this Agreement, each holder of shares of Manor Care
Common Stock converted pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of HCR Common Stock (after taking into
account all Certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of HCR Common Stock multiplied by the average of the last reported sales
prices of HCR Common Stock, as reported on the New York Stock Exchange, on each
of the ten trading days immediately preceding the date of the Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the former stockholders of Manor Care for 180 days
after the Effective Time shall be delivered to HCR, upon demand, and any
stockholders of Manor Care who have not previously complied with this Section
2.2 shall thereafter look only to HCR for payment of their claim for HCR Common
Stock, any cash in lieu of fractional shares of HCR Common Stock and any
dividends or distributions with respect to HCR Common Stock.
(g) No Liability. Neither HCR nor Manor Care shall be liable to any former
holder of shares of Manor Care Common Stock or HCR Common Stock, as the case may
be, for such shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(h) Withholding Rights. Each of HCR and the Surviving Corporation shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any former holder of shares of Manor Care Common
Stock such amounts as it is required to deduct and withhold with respect to the
making of such payment under the Code, or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by Surviving
Corporation or HCR, as the case may be, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the former holder of
the shares of Manor Care Common Stock in respect of which such deduction and
withholding was made by Surviving Corporation or HCR, as the case may be.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
(and, following the termination of the Exchange Fund, HCR) will issue in
exchange for such lost, stolen or destroyed Certificate the shares of HCR Common
Stock and any cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of HCR Common Stock deliverable in respect thereof
pursuant to this Agreement.
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(j) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any "affiliate" (as referenced in
Section 6.8) of Manor Care shall not be exchanged until HCR has received a Manor
Care Affiliate Agreement from such Affiliate.
ARTICLE III.
CLOSING
3.1 Generally. Subject to the conditions set forth in Article VII, the
closing (the "Closing") of the Merger and the other transactions contemplated
hereby shall occur as soon as practicable, but no more than five business days
(unless Manor Care and HCR shall otherwise mutually agree) following the
satisfaction or waiver (to the extent waivable under Article VII) of all
conditions to the consummation of the Merger set forth in Article VII (the
"Closing Date"). The Closing shall be held at the offices of Latham & Watkins in
Chicago, Illinois or at such other place as Manor Care and HCR may mutually
agree.
3.2. Deliveries at the Closing. Subject to the conditions set forth in
Article VII, at the Closing:
(a) There shall be delivered to HCR, Merger Sub, and Manor Care the
certificates and other documents and instruments the delivery of which is
required under Article VII; and
(b) Manor Care and Merger Sub shall cause the Certificate of Merger to be
filed as provided in Section 1.1 and shall take all other lawful actions
necessary to cause the Merger to become effective.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
4.1. Representations and Warranties of Manor Care. Except as qualified by
the disclosure schedule delivered by Manor Care to HCR concurrently with the
execution of this Agreement (the "Manor Care Disclosure Schedule") or as
disclosed with reasonable specificity in the Public Subsidiary SEC Reports ,
filed prior to the date hereof, Manor Care represents and warrants to HCR and
Merger Sub as set forth in this Section 4.1.
(a) Organization, Standing, Qualification. Each of Manor Care and its
Subsidiaries is a corporation duly incorporated, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and corporate authority to own, lease, and operate its
properties and assets and to carry on its business as it is now being conducted.
Each of Manor Care and its Subsidiaries is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, operated, or leased by
it, or the nature of its business, makes such qualification or licensing
necessary, except those jurisdictions where failure to be so qualified, licensed
or in good standing would not have a Material Adverse Effect on Manor Care.
Copies of the Certificate of Incorporation and Bylaws of Manor Care have been
made available to HCR and are complete and correct as of the date of this
Agreement. As used in this Agreement, the word "Subsidiary' means, with respect
to any party, any corporation or other organization, whether incorporated or
unincorporated, of which (i) such party or any other Subsidiary of such party is
a general partner (excluding partnerships the general partnership interests of
which held by such party or any Subsidiary of such party do not have at least
35% of the economic interests in such partnership) or (ii) at least 35% of the
securities or other interests having by their terms ordinary voting power to
elect directors or other persons performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries; provided further, that with respect
to Manor Care, but without limiting the foregoing, "Subsidiaries" shall include
Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"), and In
Home Health, Inc., a Minnesota corporation ("IHH"). As used in this Agreement,
"Vitalink Transaction" means the transactions contemplated by the Agreement and
Plan of Merger by and among Vitalink, Genesis Health Ventures, Inc., a
Pennsylvania corporation ("Genesis"), and V Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary
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of Genesis ("Acquisition Corporation"), dated as of April 26, 1998 (the
"Vitalink Merger Agreement"), pursuant to which Vitalink will merge with and
into Acquisition Corporation.
(b) Capitalization. The authorized capital stock of Manor Care consists of
(i) 160,000,000 shares of Manor Care Common Stock, of which, as of the date of
this Agreement, 63,695,583 shares are issued and outstanding, and (ii) 5,000,000
shares of Preferred Stock, par value $1.00 per share, of which 1,000,000 shares
have been designated as Series A Junior Participating Preferred Stock ("Series A
Preferred Stock"), none of which, as of the date of this Agreement, is issued
and outstanding. All of the issued and outstanding shares of capital stock of
Manor Care and each of its Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and were not granted in violation of
any statutory preemptive rights. There are no outstanding subscriptions,
options, warrants, calls, or other agreements or commitments pursuant to which
Manor Care or any Subsidiary (other than the Public Subsidiaries) is or may
become obligated to issue, sell, transfer, or otherwise dispose of, or purchase,
redeem, or otherwise acquire, any shares of capital stock of, or other equity
interests in, Manor Care or any Subsidiary (other than the Public Subsidiaries),
and there are no outstanding securities convertible into or exchangeable for any
such capital stock or other equity interests, except for (i) options to purchase
up to an aggregate of 3,501,330 shares and restricted stock grants of 346,061
shares (as of the date of this Agreement) of Manor Care Common Stock at the
exercise prices set forth in the Manor Care Disclosure Schedule, and (ii) the
Rights Agreement dated as of February 25, 1998 between Manor Care and
ChaseMellon Shareholder Services, L.L.C. (the "Manor Care Rights Agreement")
pursuant to which each outstanding share of Manor Care Common Stock has
associated with it certain rights (the "Manor Care Rights"), including rights
under certain circumstances to purchase shares of Series A Preferred Stock at
$175 per one one-hundredth share, subject to adjustment. The Manor Care
Disclosure Schedule sets forth a true and complete list as of June 2, 1998 of
(i) all holders of options to purchase Manor Care Common Stock, including the
number of shares of Manor Care Common Stock subject to each such option (a
"Manor Care Option"), the exercise or vesting schedule of such option, the
exercise price per share and the term of each such option, and (ii) all holders
of restricted stock awards with respect to Manor Care Common Stock, including
the number of shares of Manor Care Common Stock subject to each such award (a
"Manor Care Award") and the vesting schedule of each such award. There are no
stock appreciation rights, phantom stock rights, or performance shares
outstanding with respect to Manor Care or any of its Subsidiaries (other than
the Public Subsidiaries). The Manor Care Disclosure Schedule sets forth for each
class of stock of each Subsidiary (other than the Public Subsidiaries) of Manor
Care, the number of shares authorized, the number of shares issued and
outstanding and the beneficial owners of the issued and outstanding shares, and
for the Public Subsidiaries, the same information, but only as to the stock
beneficially owned by Manor Care. Except as set forth in the Manor Care
Disclosure Schedule, Manor Care owns, directly or indirectly, all of the issued
and outstanding shares of capital stock of every class of each Subsidiary, free
and clear of all liens, security interests, pledges, charges, and other
encumbrances. There are no voting trusts or other agreements or understandings
to which Manor Care or any of its Subsidiaries (other than the Public
Subsidiaries) is a party or of which Manor Care otherwise has knowledge with
respect to the voting of its capital stock or that of any Subsidiary. As used in
this Agreement, "Public Subsidiaries" means Vitalink and IHH.
(c) Authorization and Execution. Manor Care has the corporate power and
authority to execute and deliver this Agreement and, subject to approval by the
holders of Manor Care Common Stock at the special meeting of stockholders
referred to in Section 6.4, to consummate the transactions contemplated hereby.
Manor Care has the corporate power and authority to execute, deliver and
consummate the transactions contemplated by each of the Ancillary Agreements to
which Manor Care is a party. The execution, delivery and performance of this
Agreement and the Ancillary Agreements by Manor Care have been duly authorized
by the Board of Directors of Manor Care, and no further corporate action of
Manor Care, other than the approval of its stockholders, is necessary to
consummate the transactions contemplated hereby and thereby. This Agreement and
each of the Ancillary Agreements have been duly executed and delivered by Manor
Care and, assuming the accuracy of the representations and warranties set forth
in the last sentence of Section 4.2(c) without giving effect to the assumption
therein, each such agreement constitutes the legal, valid, and binding
obligation of Manor Care, enforceable against Manor Care in accordance with such
agreement's terms.
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(d) No Conflicts. Neither the execution and delivery of this Agreement or
any of the Ancillary Agreements by Manor Care, nor the consummation by Manor
Care of the transactions contemplated hereby or thereby, will (i) subject to
approval by the holders of Manor Care Common Stock at the special meeting of
stockholders referred to in Section 6.4, conflict with or result in a breach of
the Certificate of Incorporation, Bylaws, or similar organizational documents,
as currently in effect, of Manor Care or any of its Subsidiaries, (ii) except
for the requirements under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act"), the filing of the Certificate of Merger with the Delaware
Secretary of State, and the filing of the Joint Proxy Statement with the
Securities and Exchange Commission (the "SEC") in accordance with the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such filings,
licenses, permits, authorizations, consents, orders, registrations,
notifications and disclosures as are set forth on the Manor Care Disclosure
Schedule, require any filing with, or consent or approval of, any domestic
court, administrative agency, commission or other governmental authority or
institution (each, a "Government Entity") having jurisdiction over any of the
business or assets of Manor Care or any of its Subsidiaries, (iii) assuming that
all filings, permits, authorization, consents, disclosures and approvals so
listed in the Manor Care Disclosure Schedule have been duly made or obtained as
contemplated by clause (ii), violate any statute, law, ordinance, rule, or
regulation applicable to Manor Care or any of its Subsidiaries or any
injunction, judgment, order, writ, or decree to which Manor Care or any of its
Subsidiaries is subject, or (iv) result in a breach of, or constitute a default
or an event which, with the passage of time or the giving of notice, or both,
would constitute a default, give rise to a right of termination, cancellation,
or acceleration, create any entitlement of any third party to any material
payment or benefit, require the consent of any third party, or result in the
creation of any lien on the assets of Manor Care or any of its Subsidiaries
under, any Manor Care Material Contract , except, in the case of clauses (ii),
(iii) and (iv), where the violation, breach, default, termination, cancellation,
acceleration, payment, benefit, or lien, or the failure to make such filing or
obtain such consent or approval would neither materially impair the ability of
Manor Care to consummate the transactions contemplated by this Agreement nor
have a Material Adverse Effect on Manor Care.
(e) SEC Reports; Financial Statements; No Undisclosed Liabilities.
(i) Manor Care has made available to HCR, in the form filed with the
SEC, its (A) Annual Report on Form 10-K for each of the fiscal years ended
May 31, 1995 through May 31, 1997, (B) all proxy statements relating to
Manor Care's meetings of stockholders (whether annual or special) held
since January 1, 1996, and (C) all other forms and reports filed by Manor
Care with the SEC since June 1, 1994 (all such forms and reports, other
than the Joint Proxy Statement, being collectively called the "Manor Care
SEC Reports" and individually called a "Manor Care SEC Report"). No Manor
Care Group SEC Report (including any document incorporated by reference
therein), as of its filing date (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing),
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make
the statements made therein, in the light of the circumstances under which
they were made, not misleading, and each Manor Care Group SEC Report at the
time of its filing complied as to form in all material respects with all
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act, and the rules and regulations of the
SEC. Since June 1, 1994, Manor Care has filed in a timely manner all
reports that it was required to file with the SEC pursuant to the Exchange
Act and the rules and regulations of the SEC. As used in this Agreement,
"Public Subsidiary SEC Reports" means, in the case of Vitalink, its Annual
Report on Form 10-K for the fiscal year ended May 31, 1997, its proxy
statement dated November 20, 1997 and all forms and reports filed with the
SEC since June 1, 1994 and, in the case of IHH, its Annual Report on Form
10-K for the fiscal year ended September 30, 1997, its proxy statement
dated February 2, 1998 and all forms and reports filed with the SEC since
October 1, 1994. The Public Subsidiary SEC Reports together with the Manor
Care SEC Reports are collectively referred to as the "Manor Care Group SEC
Reports."
(ii) The consolidated financial statements contained in the Manor Care
Group SEC Reports were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved ("GAAP") (except as may be indicated in the notes thereto or, in
the
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case of unaudited interim financial statements, as may be permitted by the
SEC on Form 10-Q under the Exchange Act) and fairly present, in all
material respects, the consolidated financial position of Manor Care and
its Subsidiaries or the applicable Public Subsidiary and its Subsidiaries,
as the case may be as at the respective dates thereof and the consolidated
results of operations and consolidated cash flows of Manor Care and its
Subsidiaries or the applicable Public Subsidiary and its Subsidiaries, as
the case may be for the periods indicated, subject, in the case of interim
financial statements, to normal year-end adjustments.
(iii) Except as disclosed in the Manor Care SEC Reports filed prior to
the date hereof, and except for normal or recurring liabilities incurred
since May 31, 1997 in the ordinary course of business consistent with past
practices, Manor Care and its Subsidiaries do not have any liabilities,
either accrued, contingent or otherwise (whether or not required to be
reflected in financial statements in accordance with generally accepted
accounting principles), and whether due or to become due, which
individually or in the aggregate are reasonably likely to have a Material
Adverse Effect on Manor Care.
(f) Joint Proxy Statement/Registration Statement. The information to be
supplied by Manor Care for inclusion (i) in the Registration Statement shall not
at the time the Registration Statement is declared effective by the SEC contain
any untrue statement of a material fact or omit to state any material fact
required to be stated in the Registration Statement or necessary in order to
make the statements in the Registration Statement, in light of the circumstances
under which they were made, not misleading, and (ii) in the Joint Proxy
Statement shall not, on the date the Joint Proxy Statement is first mailed to
stockholders of Manor Care or HCR, at the time of the Manor Care Stockholders'
Meeting and the HCR Stockholders' Meeting, or at the Effective Time, contain any
statement which, at such time and in the light of the circumstances under which
it shall be made, is false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements made
in the Joint Proxy Statement not false or misleading. If at any time before the
Effective Time any event relating to Manor Care or any of its affiliates,
officers, or directors is discovered by Manor Care that should be set forth in
an amendment to the Registration Statement or a supplement to the Joint Proxy
Statement, Manor Care shall promptly so inform HCR.
(g) Absence of Certain Changes or Events. Except as expressly disclosed in
the Manor Care SEC Reports filed prior to the date hereof and Public
Subsidiaries SEC Reports filed prior to the date hereof or as expressly
contemplated by this Agreement, since May 31, 1997, Manor Care and its
Subsidiaries have conducted their respective businesses and operations in the
ordinary course and neither Manor Care nor any of its Subsidiaries (other than
the Public Subsidiaries) has (i) split, combined, or reclassified any shares of
its capital stock or made any other changes in its equity capital structure;
(ii) purchased, redeemed, or otherwise acquired, directly or indirectly, any
shares of capital stock of Manor Care or any of its Subsidiaries or any options,
rights, or warrants to purchase any such capital stock or any securities
convertible into or exchangeable for any such capital stock; (iii) declared, set
aside or paid any dividend or made any other distribution in respect of shares
of its capital stock, except for (A) quarterly cash dividends on Manor Care
Common Stock in the amount of $.022 per share, and (B) dividends or
distributions by any Subsidiary to Manor Care or another subsidiary; (iv) issued
any shares of its capital stock or granted any options, rights, or warrants to
purchase any such capital stock or any securities convertible into or
exchangeable for any such capital stock, except for (A) issuances of shares of
Manor Care Common Stock upon the exercise of options granted prior to the date
hereof and (B) grants of options for 767,850 shares of Manor Care Common Stock
and grants of 151,801 shares of restricted stock; (v) purchased any business,
purchased any stock of any corporation other than Manor Care, or merged or
consolidated with any person; (vi) sold, leased, or otherwise disposed of any
assets or properties that were material to Manor Care and its Subsidiaries,
taken as a whole, other than sales or other dispositions in the ordinary course
of business and the sale of Vitalink; (vii) incurred, assumed, or guaranteed any
indebtedness for money borrowed in excess of $75,000,000 in the aggregate other
than (A) borrowings incurred for working capital purposes under Manor Care's
existing revolving credit facilities and (B) intercompany indebtedness; (viii)
changed or modified in any material respect any existing accounting method,
principle, or practice; or (ix) except for this Agreement, entered into any
commitment to do any of the foregoing.
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Except as disclosed in the Manor Care Group SEC Reports filed prior to the
date hereof, since May 31, 1997, there has not been (i) any Material Adverse
Change in the financial condition, results of operations, business or properties
of Manor Care or any of its Subsidiaries (other than changes that are the effect
or result of economic factors affecting the economy as a whole or the industry
in which Manor Care competes), or any development or combination of developments
of which the management of Manor Care is aware that, individually or in the
aggregate, has had, or is reasonably likely to have, a Material Adverse Effect
on Manor Care; (ii) any damage, destruction or loss with respect to Manor Care
or any of its Subsidiaries having a Material Adverse Effect on Manor Care; (iii)
any material change by Manor Care or any of its Subsidiaries (other than the
Public Subsidiaries) in its accounting methods, principles or practices; (iv)
any revaluation by Manor Care or any of its Subsidiaries of any of its assets
having a Material Adverse Effect on Manor Care; or (v) any other action or event
that would have required the consent of HCR pursuant to Section 5.1 of this
Agreement had such action or event occurred after the date of this Agreement and
that, individually or in the aggregate, has had or is reasonably likely to have
a Material Adverse Effect on Manor Care.
(h) Tax Matters.
(i) Manor Care and its Subsidiaries have timely filed (or received
appropriate extensions for filing) all federal, state, local, and foreign
tax returns ("Tax Returns") required to be filed by them with respect to
income, gross receipts, withholding, social security, unemployment,
payroll, franchise, property, excise, sales, use, and other taxes of
whatever kind ("Taxes"), except for Tax Returns the non-filing of which
would not have a Material Adverse Effect on Manor Care, and have paid all
Taxes shown on such Tax Returns to the extent they have become due. Manor
Care's Tax Returns are accurate and complete, except to the extent that any
inaccuracies or incompleteness would not have a Material Adverse Effect on
Manor Care.
(ii) No Tax Returns filed by Manor Care or any of its Subsidiaries are
the subject of pending audits as of the date of this Agreement that could
be reasonably expected to have a Material Adverse Effect on Manor Care.
Neither Manor Care nor any of its Subsidiaries (other than the Public
Subsidiaries) has received, prior to the date of this Agreement, a notice
of deficiency or assessment of additional Taxes, which notice or assessment
remains unresolved. Neither Manor Care nor any of its Subsidiaries (other
than the Public Subsidiaries) has extended the period for assessment or
payment of any Tax, which extension has not since expired.
(iii) Manor Care and its Subsidiaries have withheld and paid over to
the appropriate governmental authorities all Taxes required by law to have
been withheld and paid in connection with amounts paid or owing to any
employee, except for any such Taxes that are immaterial in amount.
(iv) Neither Manor Care nor any of its Subsidiaries has been a member
of an affiliated group (as defined in Section 1504 of the Code) filing a
consolidated federal income tax return for any tax year since January 1,
1991 other than a group the common parent of which was Manor Care.
(v) Neither Manor Care nor any of its Subsidiaries (other than the
Public Subsidiaries) has filed a consent under Code Section 341(f)
concerning collapsible corporations.
(vi) Neither Manor Care nor any of its Subsidiaries (other than the
Public Subsidiaries) has been a United States real property holding
corporation within the meaning of Code Section 897(c)(2) during the
applicable period specified in Code Section 897(c)(1)(A)(ii).
(vii) Neither Manor Care nor any of its Subsidiaries (other than the
Public Subsidiaries) is a party to any Tax allocation or sharing agreement.
(viii) Manor Care has delivered or made available to HCR true and
complete copies of all requested federal, state, local, and foreign income
tax returns with respect to Manor Care and each of its Subsidiaries (other
than the Public Subsidiaries).
(i) Property. Except as would not, individually or in the aggregate have a
Material Adverse Effect on Manor Care: (a) Manor Care and each of its
Subsidiaries have good and clear record and marketable title to each of their
owned properties, insurable by a recognized national title insurance company at
standard rates,
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free and clear of any security interest, easement, covenant or other
restriction, except for recorded easements, covenants and other restrictions
which do not materially impair the current uses or occupancy of such property
(collectively, "liens"); (b) the improvements constructed on each such property
are in good condition, and all mechanical and utility systems servicing such
improvements are in good condition, free in each case of material defects; and
(c) each such property is properly zoned for its current use by Manor Care and
its Subsidiaries, and is not in violation of any zoning, subdivision, health,
safety, landmark preservation, wetlands preservation, building, land use or
other ordinances, laws, codes or regulations or any covenants, restrictions or
other documents of record; nor has any written notice of any claimed violation
of any such ordinances, laws, codes or regulations or any covenants,
restrictions or other documents of record been served on Manor Care or its
Subsidiaries (other than the Public Subsidiaries). All leases pursuant to which
Manor Care or any of its Subsidiaries lease from others material amounts of real
or personal property are in good standing, valid and effective in accordance
with their respective terms with respect to Manor Care and its Subsidiaries, as
the case may be, and, to Manor Care's knowledge, with respect to any other party
thereto, and there is not under any of such leases any existing material default
or event of default (or event which with notice or lapse of time, or both, would
constitute a material default), except where the lack of such good standing,
validity and effectiveness or the existence of such default or event of default
would not have a Material Adverse Effect on Manor Care. Manor Care or its
Subsidiaries, as the case may be, have valid leasehold interests in all
properties leased thereunder free and clear of all liens created by, through or
under Manor Care or its Subsidiaries, except as would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on Manor
Care.
(j) Material Contracts
(i) Except as expressly disclosed in the Manor Care SEC Reports filed
prior to the date hereof, neither Manor Care nor any of its Subsidiaries
(other than the Public Subsidiaries) is a party to any oral or written (A)
agreement, contract, indenture or other instrument relating to Indebtedness
in an amount exceeding $2,000,000, (B) partnership, joint venture or
limited liability agreement or management with any person, (C) agreement,
contract, or other instrument relating to any merger, consolidation,
business combination, share exchange, business acquisition, or for the
purchase, acquisition, sale or disposition of any assets of Manor Care or
any of its Subsidiaries (other than the Public Subsidiaries) outside the
ordinary course of business, (D) other contract, agreement or commitment to
be performed after the date hereof which would be a material contract (as
defined in Item 601(b)(10) of Regulation S-K of the SEC), or (E) contract,
agreement or commitment which materially restricts the conduct of any line
of business by Manor Care or any of its Subsidiaries (other than the Public
Subsidiaries) (such contracts, agreements and commitments, plus all
contracts, commitments and agreements for each Public Subsidiary which
would be described in clauses (A)-(E) but for the exception "(other than
the Public Subsidiaries)" are collectively referred to as the "Manor Care
Material Contracts").
(ii) Except as expressly disclosed in the Manor Care SEC Reports filed
prior to the date hereof, (A) each of the Manor Care Material Contracts is
valid and binding in accordance with its terms and is in full force and
effect and (B) there is no material breach or violation of or default by
Manor Care or any of its Subsidiaries under any of the Manor Care Material
Contracts, whether or not such breach, violation or default has been
waived, and no event has occurred which, with notice or lapse of time or
both, would constitute a material breach, violation or default, or give
rise to a right of termination, modification, cancellation, foreclosure,
imposition of a lien, prepayment or acceleration under any of the Manor
Care Material Contracts, which breach, violation or default referred to in
clauses (A) or (B), alone or in the aggregate with other such breaches,
violations or defaults referred to in clauses (A) or (B), would be
reasonably likely to have a Material Adverse Effect on Manor Care or
materially impair the ability of Manor Care to consummate the Merger.
(k) Intellectual Property. Manor Care and its Subsidiaries own or possess
adequate licenses or other valid rights to use (without the making of any
payment to others, other than payments under agreements disclosed in the Manor
Care Disclosure Schedule) all material patents and applications therefore,
trademarks, trade names, service marks and copyrights (collectively,
"Proprietary Rights") necessary to the conduct of its business in the manner in
which it is presently being conducted, except for such lack of or defects in
ownership
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or possession as would not, individually or in the aggregate, be reasonably
likely to have a Material Adverse Effect on Manor Care. As of the date of this
Agreement, neither Manor Care nor any of its Subsidiaries (other than the Public
Subsidiaries) has received any written notice that any Proprietary Rights have
been declared unenforceable or otherwise invalid by any court or governmental
agency other than notices relating to Proprietary Rights whose loss would not,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect on Manor Care. There is, to the knowledge of Manor Care, no
existing infringement, misuse, or misappropriation of any Proprietary Rights by
others that is, individually or in the aggregate, reasonably likely to have a
Material Adverse Effect on Manor Care. From January 1, 1996 to the date of this
Agreement, neither Manor Care nor any of its Subsidiaries (other than the Public
Subsidiaries) has received any written notice alleging that the operation of the
business of Manor Care or any of its Subsidiaries infringes in any material
respect upon the intellectual property rights of others other than allegations
that, if true, would not, individually or in the aggregate, be reasonably likely
to have a Material Adverse Effect on Manor Care. There is no license or other
rights to use Proprietary Rights whose loss would be reasonably likely to have a
Material Adverse Effect on Manor Care and that is scheduled to expire on or
before May 1, 2000.
(l) Litigation. Except as disclosed in the Manor Care SEC Reports filed
prior to the date hereof, no litigation, arbitration, or administrative
proceeding (i) is pending or, to the knowledge of Manor Care, threatened against
Manor Care or any Subsidiary or their respective properties, assets or
operations that, if decided adversely to such person, would, individually or in
the aggregate, have a Material Adverse Effect on Manor Care, or (ii) is pending
or, to the knowledge of Manor Care, threatened against Manor Care or any
Subsidiary as of the date of this Agreement that seeks to enjoin or otherwise
challenges the consummation of the transactions contemplated by this Agreement.
As of the date of this Agreement, neither Manor Care nor any of its Subsidiaries
(other than the Public Subsidiaries) is specifically identified as a party
subject to any material restrictions or limitations under any injunction, writ,
judgment, order, or decree of any court, administrative agency or commission or
other governmental authority.
(m) Compliance with Law; Authorizations.
(i) Manor Care and each of its Subsidiaries has complied in all
material respects and is currently in compliance with each law, license,
permit, certificate of need ("CON"), ordinance, or governmental or
regulatory rule ("Regulations") to which its business, operations, assets
or properties is subject, including any Regulations related to
reimbursement for services rendered or goods provided and including any
applicable federal or state health care program laws, rules, or
regulations, including, but not limited to, those pertaining to improper
inducements, gratuitous payments, fraudulent or abusive practices,
excessive or inadequate services, false claims and/or false statements,
civil money penalties, prohibited referrals, and/or financial
relationships, excluded individuals, controlled substances and licensure,
except where such noncompliance would not have a Material Adverse Effect on
Manor Care. Each Facility holds, possesses or lawfully uses in the
operation of its business the licenses, permits, CONs, provider agreements
and certifications under Titles XVIII and XIX of the Social Security Act
(the "Social Security Act," Titles XVIII and XIX of the Social Security Act
are hereinafter referred to collectively as the "Medicare and Medicaid
Programs"), which licenses, permits, CONs, provider agreements and
certifications are in substantial compliance with all Regulations, except
where such non-compliance or absence of a license, permit, CON, provider
agreement or certification would not have a Material Adverse Effect on
Manor Care. None of Manor Care or any of its Subsidiaries is in default
under any order of any court, governmental authority or arbitration board
or tribunal specifically applicable to Manor Care or any of its
Subsidiaries, except where such default would not have a Material Adverse
Effect on Manor Care. As of the date hereof, no action has been taken or
recommended by any governmental or regulatory official, body or authority,
either to: (i) revoke, withdraw or suspend any CON or any license, permit
or other authority to operate any of the Facilities; (ii) to terminate or
decertify any participation of any of the Facilities in the Medicare and
Medicaid Programs; or (iii) reduce or propose to reduce the number of
licensed beds in any category, nor, as of the date hereof, has there been
any decision not to renew any provider agreement related to any Facility.
In the event that any such action shall have been taken or recommended
subsequent to the date hereof, or if any decision shall have been made not
to renew any such provider agreements, Manor Care hereby agrees to provide
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notice to HCR of the same and to diligently and in good faith take prompt
corrective or remedial action to cure the same. As used in this Agreement,
"Facility" or "Facilities" refers to any nursing home, assisted living
facility, health care center, clinic or pharmacy or other facility or
owned, operated, leased or managed by Manor Care, HCR or any of their
respective Subsidiaries, as applicable in Sections 4.1(m) and 4.2(m).
(ii) All cost reports ("Cost Reports") required to be filed by Manor
Care or any Subsidiary with respect to the Facilities under the Medicare
and Medicaid Programs, or any other applicable governmental or private
provider regulations have been prepared and filed in accordance with
applicable laws, rules and regulations and Manor Care has or has caused a
Subsidiary to have paid or made provision to pay through proper recordation
of any net liability any material overpayments received from the Medicare
and Medicaid Programs and any similar obligations with respect to other
reimbursement programs in which Manor Care and its Subsidiaries
participate, except where such failure to file or make such payment would
not have a Material Adverse Effect on Manor Care. Section 4.1(m) of the
Manor Care Disclosure Schedules sets forth for each Facility the years for
which Cost Reports remain to be settled.
(n) No Brokers or Finders. Except for SBC Warburg Dillon Read Inc. ("SBC
Warburg Dillon Read"), Manor Care has not engaged any investment banker, broker,
or finder in connection with the transactions contemplated hereby.
(o) Retirement and Benefit Plans.
(i) Each employee pension benefit plan ("Pension Plan") as defined in
Section 3 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), each employee welfare benefit plan ("Welfare Plan") as
defined in Section 3 of ERISA, and each deferred compensation, bonus,
incentive, stock incentive, option, stock purchase, severance, or other
material employee benefit plan, agreement, commitment, or arrangement
("Benefit Plan") that is currently maintained by Manor Care or any of its
ERISA Affiliates or to which Manor Care or any of its ERISA Affiliates
currently contributes or is under any current obligation to contribute
(collectively, the "Manor Care Employee Plans" and individually, a "Manor
Care Employee Plan"), is listed in the Manor Care Disclosure Schedule. In
addition, Manor Care has delivered or made available to HCR copies of the
most recent determination letter issued by the Internal Revenue Service
with respect to each such Pension Plan, copies of the most recent actuarial
report for each such Pension Plan, where applicable, and copies of the
annual report (Form 5500 Series) required to be filed with any governmental
agency with respect to each such Pension Plan and each such Welfare Plan
for the most recent plan year of such plan for which reports have been
filed.
(ii) Each of Manor Care and its ERISA Affiliates has made on a timely
basis all contributions or payments required to be made by it pursuant to
the terms of the Manor Care Employee Plans, ERISA, the Code, or other
applicable laws, unless such contributions or payments that have not been
made are immaterial in amount and the failure to make such payments or
contributions will not materially and adversely affect the Manor Care
Employee Plans. All material amounts required to be reflected on the
financial statements of Manor Care and its ERISA Affiliates with respect to
each Manor Care Employee Plan are properly included in such financial
statements and Manor Care and its ERISA Affiliates have performed all
material obligations required to be performed by them under each Manor Care
Employee Plan. None of the Manor Care Employee Plans is a "multiemployer
plan," as defined in Section 3(37) or Section 4001(a)(3) of ERISA. No
Pension Plan required to be listed on the Manor Care Disclosure Schedule or
to which any of its ERISA Affiliates contributes or is obligated to
contribute and that is subject to Section 412 of the Code has incurred any
"accumulated funding deficiency" (as defined in that section), whether or
not material and whether or not subject to a waiver, as of the last day of
the most recent plan year of the plan. The funding method used in
connection with each Manor Care Employee Plan which is subject to the
minimum funding requirements of ERISA is acceptable and the actuarial
assumptions used in connection with funding each such plan are reasonable;
as of the last day of the last plan year of each such plan the "amount of
unfunded benefit liabilities" as defined in Section 4001(a)(18) of ERISA
did not and will not exceed zero.
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(iii) Each Manor Care Employee Plan (and any related trust or other
funding instrument) is being administered in all material respects in
compliance with its terms and in both form and operation, is in compliance
in all material respects with the applicable provisions of ERISA, the Code,
and other applicable laws and regulations (other than adoption of any plan
amendments for which the deadline has not yet expired), and all material
reports required to be filed with any governmental agency with respect to
each Pension Plan and each Welfare Plan required to be listed on the Manor
Care Disclosure Schedule have been timely filed.
(iv) There is no material litigation, arbitration, or administrative
proceeding pending or, to the knowledge of Manor Care, threatened against
Manor Care or any of its ERISA Affiliates or, to the knowledge of Manor
Care, any plan fiduciary by the Internal Revenue Service, the U.S.
Department of Labor, the Pension Benefit Guaranty Corporation or any
participant or beneficiary with respect to any Manor Care Employee Plan.
Neither Manor Care nor any of its ERISA Affiliates nor, to the knowledge of
Manor Care, any plan fiduciary of any Pension Plan or Welfare Plan required
to be listed on the Manor Care Disclosure Schedule has engaged in any
transaction in violation of Section 406(a) or (b) of ERISA for which no
exemption exists under Section 408 of ERISA or any "prohibited transaction"
(as defined in Section 4975(c)(1) of the Code) for which no exemption
exists under Section 4975(c)(2) or 4975(d) of the Code, or is subject to
any excise tax imposed by the Code or ERISA with respect to any Manor Care
Employee Plan.
(v) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (a) result in any
material payment becoming due, or materially increase the amount of
compensation due, any current or former employee of Manor Care or any of
its Subsidiaries under any Manor Care Employee Plan, (b) materially
increase any benefits otherwise payable under any Manor Care Employee Plan
or (c) result in the acceleration of the time of payment or vesting of any
such material benefits.
(vi) For purposes of this Section 4.1(o), the term "ERISA Affiliate"
means (A) any trade or business with which Manor Care is under common
control within the meaning of Section 4001(b) of ERISA, (B) any corporation
with which Manor Care is a member of a controlled group of corporations
within the meaning of Section 414(b) of the Code, (C) any entity with which
Manor Care is under common control within the meaning of Section 414(c) of
the Code, (D) any entity with which Manor Care is a member of an affiliated
service group within the meaning of Section 414(m) of the Code, and (E) any
entity with which Manor Care is aggregated under Section 414(o) of the
Code.
(p) Environmental Matters.
For purposes of this Agreement,
(A) "Environmental Law" means the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. sec.9601 et seq.
("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. sec.6901
et seq., the Federal Water Pollution Control Act, 33 U.S.C. sec.1251 et
seq., the Clean Air Act, 42 U.S.C. sec.7401 et seq., and any other federal,
state, local or other governmental statute, regulation, law or ordinance
relating to pollution or the protection of health, natural resources, or
the environment; and
(B) "Hazardous Substance" means any pollutant, contaminant, hazardous
substance or waste, petroleum or any fraction thereof, or any other
substance or material (whether solid, liquid or gas) regulated by any
Environmental Law.
Except as expressly disclosed in the Manor Care Group SEC Reports filed
prior to the date hereof and except for such matters that, individually and in
the aggregate are not reasonably likely to have a Material Adverse Effect on
Manor Care,
(i) No Hazardous Substances have been spilled, discharged, leaked,
emitted, injected, disposed of, released or threatened to be released on,
beneath, at, or into any real property currently or, during the period of
such ownership or lease, formerly owned or leased by Manor Care or any of
its Subsidiaries.
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Also, to the knowledge of Manor Care, no Hazardous Substances generated or
transported by Manor Care or its Subsidiaries have been spilled,
discharged, leaked, emitted, injected, disposed of, released or threatened
to be released at any location.
(ii) No underground storage tanks or other underground storage
receptacles (a) located on any of the real property currently owned by
Manor Care or any of its Subsidiaries (other than the Public Subsidiaries)
or (b) presently or formerly used by Manor Care or any of its Subsidiaries
on any real property currently leased by Manor Care or its Subsidiaries
(other than the Public Subsidiaries), in either case contain or previously
contained any Hazardous Substances, except as in compliance with
Environmental Laws.
(iii) Manor Care has made available to HCR true and complete copies of
environmental assessments as requested by HCR prepared since January 1,
1991 in Manor Care's possession, custody or control relating to any of its
(or its Subsidiaries, other than the Public Subsidiaries), currently owned
or leased real property.
(iv) There are no consent decrees, consent orders, judgments, judicial
or administrative orders, agreements with (other than permits) or liens by,
any governmental or quasi-governmental entity relating to any Environmental
Law which regulate, obligate or bind Manor Care or its Subsidiaries (other
than the Public Subsidiaries).
(v) Manor Care has not received written notice of any existing or
threatened notices of violation, liens, claims, demands, suits, CERCLA
sec.104 information requests, potentially responsible party notices ("PRP
Notices"), or causes of action for any damage, including, without
limitation, personal injury, property damage (including, without
limitation, any depreciation or diminution of property values), remediation
or response costs, lost use of property or consequential damages, arising
out of an Environmental Law against Manor Care or its Subsidiaries.
(vi) Manor Care and its Subsidiaries are and have been in the past
five years in compliance with all Environmental Laws.
(vii) As used in this Section 4.1(p), "Subsidiary" shall also include
any entity which previously was a Subsidiary of Manor Care.
(q) Insurance. All material fire and casualty, general liability, business
interruption and product liability insurance policies maintained by Manor Care
or any of its Subsidiaries are in character and amount at least equivalent to
that carried by persons engaged in similar businesses and subject to the same or
similar perils or hazards, except for any such failures to maintain insurance
policies that, individually or in the aggregate, are not reasonably likely to
have a Material Adverse Effect on Manor Care.
(r) Labor Matters. There are no pending claims against Manor Care or any of
its Subsidiaries under any workers compensation plan or policy or for long-term
disability that would have a Material Adverse Effect on Manor Care. Neither
Manor Care nor any of its Subsidiaries has any obligations under COBRA with
respect to any former employees or qualifying beneficiaries thereunder, except
for obligations that would not have a Material Adverse Effect on Manor Care.
There are no proceedings or claims pending or, to the knowledge of Manor Care or
any of its Subsidiaries, threatened, between Manor Care or any of its
Subsidiaries and any of their respective employees, which proceedings or claims
would have a Material Adverse Effect on Manor Care. Except as described in the
Manor Care SEC Reports filed prior to the date hereof, neither Manor Care nor
any of its Subsidiaries is (or has in the past been) a party to any collective
bargaining agreement or other labor union contract, nor does Manor Care nor any
of its Subsidiaries know of any activities or proceedings of any labor union to
organize any of its employees which would be reasonably likely to have a
Material Adverse Effect on Manor Care.
(s) Pooling of Interests. To the knowledge of Manor Care, after
consultation with its independent auditors, neither Manor Care nor any of its
Subsidiaries, nor any of their respective Affiliates has taken any action or
failed to take any action that would prevent HCR from accounting for the Merger
as a pooling of interests. Manor Care has received a letter from Arthur Andersen
LLP, dated as of June 9, 1998, advising it
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that, subject to the limitations set forth in its letter, Manor Care qualifies
as a "combining company" in accordance with the criteria set forth in paragraph
46 of APB 16 and has not violated the criteria set forth in Nos. 47c, 47d and
48c of APB 16 during the period extending from two years preceding the date of
initiation to the date of its letter.
(t) Opinion of Financial Adviser. SBC Warburg Dillon Read has delivered to
Manor Care a written opinion dated as of the date hereof to the effect that the
Exchange Ratio is fair from a financial point of view to Manor Care's
stockholders as of the date hereof.
(u) Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of Manor Care Common Stock entitled to vote at a Manor Care
stockholders' meeting is the only vote of the holders of any class or series of
capital stock of Manor Care necessary to adopt this Agreement, and the Merger
and to approve the transactions contemplated hereby.
(v) No Existing Discussions. As of the date hereof, Manor Care is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal .
(w) Delaware State Takeover Statutes. The Board of Directors of Manor Care
has approved the terms of this Agreement and the Ancillary Agreements to which
Manor Care is a party and the consummation of the transactions contemplated by
this Agreement and by such Ancillary Agreements, and such approval is sufficient
to render inapplicable to the Merger and the other transactions contemplated by
this Agreement and by the Ancillary Agreements the restrictions of Section 203
of the DGCL. To Manor Care's knowledge, as to Manor Care and its affiliates,
except as set forth in Section 7.2(f), no other state takeover statute or
similar statute or regulation applies or purports to apply to the Merger, this
Agreement, the Ancillary Agreements or any of the transactions contemplated by
this Agreement or the Ancillary Agreements.
(x) Manor Care Rights Agreement. Under the terms of the Manor Care Rights
Agreement, as amended to the date hereof, neither the execution of this
Agreement or the Ancillary Agreements, nor the consummation of the transactions
contemplated hereby or thereby, will cause a "distribution date" to occur or
cause the rights issued pursuant to the Manor Care Rights Agreement to become
exercisable. As of the date hereof, the Manor Care Rights Agreement has been
amended in the manner set forth on Exhibit F hereof.
(y) Tax Treatment. Neither Manor Care nor, to Manor Care's knowledge, any
of its affiliates has taken or agreed to take any action that would prevent the
Merger from constituting a transaction qualifying as a reorganization under
Section 368(a) of the Code.
(z) Board Recommendation. The Board of Directors of Manor Care has, by a
unanimous vote at a meeting of such Board duly held, approved and adopted this
Agreement, the Ancillary Agreements, the Merger and the other transactions
contemplated hereby, and determined that this Agreement, the Ancillary
Agreements, the Merger and the other transactions contemplated hereby, taken
together, are in the best interest of Manor Care and of the stockholders of
Manor Care, and prior to the date hereof has resolved to recommend that the
holders of Manor Care Common Stock approve and adopt this Agreement, the Merger
and the other transactions contemplated hereby.
(aa) Pending Restructuring. Manor Care has terminated all efforts to effect
the restructuring transactions described as part of and including the
"Distribution" (as defined in Form S-3, No. 333-37599) (the "Restructuring
Transactions"); provided, however, Manor Care may continue to leave pending such
registration statement so long as it makes no material amendments thereto and
does not otherwise seek to advance such registration.
4.2. Joint and Several Representations and Warranties of HCR and Merger
Sub. Except as qualified by the disclosure schedule delivered by HCR to Manor
Care concurrently with the execution of this Agreement (the "HCR Disclosure
Schedule"), HCR and Merger Sub jointly and severally represent and warrant to
Manor Care as follows:
(a) Organization, Standing, Qualification. Each of HCR, Merger Sub, and
HCR's other Subsidiaries is a corporation duly incorporated, validly existing,
and in good standing under the laws of the jurisdiction of its incorporation,
and has the requisite corporate power and corporate authority to own, lease, and
operate its
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properties and assets and to carry on its business as it is now being conducted.
Each of HCR and its Subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned, operated, or leased by it, or the nature
of its business, makes such qualification or licensing necessary, except those
jurisdictions where failure to be so qualified, licensed, or in good standing
would not have a Material Adverse Effect on HCR. Copies of the Certificate of
Incorporation and Bylaws of HCR and Merger Sub have been made available to Manor
Care and are complete and correct as of the date of this Agreement.
(b) Capitalization. The authorized capital stock of HCR consists of
160,000,000 shares of HCR Common Stock, of which, as of the date of this
Agreement, 44,761,102 shares are issued and outstanding and 5,000,000 shares of
Preferred Stock, par value $.01 per share, of which 800,000 shares have been
designated as Series A Junior Participating Preferred Stock, none of which, as
of the date of this Agreement, is issued and outstanding. The authorized capital
stock of Merger Sub consists of 1,000 of shares Common Stock. All of the issued
and outstanding shares of capital stock of HCR and Merger Sub and each of HCR's
other Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and were not granted in violation of any statutory preemptive
rights. There are no outstanding subscriptions, options, warrants, calls, or
other agreements or commitments pursuant to which HCR or any Subsidiary is or
may become obligated to issue, sell, transfer, or otherwise dispose of, or
purchase, redeem, or otherwise acquire, any shares of capital stock of, or other
equity interests in, HCR or any Subsidiary, and there are no outstanding
securities convertible into or exchangeable for any such capital stock or other
equity interests, except for (i) options to purchase up to an aggregate of
4,553,268 shares (as of the date of this Agreement) of HCR Common Stock at the
exercise prices set forth in the HCR Disclosure Schedule and (ii) the Rights
Agreement dated May 2, 1995 between HCR and Harris Trust and Savings Bank (the
"HCR Agreement"), pursuant to which each outstanding share of HCR Common Stock
has associated with it certain rights (the "HCR Rights") including rights under
certain circumstances to purchase shares of Series A Junior Participating
Preferred Stock at $100 per one one-hundredth share, subject to adjustment. The
HCR Disclosure Schedule sets forth a true and complete list as of June 8, 1998
of (i) all holders of options to purchase HCR Common Stock, including the number
of shares of HCR Common Stock subject to each such option (a "HCR Option"), the
exercise or vesting schedule of such option, the exercise price per share and
the term of each such option, and (ii) all holders of restricted stock awards
with respect to HCR Common Stock, including the number of shares of HCR Common
Stock subject to each such award (a "HCR Award") and the vesting schedule of
each such award. There are no stock appreciation rights, phantom stock rights,
or performance shares outstanding with respect to HCR or any of its
Subsidiaries. The HCR Disclosure Schedule sets forth for each class of stock of
each Subsidiary of HCR, the number of shares authorized, the number of shares
issued and outstanding and the beneficial owners of the issued and outstanding
shares. Except as set forth in the HCR Disclosure Schedule, HCR owns, directly
or indirectly, all of the issued and outstanding shares of capital stock of
every class of each Subsidiary, free and clear of all liens, security interests,
pledges, charges, and other encumbrances. There are no voting trusts or other
agreements or understandings to which HCR or any of its Subsidiaries is a party
or of which HCR otherwise has knowledge with respect to the voting of its
capital stock or that of any Subsidiary.
(c) Authorization and Execution. Each of HCR and Merger Sub has the
corporate power and authority to execute and deliver this Agreement and, subject
to approval by the holders of HCR Common Stock at the special meeting of
stockholders referred to in Section 6.4, to consummate the transactions
contemplated hereby. HCR has the corporate power and authority to execute,
deliver and consummate the transactions contemplated by each of the Ancillary
Agreements to which HCR is a party. The execution, delivery, and performance by
each of HCR and Merger Sub of this Agreement and the Ancillary Agreements to
which it is a party have been duly authorized by the Board of Directors of such
corporation and by HCR as sole stockholder of Merger Sub, and no further
corporate action of HCR or Merger Sub, other than the approval of HCR's
stockholders, is necessary to consummate the transactions contemplated hereby
and thereby. Each of HCR and Merger Sub have duly executed and delivered this
Agreement and the Ancillary Agreements to which it is a party and, assuming the
accuracy of the representations and warranties set forth in Section 4.1(c)
without giving effect to the assumption therein, each such agreement constitutes
the legal, valid, and binding obligation of such party enforceable against it in
accordance with such agreement's terms.
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(d) No Conflicts. Neither the execution and delivery of this Agreement nor
any of the Ancillary Agreements by HCR and Merger Sub, nor the consummation by
them of the transactions contemplated hereby or thereby, will (i) subject to
approval by the holders of HCR Common Stock at the special meeting of
stockholders referred to in Section 6.4, conflict with or result in a breach of
the Certificate of Incorporation, Bylaws or similar organizational documents, as
currently in effect, of HCR or any of its Subsidiaries, (ii) except for the
requirements under the HSR Act, the filing of the Certificate of Merger with the
Delaware Secretary of State, the filing of the Joint Proxy Statement with the
SEC in accordance with the Exchange Act, the filing of the Registration
Statement with the SEC, such filings, consents, and approvals as may be required
under applicable state securities or "blue sky" laws and regulations, and such
filings, licenses, permits, authorizations, consents, orders, registrations,
notifications and disclosures as are set forth on the HCR Disclosure Schedule,
require any filing with, or consent or approval of, any Governmental Entity
having jurisdiction over any of the business or assets of HCR or any of its
Subsidiaries, (iii) assuming that all filings, permits, authorization, consents,
disclosures and approvals so listed on the HCR Disclosure Schedule have been
duly made or obtained as contemplated by clause (ii), violate any statute, law,
ordinance, rule, or regulation applicable to HCR or any of its Subsidiaries or
any injunction, judgment, order, writ, or decree to which HCR or any of its
Subsidiaries is subject, or (iv) result in a breach of, or constitute a default
or an event which, with the passage of time or the giving of notice, or both,
would constitute a default, give rise to a right of termination, cancellation,
or acceleration, create any entitlement of any third party to any material
payment or benefit, require the consent of any third party, or result in the
creation of any lien on the assets of HCR or any of its Subsidiaries under, any
HCR Material Contract , except, in the case of clauses (ii), (iii) and (iv),
where the violation, breach, default, termination, cancellation, acceleration,
payment, benefit, or lien, or the failure to make such filing or obtain such
consent or approval would neither materially impair the ability of HCR or Merger
Sub to consummate the transactions contemplated by this Agreement nor have a
Material Adverse Effect on HCR.
(e) SEC Reports; Financial Statements; No Undisclosed Liabilities.
(i) HCR has made available to Manor Care, in the form filed with the
SEC, its (A) Annual Report on Form 10-K for each of the fiscal years ended
December 31, 1995 through December 31, 1997, (B) all proxy statements
relating to HCR's meetings of stockholders (whether annual or special) held
since January 1, 1995, and (C) all other forms and reports, filed by HCR
with the SEC since January 1, 1995 (all such forms and reports, other than
the Joint Proxy Statement, being collectively called the "HCR SEC Reports"
and individually called a "HCR SEC Report"). No HCR SEC Report (including
any document incorporated by reference therein), as of its filing date (or
if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing), contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading, and
each HCR SEC Report at the time of its filing complied as to form in all
material respects with all applicable requirements of the Securities Act,
the Exchange Act, and the rules and regulations of the SEC. Since January
1, 1995, HCR has filed in a timely manner all reports that it was required
to file with the SEC pursuant to the Exchange Act and the rules and
regulations of the SEC.
(ii) The consolidated financial statements contained in the HCR SEC
Reports filed prior to the date hereof were prepared in accordance with
GAAP (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on
Form 10-Q under the Exchange Act) and fairly present, in all material
respects, the consolidated financial position of HCR and its Subsidiaries
as at the respective dates thereof and the consolidated results of
operations and consolidated cash flows of HCR and its Subsidiaries for the
periods indicated, subject, in the case of interim financial statements, to
normal year-end adjustments.
(iii) Except as disclosed in the HCR SEC Reports filed prior to the
date hereof, and except for normal or recurring liabilities incurred since
December 31, 1997 in the ordinary course of business consistent with past
practices, HCR and its Subsidiaries do not have any liabilities, either
accrued, contingent or otherwise (whether or not required to be reflected
in financial statements in accordance
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with generally accepted accounting principles), and whether due or to
become due, which individually or in the aggregate are reasonably likely to
have a Material Adverse Effect on HCR.
(f) Joint Proxy Statement/Registration Statement. The information to be
supplied by HCR for inclusion (i) in the Registration Statement shall not at the
time the Registration Statement is declared effective by the SEC contain any
untrue statement of a material fact or omit to state any material fact required
to be stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading, and (ii) in the Joint Proxy Statement
shall not on the date the Joint Proxy Statement is first mailed to stockholders
of HCR or Manor Care, at the time of the HCR Stockholders' Meeting and Manor
Care Stockholders' Meeting, or at the Effective Time, contain any statement
that, at such time and in light of the circumstances under which it shall be
made, is false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements made in the Joint
Proxy Statement not false or misleading. If at any time before the Effective
Time any event relating to HCR or any of its affiliates, officers, or directors
is discovered by HCR that should be set forth in an amendment to the
Registration Statement or a supplement to the Joint Proxy Statement, HCR shall
promptly so inform Manor Care.
(g) Absence of Certain Changes or Events. Except as expressly disclosed in
the HCR SEC Reports filed prior to the date of this Agreement or as expressly
contemplated by this Agreement, since December 31, 1997, HCR and its
Subsidiaries have conducted their respective businesses and operations in the
ordinary course and neither HCR nor any of its Subsidiaries has (i) split,
combined, or reclassified any shares of its capital stock or made any other
changes in its equity capital structure; (ii) purchased, redeemed, or otherwise
acquired, directly or indirectly, any shares of capital stock of HCR or any of
its Subsidiaries or any options, rights, or warrants to purchase any such
capital stock or any securities convertible into or exchangeable for any such
capital stock; (iii) declared, set aside, or paid any dividend or made any other
distribution in respect of shares of its capital stock, except for dividends or
distributions by any subsidiary to HCR or another subsidiary; (iv) issued any
shares of its capital stock or granted any options, rights or warrants to
purchase any such capital stock or any securities convertible into or
exchangeable for any such capital stock, except for (A) issuances of shares of
HCR Common Stock upon the exercise of options granted prior to the date hereof
and (B) grants of options for 284,595 shares of HCR Common Stock and grants of
339,500 shares of restricted stock; (v) purchased any business, purchased any
stock of any corporation other than HCR, or merged or consolidated with any
person; (vi) sold, leased, or otherwise disposed of any assets or properties
that were material to HCR and its Subsidiaries, taken as a whole, other than
sales or other dispositions in the ordinary course of business; (vii) incurred,
assumed, or guaranteed any indebtedness for money borrowed in excess of
$75,000,000 in the aggregate other than (A) borrowings incurred for working
capital purposes under HCR's existing revolving credit facilities and (B)
intercompany indebtedness; (viii) changed or modified in any material respect
any existing accounting method, principle, or practice; or (ix) except for this
Agreement, entered into any commitment to do any of the foregoing.
Except as disclosed on the HCR SEC Reports filed prior to the date hereof,
since December 31, 1997, there has not been (i) any Material Adverse Change in
the financial condition, results of operations, business or properties of HCR or
its Subsidiaries (other than changes that are the effect or result of economic
factors affecting the economy as a whole or the industry in which HCR competes),
or any development or combination of developments of which the management of HCR
is aware that, individually or in the aggregate, has had, or is reasonably
likely to have, a Material Adverse Effect on HCR; (ii) any damage, destruction
or loss with respect to HCR or any of its Subsidiaries having a Material Adverse
Effect on HCR or its Subsidiaries; (iii) any material change by HCR in its
accounting methods, principles or practices; (iv) any revaluation by HCR or its
Subsidiaries of any of its assets having a Material Adverse Effect on HCR; or
(v) any other action or event that would have required the consent of Manor Care
pursuant to Section 5.2 of this Agreement had such action or event occurred
after the date of this Agreement and that, individually or in the aggregate, has
had or is reasonably likely to have a Material Adverse Effect on HCR.
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(h) Tax Matters.
(i) HCR and its Subsidiaries have timely filed (or received
appropriate extensions for filing) all Tax Returns required to be filed by
them with respect to all Taxes, except for Tax Returns the non-filing of
which would not have a Material Adverse Effect on HCR, and have paid all
Taxes shown on such Tax Returns to the extent they have become due. HCR's
Tax Returns are accurate and complete, except to the extent that any
inaccuracies or incompleteness would not have a Material Adverse Effect on
HCR.
(ii) No Tax Returns filed by HCR or any of its Subsidiaries are the
subject of pending audits as of the date of this Agreement that could
reasonably be expected to have a Material Adverse Effect on HCR. Neither
HCR nor any of its Subsidiaries has received, prior to the date of this
Agreement, a notice of deficiency or assessment of additional Taxes, which
notice or assessment remains unresolved. Neither HCR nor any of its
Subsidiaries has extended the period for assessment or payment of any Tax,
which extension has not since expired.
(iii) HCR and its Subsidiaries have withheld and paid over to the
appropriate governmental authorities all Taxes required by law to have been
withheld and paid in connection with amounts paid or owing to any employee,
except for any such Taxes that are immaterial in amount.
(iv) Neither HCR nor any of its Subsidiaries has been a member of an
affiliated group (as defined in Section 1504 of the Code) filing a
consolidated federal income tax return for any tax year since January 1,
1991 other than a group the common parent of which was HCR.
(v) Neither HCR nor any of its Subsidiaries has filed a consent under
Code Section 341(f) concerning collapsible corporations.
(vi) Neither HCR nor any of its Subsidiaries has been a United States
real property holding corporation within the meaning of Code Section
897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii).
(vii) Neither HCR nor any of its Subsidiaries is a party to any Tax
allocation or sharing agreement.
(viii) HCR has delivered or made available to Manor Care true and
complete copies of all requested federal, state, local, and foreign income
tax returns with respect to HCR and each of its Subsidiaries.
(i) Property. Except as would not, individually or in the aggregate have a
Material Adverse Effect on HCR: (a) HCR and each of its Subsidiaries have good
and clear record and marketable title to each of their owned properties,
insurable by a recognized national title insurance company at standard rates,
free and clear of any liens; and (b) the improvements constructed on each such
property are in good condition, and all mechanical and utility systems servicing
such improvements are in good condition, free in each case of material defects;
and (c) each such property is properly zoned for its current use by HCR and its
Subsidiaries, and is not in violation of any zoning, subdivision, health,
safety, landmark preservation, wetlands preservation, building, land use or
other ordinances, laws, codes or regulations or any covenants, restrictions or
other documents of record; nor has any written notice of any claimed violation
of any such ordinances, laws, codes or regulations or any covenants,
restrictions or other documents of record been served on HCR or its
Subsidiaries. All leases pursuant to which Manor Care or any of its Subsidiaries
lease from others material amounts of real or personal property are in good
standing, valid and effective in accordance with their respective terms with
respect to HCR and its Subsidiaries, as the case may be, and, to HCR's
knowledge, with respect to any other party thereto, and there is not under any
of such leases any existing material default or event of default (or event which
with notice or lapse of time, or both, would constitute a material default),
except where the lack of such good standing, validity and effectiveness or the
existence of such default or event of default would not have a Material Adverse
Effect on HCR. HCR or its Subsidiaries, as the case may be, have valid leasehold
interests in all properties leased thereunder free and clear of all liens
created by, through or under HCR or its Subsidiaries, except as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on HCR.
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(j) Material Contracts
(i) Except as expressly disclosed in the HCR SEC Reports filed prior
to the date hereof, neither HCR nor any of its Subsidiaries is a party to
any oral or written (A) agreement, contract, indenture or other instrument
relating to Indebtedness in an amount exceeding $2,000,000, (B)
partnership, joint venture or limited liability agreement or management
with any person, (C) agreement, contract, or other instrument relating to
any merger, consolidation, business combination, share exchange, business
acquisition, or for the purchase, acquisition, sale or disposition of any
assets of HCR or any of its Subsidiaries outside the ordinary course of
business, (D) other contract, agreement or commitment to be performed after
the date hereof which would be a material contract (as defined in Item
601(b)(10) of Regulation S-K of the SEC), or (E) contract, agreement or
commitment which materially restricts the conduct of any line of business
by HCR or any of its Subsidiaries (collectively, the "HCR Material
Contracts").
(ii) Except as expressly disclosed in the HCR SEC Reports filed prior
to the date hereof, (A) each of the HCR Material Contracts is valid and
binding in accordance with its terms and is in full force and effect and
(B) there is no material breach or violation of or default by HCR or any of
its Subsidiaries under any of the HCR Material Contracts, whether or not
such breach, violation or default has been waived, and no event has
occurred which, with notice or lapse of time or both, would constitute a
material breach, violation or default, or give rise to a right of
termination, modification, cancellation, foreclosure, imposition of a lien,
prepayment or acceleration under any of the HCR Material Contracts, which
breach, violation or default referred to in clauses (A) or (B), alone or in
the aggregate with other such breaches, violations or defaults referred to
in clauses (A) or (B), would be reasonably likely to have a Material
Adverse Effect on HCR or materially impair the ability of HCR to consummate
the Merger.
(k) Intellectual Property. HCR and its Subsidiaries own or possess adequate
licenses or other valid rights to use (without the making of any payment to
others, other than payments under agreements disclosed in the HCR Disclosure
Schedule) all of the Proprietary Rights necessary to the conduct of its business
in the manner in which it is presently being conducted, except for such lack of
or defects in ownership or possession as would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on HCR. As of
the date of this Agreement, neither HCR nor any of its Subsidiaries has received
any written notice that any Proprietary Rights have been declared unenforceable
or otherwise invalid by any court or governmental agency other than notices
relating to Proprietary Rights whose loss would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on HCR. There
is, to the knowledge of HCR, no existing infringement, misuse, or
misappropriation of any Proprietary Rights by others that is, individually or in
the aggregate, reasonably likely to have a Material Adverse Effect on HCR. From
January 1, 1996 to the date of this Agreement, neither HCR nor any of its
Subsidiaries has received any written notice alleging that the operation of the
business of HCR or any of its Subsidiaries infringes in any material respect
upon the intellectual property rights of others other than allegations that, if
true, would not, individually or in the aggregate, be reasonably likely to have
a Material Adverse Effect on HCR. There is no license or other rights to use
Proprietary Rights whose loss would be reasonably likely to have a Material
Adverse Effect on HCR and that is scheduled to expire on or before May 1, 2000.
(l) Litigation. Except as expressly disclosed in the HCR SEC Reports filed
prior to the date hereof, no litigation, arbitration, or administrative
proceeding (i) is pending or, to the knowledge of HCR, threatened against HCR or
any Subsidiary or their respective properties, assets or operations that, if
decided adversely to such person, would individually or in the aggregate have a
Material Adverse Effect on HCR, or (ii) is pending or, to the knowledge of HCR,
threatened against HCR or any subsidiary as of the date of this Agreement that
seeks to enjoin or otherwise challenges the consummation of the transactions
contemplated by this Agreement. As of the date of this Agreement, neither HCR
nor any of its Subsidiaries is specifically identified as a party subject to any
material restrictions or limitations under any injunction, writ, judgment,
order, or decree of any court, administrative agency or commission, or other
governmental authority.
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(m) Compliance with Law; Authorizations.
(i) HCR and each of its Subsidiaries has complied in all material
respects and is currently in compliance with each Regulation to which its
business, operations, assets or properties is subject, including any
Regulations related to reimbursement for services rendered or goods
provided and including any applicable federal or state health care program
laws, rules, or regulations, including, but not limited to, those
pertaining to improper inducements, gratuitous payments, fraudulent or
abusive practices, excessive or inadequate services, false claims and/or
false statements, civil money penalties, prohibited referrals, and/or
financial relationships, excluded individuals, controlled substances and
licensure, except where such noncompliance would not have a Material
Adverse Effect on the business or operations of HCR. Each Facility holds,
possesses or lawfully uses in the operation of its business the licenses,
permits, CONs, provider agreements and certifications under Medicare and
Medicaid Programs which licenses, permits, CONs, provider agreements and
certifications are in substantial compliance with all Regulations, except
where such non-compliance or absence of a license, permit, CON, provider
agreement or certification would not have a Material Adverse Effect on HCR.
None of HCR or any of its Subsidiaries is in default in any material
respect under any order of any court, governmental authority or arbitration
board or tribunal specifically applicable to HCR or any of its
Subsidiaries, except where such default would not have a Material Adverse
Effect on HCR. As of the date hereof, no action has been taken or
recommended by any governmental or regulatory official, body or authority,
either to: (i) revoke, withdraw or suspend any CON or any license, permit
or other authority to operate any of the Facilities; (ii) to terminate or
decertify any participation of any of the Facilities in the Medicare and
Medicaid Programs; or (iii) reduce or propose to reduce the number of
licensed beds in any category, nor, as of the date hereof, has there been
any decision not to renew any provider agreement related to any Facility.
In the event that any such action shall have been taken or recommended
subsequent to the date hereof, or if any decision shall have been made not
to renew any such provider agreements, HCR hereby agrees to provide notice
to Manor Care of the same and to diligently and in good faith take prompt
corrective or remedial action to cure the same.
(ii) All Cost Reports required to be filed by HCR or any Subsidiary
with respect to the Facilities under the Medicare and Medicaid Programs, or
any other applicable governmental or private provider regulations have been
prepared and filed in all material respects in accordance with applicable
laws, rules and regulations and HCR has or has caused a Subsidiary to have
paid or made provision to pay through proper recordation of any net
liability any material overpayments received from the Medicare and Medicaid
Programs and any similar obligations with respect to other reimbursement
programs in which HCR and its Subsidiaries participate except where such
failure to file or make such payment would not have a Material Adverse
Effect on HCR. Section 4.2(m) of the HCR Disclosure Schedule sets forth for
each Facility the years for which Cost Reports remain to be settled.
(n) No Brokers or Finders. Except for Chase Securities Inc. ("Chase"),
neither HCR nor Merger Sub has engaged any investment banker, broker, or finder
in connection with the transactions contemplated hereby.
(o) Retirement and Benefit Plans.
(i) Each Pension Plan, Welfare Plan, and Benefit Plan that is
currently maintained by HCR or any of its ERISA Affiliates or to which HCR
or any of its ERISA Affiliates currently contributes or is under any
current obligation to contribute (collectively, the "HCR Employee Plans"
and individually, a "HCR Employee Plan"), is listed in the HCR Disclosure
Schedule. In addition, HCR has delivered or made available to Manor Care
copies of the most recent determination letter issued by the Internal
Revenue Service with respect to each such Pension Plan, copies of the most
recent actuarial report for each such Pension Plan, where applicable, and
copies of the annual report (Form 5500 Series) required to be filed with
any governmental agency with respect to each such Pension Plan and each
such Welfare Plan for the most recent plan year of such plan for which
reports have been filed.
(ii) Each of HCR and its ERISA Affiliates has made on a timely basis
all contributions or payments required to be made by it pursuant to the
terms of the HCR Employee Plans, ERISA, the Code, or other applicable laws,
unless such contributions or payments that have not been made are
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immaterial in amount and the failure to make such payments or contributions
will not materially and adversely affect the HCR Employee Plans. All
material amounts required to be reflected on the financial statements of
HCR and its ERISA Affiliates with respect to each HCR Employee Plan are
properly included in such financial statements and HCR and its ERISA
Affiliates have performed all material obligations required to be performed
by them under each HCR Employee Plan. None of the HCR Employee Plans is a
"multiemployer plan," as defined in Section 3(37) or Section 4001(a)(3) of
ERISA. No Pension Plan required to be listed on the HCR Disclosure Schedule
or to which any of its ERISA Affiliates, contributes or is obligated to
contribute and that is subject to Section 412 of the Code has incurred any
"accumulated funding deficiency" (as defined in that section), whether or
not material and whether or not subject to a waiver, as of the last day of
the most recent plan year of the plan. The funding method used in
connection with each HCR Employee Plan which is subject to the minimum
funding requirements of ERISA is acceptable and the actuarial assumptions
used in connection with funding each such plan are reasonable; as of the
last day of the last plan year of each such plan the "amount of unfunded
benefit liabilities" as defined in Section 4001(a)(18) of ERISA did not and
will not exceed zero.
(iii) Each HCR Employee Plan (and any related trust or other funding
instrument) is being administered in all material respects in compliance
with its terms and in both form and operation, is in compliance in all
material respects with the applicable provisions of ERISA, the Code, and
other applicable laws and regulations (other than adoption of any plan
amendments for which the deadline has not yet expired), and all material
reports required to be filed with any governmental agency with respect to
each Pension Plan and each Welfare Plan required to be listed on the HCR
Disclosure Schedule have been timely filed.
(iv) There is no material litigation, arbitration, or administrative
proceeding pending or, to the knowledge of HCR, threatened against HCR or
any of its ERISA Affiliates or, to the knowledge of HCR, any plan fiduciary
by the Internal Revenue Service, the U.S. Department of Labor, the Pension
Benefit Guaranty Corporation, or any participant or beneficiary with
respect to any HCR Employee Plan. Neither HCR nor any of its ERISA
Affiliates nor, to the knowledge of HCR, any plan fiduciary of any Pension
Plan or Welfare Plan required to be listed on the HCR Disclosure Schedule
has engaged in any transaction in violation of Section 406(a) or (b) of
ERISA for which no exemption exists under Section 408 of ERISA or any
"prohibited transaction" (as defined in Section 4975(c)(1) of the Code) for
which no exemption exists under Section 4975(c)(2) or 4975(d) of the Code,
or is subject to any excise tax imposed by the Code or ERISA with respect
to any HCR Employee Plan.
(v) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (a) result in any
material payment becoming due, or materially increase the amount of
compensation due, any current or former employee of HCR or any of its
Subsidiaries under any HCR Employee Plan, (b) materially increase any
benefits otherwise payable under any HCR Employee Plan or (c) result in the
acceleration of the time of payment or vesting of any such material
benefits.
(vi) For purposes of this Section 4.2(o), the term "ERISA Affiliate"
means (A) any trade or business with which HCR is under common control
within the meaning of Section 4001(b) of ERISA, (B) any corporation with
which HCR is a member of a controlled group of corporations within the
meaning of Section 414(b) of the Code, (C) any entity with which HCR is
under common control within the meaning of Section 414(c) of the Code, (D)
any entity with which HCR is a member of an affiliated service group within
the meaning of Section 414(m) of the Code, and (E) any entity with which
HCR is aggregated under Section 414(o) of the Code.
(p) Environmental Matters. Except as expressly disclosed in the HCR SEC
Reports filed prior to the date hereof and except for such matters that,
individually and in the aggregate are not reasonably likely to have a Material
Adverse Effect on HCR,
(i) No Hazardous Substances have been spilled, discharged, leaked,
emitted, injected, disposed of, released or threatened to be released on,
beneath, at, or into any real property currently or, during the
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period of such ownership or lease, formerly owned or leased by HCR or any
of its Subsidiaries. Also, to the knowledge of HCR, no Hazardous Substances
generated or transported by HCR or its Subsidiaries have been spilled,
discharged, leaked, emitted, injected, disposed of, released or threatened
to be released at any location.
(ii) No underground storage tanks or other underground storage
receptacles (a) located on any of the real property currently owned by HCR
or any of its Subsidiaries or (b) presently or formerly used by HCR on any
real property currently leased by HCR or any of its Subsidiaries, in either
case contain or previously contained any Hazardous Substances, except as in
compliance with Environmental Laws.
(iii) HCR has made available to Manor Care true and complete copies of
environmental assessments as requested by Manor Care prepared since January
1, 1991 in HCR's possession, custody or control relating to any of its (or
its Subsidiaries') currently owned or leased real property.
(iv) There are no consent decrees, consent orders, judgments, judicial
or administrative orders, agreements with (other than permits) or liens by,
any governmental or quasi-governmental entity relating to any Environmental
Law which regulate, obligate or bind HCR or its Subsidiaries.
(v) HCR has not received written notice of any existing or threatened
notices of violation, liens, claims, demands, suits, CERCLA sec.104
information requests, PRP Notices, or causes of action for any damage,
including, without limitation, personal injury, property damage (including,
without limitation, any depreciation or diminution of property values),
remediation or response costs, lost use of property or consequential
damages, arising out of an Environmental Law against HCR or its
Subsidiaries.
(vi) HCR and its Subsidiaries are and have been in the past five years
in compliance with all Environmental Laws.
(vii) As used in this Section 4.2(p), "Subsidiary" shall also include
any entity which previously was a Subsidiary of HCR.
(q) Insurance. All material fire and casualty, general liability, business
interruption and product liability insurance policies maintained by HCR or any
of its Subsidiaries are in character and amount at least equivalent to that
carried by persons engaged in similar businesses and subject to the same or
similar perils or hazards, except for any such failures to maintain insurance
policies that, individually or in the aggregate, are not reasonably likely to
have an Material Adverse Effect on HCR.
(r) Labor Matters. There are no pending claims against HCR or any of its
Subsidiaries under any workers compensation plan or policy or for long-term
disability that would have a Material Adverse Effect on HCR. Neither HCR nor any
of its Subsidiaries has any obligations under COBRA with respect to any former
employees or qualifying beneficiaries thereunder, except for obligations that
would not have a Material Adverse Effect on HCR. There are no proceedings or
claims pending or, to the knowledge of HCR threatened, between HCR or any of its
Subsidiaries and any of their respective employees, which proceedings or claims
would have a Material Adverse Effect on HCR. Except as described in the HCR SEC
Reports filed prior to the date hereof, neither HCR nor any of its Subsidiaries
is (or has in the past been) a party to any collective bargaining agreement or
other labor union contract, nor does HCR know of any activities or proceedings
of any labor union to organize any of its employees which would be reasonably
likely to have a Material Adverse Effect on HCR.
(s) Opinion of Financial Adviser. Chase has delivered to HCR a written
opinion dated as of the date hereof to the effect that the Exchange Ratio is
fair from a financial point of view to HCR as of the date hereof.
(t) Votes Required. The affirmative vote of the holders of a majority of
the shares of HCR Common Stock present and entitled to vote at a HCR
stockholders' meeting is the only vote of the holders of any class or series of
capital stock of HCR necessary to approve the HCR Stock Issuance and the HCR
Bylaw Amendment (provided, in the case of the HCR Stock Issuance, that the total
vote cast at that meeting on such proposal represents over 50% in interest of
all securities entitled to vote on the proposal) and approval of the HCR Stock
Issuance and the HCR Bylaw Amendment is the only vote of the holders of any
class or series of capital stock of HCR necessary for the consummation of the
Merger and the transactions contemplated hereby.
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(u) No Existing Discussions. As of the date hereof, HCR is not engaged,
directly or indirectly, in any discussions or negotiations with any other party
with respect to an Acquisition Proposal.
(v) Merger Sub. Merger Sub was formed solely for the purpose of effecting
the Merger and has not engaged in any business activities or conducted any
operations other than in connection with the Merger. Except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement, and except for this Agreement
and any other agreements or arrangements contemplated by this Agreement, Merger
Sub has not incurred, directly or indirectly, through any subsidiary or
affiliate, any obligations or liabilities or entered into any agreement or
arrangements with any person.
(w) Delaware State Takeover Statutes. The Board of Directors of HCR has
approved the terms of this Agreement and the Ancillary Agreements to which HCR
is a party and the consummation of the transactions contemplated by this
Agreement and by such Ancillary Agreements, and such approval is sufficient to
render inapplicable to the Merger and the other transactions contemplated by
this Agreement and by the Ancillary Agreements the restrictions of Section 203
of the DGCL. To HCR's knowledge, as to HCR and its affiliates, no other state
takeover statute or similar statute or regulation applies or purports to apply
to the Merger, this Agreement, the Ancillary Agreements or any of the
transactions contemplated by this Agreement or the Ancillary Agreements and no
provision of the Certificate of Incorporation, bylaws or other governing
instrument of HCR or any of its Subsidiaries would, directly or indirectly,
restrict or impair the ability of HCR or any of its Subsidiaries to consummate
the transactions contemplated by this Agreement or the Ancillary Agreements.
(x) HCR Rights Agreement. Under the terms of the HCR Rights Agreement, as
amended to the date hereof, neither the execution of this Agreement or the
Ancillary Agreements, nor the consummation of the transactions as contemplated
hereby will cause a "distribution date" to occur or cause the rights issued
pursuant to the HCR Rights Agreement to become exercisable. As of the date
hereof, the HCR Rights Agreement has been amended in the manner set forth on
Exhibit G hereto.
(y) Tax Treatment. Neither HCR nor, to HCR's knowledge, any of its
affiliates has taken or agreed to take any action that would prevent the Merger
from constituting a transaction qualifying as a reorganization under Section
368(a) of the Code.
(z) Board Recommendation. The Board of Directors of HCR has, by a unanimous
vote at a meeting of such Board duly held on ,
approved and adopted this Agreement, the Ancillary Agreements, the Merger and
the other transactions contemplated hereby, and determined that this Agreement,
the Ancillary Agreements, the Merger and the other transactions contemplated
hereby, taken together, are in the best interest of HCR and of the stockholders
of HCR, and prior to the date hereof has resolved to recommend that the holders
of HCR Common Stock approve the HCR Voting Proposal.
(aa) Ownership of Stock of Manor Care. Neither HCR, nor any of HCR's
affiliates, owns or has owned within the five-year period ending at the
Effective Time any capital stock of Manor Care.
(bb) Pooling of Interests. To the knowledge of HCR, after consultation with
its independent auditors, neither HCR nor any of its Subsidiaries, nor any of
their respective affiliates has taken any action or failed to take any action
that would prevent Manor Care from accounting for the Merger as a pooling of
interests. HCR has received a letter from Ernst & Young, dated as of June 10,
1998, advising it that, subject to the limitations set forth in its letter,
Ernst & Young concurs with management's conclusion that, as of the date of its
letter, no conditions exist that would preclude HCR's accounting for the Merger
as a pooling of interests.
ARTICLE V.
CONDUCT OF BUSINESS BEFORE THE EFFECTIVE TIME
5.1 Conduct of Manor Care. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Manor Care covenants and agrees that it will conduct its
business, cause the businesses of its Subsidiaries (other than the Public
Subsidiaries) and
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undertake its reasonable best efforts to cause the business of the Public
Subsidiaries (excluding Vitalink from and after consummation of the transactions
contemplated by the Vitalink Merger Agreement as in effect on the date hereof)
to be conducted, in the ordinary course, other than actions taken by Manor Care
and its Subsidiaries, as the case may be, as expressly contemplated or required
by this Agreement, and Manor Care shall use all reasonable best efforts to
preserve substantially intact its and its Subsidiaries' business organization,
to keep available all services of its present officers, employees and
consultants and to preserve its and its Subsidiaries' present relationships with
customers, suppliers and other persons with which it or any of its Subsidiaries
has significant business relations; provided, however, that this Section 5.1
shall not be violated by any action required or expressly contemplated by the
Vitalink Merger Agreement as in effect on the date hereof. By way of
amplification and not limitation, subject to the proviso contained in the
immediately preceding sentence, except as contemplated by this Agreement, Manor
Care and its Subsidiaries shall not, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of HCR:
(a) accelerate, amend, or change the period of exercisability of options or
restricted stock granted under any employee stock plan or authorize cash
payments in exchange for any options granted under any of those plans except as
required by the terms of those plans or any related agreements or other
agreements in effect as of the date of this Agreement;
(b) transfer or license to any person or entity or otherwise extend, amend,
or modify any rights to its Proprietary Rights, other than in the ordinary
course of business consistent with past practices;
(c) declare or pay any dividends on or make any other distributions
(whether in cash, stock, or property or any combination thereof) in respect of
any of its capital stock, except that Manor Care may pay regular quarterly cash
dividends on dates substantially consistent with the dates of the dividend
payments in 1997 at a rate not to exceed $.022 per share per quarter, or split,
combine, or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of, or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock and other than in connection with
the administration of its Employee Benefit Plans in the ordinary course of
business consistent with past practice and except that a wholly-owned subsidiary
of Manor Care may declare and pay a dividend to its parent;
(d) issue, deliver, or sell or authorize or propose the issuance, delivery,
or sale of, or purchase or propose the purchase of, any shares of its capital
stock or securities convertible into shares of its capital stock, or
subscriptions, rights, warrants, or options to acquire, or other agreements or
commitments of any character obligating it to issue, any such shares or other
convertible securities (other than the grant of options to employees in a manner
consistent with past practices and pursuant to currently existing stock option
plans, and the issuance of shares upon the exercise of options, or upon the
exercise of any Rights under the Manor Care Rights Agreement outstanding as of
the date hereof), or designate any class or series of capital stock from its
authorized but undesignated preferred stock;
(e) acquire by merging or consolidating with, or by purchasing a
substantial equity interest in or substantial portion of the assets of, or by
any other manner, any business or any corporation, partnership, association, or
other business organization or division or otherwise acquire or agree to acquire
any assets that are material, individually or in the aggregate, to the business
of such party and its Subsidiaries, taken as a whole;
(f) sell, lease, license, or otherwise dispose of any of its properties or
assets that are material, individually or in the aggregate, to the business of
such party and its Subsidiaries, taken as a whole, other than in the ordinary
course of business;
(g) (i) increase the compensation or benefits payable or to become payable
to its officers or employees, except for increases in compensation in the
ordinary course of business, (ii) enter into any employment or severance
agreements with any person, (iii) grant any severance or termination pay to,
except pursuant to agreements, or policies disclosed in the Disclosure Schedule
of such party, in effect as of the date of this
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Agreement, or enter into any employment or severance agreement with, any
employee, except severance agreements in accordance with the policies disclosed
in the Disclosure Schedule of such party, (iv) enter into any collective
bargaining agreement, (v) establish, adopt, enter into, modify, or amend any
bonus, profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination, severance,
or other plan, trust, fund, policy, or arrangement for the benefit of any
directors, officers, or employees except as may be required by law, or (vi)
establish any new executive employee position;
(h) (i) revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable, other than revaluations
that it or its Subsidiaries' auditors require in accordance with generally
accepted accounting principles or in the ordinary course of business or (ii)
change or modify in any material respect any existing accounting method,
principal, or practice other than as required by generally accepted accounting
principles;
(i) incur, except borrowings for working capital purposes or to fund
capital expenditures pursuant to existing credit agreements or borrowings to
make capital expenditures permitted by clause (k), any indebtedness for borrowed
money or guarantee or assume any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire any debt securities of the party or
any of its Subsidiaries or guarantee any debt securities of others, or
voluntarily prepay any outstanding indebtedness, provided that nothing herein
shall preclude intercompany indebtedness, guaranties, or assumptions;
(j) amend or propose to amend its charter documents or bylaws or similar
organizational documents;
(k) make any capital expenditure or commitment for which it is not
contractually bound as of the date hereof except expenditures and commitments
incurred in the ordinary course of business;
(l) enter into any new Manor Care Material Contract (other than in the
ordinary course of business), or modify in any respect materially adverse to
such party or any of its Subsidiaries any existing Material Contract which is
not terminable by Manor Care upon 30 days' or less notice without penalty or
payment; or
(m) maintain Manor Care's books and records in a manner other than in the
ordinary course of business consistent with past practice;
(n) take, or agree in writing or otherwise to take, any of the actions
described in subsections (a) through (l) above, or any action that is reasonably
likely to make any of its representations or warranties contained in this
Agreement untrue or incorrect such that the condition set forth in Section
7.2(a) shall not be satisfied.
5.2. Conduct of HCR. During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, HCR covenants and agrees that it will conduct its business, and
cause the businesses of its Subsidiaries to be conducted, in the ordinary
course, other than actions taken by HCR and its Subsidiaries as expressly
contemplated or required by this Agreement, and HCR shall use all reasonable
best efforts to preserve substantially intact its and its Subsidiaries' business
organization, to keep available all services of its present officers, employees
and consultants and to preserve its and its Subsidiaries' present relationships
with customers, suppliers and other persons with which it or any of its
Subsidiaries has significant business relations. By way of amplification and not
limitation, except as contemplated by this Agreement, HCR and its Subsidiaries
shall not, during the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
directly or indirectly do, or propose to do, any of the following without the
prior written consent of Manor Care:
(a) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its capital stock, except that a wholly owned Subsidiary of HCR may
declare and pay a dividend to its parent;
(b) take or agree in writing or otherwise to take any action described in
this Section 5.2 or any action that is reasonably likely to make any of the
representations or warranties of HCR contained in this Agreement untrue or
incorrect such that the condition set forth in Section 7.3(a) shall not be
satisfied;
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(c) amend or otherwise change the Certificate of Incorporation or By-laws
of HCR;
(d) issue, deliver, or sell or authorize or propose the issuance, delivery,
or sale of, or purchase or propose the purchase of, any shares of its capital
stock or securities convertible into shares of its capital stock, or
subscriptions, rights, warrants, or options to acquire, or other agreements or
commitments of any character obligating it to issue, any such shares or other
convertible securities (other than pursuant to issuance in connection with (i)
an acquisition or exchange offer permitted under Section 5.2(i), (ii) the grant
of options to employees in a manner consistent with past practices and pursuant
to currently existing stock option plans, and (iii) the issuance of shares upon
the exercise of options or upon the exercise of any Rights under the HCR Rights
Agreement outstanding as of the date hereof) or designate any class or series of
capital stock from its authorized but undesignated preferred stock;
(e) (i) revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable, other than revaluations
that it or its Subsidiaries' auditors require in accordance with generally
accepted accounting principles or in the ordinary course of business or (ii)
change or modify in any material respect any existing accounting method,
principal, or practice other than as required by GAAP;
(f) maintain HCR's books and records in a manner other than in the ordinary
course of business consistent with past practice;
(g) accelerate, amend, or change the period of exercisability of options or
restricted stock granted under any employee stock plan or authorize cash
payments in exchange for any options granted under any of those plans except as
required by the terms of those plans or any related agreements or other
agreements in effect as of the date of this Agreement;
(h) transfer or license to any person or entity or otherwise extend, amend,
or modify any rights to its Proprietary Rights, other than in the ordinary
course of business consistent with past practices;
(i) acquire by merging or consolidating with, or by purchasing a
substantial equity interest in or substantial portion of the assets of, or by
any other manner, any business or any corporation, partnership, association, or
other business organization or division or otherwise acquire or agree to acquire
any assets (an "Acquisition") that are material, individually or in the
aggregate, to the business of such party and its Subsidiaries, taken as a whole;
provided, however, that HCR may undertake any Acquisition in which the
consideration payable by HCR does not exceed $50 million so long as the
consideration payable by HCR in all such Acquisitions does not exceed $100
million after the date hereof;
(j) (i) increase the compensation or benefits payable or to become payable
to its officers or employees, except for increases in compensation in the
ordinary course of business, (ii) enter into any employment or severance
agreements with any person, (iii) grant any severance or termination pay to,
except pursuant to agreements, or policies disclosed in the Disclosure Schedule
of such party, in effect as of the date of this Agreement, or enter into any
employment or severance agreement with, any employee, except severance
agreements in accordance with the policies disclosed in the Disclosure Schedule
of such party, (iv) enter into any collective bargaining agreement, (v)
establish, adopt, enter into, modify, or amend any bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance, or other plan, trust,
fund, policy, or arrangement for the benefit of any directors, officers, or
employees except as may be required by law, or (vi) establish any new executive
employee position; provided, however, that not withstanding the foregoing, HCR
may take any action prohibited by this Section 5.2 with respect to the matters
which are the subject of this Section 5.2(j) so long as the aggregate cost
thereof to HCR after the date hereof does not exceed $40 million;
(k) incur, except borrowings for working capital purposes or to fund
capital expenditures pursuant to existing credit agreements or borrowings to
make capital expenditures permitted by Clause (l), any indebtedness for borrowed
money or guarantee or assume any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire any debt securities of the party or
any of its Subsidiaries or guarantee any debt securities of others, or
voluntarily prepay any outstanding indebtedness, provided that nothing herein
shall preclude intercompany indebtedness, guaranties, or assumptions; and
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(l) make any capital expenditure or commitment for which it is not
contractually bound as of the date hereof except expenditures and commitments
incurred in the ordinary course of business.
5.3 Cooperation. Subject to compliance with applicable law, from the date
hereof until the Effective Time, each of HCR and Manor Care shall confer on a
regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations and shall promptly provide the other party and its counsel with
copies of all filings made by the party with any Governmental Entity in
connection with this Agreement, the Merger, and the transactions contemplated
hereby.
ARTICLE VI.
ADDITIONAL COVENANTS
6.1. No Solicitation.
(a) Neither Manor Care nor HCR may, directly or indirectly, through any
officer, director, employee, representative, or agent thereof or of any of its
Subsidiaries, other than, with respect to Manor Care, as required or expressly
contemplated by the Vitalink Merger Agreement as in effect on the date hereof,
(i) seek, initiate, or solicit any inquiries, proposals, or offers from any
person or group to acquire (or which would result in the beneficial ownership
of) a majority of the shares of the capital stock (including by way of a tender
offer) of it or of its Significant Subsidiaries, to merge or consolidate with it
or any Significant Subsidiary or to otherwise acquire any significant portion of
the assets of it and/or its Significant Subsidiaries, taken as a whole, or
similar transaction involving Manor Care or any of its Significant Subsidiaries
or HCR or any of its Significant Subsidiaries, as the case may be, or, in the
case of Manor Care or its affiliates, seek to effect (1) the acquisition of any
shares of Manor Care Common Stock held by the Key Stockholders or (2) the
Restructuring Transactions (any of the foregoing restricted inquiries,
proposals, or offers being referred to as an "Acquisition Proposal"), except in
each case as required or expressly contemplated by the Vitalink Merger Agreement
as in effect on the date hereof (ii) engage in negotiations or discussions
concerning an Acquisition Proposal with any person or group or disclose or
provide any non-public information relating to the business of such party or any
Significant Subsidiary, or afford access to the properties, books, or records of
the party or any Significant Subsidiary, to any person or group that such party
has reason to believe may be considering an Acquisition Proposal, or (iii) agree
to, approve, or recommend any Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent Manor Care or HCR, or their
respective Board of Directors, from (A) furnishing non-public information or
access to, or entering into discussions or negotiations with, any person or
entity in connection with an unsolicited bona fide Acquisition Proposal by such
person or entity or recommending an unsolicited bona fide written Acquisition
Proposal to the stockholders, if and only to the extent that (1) a third party
has made a written proposal to the Board of Directors of Manor Care or HCR, as
applicable, to consummate an Acquisition Proposal, which proposal identifies a
price or range of values to be paid for the outstanding securities or
substantially all of the assets of Manor Care or HCR, as applicable, (2) the
Board of Directors of such party believes in good faith, after consultation with
its financial advisor, that such Acquisition Proposal is reasonably capable of
being completed on the terms proposed and would, if consummated, result in a
transaction more favorable to the stockholders of such party than the
transaction contemplated by this Agreement (a "Superior Proposal"), (3) the
Board of Directors of such party determines in good faith, following
consultation with outside legal counsel, that such action is required for such
Board of Directors to comply with its fiduciary duties to stockholders under
applicable law, and (4) prior to furnishing such non-public information to, or
entering into discussions or negotiations with, such person or entity, the Board
of Directors receives from such person or entity an executed confidentiality
agreement on terms no less favorable to Manor Care or HCR, as the case may be,
than those contained in the respective Confidentiality Agreements discussed in
Section 6.14 hereof, or (B) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal. "Significant Subsidiary"
means any Subsidiary that would be a "significant subsidiary" as defined in
Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities
Act of 1993, as such Regulation is in effect on the date hereof. Each of Manor
Care and HCR shall immediately cease and cause to be terminated any existing
activities, discussions,
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or negotiations with any party conducted heretofore with respect to any
Acquisition Proposal. Each of Manor Care and HCR agrees not to release any third
party from, or waive any provision of, any standstill agreement to which it is a
party or any confidentiality agreement between it and another person who has
made, or who may reasonably be considered likely to make, an Acquisition
Proposal, unless the Board of Directors of Manor Care or HCR, as applicable,
determines in good faith, following consultation with outside legal counsel,
that such action is required for such Board of Directors to comply with its
fiduciary duties to stockholders under applicable law.
(b) Each of Manor Care or HCR shall immediately notify the other upon
receipt by it or its advisers of any Acquisition Proposal or any request for
non-public information in connection with an Acquisition Proposal or for access
to the properties, books, or records thereof by any person or entity that
informs Manor Care or HCR, as the case may be, that it is considering making, or
has made, an Acquisition Proposal. Such notice shall be made orally and in
writing and shall indicate the identity of the offeror and in reasonable detail
the terms and conditions of such proposal, inquiry or contact. The notifying
party shall continue to keep the other party hereto informed, on a current
basis, of the status of any such discussions or negotiations and the terms being
discussed or negotiated. Notwithstanding the foregoing, neither Manor Care nor
HCR shall accept or enter into any agreement concerning a Superior Proposal for
a period of at least five business days after the other party's receipt of the
notification of the terms thereof pursuant to the second preceding sentence (and
only in compliance with the terms of Article IX hereof), during which period the
other party shall be afforded the opportunity to match the terms and conditions
contained in such Superior Proposal.
6.2. Joint Proxy Statement; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement, HCR
and Manor Care shall prepare and file with the SEC a joint proxy
statement/prospectus (the "Joint Proxy Statement") to be sent to the
stockholders of HCR and Manor Care in connection with the meeting of HCR's
stockholders (the "HCR Stockholders' Meeting") and of Manor Care's stockholders
(the "Manor Care Stockholders' Meeting") to consider the Merger Agreement and
the issuance of HCR Common Stock in connection therewith, and HCR shall prepare
and file with the SEC a registration statement on Form S-4 pursuant to which the
shares of HCR Common Stock to be issued in connection with the Merger will be
registered under the Securities Act (the "Registration Statement"), in which the
Joint Proxy Statement will be included as a prospectus. HCR may delay the filing
of the Registration Statement until after the Joint Proxy Statement has been
declared effective. HCR and Manor Care shall use all reasonable best efforts to
cause the Registration Statement to become effective as soon after filing as
practicable. HCR, Merger Sub and Manor Care shall cooperate with each other in
the preparation of the Joint Proxy Statement, and HCR shall notify Manor Care of
the receipt of any comments of the SEC with respect to the Joint Proxy Statement
and of any requests by the SEC of any amendment or supplement thereto or for
additional information and shall provide to Manor Care promptly copies of all
correspondence between HCR or any representative of HCR and the SEC. HCR shall
give Manor Care and its counsel the opportunity to review the Joint Proxy
Statement prior to its being filed with the SEC and shall give Manor Care and
its counsel the opportunity to review all amendments and supplements to the
Joint Proxy Statement and all responses to requests for additional information
and replies to comments prior to their being filed with, or sent to, the SEC.
Each of HCR, Manor Care and Merger Sub agrees to use all reasonable best
efforts, after consultation with the other parties hereto, to respond promptly
to all such comments of and requests by the SEC and to cause the Joint Proxy
Statement and all required amendments and supplements thereto to be mailed to
the holders of shares of HCR Common Stock and Manor Care Common Stock entitled
to vote at the special meetings at the earliest practicable time. The Joint
Proxy Statement shall include the recommendation of the Board of Directors of
Manor Care in favor of this Agreement and the Merger and the recommendation of
the Board of Directors of HCR in favor of the HCR Voting Proposal, provided that
the Board of Directors of either Manor Care or HCR may withdraw such
recommendation if it determines in good faith, after consultation with its
outside legal counsel, that the withdrawal of such recommendation is necessary
for such Board of Directors to comply with its fiduciary duties to stockholders
under applicable law. HCR and Manor Care shall make all other necessary filings
with respect to the Merger under the Securities Act and the Exchange Act and the
rules and regulations thereunder.
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(b) Manor Care shall take all action necessary to cause the representation
set forth in Section 4.1(f) to be true and correct at all applicable times with
respect to each of the Joint Proxy Statement and the Registration Statement.
(c) HCR shall take all action necessary to cause the representation set
forth in Section 4.2(f) to be true and correct at all applicable times with
respect to each of the Joint Proxy Statement and the Registration Statement.
(d) As soon as reasonably practicable, Manor Care and HCR shall take all
such actions as may be necessary to comply with state "blue sky" or securities
laws in connection with the transactions contemplated by this Agreement.
6.3. Access to Information. Upon reasonable notice and to the extent
permitted under applicable law and the provisions of agreements to which HCR or
Manor Care, as the case may be, is a party, including, without limitation, the
agreements relating to the Vitalink Transaction, Manor Care and HCR shall each
(and shall cause their respective Subsidiaries to) afford to the officers,
employees, accountants, counsel, and other representatives of the other,
reasonable access, during normal business hours during the period before the
Effective Time, to all its properties, books, contracts, commitments, and
records and will cause its, and its Subsidiaries', employees, counsel, financial
advisers, and auditors to cooperate with the other party and its officers,
employees, and representatives in its investigation of the business of such
party and its Subsidiaries and, during such period, each of Manor Care and HCR
shall (and shall cause their respective Subsidiaries to) furnish promptly to the
other (a) a copy of each report, schedule, registration statement, and other
document filed or received by it during such period pursuant to the requirements
of federal securities laws and (b) all other information concerning its
business, properties, and personnel as such other party or its representatives
may reasonably request. Such investigations shall be conducted in a manner as
not to unreasonably interfere with the operations of the other party and its
Subsidiaries and will take all necessary precautions (including obtaining the
written agreement of its respective employees or representatives involved in
such investigation) to protect the confidentiality of any information of the
other party and its Subsidiaries disclosed to such persons during such
investigation. No information or knowledge obtained in any investigation
pursuant to this Section 6.3 shall be deemed to modify a representation or
warranty contained in this Agreement or the conditions to the obligations of the
parties to consummate the Merger.
6.4. Stockholders' Meetings.
(a) Manor Care and HCR each shall call a special meeting of its respective
stockholders to be held as promptly as practicable for the purpose of voting, in
the case of Manor Care, upon adoption and approval of this Agreement, the Merger
and the other transactions contemplated hereby (the "Manor Care Voting
Proposal") and, in the case of HCR, upon the issuance of shares of HCR Common
Stock in the Merger (the "HCR Stock Issuance") and the approval of the bylaw
amendment described in the parenthetical of Section 6.18(d) which will, among
other things, require a supermajority vote of stockholders or directors to amend
certain of HCR's bylaw's corporate governance provisions after the Effective
Time (the "HCR Bylaw Amendment" and, together with the HCR Stock Issuance, the
"HCR Voting Proposal"). Subject to Section 6.2(a), Manor Care and HCR will,
through their respective Boards of Directors, recommend to their respective
stockholders approval of such matters and will coordinate and cooperate with
respect to the timing of the meetings and shall use reasonable best efforts to
hold the meetings on the same day and as soon as practicable after the date
hereof. Each party shall use reasonable best efforts to solicit from its
stockholders proxies in favor of such matters as long as the recommendation of
its Board of Directors remains in effect.
(b) To the extent not prohibited by Section 5.1 or 5.2, each of Manor Care
and HCR may also submit additional proposals to such party's stockholders at
such party's stockholder's meeting separate from the proposal referred to in
Section 6.4(a). The approval by HCR's stockholders or Manor Care's stockholders
of such additional proposals shall not be a condition to the closing of the
Merger under this Agreement.
6.5. Legal Conditions to Merger. (a) Each of HCR and Manor Care will
undertake its reasonable best efforts to comply promptly with all legal
requirements that may be imposed on it with respect to the Merger (including
furnishing all information required under the HSR Act and in connection with
approvals of or
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filings with any other Governmental Entity) and will promptly cooperate with and
furnish information to each other in connection with any such requirements
imposed upon either of them or any of their Subsidiaries in connection with the
Merger. Each of HCR and Manor Care will, and will cause its Subsidiaries to,
undertake its reasonable best efforts to obtain (and will cooperate with each
other in obtaining) any consent, authorization, order, or approval of, or any
exemption by, any Governmental Entity or other public third party, required to
be obtained or made by HCR, Manor Care, or any of their Subsidiaries in
connection with the Merger or the taking of any action contemplated thereby or
by this Agreement. Notwithstanding anything to the contrary in this Section 6.5,
neither Manor Care nor HCR nor any of their respective Subsidiaries shall be
required to sell, otherwise dispose of or hold separate (through the
establishment of a trust or otherwise) assets or Subsidiaries of Manor Care or
HCR or of any of their Subsidiaries having a fair market value of more than $150
million or to take any action that would reasonably be expected to substantially
impair the overall benefits expected, as of the date hereof, to be realized from
the consummation of the Merger.
(b) HCR and Manor Care shall promptly advise each other upon receiving any
communication from any Governmental Entity whose consent or approval is required
for consummation of the transactions contemplated by this Agreement which causes
such party to believe that there is a reasonable likelihood that any approval
needed from a Governmental Entity will not be obtained or that the receipt of
any such approval will be materially delayed.
6.6. Tax-Free Reorganization. HCR and Manor Care shall each use reasonable
best efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code.
6.7. Pooling Accounting. HCR and Manor Care shall each use reasonable best
efforts to cause the Merger to be accounted for as a pooling of interests. Each
of HCR and Manor Care shall use reasonable best efforts to cause its respective
affiliates not to take any action that would adversely affect the ability of HCR
to account for the Merger as a pooling of interests.
6.8. Affiliate Agreements.
(a) Manor Care shall, within five business days of the date hereof, deliver
to HCR a list (reasonably satisfactory to counsel for HCR), setting forth the
names of all persons who are expected to be, at the time of the Manor Care
Stockholders' Meeting, in Manor Care's reasonable judgment, "affiliates" of
Manor Care for purposes of Rule 145 under the Securities Act or under applicable
SEC accounting releases with respect to pooling-of-interests accounting
treatment. Manor Care shall furnish such information and documents as HCR may
reasonably request for the purpose of reviewing the list. Manor Care shall use
reasonable best efforts to cause each person who is identified as an affiliate
in the list furnished pursuant to this Section 6.8(a) to execute a written
agreement, as soon as practicable after the date hereof, in substantially the
form of Exhibit C hereto (each a "Manor Care Affiliate Agreement").
(b) HCR shall, within five business days of the date hereof, deliver to
Manor Care a list (reasonably satisfactory to counsel for Manor Care) setting
forth the names of all persons who are expected to be, at the time of the HCR
Stockholders' Meeting, in HCR's reasonable judgment, affiliates of HCR under
applicable SEC accounting releases with respect to pooling-of-interests
accounting treatment. HCR shall furnish such information and documents as Manor
Care may reasonably request for the purpose of reviewing the list. HCR shall use
reasonable best efforts to cause each person who is identified as an affiliate
in the list furnished pursuant to this Section 6.8(b) to execute a written
agreement as soon as practicable after the date hereof in substantially the form
of Exhibit D hereto (each, an "HCR Affiliate Agreement").
6.9. NYSE Listing. HCR shall cause the shares of HCR Common Stock to be
issued in connection with the Merger to be approved for listing on the NYSE,
subject to official notice of issuance, before the Closing Date.
6.10. Restricted Stock Plans. At the Effective Time, each outstanding Manor
Care Award, whether vested or unvested, shall be assumed by HCR, except that
each Manor Care Award shall apply to that number of whole shares of HCR Common
Stock equal to the product of the number of shares of Manor Care Common Stock
that were subject to such award immediately prior to the Effective Time
multiplied by the Exchange Ratio and rounded to the next highest whole number of
shares of HCR Common Stock.
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6.11. Consents; Other Approvals.
(a) Subject to the terms and conditions of this Agreement, each of HCR and
Manor Care shall use their reasonable best efforts to obtain all necessary
consents, waivers, and approvals under any of HCR's or Manor Care's material
agreements, contracts, licenses, or leases in connection with the Merger.
(b) Manor Care shall undertake its reasonable best efforts to cause IHH to
provide the approvals required under Section 7.2(f) including, without
limitation, by removal and replacement of directors, taking actions as
shareholders by consent or vote and causing the filing of all filings and other
materials with the SEC requisite or useful to the foregoing.
6.12. Reports. From and after the Effective Time and so long as necessary
in order to permit Manor Care's affiliates to sell the shares of HCR Common
Stock received by them as a result of the Merger pursuant to Rule 145 and, to
the extent applicable, Rule 144 under the Securities Act, HCR will use its
reasonable best efforts to file on a timely basis all reports required to be
filed by it pursuant to Section 13 or 15(d) of the Exchange Act, referred to in
paragraph (c)(1) of Rule 144 under the Securities Act.
6.13. Additional Agreements; Reasonable Best Efforts. Subject to the terms
and conditions of this Agreement, including Section 6.2(a), each of the parties
agrees to use its reasonable best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper, or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, subject to the vote of
stockholders of HCR and Manor Care described in Section 6.4. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement or to vest the Surviving Corporation with
full title to all properties, assets, rights, approvals, immunities, and
franchises of either of Manor Care and Merger Sub, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
6.14. Confidentiality Agreement. The Confidentiality Agreements between
Manor Care and HCR dated May 12, 1998 shall remain in full force and effect
until the later of the Effective Time or such date specified in the
Confidentiality Agreement. Until the Effective Time, Manor Care and HCR shall
comply with the terms of such Confidentiality Agreements.
6.15. Stock Option Agreements. Each of Manor Care and HCR agrees to grant
the option described in the Stock Option Agreements immediately upon execution
of this Agreement and to fully perform its obligations under the Stock Option
Agreements.
6.16. Stockholder Litigation. Manor Care shall give HCR the reasonable
opportunity to participate in the defense of any stockholder litigation against
Manor Care or its directors relating to the transactions contemplated hereby or
the Vitalink Transaction.
6.17. Pooling Letters. (a) HCR shall use reasonable best efforts to cause
to be delivered to HCR and Manor Care a letter of Ernst & Young LLP, dated as of
a date within two business days before the date of the Joint Proxy Statement
shall be mailed, regarding its concurrence with HCR management's and Manor Care
management's conclusions, respectively, as to the appropriateness of
pooling-of-interests accounting for the Merger under Accounting Principles Board
Opinion No. 16 if closed and consummated in accordance with this Agreement.
(b) Manor Care shall use reasonable best efforts to cause to be delivered
to HCR and Manor Care a letter of Arthur Andersen LLP, dated as of a date within
two business days before the date of the Joint Proxy Statement shall be mailed,
regarding its concurrence with HCR management's and Manor Care management's
conclusions, respectively, as to the appropriateness of pooling-of-interests
accounting for the Merger under Accounting Principles Board Opinion No. 16 if
closed and consummated in accordance with this Agreement.
(c) Manor Care and HCR shall each provide reasonable cooperation to Arthur
Andersen LLP and Ernst & Young LLP to enable them to issue such letters.
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6.18. Post-Merger HCR Corporate Governance
(a) At the Effective Time, the total number of persons serving on the Board
of Directors of HCR shall be ten (unless otherwise agreed in writing by Manor
Care and HCR prior to the Effective Time), half of whom shall be Manor Care
Directors and half of whom shall be HCR Directors (as such terms are defined
below). The persons to serve initially on the Board of Directors of HCR
effective at the Effective Time who are Manor Care Directors (and the classes to
which they will be appointed) shall be Stewart Bainum, Jr. (Class I); William H.
Longfield (Class I); Stewart Bainum (Class II); Gail R. Wilensky (Class II);
Kennett L. Simmons (Class III). The persons to serve initially on the Board of
Directors of HCR effective at the Effective Time who are HCR Directors (and the
classes in which they will remain) shall be Paul A. Ormond (Class I); Joseph H.
Lemieux (Class II); Thomas L. Young (Class III); Robert G. Siefers (Class III);
M. Keith Weikel (Class III). The initial Board of Directors of HCR at the
Effective Time shall include no more than two Manor Care Directors and no more
than two HCR Directors who, prior to the Effective Time, were employees of Manor
Care or HCR, respectively. In the event that, prior to the Effective Time, any
person so selected to serve on the Board of Directors of HCR effective at and
immediately after the Effective Time is unable or unwilling to serve in such
position, the Board of Directors which selected such person shall designate
another person to serve in such person's stead in accordance with the provisions
of the immediately preceding sentence. From and after the Effective Time until
and including the second annual meeting of stockholders of HCR held after the
Effective Time (the "Second Meeting"), (i) the size of the Board of Directors of
HCR shall not be increased or decreased unless such increase or decrease is
approved by not less than 75% of the members thereof and (ii)(A) if any vacancy
occurs as the result of the death, resignation or removal of a Manor Care
Director or an HCR Director or (B) if any seat held by a Manor Care Director or
HCR Director is subject to nomination for election of a director, then, in the
case of either (A) or (B), subject to the fiduciary duties of the Directors of
HCR, the Board of Directors shall promptly take all necessary actions and
appoint or nominate, as the case may be, such person or persons as may be,
requested by the remaining Manor Care Directors (in the case of a vacancy or
nomination concerning a Manor Care Director) or by the remaining HCR Directors
(in the case of a vacancy or nomination concerning an HCR Director). The term
"Manor Care Director" means (i) any person who becomes a Director of HCR at the
Effective Time pursuant to the second or fifth sentences of this Section 6.18(a)
and (ii) any person who becomes a Director of HCR pursuant to the preceding
sentence and who is designated by the Manor Care Directors; and the term "HCR
Director" means (i) any person who continues or becomes a Director of HCR at the
Effective Time pursuant to the third or fifth sentences of this Section 6.18(a)
and (ii) any person who becomes a Director of HCR pursuant to the preceding
sentence and who is designated by the HCR Directors.
(b) Immediately following the Effective Time, the current Chief Executive
Officer of HCR shall continue as President and Chief Executive Officer of HCR
and the current President and Chief Executive Officer of Manor Care shall be
Chairman of the Board of HCR.
(c) From and after the Effective Time until and including the Second
Meeting, the Board of Directors of HCR shall, subject to their fiduciary duties,
promptly take all necessary action to increase the size of each existing
committee to four members and take such action to assure that such committee and
any other committee of the Board of Directors is comprised one-half of HCR
Directors and one-half of Manor Care Directors.
(d) Each of Manor Care and HCR shall take such action as shall reasonably
be deemed by either thereof to be advisable to give effect to the provisions set
forth in this Section 6.18, including without limitation incorporating such
provisions in the Bylaws of HCR to be effective at the Effective Time (which
Bylaws will provide that, during the period set forth above, (i) the Board of
Directors of HCR may not amend such provisions without the approval of not less
than 75% of the members of the Board of Directors of HCR and (ii) the
stockholders of HCR may not amend such Bylaws without the approval of HCR
stockholders owning not less than 80% of the outstanding shares of HCR).
6.19. Name Change. Immediately following the Effective Time, a newly
established, wholly owned subsidiary of HCR shall merge into HCR with HCR
surviving, and HCR shall change its name to HCR Manor Care, Inc. pursuant to
Section 253(b) of the DGCL. On the one-year anniversary of the Effective Time,
unless after the
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Effective Time the HCR Board of Directors resolves otherwise, HCR shall
change its name to Manor Care, Inc. pursuant to Section 253(b) of the DGCL or,
if such section or a successor section is not available for this purpose, as
then otherwise permitted under applicable law.
ARTICLE VII.
CONDITIONS PRECEDENT
7.1. Conditions to Each Party's Obligation To Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction before the Closing Date of the following conditions, any of
which may be waived, to the extent legally allowed, in writing, by mutual
consent of Manor Care and HCR:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of Manor Care as
may be required by law, by the rules of the New York Stock Exchange, and by any
applicable provisions of its Certificate of Incorporation or Bylaws, and the HCR
Voting Proposal shall have been approved by the requisite vote of the
stockholders of HCR as may be required by law, by the rules of the New York
Stock Exchange, and by any applicable provisions of its Certificate of
Incorporation or Bylaws.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) Approvals. There shall have been obtained permits, consents, and
approvals of securities or "blue sky" commissions or agencies of any
jurisdiction and of other governmental bodies or agencies that may reasonably be
deemed necessary so that the consummation of the Merger and the other
transactions contemplated hereby will be in compliance with applicable laws
except where the failure to obtain such permits, consents and approvals would
not be reasonably expected to have a Material Adverse Effect on Manor Care or
HCR.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order. The Joint Proxy Statement shall have
been delivered to the stockholders of Manor Care and HCR in accordance with the
requirements of the Securities Act and the Exchange Act.
(e) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction, or other order issued by any court
of competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger or materially limiting or restricting
HCR's conduct or operation of the business of HCR or Manor Care after the Merger
shall have been issued, nor shall any proceeding brought by a Governmental
Entity seeking any of the foregoing be pending which if adversely determined
would be reasonably likely to have a Material Adverse Effect on HCR or Manor
Care; nor shall there be any action taken, or any statute, rule, regulation, or
order enacted, entered, enforced, or deemed applicable to the Merger which makes
the consummation of the Merger illegal.
(f) Pooling Letters. Manor Care and HCR shall have received letters from
Arthur Andersen LLP and Ernst & Young LLP, respectively, addressed to Manor Care
and HCR, respectively, regarding their concurrence with the respective
conclusions of management of Manor Care and HCR, as to the appropriateness of
the pooling of interest accounting, under Accounting Principles and Board
Opinion No. 16 for the Merger, if closed and consummated in accordance with this
Agreement.
(g) Tax Opinions. HCR shall have received the opinion of Latham & Watkins
and Manor Care shall have received the opinion of Cahill Gordon & Reindel, which
opinions shall be dated on or about the date the Joint Proxy Statement is first
mailed to the stockholders of Manor Care and HCR and which shall be updated as
of the Closing Date, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code and that none of HCR, Merger Sub, Manor Care or Manor Care stockholders
shall recognize gain or loss for federal income tax purposes as a result of the
Merger (other than with respect to any cash received in lieu of fractional
shares of HCR Common Stock),
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and substantially in the forms attached to HCR's and Manor Care's respective
Disclosure Schedules. In rendering such opinions, Latham & Watkins and Cahill
Gordon & Reindel may rely upon representation letters of HCR and Manor Care
substantially in the forms attached to HCR's and Manor Care's respective
Disclosure Schedules.
(h) NYSE. The shares of HCR Common Stock to be issued in the Merger shall
have been approved for listing on the NYSE.
7.2. Additional Conditions to Obligations of HCR and Merger Sub. The
obligations of HCR and Merger Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing by HCR and Merger Sub:
(a) Representations and Warranties. The representations and warranties of
Manor Care contained in Section 4.1 of this Agreement (i) shall be true and
correct in all respects as of the date of this Agreement and (ii) shall be true
and correct immediately before the Effective Time, with the same force and
effect as if made on and as of the Effective Time, except to the extent any
inaccuracies in any such representations or warranties, individually or in the
aggregate, do not materially impair the ability of Manor Care to consummate the
transactions contemplated hereby and would not have a Material Adverse Effect on
Manor Care (provided that, solely for purposes of clause (ii) of this Section
7.2(a), any representation or warranty in Section 4.1 that is qualified by
Material Adverse Effect language shall be read as if such language were not
present), and except that the accuracy of representations and warranties that by
their terms speak as of the date of this Agreement or some other date will be
determined as of such date; HCR shall have received a certificate signed on
behalf of Manor Care by the chief executive officer and chief financial officer
of Manor Care to that effect.
(b) Performance of Obligations of Manor Care. Manor Care shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or before the Closing Date, and HCR shall have
received a certificate signed on behalf of Manor Care by the chief executive
officer and the chief financial officer of Manor Care to that effect.
(c) No Material Adverse Change. Since the date of this Agreement, there
shall not have occurred or arisen any event, circumstance or condition in the
business, operations, results of operations, properties, or financial condition
of Manor Care and its Subsidiaries, taken as a whole except for (a) such changes
that, individually or in the aggregate, would not have a Material Adverse Effect
on Manor Care or (b) any Anticipated Change.
(d) Consents. Manor Care shall have obtained all necessary consents,
waivers, and approvals required under any of its material agreements, contracts,
and licenses, except those consents the failure of which to obtain would not
have a Material Adverse Effect on Manor Care or materially impair the ability of
Manor Care to consummate the Merger.
(e) Manor Care Rights Agreement. No Manor Care Rights shall have become
exercisable under the Manor Care Rights Agreement.
(f) IHH Matters. The Board of Directors of IHH shall have been presented
this Agreement and the Ancillary Agreements and provided such approvals as are
sufficient to render inapplicable, with respect to IHH, the Merger and the other
transactions contemplated by this Agreement and by the Ancillary Agreements the
restrictions of Section 302A.673 of the Minnesota Business Corporation Act (the
"MBCA"). The articles or bylaws of IHH shall have been amended to render Section
302A.671 of the MBCA inapplicable to the Merger and the other transactions
contemplated by this Agreement and by the Ancillary Agreements.
7.3 Additional Conditions to Obligations of Manor Care. The obligation of
Manor Care to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing by Manor Care:
(a) Representations and Warranties. The representations and warranties of
HCR and Merger Sub contained in Section 4.2 of this Agreement (i) shall be true
and correct in all respects as of the date of this
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Agreement and (ii) shall be true and correct immediately before the Effective
Time, with the same force and effect as if made on and as of the Effective Time,
except to the extent any inaccuracies in any such representations or warranties,
individually or in the aggregate, do not materially impair the ability of HCR or
Merger Sub to consummate the transactions contemplated hereby and would not have
a Material Adverse Effect on HCR (provided that, solely for purposes of clause
(ii) of this Section 7.3(a), any representation or warranty in Section 4.2 that
is qualified by Material Adverse Effect language shall be read as if such
language were not present), and except that the accuracy of representations and
warranties that by their terms speak as of the date of this Agreement or some
other date will be determined as of such date; Manor Care shall have received a
certificate signed on behalf of HCR and Merger Sub by the chief executive
officer and chief financial officer of each of HCR and Merger Sub to that
effect.
(b) Performance of Obligations of HCR and Merger Sub. HCR and Merger Sub
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or before the Closing Date, and Manor
Care shall have received a certificate signed on behalf of HCR by the chief
executive officer and the chief financial officer of HCR to that effect.
(c) No Material Adverse Change. Since the date of this Agreement, there
shall not have occurred or arisen any event, circumstance or condition in the
business, operations, results of operations, properties, or financial condition
of HCR and its Subsidiaries, taken as a whole except for (a) such changes that,
individually or in the aggregate, would not have a Material Adverse Effect on
HCR or (b) any Anticipated Change.
(d) Consents. HCR shall have obtained all necessary consents, waivers, and
approvals required under any of its material agreements, contracts, and
licenses, except those consents the failure of which to obtain would not have a
Material Adverse Effect on HCR or materially impair the ability of HCR to
consummate the Merger.
(e) HCR Rights Agreement. No HCR Rights shall have become exercisable under
the HCR Rights Agreement.
ARTICLE VIII.
CONDUCT AND TRANSACTIONS AFTER THE EFFECTIVE TIME
8.1. Employee Matters
(a) HCR shall or shall cause the Surviving Corporation to maintain in
effect, for a period of one (1) year after the Effective Time, employee benefit
plans and arrangements which, with respect to the employees of Manor Care and
its Subsidiaries (for so long as they are Subsidiaries) as a whole, provide
benefits which are of substantially comparable value, in the aggregate, to the
benefits provided by the Manor Care Employee Plans (not taking into account any
benefits under any such plans which are equity based).
(b) For purposes of determining eligibility to participate and vesting, but
not accrual or entitlement to benefits other than severance benefit accrual
where length of service is relevant under any employee benefit plan or
arrangement of HCR or the Surviving Corporation, employees of Manor Care and its
Subsidiaries (for so long as they are Subsidiaries) as of the Effective Time
shall receive service credit for service with Manor Care and any of its
Subsidiaries (for so long as they are Subsidiaries) to the same extent that such
service was recognized under the Manor Care Employee Plans and shall waive any
pre-existing condition exclusions and actively-at-work requirements and provide
that any expenses incurred on or before the Effective Time by an employee of
Manor Care or its Subsidiaries (for so long as they are Subsidiaries) or such
employee's covered dependents shall be taken into account for purposes of
satisfying applicable deductible, coinsurance and maximum out-of-pocket
provisions.
(c) From and after the Effective Time, HCR shall cause Manor Care to abide
by the terms of the employment and severance agreements, arrangements and
policies in effect at the Effective Time.
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(d) This Section 8.1 is not intended to be for the benefit of and shall not
be enforceable by any employee or former employee of Manor Care or any of its
Subsidiaries or any dependent, beneficiary or collective bargaining
representative of any such employee or former employee.
8.2. Indemnification. All rights to indemnification, expense advancement,
and exculpation existing in favor of any present or former director, officer, or
employee of Manor Care or any of its Subsidiaries as provided in the Certificate
of Incorporation, Bylaws, or similar organizational documents of Manor Care or
any of its Subsidiaries or by law as in effect on the date hereof shall survive
the Merger with respect to matters occurring at or prior to the Effective Time,
and no action taken during such period shall be deemed to diminish the
obligations set forth in this Section 8.2. HCR hereby guarantees, effective at
the Effective Time, all obligations of the Surviving Corporation and the
Subsidiaries in respect of such indemnification and expense advancement.
8.3. Directors and Officers Liability Insurance. For a period of at least
six years after the Effective Time, HCR shall cause the Surviving Corporation to
maintain in effect either (i) the current policy of directors' and officers'
liability insurance maintained by Manor Care (provided that HCR or the Surviving
Corporation may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are no less advantageous in any
material respect to the insured parties thereunder) with respect to claims
arising from facts or events that occurred at or before the Effective Time
(including consummation of the transactions contemplated by this Agreement), or
(ii) a run-off (that is, "tail") policy or endorsement with respect to the
current policy of directors' and officers' liability insurance covering claims
asserted within four years after the Effective Time arising from facts or events
that occurred at or before the Effective Time (including consummation of the
transactions contemplated by this Agreement); provided, however, in no event
shall HCR or the Surviving Corporation be required to pay annual premiums in
excess of 200% of the annual premium currently paid by Manor Care; and if such
premium would at any time exceed 200% of such amount, HCR or the Surviving
Corporation may maintain policies that provide the best coverage available for
200% of such amount, and such policies or endorsements shall name as insureds
thereunder all present and former directors and officers of Manor Care or any of
its Subsidiaries.
ARTICLE IX.
TERMINATION
9.1. Termination. This Agreement may be terminated at any time prior to the
Effective Time (with respect to Sections 9.1(b) through 9.1(h), by written
notice by the terminating party to the other party), whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of HCR or Manor Care:
(a) by mutual written consent of Manor Care and HCR; or
(b) by either Manor Care or HCR if the Merger shall not have been
consummated by December 31, 1998; provided, however, such date shall be extended
to March 31, 1999 in the event all conditions to effect the Merger other than
those set forth in 7.1(c) or (e) have been or are capable of being satisfied at
such time and the conditions set forth in Section 7.1(c) and (e) have been or
are reasonably capable of being satisfied on or prior to March 31, 1999
(December 31, 1998, as it may be so extended, shall be referred to herein as the
"Outside Date"), provided that the right to terminate this Agreement under this
Section 9.1(b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the failure
of the Merger to occur on or before such date; or
(c) by either Manor Care or HCR if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order, decree
or ruling or taken any other nonappealable final action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; or
(d) by Manor Care, if, at the HCR Stockholders' Meeting (including any
adjournment or postponement thereof), the requisite vote of the stockholders of
HCR in favor of the HCR Voting Proposal shall not have been obtained; or by HCR
if, at the Manor Care Stockholders' Meeting (including any adjournment or
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postponement thereof), the requisite vote of the stockholders of Manor Care in
favor of the Manor Care Voting Proposal shall not have been obtained; or
(e) by Manor Care, if (i) the Board of Directors of HCR shall have
withdrawn or modified its recommendation of the HCR Voting Proposal; (ii) after
the receipt by HCR of a proposal concerning an Alternative Transaction, Manor
Care requests in writing that the Board of Directors of HCR reconfirm its
recommendation of the HCR Voting Proposal and the Board of Directors of HCR
fails to do so within 10 business days after its receipt of Manor Care's
request; (iii) the Board of Directors of HCR shall have recommended to the
stockholders of HCR an Alternative Transaction; (iv) a tender offer or exchange
offer that, if successful, would result in any person or "group" becoming a
"beneficial owner" (such terms having the meaning in this Agreement as is
ascribed under Regulation 13D under the Exchange Act) of 35% or more of the
outstanding shares of HCR Common Stock is commenced (other than by Manor Care or
an affiliate of Manor Care) and the Board of Directors of HCR recommends that
the stockholders of HCR tender their shares in such tender or exchange offer or
(v) for any reason HCR fails to call and hold the HCR Stockholders' Meeting by
the Outside Date (provided that Manor Care's right to terminate this Agreement
under such clause (v) shall not be available if at such time HCR would be
entitled to terminate this Agreement under Section 9.1(g)); or
(f) by HCR, if (i) the Board of Directors of Manor Care shall have
withdrawn or modified its recommendation of this Agreement; (ii) after the
receipt by Manor Care of a proposal concerning an Alternative Transaction, HCR
requests in writing that the Board of Directors of Manor Care reconfirm its
recommendation of this Agreement and the Merger and the Board of Directors of
Manor Care fails to do so within 10 business days after its receipt of HCR's
request; (iii) the Board of Directors of Manor Care shall have recommended to
the stockholders of Manor Care an Alternative Transaction; (iv) a tender offer
or exchange offer that, if successful, would result in any person or group
becoming a beneficial owner of 35% or more of the outstanding shares of Manor
Care Common Stock is commenced (other than by HCR or an affiliate of HCR) and
the Board of Directors of Manor Care recommends that the stockholders of Manor
Care tender their shares in such tender or exchange offer; or (v) for any reason
Manor Care fails to call and hold the Manor Care Stockholders' Meeting by the
Outside Date (provided that HCR's right to terminate this Agreement under such
clause (v) shall not be available if at such time Manor Care would be entitled
to terminate this Agreement under Section 9.1(g)); or
(g) by Manor Care or HCR, if there has been a breach of any representation,
warranty, covenant or agreement on the part of the other party set forth in this
Agreement, which breach (i) causes the conditions set forth in Section 7.3 (in
the case of termination by Manor Care) or in Section 7.2 (in the case of
termination by HCR) not to be satisfied, and (ii) shall not have been cured
within 20 business days following receipt by the breaching party of written
notice of such breach from the other party; or
(h) by Manor Care, prior to the approval by HCR's stockholders of the HCR
Voting Proposal, or by HCR, prior to approval by Manor Care's stockholders of
the Manor Care Voting Proposal, if, as a result of a Superior Proposal received
by such party from a Third Party, the Board of Directors of such party
determines in good faith, following consultation with outside legal counsel,
that failing to accept such Superior Proposal would constitute a breach by the
Board of Directors of such party of its fiduciary duties to its stockholders
under applicable law; provided, however, that no termination shall be effective
pursuant to this Section 9.1(h) under circumstances in which a termination fee
is payable by the terminating party pursuant to Sections 9.3(c) or (e), unless
concurrently with such termination, such fees are paid in full by the
terminating party in accordance with such Sections.
9.2. Effect of Termination. In the event of termination of this Agreement
as provided in Section 9.1, this Agreement shall immediately become void and
there shall be no liability or obligation on the part of Manor Care, HCR, Merger
Sub or their respective officers, directors, stockholders or affiliates, except,
in the case of HCR, Manor Care or Merger Sub, as set forth in Section 9.3 or in
the case of a willful breach of this Agreement or the Stock Option Agreements;
provided that, the provisions of Section 9.3 of this Agreement and the
Confidentiality Agreements shall remain in full force and effect and survive any
termination of this Agreement.
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9.3. Fees and Expenses.
(a) Except as set forth in this Section 9.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated.
(b) [OMITTED]
(c) HCR shall pay Manor Care a termination fee of $70 million concurrently
upon the earliest to occur of the following events:
(i) the termination of this Agreement by Manor Care pursuant to
Section 9.1(d), but only if a proposal for an Alternative Transaction
involving HCR shall have been made prior to the HCR Stockholders' Meeting
and either an Alternative Transaction with HCR is entered into, or an
Alternative Transaction with HCR is consummated, within eighteen months of
such termination ;
(ii) the termination of this Agreement by Manor Care pursuant to
Section 9.1(e); or
(iii) the termination of this Agreement by HCR pursuant to Section
9.1(h).
Notwithstanding the foregoing, if and to the extent that Manor Care has
purchased shares of HCR Common Stock pursuant to the HCR Stock Option Agreement
prior to the date of payment under this Section 9.3(c), the amount payable to
Manor Care under this Section 9.3(c), together with (i) (x) the amount received
by Manor Care pursuant to HCR's repurchase of shares (as defined in the HCR
Stock Option Agreement) pursuant to Section 7 of the HCR Stock Option Agreement,
less Manor Care's purchase price for such shares, and (ii) (x) the net cash
amounts received by Manor Care pursuant to the sale of shares (or any other
securities into which such shares are converted or exchanged) prior to the date
of payment under this Section 9.3(c) to any unaffiliated party, less (y) Manor
Care's purchase price for such shares, shall not exceed $70 million.
HCR's payment of (i) a termination fee and (ii) amounts, if any, payable
pursuant to the HCR Stock Option Agreement pursuant to this subsection shall be
the sole and exclusive remedy of Manor Care against HCR and any of its
Subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving rise to
such payment; provided that this limitation shall not apply in the event of a
willful breach of this Agreement by HCR.
(d) [OMITTED]
(e) Manor Care shall pay HCR a termination fee of $100 million concurrently
upon the earliest to occur of the following events:
(i) the termination of this Agreement by HCR pursuant to Section
9.1(d), but only if a proposal for an Alternative Transaction involving
Manor Care shall have been made prior to the Manor Care Stockholders'
Meeting and either an Alternative Transaction with Manor Care is entered
into, or an Alternative Transaction with Manor Care is consummated, within
eighteen months of such termination (or in the case of the Restructuring
Transactions, or transactions in whole or in part similar thereto, twelve
months);
(ii) the termination of this Agreement by HCR pursuant to Section
9.1(f); or
(iii) the termination of this Agreement by Manor Care pursuant to
Section 9.1(h).
Notwithstanding the foregoing, if and to the extent that HCR has purchased
shares of Manor Care Common Stock pursuant to the Manor Care Stock Option
Agreement prior to the date of payment this under Section 9.3(e), the amount
payable to HCR under this Section 9.3(e), together with (i) (x) the amount
received by HCR pursuant to Manor Care's repurchase of shares (as defined in the
Manor Care Stock Option Agreement) pursuant to Section 7 of the Manor Care Stock
Option Agreement, less HCR's purchase price for such shares, and (ii) (x) the
net cash amounts received by HCR pursuant to the sale of shares (or any other
securities into which such shares are converted or exchanged) prior to the date
of payment under this
42
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Section 9.3(e) to any unaffiliated party, less (y) HCR's purchase price for such
shares, shall not exceed $100 million.
Manor Care's payment of (i) a termination fee and (ii) amounts, if any,
payable pursuant to the Manor Care Stock Option Agreement pursuant to this
subsection shall be the sole and exclusive remedy of HCR against Manor Care and
any of its Subsidiaries and their respective directors, officers, employees,
agents, advisors or other representatives with respect to the occurrences giving
rise to such payment; provided that this limitation shall not apply in the event
of a willful breach of this Agreement by Manor Care.
(f) [OMITTED]
(g) As used in this Agreement, "Alternative Transaction" means any of (i) a
transaction pursuant to which any person or group other than Manor Care or HCR
or their respective affiliates (a "Third Party"), acquires beneficial ownership
of more than 35% of the outstanding shares of HCR Common Stock or Manor Care
Common Stock, as the case may be, pursuant to a tender offer or exchange offer
or otherwise, (ii) a merger or other business combination involving Manor Care
or HCR pursuant to which any Third Party acquires beneficial ownership of more
than 35% of the outstanding shares of HCR Common Stock or Manor Care Common
Stock, as the case may be, or the entity surviving such merger or business
combination, (iii) any other transaction pursuant to which any Third Party
acquires control of assets (including for this purpose the outstanding equity
securities of Subsidiaries of Manor Care or HCR, and the entity surviving any
merger or business combination including any of them) of Manor Care or HCR
having a fair market value (as determined by the Board of Directors of Manor
Care or HCR, as the case may be, in good faith) equal to more than a majority of
the fair market value of all the assets of Manor Care or HCR, as the case may
be, and their respective Subsidiaries, taken as a whole, immediately prior to
such transaction, (iv) Manor Care and/or its affiliates shall acquire in the
aggregate 35% or more of the Manor Care Common Stock held by the Key
Stockholders on the date hereof, (v) the Restructuring Transactions or
transactions in whole or substantial part similar thereto, (vi) any other
merger, share issuance, business combination, consolidation or other similar
transaction pursuant to which 40% or more of the directors of Manor Care or HCR
in office on the date hereof cease to be directors thereof or the directors
thereof on the date hereof shall cease to constitute at least 60% of the
directors thereof, or (vii) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
ARTICLE X.
MISCELLANEOUS PROVISIONS
10.1. Termination of Representations and Warranties. The representations
and warranties set forth in this Agreement (including those set forth in the
Manor Care and HCR Disclosure Schedules) or in any certificate furnished under
this Agreement shall not survive the Effective Time.
10.2. Amendment and Modification. To the extent permitted by applicable
law, this Agreement may be amended, modified, or supplemented only by written
agreement of the parties at any time before the Effective Time with respect to
any of the terms contained herein, except that after the Manor Care
Stockholders' Meeting, the amount and form of the merger consideration shall not
be altered without the approval of the stockholders of Manor Care.
10.3. Waiver of Compliance; Consents. Any failure of a party to comply with
any obligation, covenant, agreement, or condition herein, to the extent legally
allowed, may be waived in writing by the other, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement, or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party hereto, such consent shall be given in writing in a
manner consistent with the requirements for a waiver of compliance as set forth
in this Section 10.3.
43
<PAGE>
10.4. Press Releases and Public Announcements.
(a) HCR and Manor Care shall agree on the form and content of the initial
press release and Forms 8-K, if any, regarding the transactions contemplated
hereby.
(b) In addition to the foregoing, neither HCR nor Manor Care may issue any
press release or make any public disclosure relating to the subject matter of
this Agreement without prior written approval of the other party; provided,
however, that each of Manor Care and HCR may make any public disclosure it
believes in good faith is required by applicable law, SEC regulations or any
listing or trading agreement concerning its publicly traded securities after
consultation with the other party regarding the form and content of the
disclosure before making such disclosure.
10.5. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, effective when
delivered, or if delivered by express delivery service, effective when
delivered, or if mailed by registered or certified mail (return receipt
requested), effective three business days after mailing, to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) If to HCR or Merger Sub:
One SeaGate
Toledo, OH 43604-2616
Attention: R. Jeffrey Bixler
with a copy to:
Latham & Watkins
233 South Wacker Drive
Sears Tower, Suite 5800
Chicago, IL 60606
Attention: Mark D. Gerstein
(b) If to Manor Care, Inc.:
11555 Darnestown Road
Gaithersburg, MD 20878-3200
Attention: James H. Rempe
with a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
Attention: W. Leslie Duffy
10.6. Assignment. This Agreement and all of the provisions hereof shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder may be assigned by any party
hereto without the prior written consent of the other parties. Except for the
provisions of Sections 8.2, 8.3, and 8.4, this Agreement is not intended to
confer upon any other person except the parties any rights or remedies
hereunder.
10.7. Interpretation; Glossary. As used in this Agreement, unless otherwise
defined, (i) the term "including" means "including without limitation"; (ii) the
term "person" means an individual, a partnership, a limited liability company, a
joint venture, a corporation, a trust, an incorporated organization and a
government or any department or agency thereof; (iii) the term "affiliate" has
the meaning set forth in Rule 12b-2 under the Exchange Act; (iv) the phrase
"business day" means any day other than a Saturday, Sunday or a day that is a
statutory holiday under the laws of the United States or the State of Delaware;
(v) all dollar amounts are expressed in United States funds; (vi) the phrase "to
the knowledge of a party" or
44
<PAGE>
any similar phrase means the actual knowledge of one or more of the executive
officers of the party; (vii) as used with respect to Manor Care or HCR, as the
case may be, the term "Material Adverse Effect" means any change or effect that,
individually or when taken together with all changes or effects that have
occurred before the determination of the occurrence of the Material Adverse
Effect, has had or is reasonably likely to have a material adverse effect on the
business, operations, results of operations, properties, or financial condition
of the party and its Subsidiaries taken as a whole; (viii) "Anticipated Change"
means the implementation of the prospective payment system as the principal
reimbursement method under the Medicare Program for skilled nursing homes.
Definitions of other terms used in this Agreement may be found as indicated
below:
<TABLE>
<CAPTION>
DEFINED TERM LOCATION OF DEFINITION
------------ ----------------------
<S> <C>
"Acquisition Corporation".............. Section 4.1(a)
"Acquisition Proposal"................. Section 6.1(a)
"Agreement"............................ Preamble
"Alternative Transaction".............. Section 9.3(g)
"Ancillary Agreements"................. Seventh Recital
"Anticipated Change"................... Section 10.7
"Benefit Plan"......................... Section 4.1(o)(i)
"CERCLA"............................... Section 4.1(p)(i)(A)
"Certificate of Merger"................ Section 1.1
"Certificates"......................... Section 2.2(b)
"Chase"................................ Section 4.2(n)
"Closing".............................. Section 3.1
"Closing Date"......................... Section 3.1
"Code"................................. Fourth Recital
"CON".................................. Section 4.1(m)(i)
"Cost Reports"......................... Section 4.1(m)(ii)
"DGCL"................................. Section 1.1
"Effective Time"....................... Section 1.1
"Environmental Law".................... Section 4.1(p)(i)(A)
"ERISA"................................ Section 4.1(o)(i)
"ERISA Affiliate"...................... Section 4.1(o)(vi) and Section
4.2(o)(vi), respectively
"Exchange Act"......................... Section 4.1(d)
"Exchange Agent"....................... Section 2.2(a)
"Exchange Fund"........................ Section 2.2(a)
"Exchange Ratio"....................... Section 2.1(c)
"Facility"............................. Section 4.1(m)(i)
"GAAP"................................. Section 4.1(e)(ii)
"Genesis".............................. Section 4.1(a)
"Government Entity".................... Section 4.1(d)
"Hazardous Substance".................. Section 4.1(p)(i)(B)
"HCR".................................. Preamble
"HCR Affiliate Agreement".............. Section 6.8(b)
"HCR Agreement"........................ Section 4.2(b)
"HCR Award"............................ Section 4.2(b)
"HCR Bylaw Amendment".................. Section 6.4
"HCR Common Stock"..................... Section 2.1(b)
"HCR Director"......................... Section 6.18(a)
"HCR Disclosure Schedule".............. Section 4.2
"HCR Employee Plan".................... Section 4.2(o)(i)
"HCR Material Contracts"............... Section 4.2(e)(i)
"HCR Option"........................... Section 4.2(b)
"HCR Rights"........................... Section 4.2(b)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM LOCATION OF DEFINITION
------------ ----------------------
<S> <C>
"HCR SEC Report"....................... Section 4.2(e)(i)
"HCR Stock Issuance"................... Section 6.4(a)
"HCR Stockholders' Meeting"............ Section 6.2(a)
"HCR Voting Proposal".................. Section 6.4(a)
"HSR Act".............................. Section 4.1(d)
"IHH".................................. Section 4.1(a)
"Joint Proxy Statement"................ Section 6.2(a)
"Key Stockholders"..................... Sixth Recital
"liens"................................ Section 4.1(i)
"Manor Care"........................... Preamble
"Manor Care Affiliate Agreement"....... Section 6.8(a)
"Manor Care Award"..................... Section 4.1(b)
"Manor Care Common Stock".............. Section 2.1(b)
"Manor Care Director".................. Section 6.18(a)
"Manor Care Disclosure Schedule"....... Section 4.1
"Manor Care Employee Plan"............. Section 4.1(o)(i)
"Manor Care Incentive Plan"............ Section 6.10(d)
"Manor Care Material Contracts"........ Section 4.1(j)(i)
"Manor Care Option".................... Section 4.1(b)
"Manor Care Rights".................... Section 4.1(b)
"Manor Care Rights Agreement".......... Section 4.1(b)
"Manor Care SEC Report"................ Section 4.1(e)(i)
"Manor Care Stockholders' Meeting"..... Section 6.2(a)
"Material Adverse Effect".............. Section 10.7
"MBCA"................................. Section 7.2(g)
"Medicare and Medicaid Programs"....... Section 4.1(m)(i)
"Merger"............................... Second Recital
"Merger Sub"........................... Preamble
"Outside Date"......................... Section 9.1(b)
"Pension Plan"......................... Section 4.1(o)(i)
"Proprietary Rights"................... Section 4.1(k)
"PRP Notices".......................... Section 4.1(p)(v)
"Public Subsidiaries".................. Section 4.1(b)
"Public Subsidiary SEC Reports"........ Section 4.1(e)(i)
"Registration Statement"............... Section 6.2(a)
"Regulations".......................... Section 4.1(m)(i)
"Restructuring Transactions"........... Section 4.1(aa)
"SBC Warburg Dillon Read".............. Section 4.1(n)
"SEC".................................. Section 4.1(d)
"Second Meeting"....................... Section 6.18(a)
"Securities Act"....................... Section 4.1(e)(i)
"Seller SEC Reports"................... Section 4.1(e)(i)
"Series A Preferred Stock"............. Section 4.1(b)
"Significant Subsidiary"............... Section 6.1(a)
"Social Security Act".................. Section 4.1(m)(i)
"Stock Option Agreement"............... Seventh Recital
"Subsidiaries"......................... Section 4.1(a)
"Subsidiary"........................... Section 4.1(a)
"Superior Proposal".................... Section 6.1(a)
"Surviving Corporation"................ Section 1.2
"Tax Returns".......................... Section 4.1(h)(i)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM LOCATION OF DEFINITION
------------ ----------------------
<S> <C>
"Taxes"................................ Section 4.1(h)(i)
"Third Party".......................... Section 9.3(g)
"Vitalink"............................. Section 4.1(a)
"Vitalink Merger Agreement"............ Section 4.1(a)
"Vitalink Transaction"................. Section 4.1(a)
"Voting Agreement"..................... Sixth Recital
"Welfare Plan"......................... Section 4.1(o)(i)
</TABLE>
10.8. Governing Law. The Laws of the State of Delaware shall govern the
interpretation, validity and performance of the terms of this Agreement,
regardless of the law that might be applied under principles of conflicts of
law. Any suit, action or proceeding by a party hereto with respect to this
Agreement, or any judgment entered by any court in respect of any thereof, may
be brought in any state or federal court of competent jurisdiction in the State
of Delaware, and each party hereto hereby submits to the exclusive jurisdiction
of such courts for the purpose of any such suit, action, proceeding or judgment.
By the execution and delivery of this Agreement, (i) HCR and Merger Sub each
appoints The Corporation Trust Company, at its office in Wilmington, Delaware,
as its agent upon which process may be served in any such suit, action or
proceeding and (ii) Manor Care appoints CSC/The United States Corporation
Company in Wilmington, Delaware as its agent upon which process may be served in
any such suit, action or proceeding. Service of process upon such agent,
together with notice of such service given to a party hereto in the manner
provided in Section 10.5 hereof, shall be deemed in every respect effective
service of process upon it in any suit, action or proceeding. Nothing herein
shall in any way be deemed to limit the ability of a party hereto to serve any
such writs, process or summonses in any other manner permitted by applicable
Law. Each party hereto hereby irrevocably waives any objections which it may now
or hereafter have to the laying of the venue of any suit, action or proceeding
arising out of or relating to this Agreement brought in any state or federal
court of competent jurisdiction in the State of Delaware, and hereby further
irrevocably waives any claim that any such suit, action or proceeding brought in
any such court has been brought in any inconvenient forum. No suit, action or
proceeding against a party hereto with respect to this Agreement may be brought
in any court, domestic or foreign, or before any similar domestic or foreign
authority other than in a court of competent jurisdiction in the State of
Delaware, and each party hereto hereby irrevocably waives any right which it may
otherwise have had to bring such an action in any other court, domestic or
foreign, or before any similar domestic or foreign authority.
10.9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.10. Headings; Internal References. The Article and Section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties, and shall not affect the interpretation of
this Agreement.
10.11. Entire Agreement. This Agreement, including the Manor Care and HCR
Disclosure Schedules, the exhibits hereto, the Ancillary Agreements and the
Confidentiality Agreements described in Section 6.14, embody the entire
agreement and understanding of the parties in respect of the subject matter
contained herein, and supersede all prior agreements and understandings among
the parties with respect to such subject matter. There are no restrictions,
promises, representations, warranties (express or implied), covenants, or
undertakings of the parties, other than those expressly set forth or referred to
in this Agreement or the Confidentiality Agreements.
10.12. Severability. If any term, provision, covenant, agreement, or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void, or unenforceable, the remainder of the terms, provisions,
covenants, agreements, and restrictions of this Agreement shall continue in full
force and effect and will in no way be affected, impaired, or invalidated.
10.13. Equitable Remedies. The parties agree that money damages or other
remedy at law would not be a sufficient or adequate remedy for any breach or
violation of, or default under, this Agreement by them and
47
<PAGE>
that in addition to all other remedies available to them, each of them shall be
entitled, to the fullest extent permitted by law, to an injunction restraining
such breach, violation, or default or threatened breach, violation, or default
and to any other equitable relief, including specific performance, without bond
or other security being required.
10.14. Disclosure Schedules. The Manor Care Disclosure Schedule shall be
arranged in paragraphs corresponding to the numbered and lettered paragraphs
contained in Article IV hereof and the disclosure in any paragraph shall qualify
other paragraphs in Article IV hereof only to the extent that it is reasonably
apparent from a reading of such disclosure that it also qualifies or applies to
such other paragraphs. The HCR Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
Article IV hereof and the disclosure in any paragraph shall qualify other
paragraphs in Article IV hereof only to the extent that it is reasonably
apparent from a reading of such disclosure that it also qualifies or applies to
such other paragraphs.
IN WITNESS WHEREOF, the parties execute and deliver this Agreement as of
the date first above written.
MANOR CARE, INC.
By: /s/ JAMES H. REMPE
------------------------------------
A duly authorized signatory
HEALTH CARE AND RETIREMENT
CORPORATION
By: /s/ R. JEFFREY BIXLER
------------------------------------
A duly authorized signatory
CATERA ACQUISITION CORP.
By: /s/ R. JEFFREY BIXLER
------------------------------------
A duly authorized signatory
48
<PAGE>
EXHIBIT 10.11
MANOR CARE, INC.
SEVERANCE PLAN FOR SELECTED EMPLOYEES
ARTICLE I. DEFINITIONS
For purposes of this Plan, the following terms have the meanings indicated:
1.1 "Affiliated Company" means any trade or business, whether or not
incorporated, which is a member of the controlled group of corporations (within
the meaning of Section 414(b) of the Code) that includes the Company or which is
under common control with the Company within the meaning of Section 414(c) of
the Code.
1.2 "Applicable Multiple" means the multiple applicable to the particular
Participant as specified in Exhibit A, which multiple may be one-half, one or
two.
1.3 "Applicable Multiple Period" means a period beginning on the
Participant's Termination Date and lasting for: (i) 6 months if the
Participant's Applicable Multiple is one-half, (ii) 12 months if the
Participant's Applicable Multiple is one, and (iii) 24 months if the
Participant's Applicable Multiple is two.
<PAGE>
-2-
1.4 "Cause" means a Participant's (i) willfully engaging in conduct which
is materially and demonstrably injurious to the Company, or (ii) willfully
engaging in an act or acts of dishonesty resulting in material personal gain to
the Participant at the expense of the Company.
1.5 "Code" means the Internal Revenue Code of 1986, as amended.
1.6 "Committee" means the committee appointed by the Board of Directors of
the Company to administer the Plan.
1.7 "Company" means Manor Care, Inc. and any successor or Parent thereof.
1.8 "Good Reason" means (i) a significant reduction in the scope of a
Participant's authority, position, title, functions, duties or responsibilities,
(ii) the relocation of a Participant's office location to a location more than
25 miles from the Participant's prior principal place of employment, (iii) any
reduction in a Participant's base salary, (iv) a significant change in the
Company's annual bonus program adversely affecting the Participant, or (v) a
significant reduction in the other employee benefits provided to a Participant;
provided, however, that subsection (ii) shall apply only in the
<PAGE>
-3-
case of a Participant whose office location on June 1, 1998 is in Gaithersburg,
Maryland.
1.9 "Parent" means any company owning, directly or indirectly, stock
possessing more than 50% of the total combined voting power of all classes of
stock in Manor Care, Inc. or its successor entitled to vote.
1.10 "Participant" means any employee of the Company or any of its
subsidiaries who is listed on Exhibit A hereto.
1.11 "Plan" means this plan, the Manor Care, Inc. Severance Plan for
Selected Employees.
1.12 "Termination Date" means the date on which a Participant's employment
with the Company and its Affiliated Companies terminates.
ARTICLE II. PARTICIPATION
The employees of the Company and its subsidiaries who shall be Participants
in the Plan are those persons listed on Exhibit A.
<PAGE>
-4-
ARTICLE III. ELIGIBILITY FOR BENEFITS
A Participant shall be entitled to severance benefits under this Plan if
and only if his employment with the Company and its Affiliated Companies
terminates under either of the following circumstances:
(A) a termination by the Company or an Affiliated Company other than for
Cause, or
(B) a termination by the Participant for Good Reason.
If an event constituting a ground for termination of employment for Good Reason
occurs, and the Participant fails to give notice of termination within 3 months
after the occurrence of such event, the Participant shall be deemed to have
waived his right to terminate employment for Good Reason in connection with such
event (but not for any other event for which the 3-month period has not
expired).
ARTICLE IV. AMOUNT OF BENEFITS
A Participant who becomes entitled to severance benefits pursuant to
Article III shall receive the following benefits:
(A) The Company shall pay to the Participant as a severance benefit an
amount equal to the Applicable Multiple times the sum of (i) the Participant's
annual rate of base sal-
<PAGE>
-5-
ary immediately preceding his Termination Date (but not less than his annual
rate of base salary for 1998), (ii) the maximum bonus that the Participant could
have received under the Company's annual bonus program for the Company's fiscal
year in which his Termination Date falls (but not less than his maximum bonus
opportunity for the Company's fiscal year ending May 31, 1999), and (iii) the
greater of the Participant's car allowance for the Company's fiscal year ending
May 31, 1999 or for the fiscal year in which his Termination Date falls. Such
severance benefit shall be paid in a lump sum within 30 days after the
Participant's Termination Date.
(B) The Company shall pay to the Participant as a bonus for the year in
which his Termination Date falls an amount equal to a portion (determined as
provided in the next sentence) of the maximum bonus that the Participant could
have received under the Company's annual bonus program for the fiscal year in
which his Termination Date falls. Such portion shall be determined by dividing
the number of days of the Participant's employment during such calendar year up
to his Termination Date by 365 (366 if a leap year). Such payment shall be made
in a lump sum within 30 days after such Termination Date, and the Participant
shall have no right to any further bonuses under said program.
(C) During the Applicable Multiple Period, the Participant shall remain
covered by the medical, dental, life insurance, and long-term disability plans
of the Company that covered him immediately prior to his Termination Date as if
he had remained in employment for such Applicable Multiple Period. In the event
that the Participant's participation in any such plan is barred, the Company
shall arrange to provide the Participant with substantially similar benefits.
(D) If the Participant participates in the Company's Supplemental Executive
Retirement Plan (the "SERP"), the Participant shall receive under the SERP the
benefits that he would have been entitled to receive under the SERP if he had
continued in employment with the Company for the Applicable Multiple Period and
received base salary for such Applicable Multiple Period at the rate in effect
on such Termination Date.
(E) If the Participant participates in the Company's Nonqualified
Retirement Savings and Investment Plan (the "Nonqualified Plan"), the Company
shall credit to the Participant's Company Contribution Account under the
Nonqualified Plan, effective as of the Participant's Termination Date, an amount
equal to the product of: (i) the Applicable Multiple,
<PAGE>
-6-
(ii) 6%, and (iii) the Participant's annual rate of base salary immediately
preceding his Termination Date. In addition, effective as of the Participant's
Termination Date, the Participant's account balance under the Nonqualified Plan
(as adjusted pursuant to the preceding sentence) shall be increased by a factor
of 20%, and the Participant shall receive credit for vesting purposes for an
additional period of service equal to the Applicable Multiple Period.
(F) The Company shall arrange for an outplacement assistance firm to
provide outplacement assistance services to the Participant at the Company's
expense for a period following the Participant's Termination Date equal to the
lesser of (i) the Applicable Multiple Period, or (ii) one year.
(G) This subsection (G) shall apply only in the case of Scott Van Hove: If
any payment or benefit received by or in respect of a Participant under this
Plan or any other plan, arrangement or agreement with the Company or any of its
affiliates (determined without regard to any additional payments required under
this subsection (G) and Exhibit B of this Plan) (a "Payment") would be subject
to the excise tax imposed by Section 4999 of the Code (or any similar tax that
may hereafter be imposed) or any interest or penalties are incurred by the
Participant with respect to such excise tax (such excise tax, together with any
such interest and penalties, being hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to the Participant with respect to such
Payment at the time specified in Exhibit B an additional amount (the "Gross-up
Payment") such that the net amount retained by the Participant from the Payment
and the Gross-up Payment, after reduction for any Excise Tax upon the Payment
and any Federal, state and local income and employment tax and Excise Tax upon
the Gross-up Payment, shall be equal to the Payment. The calculation and payment
of the Gross-up Payment shall be subject to the provisions of Exhibit B.
Anything in this subsection (G) or in Exhibit B to the contrary notwithstanding,
no Gross-Up Payment shall be made in respect of any payment of stock in Health
Care and Retirement Corporation ("Stock Payment") to the Participant (and, to
the extent any such Stock Payment constitutes a "parachute payment" within the
meaning of Section 280G of the Code, the Gross-Up Payments in respect of any
Payments other than Stock Payments shall be computed by first applying the Stock
Payments which are "parachute payments" against the "base amount" as that term
is defined in Section 280G).
<PAGE>
-7-
ARTICLE V. PLAN ADMINISTRATION
5.1 Committee. The Plan shall be administered by the Committee. The
Committee shall interpret the provisions of the Plan and shall determine all
questions arising in the administration thereof, including without limitation
the reconciliation of any inconsistent provisions, the resolution of any
ambiguities, the correction of defects, and the supplying of omissions. Any such
determination by the Committee shall be conclusive and binding on all persons
and shall be consistently and uniformly applied to all persons similarly
situated.
5.2 Claims Procedure. In the event that a claim for a benefit under the
Plan has been denied, the decision shall be subject to review by the Committee
upon written request of the claimant received by the Committee within sixty (60)
days after mailing or delivery to the claimant of written notice of such denial.
The decision of the Committee upon such review shall be in writing and shall
state the reasons for the decision and the provisions of the Plan on which the
decision is based. Such decision shall be made within sixty (60) days after the
Committee's receipt of written request for such review unless a hearing is
necessitated to determine the facts and circumstances, in which event a decision
shall be rendered as soon as possible, but not later than one hundred and twenty
(120) days
<PAGE>
-8-
after the claimant's written request for review. The decision of the Committee
upon review shall be final and binding on all persons.
ARTICLE VI. MISCELLANEOUS
6.1 Plan Not Employment Agreement. The Plan does not constitute an
agreement or contract of employment and shall not be construed to limit in any
manner the right of the Company or any Affiliated Company to terminate a
Participant's employment.
6.2 No Duty to Seek Employment. A Participant shall not be under any duty
or obligation to seek other employment following his Termination Date, and no
amount, payment or benefits due to a Participant hereunder shall be reduced or
suspended if the Participant accepts subsequent employment.
6.3 Arbitration. Any dispute or controversy arising under or in connection
with this Plan shall, if the Participant so elects, be settled by arbitration,
conducted before a panel of three arbitrators in Washington, D.C. in accordance
with the applicable rules and procedures of the American Arbitration Association
then in effect. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction. Such arbitration shall be final and
binding on the par-
<PAGE>
-9-
ties. The panel of arbitrators shall be selected as follows: the Participant and
the Company shall each designate an individual to act as arbitrator; the two
arbitrators shall then jointly designate a third arbitrator.
6.4 Legal Expenses. If any dispute or controversy arises under or in
connection with this Plan, the Company shall promptly pay all legal fees and
expenses, including, without limitation, reasonable attorneys' fees, incurred by
the Participant in seeking to obtain or enforce any right or benefit under this
Plan, provided, however, that this obligation of the Company shall not apply
unless the Participant prevails in whole or in part.
6.5 Confidential Information. Each Participant shall retain in confidence
any confidential information known to him concerning the Company, its
subsidiaries and their respective businesses until such information is publicly
disclosed. This provision shall apply both before and after the Participant's
Termination Date.
6.6 Successors. This Plan shall be binding upon and inure to the benefit of
the Participant and his estate and the Company and any successor or Parent of
the Company, but neither this Plan nor any rights arising hereunder may be
assigned or pledged by the Participant.
<PAGE>
-10-
6.7 Controlling Law. This Plan shall in all respects be governed by and
construed in accordance with the laws of the State of Delaware (without giving
effect to principles of conflict of laws).
6.8 Plan Amendment and Termination. The Company reserves the right to amend
or terminate the Plan at any time and for any reason, provided, however, that
(i) no amendment or termination adopted prior to June 10, 2000 may adversely
affect the rights under this Plan of any person who has been designated as a
Participant prior to the adoption of such amendment or termination, and (ii) no
amendment or termination may adversely affect the rights under this Plan of any
Participant whose Termination Date preceded the date of adoption of such
amendment or termination.
<PAGE>
EXHIBIT 10.12
NONCOMPETITION AGREEMENT
AGREEMENT, made as of this 10th day of June, 1998, by and among MANOR CARE,
INC., a Delaware corporation ("Manor Care"), HEALTH CARE AND RETIREMENT
CORPORATION, a Delaware corporation ("HCR"), and STEWART BAINUM, JR. ("Mr.
Bainum").
W I T N E S S E T H
WHEREAS, HCR and Manor Care have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which Manor Care will become a
wholly-owned subsidiary of HCR; and
WHEREAS, Manor Care wishes to retain the services of Mr. Bainum as Chairman
of the Board, President and Chief Executive Officer of Manor Care for the period
of time up to the consummation of the merger contemplated by the Merger
Agreement (the "Merger"); and
WHEREAS, HCR upon the consummation of the Merger wishes to retain the
services of Mr. Bainum as Chairman of the Board of HCR and as Special Consultant
to HCR; and
WHEREAS, HCR and Manor Care wish to assure themselves that Mr. Bainum will
not compete with HCR or Manor Care for the Noncompetition Period specified in
this Agreement; and
<PAGE>
-2-
WHEREAS, Mr. Bainum is willing to agree not to compete for such period in
exchange for the payment of the cash payment described herein;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. In consideration of the payment of the compensation described in Section
2 of this Agreement, Mr. Bainum agrees that during the Noncompetition Period (as
hereinafter defined), he will not:
(a) accept a position as an officer, director, employee, agent, or
consultant of a person or entity that is engaged in the skilled
nursing, assisted living, institutional pharmacy, and/or home health
care industry (such a person or entity is referred to in this
Agreement as a "Competitor" and such activities are referred to in
this Agreement as "Competing Activities"); or
(b) hire or engage any employee of the Company or any of its subsidiaries
or induce any employee of the Company or any of its subsidiaries to
leave his or her employment with the Company or any of its
subsidiaries on behalf of any Competitor; provided,
<PAGE>
-3-
however, that the reference to "employee" in this subsection (b) shall
not include any person who is not an employee of the Company or any of
its subsidiaries at the applicable time by reason of having been laid
off or otherwise terminated by the Company or any of its subsidiaries.
For purposes of this Agreement, the "Noncompetition Period" shall be the
period beginning on the date of this Agreement and ending on the later of: (i)
the last day of the two-year period beginning on the date on which Mr. Bainum
ceases to be an employee of the Company (as hereinafter defined) and any of its
subsidiaries or (ii) June 9, 2001. In addition, for purposes of this Agreement,
"Company" shall mean (i) prior to the consummation of the merger contemplated by
the Merger Agreement, Manor Care, and (ii) on any after the consummation of said
merger, HCR (which will be renamed HCR Manor Care, Inc.).
2. Compensation Payable to Mr. Bainum. In consideration of Mr. Bainum's
agreement to the terms of Section 1 of this Agreement, the Company agrees to pay
to Mr. Bainum, within 30 days after consummation of the Merger, an amount equal
to the Applicable Multiple (as hereinafter defined) times the sum of $840,000.
For purposes of this Agreement, the Applicable
<PAGE>
-4-
Multiple shall be the greater of (i) two or (ii) the number of years from the
date of termination of Mr. Bainum's employment until June 9, 2001 (such number
of years to be determined by treating each full 12-month period as one year and
each month or part thereof in excess of full 12-month periods as one-twelfth of
a year).
3. Remedies. Without intending to limit the remedies available to the
Company, Mr. Bainum acknowledges that a breach or threatened breach of any of
the covenants contained in Section 1 of this Agreement may result in material
irreparable injury to the Company or one of its subsidiaries for which there is
no adequate remedy at law, that it may not be possible to measure damages for
such injuries precisely, and that in the event of such a breach or threat
thereof, the Company shall be entitled to obtain a temporary restraining order,
a preliminary or permanent injunction, or other comparable provisional or
equitable relief restraining Mr. Bainum from engaging in activities prohibited
by Section 1, and such other relief as may be required to enforce specifically
any of the covenants in such Section 1.
4. Reformation. (a) Mr. Bainum agrees that the restrictions in Section 1 of
this Agreement are reasonable in
<PAGE>
-5-
scope and duration in light of the business and competitors of the Company and
its subsidiaries.
(b) If any provision of Section 1 of this Agreement is held by a court or
arbitrator to be unreasonable in scope or duration, the court or arbitrator
shall, to the extent permitted by law, reform such provision so that it is
enforcable, and enforce the applicable provision as so reformed. Reformation
pursuant to this Section 4 shall not affect any other provision of this
Agreement or render this Agreement unenforcable or void.
5. No Consummation of Merger. HCR shall have no rights or obligations under
this Agreement unless and until the merger contemplated by the Merger Agreement
is consummated.
6. Controlling Law. This Agreement shall in all respects be governed by and
construed in accordance with the laws of the State of Delaware (without giving
effect to principles of conflict of laws).
7. Changes to Agreement. This Agreement may not be changed orally but only
in a writing, signed by the party against whom enforcement is sought.
8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed
<PAGE>
-6-
shall be deemed an original but all of which together shall constitute one and
the same instrument.
9. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to its subject matter and supersedes all prior
agreements, drafts, and written or oral representations of either party.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
MANOR CARE, INC.
______________________ By:_____________________________
Stewart Bainum, Jr.
ATTEST:
By:______________________________
HEALTHCARE AND RETIREMENT CORPORATION
By:_______________________________
ATTEST:
By:_______________________________
<PAGE>
EXHIBIT 10.13
RETENTION AGREEMENT
AGREEMENT, made as of this 10th day of June, 1998 (the "Effective Date"),
by and among MANOR CARE, INC., a Delaware corporation (the "Company"), HEALTH
CARE AND RETIREMENT CORPORATION, a Delaware corporation ("HCR"), and STEWART
BAINUM, JR. (the "Employee").
W I T N E S S E T H
WHEREAS, HCR and the Company have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Company will become a
wholly-owned subsidiary of HCR; and
WHEREAS, the Employee has been providing and continues to provide valuable
services to the Company in his capacity as Chairman of the Board, President and
Chief Executive Officer; and
WHEREAS, HCR and the Company wish to assure themselves of the continued
services of the Employee at least during the period leading up to and
immediately following the merger contemplated by the Merger Agreement (the
"Merger") by providing an incentive to the Employee to remain in employment; and
<PAGE>
-2-
WHEREAS, the Company desires to retain the services of Mr. Bainum as
Chairman of the Board, President and Chief Executive Officer of the Company for
the period of time up to the consummation of the Merger and, thereafter, as a
Special Consultant to HCR; and
WHEREAS, HCR upon consummation of the Merger desires to utilize the
services of Mr. Bainum as a Special Consultant to HCR; and
WHEREAS, the Employee is willing, for the consideration provided, to
continue in the employment of the Company as Chairman of the Board, President
and Chief Executive Officer until consummation of the Merger and, thereafter, as
Special Consultant to HCR;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Retention Provisions and Stay Bonus. Up to the Effective Time of the
Merger, the Employee shall continue to serve as Chairman of the Board, President
and Chief Executive Officer of the Company. From the Effective Time of the
Merger until December 31, 1998, the Employee shall be employed by the Company as
a Special Consultant to HCR with such duties as reasonably requested by the
President and reasonably agreed to by
<PAGE>
-3-
the Employee. During this period, the Employee shall receive compensation and
benefits at the rate and under the provisions in effect on the date hereof. If
the Employee remains in employment with the Company until December 31, 1998, the
Employee shall be entitled to receive within 30 days thereafter in a lump sum a
special bonus in the amount of $838,724. Except as provided in Section 2 below,
such special bonus shall not be payable if the Employee's employment with the
Company terminates prior to December 31, 1998.
2. Bonus Upon Early Termination. (a) If the Employee's employment with
the Company shall terminate prior to December 31, 1998 either (i) because of
termination by the Company other than for Cause (as hereinafter defined) or (ii)
because of termination by the Employee for Good Reason (as hereinafter defined),
the Employee shall be entitled to receive a special bonus in the amount of
$838,724. Such special bonus shall be paid in a lump sum within 30 days after
the date of such termination of employment.
(b) For purposes of this Agreement, "Cause" shall mean the Employee's (i)
willfully engaging in conduct which is materially and demonstrably injurious to
the Company, or (ii) willfully engaging in an act or acts of dishonesty
resulting in
<PAGE>
-4-
material personal gain to the Employee at the expense of the Company.
(c) For purposes of this Agreement, "Good Reason" shall mean (i) a
significant reduction after the Effective Time of the Merger in the scope of the
Employee's authority, position, title, functions, duties or responsibilities as
Special Consultant to HCR, (ii) the relocation of the Employee's office location
to a location more than 25 miles away from the Employee's principal place of
employment on the Effective Date, (iii) any reduction in the Employee's base
salary, (iv) a significant change in the Company's annual bonus program
adversely affecting the Employee, or (v) a significant reduction in the other
employee benefits provided to the Employee.
3. Additional Benefits upon Termination Without Cause or For Good Reason.
If the Employee's employment with the Company shall terminate (regardless of
whether before December 31, 1998 or on or after such date) either (i) because of
termination by the Company other than for Cause (as defined in Section 2(b)) or
(ii) because of termination by the Employee for Good Reason (as defined in
Section 2(c)), the Employee shall be entitled to the following:
(a) The Company shall pay to the Employee as a bonus for the year of
termination of his employment an
<PAGE>
-5-
amount equal to a portion (determined as provided in the next sentence) of the
maximum bonus that the Employee could have received under the Company's annual
bonus program for the fiscal year in which his employment terminates. Such
portion shall be determined by dividing the number of days of the Employee's
employment during such fiscal year up to his termination of employment by 365
(366 if a leap year). Such payment shall be made in a lump sum within 30 days
after the date of such termination of employment, and the Employee shall have no
right to any further bonuses under said program.
(b) The Employee shall receive under the Company's Supplemental Executive
Retirement Plan (the "SERP") the benefits that he would have been entitled to
receive under the SERP if he had continued in employment with the Company for
the period beginning on his date of termination of employment and continuing
thereafter for a period of years and months corresponding to the Applicable
Multiple and had received base salary for such period at the rate in effect on
such date of termination of employment. For purposes of this Agreement, the
Applicable Multiple shall be the greater of (i) two years or (ii) the number of
years from the date of the Employee's termination of employment until June 9,
2001 (such number of years to be determined by treating each
<PAGE>
-6-
full 12-month period as one year and each month or part thereof in excess of
full 12-month periods as one-twelfth of a year).
(c) The Company shall credit to the Employee's Company Contribution
Account under the Company's Nonqualified Retirement Savings and Investment Plan
(the "Nonqualified Plan"), effective as of the date of the Employee's
termination of employment, an amount equal to the product of (i) 6%, (ii) the
Applicable Multiple, and (iii) the Employee's annual rate of base salary
immediately preceding his termination of employment. In addition, effective as
of the date of the Employee's termination of employment, the Employee's account
balance under the Nonqualified Plan (as adjusted pursuant to the preceding
sentence) shall be increased by a factor of 20%, and the Employee shall receive
credit for vesting purposes for an additional period of service equal to the
period of years and months corresponding to the Applicable Multiple.
4. Entitlement To Other Benefits. Except as provided in this Agreement,
this Agreement shall not be construed as limiting in any way any rights or
benefits that the Employee or his spouse, dependents or beneficiaries may have
pursuant to any other plan or program of the Company.
<PAGE>
-7-
5. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall, if the Employee so elects, be settled by arbitration,
conducted before a panel of three arbitrators in Washington, D.C. in accordance
with the applicable rules and procedures of the American Arbitration Association
then in effect. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction. Such arbitration shall be final and
binding on the parties. The panel of arbitrators shall be selected as follows:
the Employee and the Company shall each designate an individual to act as
arbitrator; the two arbitrators shall then jointly designate a third arbitrator.
6. Legal Expenses. If any dispute or controversy arises under or in
connection with this Agreement, the Company shall promptly pay all legal fees
and expenses, including, without limitation, reasonable attorneys' fees,
incurred by the Employee in seeking to obtain or enforce any right or benefit
under this Agreement, provided, however, that this obligation of the Company
shall not apply unless the Employee prevails in whole or in part.
7. Successors. This Agreement shall be binding upon and inure to the
benefit of the Employee and his estate and the Company and any successor or
Parent (as hereinafter de-
<PAGE>
-8-
fined) of the Company, but neither this Agreement nor any rights arising
hereunder may be assigned or pledged by the Employee. For purposes of this
Agreement, the term "Company" shall include Manor Care, Inc. and its successors
and any Parent thereof. "Parent" shall mean any company owning, directly or
indirectly, stock possessing more than 50% of the total combined voting power of
all classes of stock in Manor Care, Inc. or its successor entitled to vote.
8. Obligation of HCR. HCR shall cause the Company to satisfy its
obligations under this Agreement; provided, however, that HCR shall have no
obligations or liabilities under this Agreement if the transactions contemplated
by the Merger Agreement are not consummated.
9. Severability. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting 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.
10. Notices. All notices required or permitted to be given under this
Agreement shall be given in writing and
<PAGE>
-9-
shall be deemed sufficiently given if delivered by hand or mailed by registered
mail, return receipt requested, to his residence in the case of the Employee and
to its principal executive offices in the case of the Company. Either party may
by giving written notice to the other party in accordance with this Section 10
change the address at which it is to receive notices hereunder.
11. Controlling Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of Delaware (without
giving effect to principles of conflict of laws).
12. Changes to Agreement. This Agreement may not be changed orally but
only in a writing, signed by the party against whom enforcement is sought.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
14. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to its subject matter and supersedes all prior
agreements, drafts, and written or oral representations of either party.
<PAGE>
-10-
15. Employment Agreement Superseded. Any Employment Agreement between the
Company or HCR and the Employee dated on or before the date of this Agreement is
superseded by this Agreement and shall be of no force and effect effective as of
June 10, 1998.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
EMPLOYEE: MANOR CARE, INC.
______________________ By:____________________________________
ATTEST:
By:____________________________
HEALTHCARE AND RETIREMENT CORPORATION
By:____________________________
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 10th day of June, 1998, by and among MANOR CARE,
INC., a Delaware corporation (the "Company"), HEALTH CARE AND RETIREMENT
CORPORATION, a Delaware corporation ("HCR"), and MARGARITA A. SCHOENDORFER (the
"Employee").
W I T N E S S E T H
WHEREAS, HCR and the Company have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Company will become a
wholly-owned subsidiary of HCR; and
WHEREAS, the Boards of Directors of HCR and the Company have approved the
employment of the Employee on the terms and conditions set forth in this
Agreement; and
WHEREAS, the Employee is willing, for the consideration provided, to
continue in the employment of the Company on the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby agrees to continue to employ the
Employee, and the Employee hereby accepts
<PAGE>
-2-
such continued employment, upon the terms and conditions set forth in this
Agreement. HCR shall cause the Company to satisfy its obligations under this
Agreement; provided, however, that HCR shall have no obligations or liabilities
under this Agreement if the transactions contemplated by the Merger Agreement
are not consummated.
2. Term. The term (the "Term") of the Employee's employment under this
Agreement shall be the period commencing on June 10, 1998 (the "Effective Date")
and shall continue until the termination of the Employee's employment pursuant
to Section 5, 6, 7 or 8.
3. Position and Duties. During the Term, the Employee shall serve as Vice
President, Controller of the Company, and shall have such responsibilities and
authority as commensurate with such office and as may from time to time be
prescribed by or pursuant to the Company's By-laws. The Employee shall devote
substantially all of her working time and efforts to the business and affairs of
the Company.
4. Compensation. During the Term, the Company shall provide the Employee
with the following compensation and other benefits:
<PAGE>
-3-
(a) Base Salary. The Company shall pay to the Employee base salary at the
initial rate of $157,000 per annum, which shall be payable in accordance with
the standard payroll practices of the Company. Such base salary rate shall be
reviewed annually in accordance with the Company's normal policies; provided,
however, that at no time during the Term shall the Employee's base salary be
decreased from the rate then in effect except with the written consent of the
Employee.
(b) Bonus. During the Term, the Employee shall participate in the annual
bonus program maintained for the executive officers of the Company. The
Employee's maximum bonus opportunity for each fiscal year during the Term shall
be no less than 35% of her annual base salary for that year.
(c) Other Benefits. In addition to the compensation and benefits otherwise
specified in this Agreement, the Employee (and, if provided for under the
applicable plan or program, her spouse) shall be entitled to participate in, and
to receive benefits under, the Company's employee benefit plans and programs
that are or may be available to executives generally and on terms and conditions
that are no less favorable than those generally applicable to other executives
of the Company. At no time during the Term shall
<PAGE>
-4-
the Employee's participation in or benefits received under such plans and
programs be decreased except (i) in connection with across-the-board reductions
similarly affecting substantially all executives of the Company or (ii) with the
written consent of the Employee.
(d) Stay Bonus. If the Employee remains in employment with the Company
until December 31, 1998, the Employee shall be entitled to receive within 30
days thereafter in a lump sum a special bonus in an amount equal to the sum of
(i) her annual rate of base salary on December 31, 1998, (ii) the maximum bonus
that the Employee could receive under the Company's annual bonus program for the
Company's fiscal year ending May 31, 1999, and (iii) the Employee's car
allowance for the Company's fiscal year ending May 31, 1999. Except as otherwise
provided in Section 9(e), such special bonus shall not be payable to the
Employee if her employment with the Company terminates for any reason prior to
December 31, 1998.
(e) Expenses. The Employee shall be entitled to prompt reimbursement of
all reasonable expenses incurred by her in performing services hereunder,
provided she properly accounts therefor in accordance with the Company's
policies.
<PAGE>
-5-
(f) Office and Services Furnished. The Company shall furnish the Employee
with office space, secretarial assistance and such other facilities and services
as shall be suitable to the Employee's position and adequate for the performance
of her duties hereunder.
5. Termination of Employment by the Company.
(a) For Cause. The Company may terminate the Employee's employment for
Cause if (i) the Employee willfully engages in conduct which is materially and
demonstrably injurious to the Company, or (ii) the Employee willfully engages in
an act or acts of dishonesty resulting in material personal gain to the Employee
at the expense of the Company. The Company shall exercise its right to terminate
the Employee's employment for Cause by (i) giving her written notice of
termination at least 20 days before the date of such termination specifying in
reasonable detail the circumstances constituting such Cause; and (ii) delivering
to the Employee a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors
(except the Employee), after reasonable notice to the Employee and an
opportunity for the Employee and her counsel to be heard before the Board of
Directors, finding that the Employee has engaged in the con-
<PAGE>
-6-
duct set forth in this subsection (a). In the event of such termination of the
Employee's employment for Cause, the Employee shall be entitled to receive (i)
her base salary pursuant to Section 4(a) and any other compensation and benefits
to the extent actually earned pursuant to this Agreement or any benefit plan or
program of the Company as of the date of such termination at the normal time for
payment of such salary, compensation or benefits and (ii) any amounts owing
under Section 4(e). Except as provided in Section 10, the Employee shall receive
no other compensation or benefits from the Company.
(b) Without Cause. The Company may terminate the Employee's employment at
any time and for any reason, other than for Cause, by giving her a written
notice of termination to that effect at least 30 days before the date of
termination. In the event of such termination of the Employee's employment
without Cause, the Employee shall be entitled to the benefits described in
Section 9.
6. Termination of Employment for Good Reason. The Employee may terminate
her employment for Good Reason by giving the Company a written notice of
termination at least 30 days before the date of such termination specifying in
reasonable detail the circumstances constituting such Good Reason. In the
<PAGE>
-7-
event of the Employee's termination of her employment for Good Reason, the
Employee shall be entitled to the benefits described in Section 9. For purposes
of this Agreement, Good Reason shall mean (i) a significant reduction in the
scope of the Employee's authority, position, title, functions, duties or
responsibilities from that which is contemplated by this Agreement, (ii) the
relocation of the Employee's office location to a location more than 25 miles
away from the Employee's principal place of employment on the Effective Date,
(iii) any reduction in the Employee's base salary, (iv) a significant change in
the Company's annual bonus program adversely affecting the Employee, or (v) a
significant reduction in the other employee benefits provided to the Employee.
If an event constituting a ground for termination of employment for Good Reason
occurs, and the Employee fails to give notice of termination within 3 months
after the occurrence of such event, the Employee shall be deemed to have waived
her right to terminate employment for Good Reason in connection with such event
(but not for any other event for which the 3-month period has not expired).
7. Resignation from Employment Other than for Good Cause. The Employee
may terminate her employment at any time and for any reason, other than pursuant
to Section 6, by giving the Company a written notice of termination to that
effect at least 30 days before the date of termination. In the event of
<PAGE>
-8-
the Employee's termination of her employment pursuant to this Section 7, the
Employee shall be entitled to receive (i) her base salary pursuant to Section
4(a) and any other compensation and benefits to the extent actually earned by
the Employee pursuant to this Agreement or any benefit plan or program of the
Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits, and (ii) any amounts owing under Section
4(e). Except as provided in Section 10, the Employee shall receive no other
compensation or benefits from the Company.
8. Termination of Employment By Death. In the event of the death of the
Employee during the course of her employment hereunder, the Employee's estate
shall be entitled to receive her base salary pursuant to Section 4(a) and any
other compensation and benefits to the extent actually earned by the Employee
pursuant to this Agreement or any other benefit plan or program of the Company
as of the date of such termination at the normal time for payment of such
salary, compensation or benefits, and any amounts owing under Section 4(e).
9. Benefits upon Termination Without Cause or For Good Reason. If the
Employee's employment with the Company shall terminate (i) because of
termination by the Company pursuant to Section 5(b) other than for Cause or (ii)
because of
<PAGE>
-9-
termination by the Employee for Good Reason pursuant to Section 6, the Employee
shall be entitled to the following:
(a) The Company shall pay to the Employee her base salary pursuant to
Section 4(a) and any other compensation and benefits to the extent actually
earned by the Employee under this Agreement or any benefit plan or program of
the Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits.
(b) The Company shall pay the Employee any amounts owing under Section
4(e).
(c) The Company shall pay to the Employee as a severance benefit an amount
equal to two times the sum of (i) her annual rate of base salary immediately
preceding her termination of employment, (ii) the maximum bonus that the
Employee could have received under the Company's annual bonus program for the
fiscal year in which her employment terminates, and (iii) the greater of the
Employee's car allowance for the Company's fiscal year ending May 31, 1999 or
for the fiscal year in which her employment terminates. Such severance benefit
shall be paid in a lump sum within 30 days after the date of such termination of
employment.
<PAGE>
-10-
(d) The Company shall pay to the Employee as a bonus for the year of
termination of her employment an amount equal to a portion (determined as
provided in the next sentence) of the maximum bonus that the Employee could have
received under the Company's annual bonus program for the fiscal year in which
her employment terminates. Such portion shall be determined by dividing the
number of days of the Employee's employment during such fiscal year up to her
termination of employment by 365 (366 if a leap year). Such payment shall be
made in a lump sum within 30 days after the date of such termination of
employment, and the Employee shall have no right to any further bonuses under
said program.
(e) If the Employee's termination of employment occurs prior to December
31, 1998, the Employee shall be entitled to receive a special bonus equal to the
sum of (i) her annual rate of base salary immediately preceding her termination
of employment, (ii) the maximum bonus that the Employee could have received
under the Company's annual bonus program for the fiscal year in which her
employment terminates, and (iii) the greater of the Employee's car allowance for
the Company's fiscal year ending May 31, 1999 or for the fiscal year in which
her employment terminates. Such special bonus shall be paid in a lump sum within
30 days after the date of such termination of employment.
<PAGE>
-11-
(f) During the period beginning on the date of the Employee's termination
of employment and continuing thereafter for a period of two years, the Employee
shall remain covered by the medical, dental, life insurance and long-term
disability plans of the Company that covered her immediately prior to her
termination of employment as if she had remained in employment for such period.
In the event that the Employee's participation in any such plan is barred, the
Company shall arrange to provide the Employee with substantially similar
benefits.
(g) The Employee shall receive under the Company's Supplemental Executive
Retirement Plan (the "SERP") the benefits that she would have been entitled to
receive under the SERP if she had continued in employment with the Company for
the period beginning on her date of termination of employment and continuing
thereafter for a period of two years and had received base salary for such
period at the rate in effect on such date of termination of employment.
(h) The Company shall credit to the Employee's Company Contribution
Account under the Company's Nonqualified Retirement Savings and Investment Plan
(the
<PAGE>
-12-
"Nonqualified Plan"), effective as of the date of the Employee's
termination of employment, an amount equal to the product of (i) 12% and (ii)
the Employee's annual rate of base salary immediately preceding her termination
of employment. In addition, effective as of the date of the Employee's
termination of employment, the Employee's account balance under the Nonqualified
Plan (as adjusted pursuant to the preceding sentence) shall be increased by a
factor of 20%, and the Employee shall receive credit for vesting purposes for an
additional two years of service.
(i) The Company shall arrange for an outplacement assistance firm to
provide outplacement assistance services to the Employee at the Company's
expense for a period of twelve months beginning on the date of termination of
the Employee's employment.
(j) If any payment or benefit received by or in respect of the Employee
under this Agreement or any other plan, arrangement or agreement with the
Company or any of its affiliates (determined without regard to any additional
payments required under this subsection (j) and Appendix A of this Agreement) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax
<PAGE>
-13-
that may hereafter be imposed) or any interest or penalties are incurred by the
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, being hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to the Employee with respect to such
Payment at the time specified in Appendix A an additional amount (the "Gross-up
Payment") such that the net amount retained by the Employee from the Payment and
the Gross-up Payment, after reduction for any Excise Tax upon the Payment and
any Federal, state and local income and employment tax and Excise Tax upon the
Gross-up Payment, shall be equal to the Payment. The calculation and payment of
the Gross-up Payment shall be subject to the provisions of Appendix A. Anything
in this subsection (j) or in Appendix A to the contrary notwithstanding, no
Gross-Up Payment shall be made in respect of any payment of HCR stock ("Stock
Payment") to the Employee (and, to the extent any such Stock Payment constitutes
a "parachute payment" within the meaning of Section 280G of the Code, the
Gross-Up Payments in respect of any Payments other than Stock Payments shall be
computed by first applying the Stock Payments which are "parachute payments"
against the "base amount" as that term is defined in Section 280G).
<PAGE>
-14-
10. Entitlement To Other Benefits. Except as provided in this Agreement,
this Agreement shall not be construed as limiting in any way any rights or
benefits that the Employee or her spouse, dependents or beneficiaries may have
pursuant to any other plan or program of the Company.
11. Confidential Information. The Employee shall retain in confidence any
confidential information known to her concerning the Company, its subsidiaries,
and their respective businesses until such information is publicly disclosed.
This provision shall survive the termination of the Employee's employment for
any reason under this Agreement.
12. No Duty to Seek Employment. The Employee shall not be under any duty
or obligation to seek or accept other employment following termination of
employment, and no amount, payment or benefits due to the Employee hereunder
shall be reduced or suspended if the Employee accepts subsequent employment.
13. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall, if the Employee so elects, be settled by arbitration,
conducted before a panel of three arbitrators in Washington, D.C. in accordance
with the applicable rules and procedures of the American Arbitration Association
then in effect. Judgment upon the award
<PAGE>
-15-
rendered by the arbitrators may be entered in any court having jurisdiction.
Such arbitration shall be final and binding on the parties. The panel of
arbitrators shall be selected as follows: the Employee and the Company shall
each designate an individual to act as arbitrator; the two arbitrators shall
then jointly designate a third arbitrator.
14. Legal Expenses. If any dispute or controversy arises under or in
connection with this Agreement, the Company shall promptly pay all legal fees
and expenses, including, without limitation, reasonable attorneys' fees,
incurred by the Employee in seeking to obtain or enforce any right or benefit
under this Agreement, provided, however, that this obligation of the Company
shall not apply unless the Employee prevails in whole or in part.
15. Successors. This Agreement shall be binding upon and inure to the
benefit of the Employee and her estate and the Company and any successor or
Parent (as hereinafter defined) of the Company, but neither this Agreement nor
any rights arising hereunder may be assigned or pledged by the Employee. For
purposes of this Agreement, the term "Company" shall include Manor Care, Inc.
and its successors and any Parent thereof. "Parent" shall mean any company
owning, directly or indirectly, stock possessing more than 50% of the total
com-
<PAGE>
-16-
bined voting power of all classes of stock in Manor Care, Inc. or its successor
entitled to vote.
16. Severability. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting 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.
17. Notices. All notices required or permitted to be given under this
Agreement shall be given in writing and shall be deemed sufficiently given if
delivered by hand or mailed by registered mail, return receipt requested, to her
residence in the case of the Employee and to its principal executive offices in
the case of the Company. Either party may by giving written notice to the other
party in accordance with this Section 17 change the address at which it is to
receive notices hereunder.
18. Controlling Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of Delaware (without
giving effect to principles of conflict of laws).
<PAGE>
-17-
19. Changes to Agreement. This Agreement may not be changed orally but
only in a writing, signed by the party against whom enforcement is sought.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
21. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to its subject matter and supersedes all prior
agreements, drafts, and written or oral representations of either party.
<PAGE>
-18-
IN WITNESS WHEREOF, the parties have executed this Agreement on the ____
day of June, 1998.
EMPLOYEE: MANOR CARE, INC.
______________________ By:_______________________________
ATTEST:
By:_______________________________
HEALTH CARE AND RETIREMENT
CORPORATION
By:_______________________________
ATTEST:
By:_______________________________
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 10th day of June, 1998, by and among MANOR CARE,
INC., a Delaware corporation (the "Company"), HEALTH CARE AND RETIREMENT
CORPORATION, a Delaware corporation ("HCR"), and LEIGH C. COMAS (the
"Employee").
W I T N E S S E T H
WHEREAS, HCR and the Company have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Company will become a
wholly-owned subsidiary of HCR; and
WHEREAS, the Boards of Directors of HCR and the Company have approved the
employment of the Employee on the terms and conditions set forth in this
Agreement; and
WHEREAS, the Employee is willing, for the consideration provided, to
continue in the employment of the Company on the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby agrees to continue to employ the
Employee, and the Employee hereby accepts such continued employment, upon the
terms and conditions set
<PAGE>
forth in this Agreement. HCR shall cause the Company to satisfy its obligations
under this Agreement; provided, however, that HCR shall have no obligations or
liabilities under this Agreement if the transactions contemplated by the Merger
Agreement are not consummated.
2. Term. The term (the "Term") of the Employee's employment under this
Agreement shall be the period commencing on June 10, 1998 (the "Effective Date")
and shall continue until the termination of the Employee's employment pursuant
to Section 5, 6, 7 or 8.
3. Position and Duties. During the Term, the Employee shall serve as Vice
President - Finance and Treasurer of the Company, and shall have such
responsibilities and authority as commensurate with such office and as may from
time to time be prescribed by or pursuant to the Company's By-laws. The Employee
shall devote substantially all of her working time and efforts to the business
and affairs of the Company.
4. Compensation. During the Term, the Company shall provide the Employee
with the following compensation and other benefits:
(a) Base Salary. The Company shall pay to the Employee base salary at the
initial rate of $200,000 per an-
-2-
<PAGE>
num, which shall be payable in accordance with the standard payroll practices of
the Company. Such base salary rate shall be reviewed annually in accordance with
the Company's normal policies; provided, however, that at no time during the
Term shall the Employee's base salary be decreased from the rate then in effect
except with the written consent of the Employee.
(b) Bonus. During the Term, the Employee shall participate in the annual
bonus program maintained for the executive officers of the Company. The
Employee's maximum bonus opportunity for each fiscal year during the Term shall
be no less than 45% of her annual base salary for that year.
(c) Other Benefits. In addition to the compensation and benefits otherwise
specified in this Agreement, the Employee (and, if provided for under the
applicable plan or program, her spouse) shall be entitled to participate in, and
to receive benefits under, the Company's employee benefit plans and programs
that are or may be available to executives generally and on terms and conditions
that are no less favorable than those generally applicable to other executives
of the Company. At no time during the Term shall the Employee's participation in
or benefits received under such plans and programs be decreased except (i) in
connec-
-3-
<PAGE>
tion with across-the-board reductions similarly affecting substantially all
executives of the Company or (ii) with the written consent of the Employee.
(d) Stay Bonus. If the Employee remains in employment with the Company
until December 31, 1998, the Employee shall be entitled to receive within 30
days thereafter in a lump sum a special bonus in an amount equal to the sum of
(i) her annual rate of base salary on December 31, 1998, (ii) the maximum bonus
that the Employee could receive under the Company's annual bonus program for the
Company's fiscal year ending May 31, 1999, and (iii) the Employee's car
allowance for the Company's fiscal year ending May 31, 1999. Except as otherwise
provided in Section 9(e), such special bonus shall not be payable to the
Employee if her employment with the Company terminates for any reason prior to
December 31, 1998.
(e) Expenses. The Employee shall be entitled to prompt reimbursement of all
reasonable expenses incurred by her in performing services hereunder, provided
she properly accounts therefor in accordance with the Company's policies.
(f) Office and Services Furnished. The Company shall furnish the Employee
with office space, secretarial assistance and such other facilities and services
as shall
-4-
<PAGE>
be suitable to the Employee's position and adequate for the performance of her
duties hereunder.
5. Termination of Employment by the Company.
(a) For Cause. The Company may terminate the Employee's employment for
Cause if (i) the Employee willfully engages in conduct which is materially and
demonstrably injurious to the Company, or (ii) the Employee willfully engages in
an act or acts of dishonesty resulting in material personal gain to the Employee
at the expense of the Company. The Company shall exercise its right to terminate
the Employee's employment for Cause by (i) giving her written notice of
termination at least 20 days before the date of such termination specifying in
reasonable detail the circumstances constituting such Cause; and (ii) delivering
to the Employee a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors
(except the Employee), after reasonable notice to the Employee and an
opportunity for the Employee and her counsel to be heard before the Board of
Directors, finding that the Employee has engaged in the conduct set forth in
this subsection (a). In the event of such termination of the Employee's
employment for Cause, the Employee shall be entitled to receive (i) her base
salary pur-
-5-
<PAGE>
suant to Section 4(a) and any other compensation and benefits to the extent
actually earned pursuant to this Agreement or any benefit plan or program of the
Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits and (ii) any amounts owing under Section
4(e). Except as provided in Section 10, the Employee shall receive no other
compensation or benefits from the Company.
(b) Without Cause. The Company may terminate the Employee's employment at
any time and for any reason, other than for Cause, by giving her a written
notice of termination to that effect at least 30 days before the date of
termination. In the event of such termination of the Employee's employment
without Cause, the Employee shall be entitled to the benefits described in
Section 9.
6. Termination of Employment for Good Reason. The Employee may terminate
her employment for Good Reason by giving the Company a written notice of
termination at least 30 days before the date of such termination specifying in
reasonable detail the circumstances constituting such Good Reason. In the event
of the Employee's termination of her employment for Good Reason, the Employee
shall be entitled to the benefits described in Section 9. For purposes of this
Agreement, Good
-6-
<PAGE>
Reason shall mean (i) a significant reduction in the scope of the Employee's
authority, position, title, functions, duties or responsibilities from that
which is contemplated by this Agreement, (ii) the relocation of the Employee's
office location to a location more than 25 miles away from the Employee's
principal place of employment on the Effective Date, (iii) any reduction in the
Employee's base salary, (iv) a significant change in the Company's annual bonus
program adversely affecting the Employee, or (v) a significant reduction in the
other employee benefits provided to the Employee. If an event constituting a
ground for termination of employment for Good Reason occurs, and the Employee
fails to give notice of termination within 3 months after the occurrence of such
event, the Employee shall be deemed to have waived her right to terminate
employment for Good Reason in connection with such event (but not for any other
event for which the 3-month period has not expired).
7. Resignation from Employment Other than for Good Cause. The Employee may
terminate her employment at any time and for any reason, other than pursuant to
Section 6, by giving the Company a written notice of termination to that effect
at least 30 days before the date of termination. In the event of the Employee's
termination of her employment pursuant to this Section 7, the Employee shall be
entitled to receive (i) her base salary pursuant to Section 4(a) and any other
compensation
-7-
<PAGE>
and benefits to the extent actually earned by the Employee pursuant to this
Agreement or any benefit plan or program of the Company as of the date of such
termination at the normal time for payment of such salary, compensation or
benefits, and (ii) any amounts owing under Section 4(e). Except as provided in
Section 10, the Employee shall receive no other compensation or benefits from
the Company.
8. Termination of Employment By Death. In the event of the death of the
Employee during the course of her employment hereunder, the Employee's estate
shall be entitled to receive her base salary pursuant to Section 4(a) and any
other compensation and benefits to the extent actually earned by the Employee
pursuant to this Agreement or any other benefit plan or program of the Company
as of the date of such termination at the normal time for payment of such
salary, compensation or benefits, and any amounts owing under Section 4(e).
9. Benefits upon Termination Without Cause or For Good Reason. If the
Employee's employment with the Company shall terminate (i) because of
termination by the Company pursuant to Section 5(b) other than for Cause or (ii)
because of termination by the Employee for Good Reason pursuant to Section 6,
the Employee shall be entitled to the following:
-8-
<PAGE>
(a) The Company shall pay to the Employee her base salary pursuant to
Section 4(a) and any other compensation and benefits to the extent actually
earned by the Employee under this Agreement or any benefit plan or program of
the Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits.
(b) The Company shall pay the Employee any amounts owing under Section
4(e).
(c) The Company shall pay to the Employee as a severance benefit an amount
equal to two times the sum of (i) her annual rate of base salary immediately
preceding her termination of employment, (ii) the maximum bonus that the
Employee could have received under the Company's annual bonus program for the
fiscal year in which her employment terminates, and (iii) the greater of the
Employee's car allowance for the Company's fiscal year ending May 31, 1999 or
for the fiscal year in which her employment terminates. Such severance benefit
shall be paid in a lump sum within 30 days after the date of such termination of
employment.
(d) The Company shall pay to the Employee as a bonus for the year of
termination of her employment an amount equal to a portion (determined as
provided in the
-9-
<PAGE>
next sentence) of the maximum bonus that the Employee could have received under
the Company's annual bonus program for the fiscal year in which her employment
terminates. Such portion shall be determined by dividing the number of days of
the Employee's employment during such fiscal year up to her termination of
employment by 365 (366 if a leap year). Such payment shall be made in a lump sum
within 30 days after the date of such termination of employment, and the
Employee shall have no right to any further bonuses under said program.
(e) If the Employee's termination of employment occurs prior to December
31, 1998, the Employee shall be entitled to receive a special bonus equal to the
sum of (i) her annual rate of base salary immediately preceding her termination
of employment, (ii) the maximum bonus that the Employee could have received
under the Company's annual bonus program for the fiscal year in which her
employment terminates, and (iii) the greater of the Employee's car allowance for
the Company's fiscal year ending May 31, 1999 or for the fiscal year in which
her employment terminates. Such special bonus shall be paid in a lump sum within
30 days after the date of such termination of employment.
-10-
<PAGE>
(f) During the period beginning on the date of the Employee's termination
of employment and continuing thereafter for a period of two years, the Employee
shall remain covered by the medical, dental, life insurance and long-term
disability plans of the Company that covered her immediately prior to her
termination of employment as if she had remained in employment for such period.
In the event that the Employee's participation in any such plan is barred, the
Company shall arrange to provide the Employee with substantially similar
benefits.
(g) The Employee shall receive under the Company's Supplemental Executive
Retirement Plan (the "SERP") the benefits that she would have been entitled to
receive under the SERP if she had continued in employment with the Company for
the period beginning on her date of termination of employment and continuing
thereafter for a period of two years and had received base salary for such
period at the rate in effect on such date of termination of employment.
(h) The Company shall credit to the Employee's Company Contribution Account
under the Company's Nonqualified Retirement Savings and Investment Plan (the
"Nonqualified Plan"), effective as of the date of the Employee's termination of
employment, an amount equal to the
-11-
<PAGE>
product of (i) 12% and (ii) the Employee's annual rate of base salary
immediately preceding her termination of employment. In addition, effective as
of the date of the Employee's termination of employment, the Employee's account
balance under the Nonqualified Plan (as adjusted pursuant to the preceding
sentence) shall be increased by a factor of 20%, and the Employee shall receive
credit for vesting purposes for an additional two years of service. (i) The
Company shall arrange for an outplacement assistance firm to provide
outplacement assistance services to the Employee at the Company's expense for a
period of twelve months beginning on the date of termination of the Employee's
employment.
(j) If any payment or benefit received by or in respect of the Employee
under this Agreement or any other plan, arrangement or agreement with the
Company or any of its affiliates (determined without regard to any additional
payments required under this subsection (j) and Appendix A of this Agreement) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that
may hereafter be imposed) or any interest or penalties are incurred by the
Employee with respect to such excise tax
-12-
<PAGE>
(such excise tax, together with any such interest and penalties, being
hereinafter collectively referred to as the "Excise Tax"), the Company shall pay
to the Employee with respect to such Payment at the time specified in Appendix A
an additional amount (the "Gross-up Payment") such that the net amount retained
by the Employee from the Payment and the Gross-up Payment, after reduction for
any Excise Tax upon the Payment and any Federal, state and local income and
employment tax and Excise Tax upon the Gross-up Payment, shall be equal to the
Payment. The calculation and payment of the Gross-up Payment shall be subject to
the provisions of Appendix A. Anything in this subsection (j) or in Appendix A
to the contrary notwithstanding, no Gross-Up Payment shall be made in respect of
any payment of HCR stock ("Stock Payment") to the Employee (and, to the extent
any such Stock Payment constitutes a "parachute payment" within the meaning of
Section 280G of the Code, the Gross-Up Payments in respect of any Payments other
than Stock Payments shall be computed by first applying the Stock Payments which
are "parachute payments" against the "base amount" as that term is defined in
Section 280G).
10. Entitlement To Other Benefits. Except as provided in this Agreement,
this Agreement shall not be construed as limiting in any way any rights or
benefits that the Employee
-13-
<PAGE>
or her spouse, dependents or beneficiaries may have pursuant to any other plan
or program of the Company.
11. Confidential Information. The Employee shall retain in confidence any
confidential information known to her concerning the Company, its subsidiaries,
and their respective businesses until such information is publicly disclosed.
This provision shall survive the termination of the Employee's employment for
any reason under this Agreement.
12. No Duty to Seek Employment. The Employee shall not be under any duty or
obligation to seek or accept other employment following termination of
employment, and no amount, payment or benefits due to the Employee hereunder
shall be reduced or suspended if the Employee accepts subsequent employment.
13. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall, if the Employee so elects, be settled by arbitration,
conducted before a panel of three arbitrators in Washington, D.C. in accordance
with the applicable rules and procedures of the American Arbitration Association
then in effect. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction. Such arbitration shall be final and
binding on the parties. The panel of arbitrators shall be selected as
-14-
<PAGE>
follows: the Employee and the Company shall each designate an individual to act
as arbitrator; the two arbitrators shall then jointly designate a third
arbitrator.
14. Legal Expenses. If any dispute or controversy arises under or in
connection with this Agreement, the Company shall promptly pay all legal fees
and expenses, including, without limitation, reasonable attorneys' fees,
incurred by the Employee in seeking to obtain or enforce any right or benefit
under this Agreement, provided, however, that this obligation of the Company
shall not apply unless the Employee prevails in whole or in part.
15. Successors. This Agreement shall be binding upon and inure to the
benefit of the Employee and her estate and the Company and any successor or
Parent (as hereinafter defined) of the Company, but neither this Agreement nor
any rights arising hereunder may be assigned or pledged by the Employee. For
purposes of this Agreement, the term "Company" shall include Manor Care, Inc.
and its successors and any Parent thereof. "Parent" shall mean any company
owning, directly or indirectly, stock possessing more than 50% of the total
combined voting power of all classes of stock in Manor Care, Inc. or its
successor entitled to vote.
-15-
<PAGE>
16. Severability. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting 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.
17. Notices. All notices required or permitted to be given under this
Agreement shall be given in writing and shall be deemed sufficiently given if
delivered by hand or mailed by registered mail, return receipt requested, to her
residence in the case of the Employee and to its principal executive offices in
the case of the Company. Either party may by giving written notice to the other
party in accordance with this Section 17 change the address at which it is to
receive notices hereunder.
18. Controlling Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of Delaware (without
giving effect to principles of conflict of laws).
-16-
<PAGE>
19. Changes to Agreement. This Agreement may not be changed orally but only
in a writing, signed by the party against whom enforcement is sought.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
21. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to its subject matter and supersedes all prior
agreements, drafts, and written or oral representations of either party.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the ____
day of June, 1998.
EMPLOYEE: MANOR CARE, INC.
______________________ By:________________________________
ATTEST:
By:________________________________
HEALTH CARE AND RETIREMENT
CORPORATION
By:________________________________
ATTEST:
By:________________________________
-18-
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 10th day of June, 1998, by and among MANOR CARE,
INC., a Delaware corporation (the "Company"), HEALTH CARE AND RETIREMENT
CORPORATION, a Delaware corporation ("HCR"), and JOSEPH R. BUCKLEY (the
"Employee").
W I T N E S S E T H
WHEREAS, HCR and the Company have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Company will become a
wholly-owned subsidiary of HCR; and
WHEREAS, the Boards of Directors of HCR and the Company have approved the
employment of the Employee on the terms and conditions set forth in this
Agreement; and
WHEREAS, the Employee is willing, for the consideration provided, to
continue in the employment of the Company on the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby agrees to continue to employ the
Employee, and the Employee hereby accepts such continued employment, upon the
terms and conditions set
<PAGE>
forth in this Agreement. HCR shall cause the Company to satisfy its obligations
under this Agreement; provided, however, that HCR shall have no obligations or
liabilities under this Agreement if the transactions contemplated by the Merger
Agreement are not consummated.
2. Term. The term (the "Term") of the Employee's employment under this
Agreement shall be the period commencing on June 10, 1998 (the "Effective Date")
and shall continue until the termination of the Employee's employment pursuant
to Section 5, 6, 7 or 8.
3. Position and Duties. During the Term, the Employee shall serve as
Executive Vice President of the Company, and shall have such responsibilities
and authority as commensurate with such office and as may from time to time be
prescribed by or pursuant to the Company's By-laws. The Employee shall devote
substantially all of his working time and efforts to the business and affairs of
the Company.
4. Compensation. During the Term, the Company shall provide the Employee
with the following compensation and other benefits:
(a) Base Salary. The Company shall pay to the Employee base salary at the
initial rate of $273,000 per an-
-2-
<PAGE>
num, which shall be payable in accordance with the standard payroll practices of
the Company. Such base salary rate shall be reviewed annually in accordance with
the Company's normal policies; provided, however, that at no time during the
Term shall the Employee's base salary be decreased from the rate then in effect
except with the written consent of the Employee.
(b) Bonus. During the Term, the Employee shall participate in the annual
bonus program maintained for the executive officers of the Company. The
Employee's maximum bonus opportunity for each fiscal year during the Term shall
be no less than 55% of his annual base salary for that year.
(c) Other Benefits. In addition to the compensation and benefits otherwise
specified in this Agreement, the Employee (and, if provided for under the
applicable plan or program, his spouse) shall be entitled to participate in, and
to receive benefits under, the Company's employee benefit plans and programs
that are or may be available to executives generally and on terms and conditions
that are no less favorable than those generally applicable to other executives
of the Company. At no time during the Term shall the Employee's participation in
or benefits received under such plans and programs be decreased except (i) in
con-
-3-
<PAGE>
nection with across-the-board reductions similarly affecting substantially all
executives of the Company or (ii) with the written consent of the Employee.
(d) Stay Bonus. If the Employee remains in employment with the Company
until December 31, 1998, the Employee shall be entitled to receive within 30
days thereafter in a lump sum a special bonus in an amount equal to the sum of
(i) his annual rate of base salary on December 31, 1998, (ii) the maximum bonus
that the Employee could receive under the Company's annual bonus program for the
Company's fiscal year ending May 31, 1999, and (iii) the Employee's car
allowance for the Company's fiscal year ending May 31, 1999. Except as otherwise
provided in Section 9(e), such special bonus shall not be payable to the
Employee if his employment with the Company terminates for any reason prior to
December 31, 1998.
(e) Expenses. The Employee shall be entitled to prompt reimbursement of all
reasonable expenses incurred by him in performing services hereunder, provided
he properly accounts therefor in accordance with the Company's policies.
(f) Office and Services Furnished. The Company shall furnish the Employee
with office space, secretarial assistance and such other facilities and services
as shall
-4-
<PAGE>
be suitable to the Employee's position and adequate for the performance of his
duties hereunder.
5. Termination of Employment by the Company.
(a) For Cause. The Company may terminate the Employee's employment for
Cause if (i) the Employee willfully engages in conduct which is materially and
demonstrably injurious to the Company, or (ii) the Employee willfully engages in
an act or acts of dishonesty resulting in material personal gain to the Employee
at the expense of the Company. The Company shall exercise its right to terminate
the Employee's employment for Cause by (i) giving him written notice of
termination at least 20 days before the date of such termination specifying in
reasonable detail the circumstances constituting such Cause; and (ii) delivering
to the Employee a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors
(except the Employee), after reasonable notice to the Employee and an
opportunity for the Employee and his counsel to be heard before the Board of
Directors, finding that the Employee has engaged in the conduct set forth in
this subsection (a). In the event of such termination of the Employee's
employment for Cause, the Employee shall be entitled to receive (i) his base
salary pur-
-5-
<PAGE>
suant to Section 4(a) and any other compensation and benefits to the extent
actually earned pursuant to this Agreement or any benefit plan or program of the
Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits and (ii) any amounts owing under Section
4(e). Except as provided in Section 10, the Employee shall receive no other
compensation or benefits from the Company.
(b) Without Cause. The Company may terminate the Employee's employment at
any time and for any reason, other than for Cause, by giving him a written
notice of termination to that effect at least 30 days before the date of
termination. In the event of such termination of the Employee's employment
without Cause, the Employee shall be entitled to the benefits described in
Section 9.
6. Termination of Employment for Good Reason. The Employee may terminate
his employment for Good Reason by giving the Company a written notice of
termination at least 30 days before the date of such termination specifying in
reasonable detail the circumstances constituting such Good Reason. In the event
of the Employee's termination of his employment for Good Reason, the Employee
shall be entitled to the benefits described in Section 9. For purposes of this
Agreement, Good
-6-
<PAGE>
Reason shall mean (i) a significant reduction in the scope of the Employee's
authority, position, title, functions, duties or responsibilities from that
which is contemplated by this Agreement, (ii) the relocation of the Employee's
office location to a location more than 25 miles away from the Employee's
principal place of employment on the Effective Date, (iii) any reduction in the
Employee's base salary, (iv) a significant change in the Company's annual bonus
program adversely affecting the Employee, or (v) a significant reduction in the
other employee benefits provided to the Employee. If an event constituting a
ground for termination of employment for Good Reason occurs, and the Employee
fails to give notice of termination within 3 months after the occurrence of such
event, the Employee shall be deemed to have waived his right to terminate
employment for Good Reason in connection with such event (but not for any other
event for which the 3-month period has not expired).
7. Resignation from Employment Other than for Good Cause. The Employee may
terminate his employment at any time and for any reason, other than pursuant to
Section 6, by giving the Company a written notice of termination to that effect
at least 30 days before the date of termination. In the event of the Employee's
termination of his employment pursuant to this Section 7, the Employee shall be
entitled to receive (i) his base salary pursuant to Section 4(a) and any other
compensation
-7-
<PAGE>
and benefits to the extent actually earned by the Employee pursuant to this
Agreement or any benefit plan or program of the Company as of the date of such
termination at the normal time for payment of such salary, compensation or
benefits, and (ii) any amounts owing under Section 4(e). Except as provided in
Section 10, the Employee shall receive no other compensation or benefits from
the Company.
8. Termination of Employment By Death. In the event of the death of the
Employee during the course of his employment hereunder, the Employee's estate
shall be entitled to receive his base salary pursuant to Section 4(a) and any
other compensation and benefits to the extent actually earned by the Employee
pursuant to this Agreement or any other benefit plan or program of the Company
as of the date of such termination at the normal time for payment of such
salary, compensation or benefits, and any amounts owing under Section 4(e).
9. Benefits upon Termination Without Cause or For Good Reason. If the
Employee's employment with the Company shall terminate (i) because of
termination by the Company pursuant to Section 5(b) other than for Cause or (ii)
because of termination by the Employee for Good Reason pursuant to Section 6,
the Employee shall be entitled to the following:
-8-
<PAGE>
(a) The Company shall pay to the Employee his base salary pursuant to
Section 4(a) and any other compensation and benefits to the extent actually
earned by the Employee under this Agreement or any benefit plan or program of
the Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits.
(b) The Company shall pay the Employee any amounts owing under Section
4(e).
(c) The Company shall pay to the Employee as a severance benefit an amount
equal to two times the sum of (i) his annual rate of base salary immediately
preceding his termination of employment, (ii) the maximum bonus that the
Employee could have received under the Company's annual bonus program for the
fiscal year in which his employment terminates, and (iii) the greater of the
Employee's car allowance for the Company's fiscal year ending May 31, 1999 or
for the fiscal year in which his employment terminates. Such severance benefit
shall be paid in a lump sum within 30 days after the date of such termination of
employment.
(d) The Company shall pay to the Employee as a bonus for the year of
termination of his employment an amount equal to a portion (determined as
provided in the
-9-
<PAGE>
next sentence) of the maximum bonus that the Employee could have received under
the Company's annual bonus program for the fiscal year in which his employment
terminates. Such portion shall be determined by dividing the number of days of
the Employee's employment during such fiscal year up to his termination of
employment by 365 (366 if a leap year). Such payment shall be made in a lump sum
within 30 days after the date of such termination of employment, and the
Employee shall have no right to any further bonuses under said program.
(e) If the Employee's termination of employment occurs prior to December
31, 1998, the Employee shall be entitled to receive a special bonus equal to the
sum of (i) his annual rate of base salary immediately preceding his termination
of employment, (ii) the maximum bonus that the Employee could have received
under the Company's annual bonus program for the fiscal year in which his
employment terminates, and (iii) the greater of the Employee's car allowance for
the Company's fiscal year ending May 31, 1999 or for the fiscal year in which
his employment terminates. Such special bonus shall be paid in a lump sum within
30 days after the date of such termination of employment.
-10-
<PAGE>
(f) During the period beginning on the date of the Employee's termination
of employment and continuing thereafter for a period of two years, the Employee
shall remain covered by the medical, dental, life insurance and long-term
disability plans of the Company that covered him immediately prior to his
termination of employment as if he had remained in employment for such period.
In the event that the Employee's participation in any such plan is barred, the
Company shall arrange to provide the Employee with substantially similar
benefits.
(g) The Employee shall receive under the Company's Supplemental Executive
Retirement Plan (the "SERP") the benefits that he would have been entitled to
receive under the SERP if he had continued in employment with the Company for
the period beginning on his date of termination of employment and continuing
thereafter for a period of two years and had received base salary for such
period at the rate in effect on such date of termination of employment.
(h) The Company shall credit to the Employee's Company Contribution Account
under the Company's Nonqualified Retirement Savings and Investment Plan (the
"Nonqualified Plan"), effective as of the date of the Employee's termination of
employment, an amount equal to the
-11-
<PAGE>
product of (i) 12% and (ii) the Employee's annual rate of base salary
immediately preceding his termination of employment. In addition, effective as
of the date of the Employee's termination of employment, the Employee's account
balance under the Nonqualified Plan (as adjusted pursuant to the preceding
sentence) shall be increased by a factor of 20%, and the Employee shall receive
credit for vesting purposes for an additional two years of service.
(i) The Company shall arrange for an outplacement assistance firm to
provide outplacement assistance services to the Employee at the Company's
expense for a period of twelve months beginning on the date of termination of
the Employee's employment.
(j) If any payment or benefit received by or in respect of the Employee
under this Agreement or any other plan, arrangement or agreement with the
Company or any of its affiliates (determined without regard to any additional
payments required under this subsection (j) and Appendix A of this Agreement) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that
may hereafter be imposed) or any interest or penalties are incurred by the
Employee with respect to such excise tax
-12-
<PAGE>
(such excise tax, together with any such interest and penalties, being
hereinafter collectively referred to as the "Excise Tax"), the Company shall pay
to the Employee with respect to such Payment at the time specified in Appendix A
an additional amount (the "Gross-up Payment") such that the net amount retained
by the Employee from the Payment and the Gross-up Payment, after reduction for
any Excise Tax upon the Payment and any Federal, state and local income and
employment tax and Excise Tax upon the Gross-up Payment, shall be equal to the
Payment. The calculation and payment of the Gross-up Payment shall be subject to
the provisions of Appendix A. Anything in this subsection (j) or in Appendix A
to the contrary notwithstanding, no Gross-Up Payment shall be made in respect of
any payment of HCR stock ("Stock Payment") to the Employee (and, to the extent
any such Stock Payment constitutes a "parachute payment" within the meaning of
Section 280G of the Code, the Gross-Up Payments in respect of any Payments other
than Stock Payments shall be computed by first applying the Stock Payments which
are "parachute payments" against the "base amount" as that term is defined in
Section 280G).
10. Entitlement To Other Benefits. Except as provided in this Agreement,
this Agreement shall not be construed as limiting in any way any rights or
benefits that the Employee
-13-
<PAGE>
or his spouse, dependents or beneficiaries may have pursuant to any other plan
or program of the Company.
11. Confidential Information. The Employee shall retain in confidence any
confidential information known to him concerning the Company, its subsidiaries,
and their respective businesses until such information is publicly disclosed.
This provision shall survive the termination of the Employee's employment for
any reason under this Agreement.
12. No Duty to Seek Employment. The Employee shall not be under any duty or
obligation to seek or accept other employment following termination of
employment, and no amount, payment or benefits due to the Employee hereunder
shall be reduced or suspended if the Employee accepts subsequent employment.
13. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall, if the Employee so elects, be settled by arbitration,
conducted before a panel of three arbitrators in Washington, D.C. in accordance
with the applicable rules and procedures of the American Arbitration Association
then in effect. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction. Such arbitration shall be final and
binding on the parties. The panel of arbitrators shall be selected as
-14-
<PAGE>
follows: the Employee and the Company shall each designate an individual to act
as arbitrator; the two arbitrators shall then jointly designate a third
arbitrator.
14. Legal Expenses. If any dispute or controversy arises under or in
connection with this Agreement, the Company shall promptly pay all legal fees
and expenses, including, without limitation, reasonable attorneys' fees,
incurred by the Employee in seeking to obtain or enforce any right or benefit
under this Agreement, provided, however, that this obligation of the Company
shall not apply unless the Employee prevails in whole or in part.
15. Successors. This Agreement shall be binding upon and inure to the
benefit of the Employee and his estate and the Company and any successor or
Parent (as hereinafter defined) of the Company, but neither this Agreement nor
any rights arising hereunder may be assigned or pledged by the Employee. For
purposes of this Agreement, the term "Company" shall include Manor Care, Inc.
and its successors and any Parent thereof. "Parent" shall mean any company
owning, directly or indirectly, stock possessing more than 50% of the total
combined voting power of all classes of stock in Manor Care, Inc. or its
successor entitled to vote.
-15-
<PAGE>
16. Severability. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting 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.
17. Notices. All notices required or permitted to be given under this
Agreement shall be given in writing and shall be deemed sufficiently given if
delivered by hand or mailed by registered mail, return receipt requested, to his
residence in the case of the Employee and to its principal executive offices in
the case of the Company. Either party may by giving written notice to the other
party in accordance with this Section 17 change the address at which it is to
receive notices hereunder.
18. Controlling Law. This Agreement shall in all respects be governed by
and construed in accordance with the laws of the State of Delaware (without
giving effect to principles of conflict of laws).
-16-
<PAGE>
19. Changes to Agreement. This Agreement may not be changed orally but only
in a writing, signed by the party against whom enforcement is sought.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
21. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to its subject matter and supersedes all prior
agreements, drafts, and written or oral representations of either party.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the ____
day of June, 1998.
EMPLOYEE: MANOR CARE, INC.
______________________ By:__________________________________
ATTEST:
By:__________________________________
HEALTH CARE AND RETIREMENT
CORPORATION
By:__________________________________
ATTEST:
By:__________________________________
-18-
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, made as of this 27th day of October, 1997, by and between
MANOR CARE, INC., a Delaware corporation (the "Company"), and JAMES H. REMPE
(the "Employee").
W I T N E S S E T H
-------------------
WHEREAS, the Company and the Employee reached agreement on the basic
terms and conditions of the continued employment of the Employee as evidenced by
a memorandum dated October 16, 1997 agreed to on behalf of the Company on
October 27, 1997; and
WHEREAS, the Employee and the Company wish to enter into a formal
employment agreement reflecting such agreement;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby agrees to continue to employ the
----------
Employee, and the Employee hereby accepts such continued employment, upon the
terms and conditions set forth in this Agreement.
<PAGE>
-2-
2. Term. The term (the "Term") of the Employee's employment under
----
this Agreement shall be the period commencing on October 27, 1997 and shall
continue until May 31, 2002, unless sooner terminated by termination of the
Employee's employment pursuant to Section 9, 10, 11 or 12. The Term shall be
divided into two parts: (i) the period from October 27, 1997 through May 31,
2000 (the "Initial Term") and (ii) the period from June 1, 2000 through May 31,
2002 (the "Final Term"); provided, however, that in no event shall the Initial
Term or Final Term extend beyond the end of the Term.
3. Position and Duties. During the Initial Term, the Employee shall
-------------------
serve as Senior Vice President, General Counsel and Secretary of the Company,
and shall have such responsibilities and authority as commensurate with such
office and as may from time to time be prescribed by or pursuant to the
Company's By-laws. The Employee shall devote substantially all of his working
time and efforts during the Initial Term to the business and affairs of the
Company.
During the Final Term, the Employee shall perform such services as are
reasonably requested by the Chief Executive Officer of the Company; provided,
however, that the Em-
<PAGE>
-3-
ployee's services during the Final Term shall consume no more than 25% of the
Employee's available working time in any given month. The Employee shall not be
required to maintain any office hours during the Final Term. The Employee shall
remain a common-law employee of the Company during the Final Term but shall not
hold any of the positions set forth in the first sentence of this Section 3.
4. Compensation. During the Term, the Company shall provide the
------------
Employee with the following compensation and other benefits:
(a) Base Salary. During the Initial Term, the Company shall pay to
-----------
the Employee base salary at the initial rate of $293,592 per annum, which shall
be payable in accordance with the standard payroll practices of the Company.
Such base salary rate shall be reviewed annually during the Initial Term in
accordance with the Company's normal policies; provided, however, that at no
time during the Initial Term shall the Employee's base salary be decreased from
the rate then in effect except with the written consent of the Employee.
<PAGE>
-4-
During the Final Term, the Company shall pay to the Employee base
salary at an initial rate equal to 25% of his annual base salary rate as in
effect on May 31, 2000, which shall be payable in accordance with the standard
payroll practices of the Company. Such base salary rate shall be reviewed
annually during the Final Term in accordance with the Company's normal policies;
provided, however, that at no time during the Final Term shall the Employee's
base salary be decreased from the rate then in effect except with the written
consent of the Employee.
(b) Bonus. During the Term, the Employee shall participate in the
-----
annual bonus program maintained for the executive officers of the Company. The
Employee's maximum bonus opportunity for each fiscal year during the Term shall
be no less than 50% of his annual base salary for that year.
(c) Club Dues. During the Term, the Company shall pay the Employee's
---------
dues for membership in a country club or lunch club of his choice.
(d) Other Benefits. In addition to the compensation and benefits
--------------
otherwise specified in this Agreement, the
<PAGE>
-5-
Employee (and, if provided for under the applicable plan or program, his spouse)
shall be entitled to participate in, and to receive benefits under, the
Company's employee benefit plans and programs that are or may be available to
senior executives generally and on terms and conditions that are no less
favorable than those generally applicable to other senior executives of the
Company. At no time during the Term shall the Employee's participation in or
benefits received under such plans and programs be decreased except (i) in
connection with across-the-board reductions similarly affecting substantially
all senior executives of the Company or (ii) with the written consent of the
Employee.
(e) Expenses. The Employee shall be entitled to prompt reimbursement
--------
of all reasonable expenses incurred by him in performing services hereunder,
provided he properly accounts therefor in accordance with the Company's
policies.
(f) Office and Services Furnished. During the Term, the Company
-----------------------------
shall provide the Employee with suitable office space and secretarial
assistance, together with access to a telephone, computer, printer, fax machine,
and other necessary office equipment.
<PAGE>
-6-
5. SERP Benefits. The Employee has elected to receive his benefits
-------------
under the Company's Supplemental Executive Retirement Plan ("SERP") in equal
monthly installments for life commencing as of May 1, 1998. The parties
acknowledge that the Employee's monthly payment under the SERP shall be
$7,140.08. If there is any cost-of-living increase in benefits payable to any
other person covered by the SERP or under any other supplemental retirement plan
maintained by the Company or any successor thereto or parent thereof, the amount
of the Employee's SERP benefit shall be correspondingly adjusted. The Company
shall pay (i) the Employee's share of the Federal Insurance Contributions Act
taxes, the Federal Unemployment Tax Act taxes, and any other federal, state and
local employment taxes imposed on the SERP payments and (ii) an additional
amount (the "SERP Gross-up Payment") sufficient to cover the Federal, state and
local income and employment taxes on the payments made by the Company pursuant
to (i) and on the SERP Gross-up Payment. For purposes of determining the SERP
Gross-up Payment, the Employee shall be deemed to pay Federal income taxes at
the highest marginal rate of Federal income taxation in the calendar year for
which the SERP Gross-up Payment is to be made and state and local income taxes
at the highest marginal rate to
<PAGE>
-7-
which such payment could be subject based upon the state and locality of the
Employee's residence or employment, net of the maximum deduction in Federal
income taxes which could be obtained from deduction of such state and local
taxes. In addition, for purposes of determining the amount of the SERP Gross-up
Payment, the Company shall make a determination of the amount of any employment
taxes required on the SERP Gross-up Payment. The SERP Gross-up Payment shall be
paid to the Employee no later than March 1 of the calendar year next following
the calendar year to which it relates.
6. Security for Nonqualified Benefits. Upon the Employee's
----------------------------------
termination of employment for any reason, the Company shall take such actions as
may be necessary to fully secure the Company's obligations to pay benefits to
the Employee and his beneficiaries under the SERP, the Company's Nonqualified
Retirement Savings and Investment Plan, and the Company's other nonqualified
deferred compensation plans. Such security shall protect the Employee against
the risk that the Company will fail to pay such benefits by reason of either
repudiation or insolvency. If the provision of such security results in the
imposition of any Federal, state or local income or employ-
<PAGE>
-8-
ment taxes on the Employee (or his beneficiary) prior to the date on which such
benefits become payable under the applicable plan, the Company shall pay to the
Employee (or his beneficiary) each year (i) an amount equal to such Federal,
state and local income and employment taxes and (ii) an additional amount (the
"Nonqualified Gross-up Payment") sufficient to cover the Federal, state and
local income and employment taxes on the payments made by the Company pursuant
to (i) and on the Nonqualified Gross-up Payment. Such income and employment
taxes shall be calculated in the same manner as described in Section 5. The
Nonqualified Gross-up Payment shall be paid to the Employee (or his beneficiary)
no later than March 1 of the calendar year next following the calendar year to
which it relates.
7. Vesting of Restricted Stock. The shares of restricted stock
---------------------------
granted to the Employee pursuant to a restricted stock agreement dated October
16, 1997 shall vest in accordance with the following schedule: (i) one-third on
February 24, 1998, (ii) an additional one-third on February 24, 1999, and (iii)
the final one-third on February 24, 2000. Notwithstanding the foregoing, such
shares of restricted stock shall imme-
<PAGE>
-9-
diately become fully vested in the event that the Employee's employment with the
Company terminates for any reason other than (i) the Company's termination of
the Employee's employment for Cause in accordance with Section 9(a) or (ii) the
Employee's resignation (other than for Good Reason) pursuant to Section 11.
8. Stock Options. The stock options granted to the Employee by the
-------------
Company shall become exercisable in accordance with their terms; provided,
however, that such options shall immediately become fully exercisable on the
date of the Employee's retirement if the Company adopts a policy that stock
options of executives shall become fully exercisable upon the executive's
retirement.
9. Termination of Employment by the Company.
----------------------------------------
(a) For Cause. The Company may terminate the Employee's employment
---------
for Cause if (i) the Employee willfully engages in conduct which is materially
and demonstrably injurious to the Company, or (ii) the Employee willfully
engages in an act or acts of dishonesty resulting in material personal gain to
the Employee at the expense of the Company.
<PAGE>
-10-
The Company shall exercise its right to terminate the Employee's employment for
Cause by (i) giving him written notice of termination at least 20 days before
the date of such termination specifying in reasonable detail the circumstances
constituting such Cause; and (ii) delivering to the Employee a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors (except the Employee), after
reasonable notice to the Employee and an opportunity for the Employee and his
counsel to be heard before the Board of Directors, finding that the Employee has
engaged in the conduct set forth in this subsection (a). In the event of such
termination of the Employee's employment for Cause, the Employee shall be
entitled to receive (i) his base salary pursuant to Section 4(a) and any other
compensation and benefits to the extent actually earned pursuant to this
Agreement or any benefit plan or program of the Company as of the date of such
termination at the normal time for payment of such salary, compensation or
benefits and (ii) any amounts owing under Section 4(e). Except as provided in
Section 14, the Employee shall receive no other compensation or benefits from
the Company.
<PAGE>
-11-
(b) Without Cause. The Company may terminate the Employee's
-------------
employment at any time and for any reason, other than for Cause, by giving him a
written notice of termination to that effect at least 30 days before the date of
termination. In the event of such termination of the Employee's employment
without Cause, the Employee shall be entitled to the benefits described in
Section 13.
10. Termination of Employment for Good Reason. The Employee may
-----------------------------------------
terminate his employment for Good Reason by giving the Company a written notice
of termination at least 30 days before the date of such termination specifying
in reasonable detail the circumstances constituting such Good Reason. In the
event of the Employee's termination of his employment for Good Reason, the
Employee shall be entitled to the benefits described in Section 13. For
purposes of this Agreement, Good Reason shall mean (i) a significant reduction
in the scope of the Employee's authority, position, title, functions, duties or
responsibilities from that which is contemplated by this Agreement, (ii) the
relocation of the Employee's office location to a location more than 25 miles
away from the Employee's principal place of employment on October 27, 1997,
(iii) any reduc-
<PAGE>
-12-
tion in the Employee's base salary, (iv) a significant change in the Company's
annual bonus program adversely affecting the Employee, or (v) a significant
reduction in the other employee benefits provided to the Employee. If an event
constituting a ground for termination of employment for Good Reason occurs, and
the Employee fails to give notice of termination within 3 months after the
occurrence of such event, the Employee shall be deemed to have waived his right
to terminate employment for Good Reason in connection with such event (but not
for any other event for which the 3-month period has not expired).
11. Resignation from Employment Other than for Good Reason. The
------------------------------------------------------
Employee may resign from employment at any time and for any reason, other than
pursuant to Section 10, by giving the Company a written notice of termination to
that effect at least 30 days before the date of termination. In the event of
the Employee's termination of his employment pursuant to this Section 11, the
Employee shall be entitled to receive (i) his base salary pursuant to Section
4(a) and any other compensation and benefits to the extent actually earned by
the Employee pursuant to this Agreement or any benefit plan or program of the
Company as of the date of such termination at the
<PAGE>
-13-
normal time for payment of such salary, compensation or benefits, and (ii) any
amounts owing under Section 4(e). Except as provided in Section 14, the Employee
shall receive no other compensation or benefits from the Company.
12. Termination of Employment By Death. In the event of the death of
----------------------------------
the Employee during the course of his employment hereunder, the Employee's
estate shall be entitled to receive his base salary pursuant to Section 4(a) and
any other compensation and benefits to the extent actually earned by the
Employee pursuant to this Agreement or any other benefit plan or program of the
Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits, and any amounts owing under Section 4(e).
13. Benefits upon Termination Without Cause or For Good Reason. If
----------------------------------------------------------
the Employee's employment with the Company shall terminate (i) because of
termination by the Company pursuant to Section 9(b) other than for Cause, or
(ii) because of termination by the Employee for Good Reason pursuant to Section
10, the Employee shall be entitled to the following:
<PAGE>
-14-
(a) The Company shall pay to the Employee his base salary pursuant to
Section 4(a) and any other compensation and benefits to the extent actually
earned by the Employee under this Agreement or any benefit plan or program of
the Company as of the date of such termination at the normal time for payment of
such salary, compensation or benefits.
(b) The Company shall pay the Employee any amounts owing under Section
4(e).
(c) The Company shall pay to the Employee as a severance benefit the
sum of the amounts that the Employee would have received as salary, bonus and
car allowance if he had continued in employment with the Company until May 31,
2002, assuming (i) that his annual base salary on the date of termination of
employment increased thereafter at a rate of 5% per year (but taking into
account the reduction to 25% of the then applicable base salary on June 1,
2000), (ii) that he received annual bonuses at the rate of 50% of base salary
for each fiscal year, and (iii) that his car allowance each year was the greater
of his car allowance for the Company's fiscal year ending March 31, 1998 or for
the
<PAGE>
-15-
fiscal year in which his employment terminates. Such severance benefit
shall be paid in a lump sum within 30 days after the date of such termination of
employment.
(d) The Company shall pay to the Employee as a bonus for the year of
termination of his employment an amount equal to a portion (determined as
provided in the next sentence) of the maximum bonus that the Employee could have
received under the Company's annual bonus program for the fiscal year in which
his employment terminates. Such portion shall be determined by dividing the
number of days of the Employee's employment during such fiscal year up to his
termination of employment by 365 (366 if a leap year). Such payment shall be
made in a lump sum within 30 days after the date of such termination of
employment, and the Employee shall have no right to any further bonuses under
said program.
(e) During the period beginning on the date of the Employee's
termination of employment and ending on May 31, 2002, the Employee shall remain
covered by the medical, dental, disability and other welfare benefit plans of
the Company that covered him immediately prior to his termi-
<PAGE>
-16-
nation of employment as if he had remained in employment for such period. In the
event that the Employee's participation in any such plan is barred, the Company
shall arrange to provide the Employee with substantially similar benefits. In no
event shall the welfare benefits provided pursuant to this subsection (e) be
less favorable, in the aggregate, than the most favorable such benefits in
effect for the Employee at any time during the period beginning on October 27,
1997 and ending on the date of the Employee's termination of employment or, if
more favorable to the Employee, those provided generally at the applicable time
to senior executives of the Company.
(f) The shares of restricted stock granted to the Employee on February
24, 1997 shall become fully vested on the date of the Employee's termination of
employment.
(g) The Company shall continue to pay the club dues described in
Section 4(c) and to provide the office space, secretarial assistance and access
to office equipment described in Section 4(f) through May 31, 2002.
<PAGE>
-17-
(h) The Company shall credit to the Employee's Company Contribution
Account under the Company's Nonqualified Retirement Savings and Investment Plan
(the "Nonqualified Plan"), effective as of the date of the Employee's
termination of employment, an amount equal to 6% of the base salary that would
have been paid to the Employee during the period commencing on the date of his
termination of employment and ending on May 31, 2002, assuming that his annual
base salary on the date of termination of employment increased thereafter at a
rate of 5% per year but taking into account the reduction to 25% of the then
applicable base salary on June 1, 2000. In addition, effective as of the date
of the Employee's termination of employment, the Employee's account balance
under the Nonqualified Plan (as adjusted pursuant to the preceding sentence)
shall be increased by a factor of 20%.
(i) The Company shall arrange for an outplacement assistance firm to
provide outplacement assistance services to the Employee at the Company's
expense for a period of twelve months beginning on the date of termination of
the Employee's employment.
<PAGE>
-18-
14. Entitlement To Other Benefits. Except as provided in this
-----------------------------
Agreement, this Agreement shall not be construed as limiting in any way any
rights or benefits that the Employee or his spouse, dependents or beneficiaries
may have pursuant to any other plan or program of the Company.
15. Confidential Information. The Employee shall retain in
------------------------
confidence any confidential information known to him concerning the Company, its
subsidiaries, and their respective businesses until such information is publicly
disclosed. This provision shall survive the termination of the Employee's
employment for any reason under this Agreement.
16. No Duty to Seek Employment. The Employee shall not be under any
--------------------------
duty or obligation to seek or accept other employment following termination of
employment, and no amount, payment or benefits due to the Employee hereunder
shall be reduced or suspended if the Employee accepts subsequent employment.
17. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall, if the Employee so elects, be settled by
arbitration, conducted before a
<PAGE>
-19-
panel of three arbitrators in Washington, D.C. in accordance with the applicable
rules and procedures of the American Arbitration Association then in effect.
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction. Such arbitration shall be final and binding on the parties.
The panel of arbitrators shall be selected as follows: the Employee and the
Company shall each designate an individual to act as arbitrator; the two
arbitrators shall then jointly designate a third arbitrator.
18. Legal Expenses. If any dispute or controversy arises under or in
--------------
connection with this Agreement, the Company shall promptly pay all legal fees
and expenses, including, without limitation, reasonable attorneys' fees,
incurred by the Employee in seeking to obtain or enforce any right or benefit
under this Agreement, provided, however, that this obligation of the Company
shall not apply unless the Employee prevails in whole or in part.
19. Successors. This Agreement shall be binding upon and inure to
----------
the benefit of the Employee and his estate and the Company and any successor or
Parent (as hereinafter defined) of the Company, but neither this Agreement nor
any
<PAGE>
-20-
rights arising hereunder may be assigned or pledged by the Employee. For
purposes of this Agreement, the term "Company" shall include Manor Care, Inc.
and its successors and any Parent thereof. "Parent" shall mean any company
owning, directly or indirectly, stock possessing more than 50% of the total
combined voting power of all classes of stock in Manor Care, Inc. or its
successor entitled to vote.
20. Severability. Any provision in this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting 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.
21. Notices. All notices required or permitted to be given under
-------
this Agreement shall be given in writing and shall be deemed sufficiently given
if delivered by hand or mailed by registered mail, return receipt requested, to
his residence in the case of the Employee and to its principal executive offices
in the case of the Company. Either party may
<PAGE>
-21-
by giving written notice to the other party in accordance with this Section 21
change the address at which it is to receive notices hereunder.
22. Controlling Law. This Agreement shall in all respects be
---------------
governed by and construed in accordance with the laws of the State of Delaware
(without giving effect to principles of conflict of laws).
23. Changes to Agreement. This Agreement may not be changed orally
--------------------
but only in a writing, signed by the party against whom enforcement is sought.
24. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
25. Entire Agreement. This Agreement constitutes the entire
----------------
Agreement between the parties with respect to its subject matter and supersedes
all prior agreements, drafts, and written or oral representations of either
party.
<PAGE>
-22-
IN WITNESS WHEREOF, the parties have executed this Agreement as of
October 27, 1997.
EMPLOYEE: MANOR CARE, INC.
______________________ By:____________________________
James H. Rempe
ATTEST:
By:____________________________
<PAGE>
EXHIBIT 10.18
AMENDMENT TO
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 10th day of June, 1998, by and among MANOR CARE,
INC., a Delaware corporation (the "Company"), HEALTH CARE AND RETIREMENT
CORPORATION, a Delaware corporation ("HCR"), and JAMES H. REMPE (the
"Employee").
W I T N E S S E T H
WHEREAS, the Employee and the Company entered into an Employment Agreement
dated as of October 27, 1997 (the "Employment Agreement"); and
WHEREAS, HCR and the Company have entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Company will become a
wholly-owned subsidiary of HCR; and
WHEREAS, the Boards of Directors of HCR and the Company have approved the
Employment Agreement as amended by this Agreement; and
WHEREAS, the Employee is willing, for the consideration provided, to
continue in the employment of the Company pursuant to the terms and conditions
of the Employment Agreement as amended by this Agreement;
<PAGE>
-2-
NOW, THEREFORE, the parties, intending to be legally bound, agree to amend
the Employment Agreement as follows:
1. Section 1 of the Employment Agreement is amended by adding at the end
thereof the following:
"HCR shall cause the Company to satisfy its obligations under this
Agreement; provided, however, that HCR shall have no obligations or liabilities
under this Agreement if the transactions contemplated by the Merger Agreement
are not consummated."
2. A new subsection (g) is added at the end of Section 4 of the Employment
Agreement to read as follows:
"(g) Stay Bonus. If the Employee remains in employment with the
Company until December 31, 1998, the Employee shall be entitled to receive
within 30 days thereafter in a lump sum a special bonus in an amount equal
to the sum of (i) his annual rate of base salary on December 31, 1998, (ii)
the maximum bonus that the Employee could receive under the Company's
annual bonus program for the Company's fiscal year ending May 31, 1999, and
(iii) the Employee's car allowance for the Company's fiscal year ending May
31, 1999. Except as otherwise provided in Section 13(k), such special bonus
shall not be payable to the Employee if his employment with the Company
terminates for any reason prior to December 31, 1998."
3. Section 13 of the Employment Agreement is amended by adding at the end
thereof the following subsections (j) and (k):
"(j) If the Employee's employment with the Company terminates under
circumstances entitling the Employee to benefits pursuant to this Section
13 and
<PAGE>
-3-
the date of such termination of employment is before June 9, 2001, the
following special provisions shall apply:
(i) The severance benefit described in subsection (c) of this Section
13 shall be the greater of the severance benefit determined
pursuant to said subsection (c) or an amount equal to two times
the sum of (i) his highest annual rate of base salary at any time
preceding his termination of employment, (ii) the maximum bonus
that the Employee could have received under the Company's annual
bonus program for the fiscal year in which his employment
terminates or, if greater, the Employee's highest bonus for any
of the three fiscal years preceding his termination of
employment, and (iii) the Employee's highest car allowance at any
time preceding his termination of employment.
(ii) The Employee shall remain covered by the welfare plans that
covered him immediately prior to his termination of employment
for the greater of the period described in subsection (e) of this
Section 13 or for a period of two years.
(iii)The credit to the Employee's Company Contribution Account
pursuant to the first sentence of subsection (h) of this Section
13 shall be the greater of the credit so determined pursuant to
the first sentence of said subsection (h) or the product of (i)
12% and (ii) the Employee's highest annual rate of base salary at
any time preceding his termination of employment.
<PAGE>
-4-
"(k) If the Employee's termination of employment occurs prior to
December 31, 1998, the Employee shall be entitled to receive a special
bonus equal to the sum of (i) his annual rate of base salary immediately
preceding his termination of employment, (ii) the maximum bonus that the
Employee could have received under the Company's annual bonus program for
the fiscal year in which his employment terminates, and (iii) the greater
of the Employee's car allowance for the Company's fiscal year ending May
31, 1999 or for the fiscal year in which his employment terminates. Such
special bonus shall be paid in a lump sum within 30 days after the date of
such termination of employment."
Except as amended by this Agreement, the Employment Agreement shall remain
in full force and effect.
<PAGE>
-5-
IN WITNESS WHEREOF, the parties have executed this Agreement on the 10th
day of June, 1998.
EMPLOYEE: MANOR CARE, INC.
______________________ By:____________________________________
James H. Rempe
ATTEST:
By:____________________________________
HEALTH CARE AND RETIREMENT CORPORATION
By:____________________________________
ATTEST:
By:____________________________________
<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. ManorCare Health Services, Inc., a Delaware corporation - includes 109
active omitted subsidiaries operating in the United States.
2. New ManorCare Health Services, Inc., a Delaware corporation - includes 18
active omitted subsidiaries operating in the United States.
3. Four Seasons Nursing Centers, Inc., a Delaware corporation.
4. Vitalink Pharmacy Services, Inc., a Delaware corporation, of which the
Company owns approximately 50% of the Common Stock - includes 5 active
omitted subsidiaries operating in the United States.
5. In Home Health, Inc., a Minnesota corporation, of which the Company
effectively controls approximately 63% of the voting capital stock.
6. MNR Finance Corp., a Delaware corporation.
7. 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 of
our report dated July 3, 1998, included in Manor Care, Inc.'s Form 10-K for the
year ended May 31, 1998, 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, 33-63965, 333-14165,
333-16669 and 333-18607.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
August 14, 1998
<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>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 48,663
<SECURITIES> 0
<RECEIVABLES> 197,826
<ALLOWANCES> 30,604
<INVENTORY> 12,795
<CURRENT-ASSETS> 275,130
<PP&E> 1,519,441
<DEPRECIATION> 387,014
<TOTAL-ASSETS> 1,741,277
<CURRENT-LIABILITIES> 158,098
<BONDS> 533,729
0
0
<COMMON> 6,712
<OTHER-SE> 772,748
<TOTAL-LIABILITY-AND-EQUITY> 1,741,277
<SALES> 0
<TOTAL-REVENUES> 1,359,329
<CGS> 0
<TOTAL-COSTS> 1,037,494
<OTHER-EXPENSES> 79,275
<LOSS-PROVISION> 26,189
<INTEREST-EXPENSE> 12,385
<INCOME-PRETAX> 135,054
<INCOME-TAX> 50,831
<INCOME-CONTINUING> 84,223
<DISCONTINUED> 12,070
<EXTRAORDINARY> (3,216)
<CHANGES> (3,173)
<NET-INCOME> 89,904
<EPS-PRIMARY> 1.41<F1>
<EPS-DILUTED> 1.39<F1>
<FN>
<F1>THE COMPANY NOW PRESENTS SIMPLE EARNINGS PER SHARE (EPS) AS WELL AS DILUTED
EPS ON THE FACE OF ITS INCOME STATEMENT WHICH ARE CALCULATED IN ACCORDANCE WITH
SFAS 128. THE COMPANY HAS PRESENTED BASIC EPS DATA IN THE EARNINGS PER SHARE -
PRIMARY LINE AND DILUTED EPS DATA IN THE EARNINGS PER SHARE - FULLY DILUTED
LINE.</FN>
</TABLE>
