SEVERANCE AGREEMENT

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          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

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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

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          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

 

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     (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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          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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          (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.

 

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          (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

 

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          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,

 

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               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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               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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     "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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     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

 

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     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

 

                                       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

 

                                       16

<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

 

 

                                   SCHEDULE I

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