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