-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ALUS91d6RLcVVdbnM31Lke09xWQhW/xGiwTL/OHpxBZzp7B+wiSmfLu/mx4Jpm6t Q3I9ff0N+uJjIfrwKhA6bg== 0000950137-98-000674.txt : 19980224 0000950137-98-000674.hdr.sgml : 19980224 ACCESSION NUMBER: 0000950137-98-000674 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980223 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH CARE & RETIREMENT CORP / DE CENTRAL INDEX KEY: 0000878736 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 341687107 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10858 FILM NUMBER: 98547498 BUSINESS ADDRESS: STREET 1: ONE SEAGATE CITY: TOLEDO STATE: OH ZIP: 43604-2616 BUSINESS PHONE: 4192525500 MAIL ADDRESS: STREET 1: ONE SEAGATE CITY: TOLEDO STATE: OH ZIP: 43604-2616 10-K 1 FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10858 HEALTH CARE AND RETIREMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 34-1687107 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE SEAGATE, TOLEDO, OHIO 43604-2616 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered -------------------- --------------------- COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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] Based on the closing price of $39.6875 per share on January 30, 1998, the aggregate market value of the registrant's voting stock held by non-affiliates was $1,718,184,191. 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 Health Care and Retirement Corporation outstanding as of January 30, 1998 was 44,553,984. 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 Stockholders' Meeting to be held May 5, 1998 are incorporated by reference in Part III. 2 TABLE OF CONTENTS
PART I ITEM 1. BUSINESS ........................................................2 ITEM 2. PROPERTIES ......................................................8 ITEM 3. LEGAL PROCEEDINGS ...............................................9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS .................................9 ITEM 6. SELECTED FINANCIAL DATA ........................................10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................................11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................................16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .......................................36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................................36 ITEM 11. EXECUTIVE COMPENSATION ........................................38 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .........................................38 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..................................................38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .......................................39 SIGNATURES ..................................................................43 EXHIBITS ...................................................................E-1
1 3 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Health Care and Retirement Corporation ("HCR" or the "Company") is a provider of a range of health care services, including long term care, subacute medical care, rehabilitation therapy, home health care, pharmacy services and management services for subacute care, rehabilitation therapy, vision care and eye surgery. The most significant portion of HCR's business is long term care. The Company operates 129 nursing centers with 16,700 beds located in 16 states. The Company owns 121 of the centers, with 93 operating under the Heartland name. At December 31, 1997, HCR operated 63 medical specialty units with more than 2,200 beds, within its nursing centers. Medical specialty units provide subacute medical care, intensive rehabilitation programs or Alzheimer's care programs. MileStone Healthcare Inc., acquired in January 1997 and a wholly owned subsidiary, is a leading provider of program management services for subacute care and acute rehabilitation programs in hospitals and skilled nursing centers, and comprehensive outpatient rehabilitation facilities (CORFs). These services are provided in 53 subacute and rehabilitation units and 10 CORFs located in 14 states at December 31, 1997. Heartland Rehabilitation Services, Inc., a wholly owned subsidiary, provides rehabilitation therapy in HCR centers, skilled centers of others, hospitals and outpatient therapy clinics serving the midwest and mid-Atlantic states, Texas and Florida. This subsidiary expanded its operations by acquiring or opening 22 clinics in 1997, making a total of 73 outpatient clinics at December 31, 1997. The executive offices of the Company are located at One SeaGate, Toledo, Ohio 43604-2616. Its telephone number is (419) 252-5500. NARRATIVE DESCRIPTION OF BUSINESS Long Term Care Services The Company generally provides comprehensive long term care services to patients in all of its centers. These services include three basic types of care. Skilled Nursing Care. The Company operates 124 long term care centers which provide health care services emphasizing skilled nursing care. Registered nurses, licensed practical nurses and certified nursing assistants provide services prescribed by the patient's attending physician, including administration of medications and injections on a 24-hour basis. Licensed therapists provide physical, speech, occupational and respiratory therapy for patients recovering from strokes, heart attacks, orthopedic conditions or other illnesses, injuries or disabilities. In addition, the centers provide daily dietary services, social services, therapeutic recreational activities, 2 4 housekeeping and laundry services. Dentistry, podiatry, psychological counseling, laboratory, pharmacy and X-ray services are available. Assisted Living Services. Three of the Company's centers and 19 units in other HCR centers are dedicated to providing assisted living or personal care services. These services, which are less intensive than the Company's skilled nursing care, assist patients with the general activities of daily living such as dressing, bathing and meal preparation. Residential or Retirement Care. Two of the Company's centers are dedicated to providing residential services to residents with greater independence and less demanding health needs than the patients in the Company's other centers. These retirement centers provide general supervision and a protected environment, including room, board and planned social activities. Specialty Medical Services In certain centers specialized nursing or rehabilitative care is provided for patients whose medical problems are more acute or require more sophisticated treatment. These specialty services include the following programs. Subacute Medical Care and Rehabilitation Programs. These programs are provided in specialized units with specially trained staff, appropriate equipment and increased involvement by physician specialists. Working closely with patients, families and insurers, interdisciplinary teams develop comprehensive, individualized patient care plans that target the essential medical and functional discharge objectives. Programs for medically complex patients cover post-coronary surgery care, oncology, pain management, infectious disease treatment, peritoneal and hemo dialysis and complex wound care. Rehabilitation programs promote recovery from major surgery, stroke, amputation, joint replacement, head injury or general neurologic or orthopedic conditions. Alzheimer's Care Programs. Specialized care and programming are provided by trained staff in a growing number of HCR centers for persons who have Alzheimer's or related disorders. Education and support are also provided to families of these patients. Health Care Services HCR provides rehabilitation therapy in its centers, skilled centers of others, hospitals and 73 outpatient clinics. The home health care business specializes in all levels of home health, hospice care and rehabilitation therapy from 33 offices. HCR 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 53 subacute care and acute rehabilitation programs in hospitals and skilled nursing centers and 10 comprehensive outpatient rehabilitation facilities. HCR owns 50% of a partnership, Heartland Healthcare Services, which provides high quality pharmaceutical products to long term care centers and institutional pharmacies. 3 5 Labor Labor costs account for approximately 63% of the Company's operating expenses and the Company competes with other health care providers for the services of nurses and other professional and nonprofessional health care workers. In the past, the health care industry has periodically experienced shortages of nurses. 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 possible 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.
1997 1996 1995 ------ ------ ------ Medicaid 29.9% 32.5% 33.6% Medicare 26.2% 27.4% 28.2% Private pay & other 43.9% 40.1% 38.2% ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
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. The Medicare program is generally a cost-based reimbursement program. The Medicaid programs differ from state to state and generally reimburse the Company under prospective rate methodologies. The Balanced Budget Act of 1997 (Balanced Budget Act) signed into law on August 5, 1997, changes the Medicare reimbursement methodology to a prospective payment system effective with cost reporting periods beginning after July 1, 1998 and, among other things, repeals the federal payment standard for Medicaid nursing facilities after October 1, 1997, thereby granting states greater flexibility in establishing payment rates. There can be no assurance that these changes or any future changes or any future health care legislation will not adversely affect HCR's business. 4 6 Regulation and Licenses The federal government and all states in which the Company operates regulate, license or certify various aspects of the Company's business. Long term care centers are subject to periodic inspection by governmental and other authorities to assure continued compliance with various requirements such as resident rights, admission, discharge and transfer rights, quality of life, quality of care, nursing, dietary, rehabilitation, dental and pharmacy services, administration, physical environment, infection control, resident assessment and resident behavior and facility practices. These reviews and inspections may affect either the license to operate a long term care facility or the eligibility to participate in the Medicare and Medicaid programs. The failure to maintain or renew any required regulatory licenses or certifications could prevent the Company from offering its existing services at the non-complying facility. In general, state licenses are renewable annually. At December 31, 1997, the Company had valid licenses at all centers where such licenses were necessary for continued operation and the Company expects that pending license renewals will be favorably completed. It is possible that, as a result of alleged deficiencies observed during an inspection or review, the license at a center could be placed on a provisional or conditional status or the Medicaid or Medicare certification could be subject to termination unless a resurvey determines that the alleged deficiencies were corrected or substantial progress toward correction was achieved. At December 31, 1997 no centers had received final notices or determinations that Medicare and/or Medicaid certifications would be terminated. At December 31, 1997, the Company had one center operating under a provisional or conditional license. As of December 31, 1997, the Company had 114 Medicaid certified facilities and 124 Medicare certified facilities. Changes in federal regulations from the Omnibus Budget Reconciliation Act of 1987 became effective July 1, 1995. These federal regulations affect the survey process for nursing facilities and the authority of state survey agencies and the Health Care Financing Administration to impose sanctions on facilities based upon noncompliance with requirements for participation in the Medicare and Medicaid programs. Sanctions can include temporary management, denial of payment for new admissions, denial of payment for all residents, civil fines of $50 to $10,000 per day of violation, closure of the facility, directed plans of correction and directed in-service training. The Company has adopted policies and procedures which are designated to facilitate the Company's compliance with the regulations, although, there can be no assurance that, in the future, the Company will not have sanctions imposed, including civil fines, for alleged violations of the requirements. Government reimbursement programs such as Medicare and Medicaid are subject to statutory and regulatory changes, rate adjustments, administrative rulings and interpretations and processing delays by fiscal intermediaries, all of which could materially decrease the rate of payments to the Company for its services and supplies rendered to patients covered by such programs. In addition, under the retrospective reimbursement system used by the Medicare program and the Medicaid programs in certain states in which the Company operates, the Company receives interim payments 5 7 during the year for patient care services based on each center's expected reimbursable cost. Based on the submission of year end cost reports and routine audits, the amount of reimbursement can be adjusted in favor of the Company or the program. The Company is also subject to federal and state laws which govern financial and other arrangements involving healthcare providers. Such laws include the illegal remuneration provisions of the Social Security Act, which make it a felony to solicit, receive, offer to pay or pay any kickback, bribe or rebate in return for referring a person for any item or service or in return for purchasing, leasing, ordering or arranging for any good, facility, service or item paid by federal health care programs. The Office of the Inspector General of the Department of Health and Human Services, the Department of Justice and other federal agencies interpret these fraud and abuse provisions liberally and enforce them aggressively. The recently enacted Balanced Budget Act also includes numerous health fraud provisions, including: increased mandatory exclusion periods for multiple health fraud convictions and permanent exclusion for those convicted of three health care-related crimes; authority for the Secretary to refuse to enter into Medicare agreements with convicted felons; new civil money penalties for contracting with an excluded provider or violating the federal anti-kickback statute; and an expansion of the mandatory and permissive exclusions added by the Health Insurance Portability and Accountability Act of 1996 to substantially any federal health care program. In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as providers 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 (including Medicare and Medicaid), asset forfeitures and civil and criminal penalties. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. A civil action to exclude a provider from the Medicaid and/or Medicare programs may be brought. There are also other civil and criminal statutes applicable to nursing facilities and other health care providers, such as those governing false claims. The Company believes it is in compliance with all of the foregoing statutes and regulations. The Company maintains a corporate compliance program to facilitate its compliance with applicable statutes and regulations. However, there can be no assurance that government officials responsible for enforcing these statutes will not assert that the Company or certain transactions in which the Company is involved are in violation of these statutes. Competitive Conditions The long term care industry is highly fragmented and the Company competes 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. In addition the Company competes with alternative types of health care providers such as home health care, adult day care centers, and hospitals which convert underutilized acute care capacity to skilled nursing facilities. Although the Company has 129 centers in 16 states, competitive factors are dominated by local or regional characteristics. 6 8 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. Cautionary Statements Statements contained in this Annual Report on Form 10-K which are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). In addition, the Company, through its senior management, from time to time makes forward-looking oral and written public statements concerning the Company's expected future operations and performance and other developments. The following cautionary statements are being made pursuant to the provisions of the Act with the intention of obtaining the benefits of the safe harbor provisions of the Act. HCR cautions investors that any forward-looking statements made by the Company are necessarily estimates reflecting the Company's best judgement based upon current information, and involve known and unknown risks and uncertainties and other factors that may cause actual future results to differ materially from the estimates in the forward-looking statements. Such factors include legislative, regulatory or other changes in the healthcare industry at either or both the federal or state levels, changes in reimbursement for the Company's services by governmental or private payors and the Company's ability to respond to such regulatory and/or reimbursement changes, competition, the Company's ability to recruit and retain competent management and other personnel, the Company's ability to negotiate satisfactory arrangements with third-party payors, the Company's ability to successfully integrate acquisitions, general conditions in the economy and capital markets, and other factors set forth herein or identified from time to time in the Company's Securities and Exchange Commission filings and in other public announcements. Employees As of December 31, 1997, the Company has approximately 22,000 full and part-time employees. Approximately 2,600 of the employees are salaried and the remainder are paid on an hourly basis. Approximately 2,200 of the employees are members of labor unions. 7 9 ITEM 2. PROPERTIES The principal properties of the registrant and its subsidiaries, which are of material importance to the conduct of its business, consist of 129 long term care centers located in 16 states, 73 outpatient therapy clinics located in Ohio, New Jersey, Virginia, Kentucky and Florida, and 33 home health care offices located in Michigan, Ohio, Indiana, Illinois and Florida. All of the outpatient clinics and home health care offices are leased. While each long term care center is unique, the average center is approximately 40,000 square feet in size and provides 120 semi-private licensed beds. The centers are predominately single story structures with brick or stucco facades, dry wall partitions and attractive interior finishes. Common areas include dining, therapy, personal care and activities rooms, 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, 1997, approximately 89% of the beds were utilized. The following table shows the number and location of centers and beds operated by the Company as of December 31, 1997.
Number of Centers -------------------- Owned Leased Number of Beds --------- --------- -------------- Ohio 31 (1) 3,489 Florida 19 6 3,298 Michigan 23 1 3,090 Texas 8 1,357 Pennsylvania 7 1 1,127 West Virginia 7 940 Wisconsin 5 826 Illinois 7 618 Maryland 3 519 South Carolina 4 481 Virginia 2 214 Tennessee 1 211 Kentucky 1 200 Indiana 1 120 New Jersey 1 106 Missouri 1 98 --- --- ------ 121 8 16,694 === === ======
The Company subleases space for its corporate offices in Toledo, Ohio from Owens-Illinois, Inc. (1) Some or all of the property at two centers in Ohio are subject to liens which encumber the properties in an aggregate amount of approximately $1,655,000. 8 10 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings other than litigation arising in the ordinary course of business for which the Company has insurance coverage. The Company does not believe the results of such litigation, even if the outcome were unfavorable to the Company, would have a material adverse effect on its financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 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 1996 and 1997 is shown below. The prices are adjusted to reflect a 3-for-2 stock split effected in 1996 by the payment of a 50% stock dividend on June 5 to stockholders of record on May 21, 1996.
Low High --- --- 1996 First Quarter $22.4167 $27.4167 Second Quarter $23.2500 $26.6250 Third Quarter $21.7500 $26.0000 Fourth Quarter $23.8750 $29.2500 1997 First Quarter $25.0000 $30.7500 Second Quarter $27.7500 $34.8750 Third Quarter $32.9375 $38.3750 Fourth Quarter $35.5000 $42.5000
No cash dividends have been declared or paid on the common stock. The number of stockholders of record on January 31, 1998 was 308. More than 98% of the outstanding shares were registered in the name of Depository Trust Company, or CEDE, which held such shares on behalf of 224 brokerage firms, banks and other financial institutions. The shares attributed to these financial institutions, in turn, represented the interests of more than 15,000 unidentified beneficial owners. 9 11
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- FIVE-YEAR FINANCIAL HISTORY 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands, except per share and other data) Results of Operations - --------------------- Revenues $891,963 $782,023 $713,469 $615,103 $559,344 Expenses: Operating 705,867 625,331 575,462 492,990 450,720 General and administrative 34,983 32,182 30,440 29,897 27,747 Depreciation and amortization 37,395 30,677 25,973 21,283 18,567 -------- -------- -------- -------- -------- 778,245 688,190 631,875 544,170 497,034 -------- -------- -------- -------- -------- Income from operations 113,718 93,833 81,594 70,933 62,310 Interest expense, net (15,339) (10,415) (9,835) (8,662) (9,490) Equity in earnings of partnership 2,806 1,500 531 -------- -------- -------- -------- -------- Income before taxes and cumulative effect 101,185 84,918 72,290 62,271 52,820 Income taxes 31,064 25,475 21,687 20,238 18,751 -------- -------- -------- -------- -------- Income before cumulative effect 70,121 59,443 50,603 42,033 34,069 Cumulative effect as of December 31, 1992 of change in the method of accounting for income taxes 1,430 -------- -------- -------- -------- -------- Net income $ 70,121 $ 59,443 $ 50,603 $ 42,033 $ 35,499 ======== ======== ======== ======== ======== Earnings per share - basic: Income before cumulative effect $ 1.57 $ 1.30 $ 1.08 $ 0.88 $ 0.70 Cumulative effect of accounting change 0.03 -------- -------- -------- -------- -------- Net income $ 1.57 $ 1.30 $ 1.08 $ 0.88 $ 0.73 ======== ======== ======== ======== ======== Earnings per share - diluted: Income before cumulative effect $ 1.51 $ 1.24 $ 1.03 $ 0.84 $ 0.68 Cumulative effect of accounting change 0.03 -------- -------- -------- -------- -------- Net income $ 1.51 $ 1.24 $ 1.03 $ 0.84 $ 0.71 ======== ======== ======== ======== ======== Cash provided by operating activities $ 72,611 $ 91,475 $ 59,519 $ 74,557 $ 60,668 Financial Position - ------------------ Total assets $936,351 $802,784 $729,191 $671,430 $635,994 Working capital 49,427 22,539 14,391 20,154 11,411 Long-term debt 292,951 202,295 159,082 149,028 155,500 Stockholders' equity 434,006 393,034 374,430 344,501 316,919 Financial Measurements (Unaudited) - ---------------------------------- Income from operations as a percent of revenues 12.7% 12.0% 11.4% 11.5% 11.1% Income before cumulative effect as a percent of revenues 7.9 7.6 7.1 6.8 6.1 Net debt-to-capital ratio 40.1 34.1 29.8 26.6 32.1 Other Data (Unaudited) - ---------------------- Number of facilities 129 128 127 129 124 Number of licensed beds 16,694 16,534 16,366 16,605 15,942 Percentage of occupied beds 89% 89% 90% 91% 92% Number of employees 22,000 20,000 18,500 16,500 16,000
The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." All per share data have been adjusted to reflect the 3-for-2 stock split effected in the form of a dividend in 1996. 10 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION DECEMBER 31, 1997 AND 1996 Health Care and Retirement Corporation (HCR or Company) paid $55,028,000 in 1997 for the acquisition of various businesses, including a privately held company, MileStone Healthcare, Inc., and contingent consideration related to prior year acquisitions. The businesses acquired provide rehabilitation therapy services and program management services for comprehensive medical rehabilitation and subacute care. The acquisitions were accounted for under the purchase method of accounting. HCR acquired assets of $12,000,000, assumed liabilities of $21,000,000 and recorded $64,000,000 of intangible assets. Certain of these agreements contain a provision for additional consideration contingent upon the future financial results of the business. The maximum contingent consideration related to 1997 and prior acquisitions aggregates $54,288,000 and will, if earned, be paid over the next five years and treated as additions to the purchase price of the businesses. Property and equipment increased $50,238,000 as a result of renovations and capital improvements to existing facilities, the construction of a 180-bed facility in Ann Arbor, Michigan, that opened in June, 1997 and the partial construction of a 120-bed facility near Milwaukee, Wisconsin, scheduled for completion in the third quarter of 1998. There was no valuation allowance related to the deferred tax assets at December 31, 1997 and 1996, as the assets could be realized through the reversal of existing taxable temporary differences. RESULTS OF OPERATIONS - OVERVIEW HCR is a provider of a range of health care services, including long term care, subacute medical care, rehabilitation therapy, home health care, pharmacy services and management services for subacute care, rehabilitation therapy, vision care and eye surgery. The most significant portion of HCR's business relates to long term care, operating 129 centers in 16 states with more than half located in Ohio, Michigan and Florida. The major factors influencing HCR's financial performance are acquisitions, consistently high occupancy rates in the Company's centers, and continued improvement in the percentage of revenue from Medicare, private pay and insured patients. Growth in the core business continues with the construction of new facilities, including a 165-bed facility in West Bloomfield, Michigan, in December 1996 and 180-bed facility in Ann Arbor, Michigan, in June 1997. HCR is expanding the number of medical specialty units within its new facilities as well as its existing long term care centers that provide subacute medical care, rehabilitation programs or Alzheimer's care programs. During 1997, HCR added 5 medical specialty units, bringing the total to 63 units with more than 2,200 beds at December 31, 1997, compared to 58 units with 1,800 beds and 56 units with 1,700 beds at December 31, 1996 and 1995, respectively. 11 13 HCR has developed an integrated health care network from acquisitions, management agreements and a partnership. MileStone Healthcare, Inc., acquired in January 1997 and a wholly owned subsidiary, is a leading provider of program management services for subacute care and acute rehabilitation programs in hospitals and skilled nursing centers, and comprehensive outpatient rehabilitation facilities (CORFs). These services are provided in 53 subacute and rehabilitation units and 10 CORFs located in 14 states at December 31, 1997. Heartland Rehabilitation Services, Inc., a wholly owned subsidiary, provides rehabilitation therapy in long term care centers of HCR, skilled centers of others, hospitals and outpatient therapy clinics serving the midwestern and mid-Atlantic states, Texas and Florida. This subsidiary expanded its operations by acquiring or opening 22 clinics in 1997, 32 clinics in 1996 and 16 clinics in 1995, making a total of 73 outpatient clinics at December 31, 1997. 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 and Florida. This subsidiary acquired 2 offices in 1996 and 31 offices in 1995, making a total of 33 offices at December 31, 1997. 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 certain percentage of operating income as defined by the agreements. In 1994 HCR formed a partnership with Omnicare, Inc., a leading provider of institutional pharmacy services. Each of the companies has a 50% share in the partnership, Heartland Healthcare Services, which provides high quality pharmaceutical products on a cost-effective basis to long term care centers and institutional pharmacies. HCR accounts for the partnership under the equity method of accounting. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenue increased $109,940,000 or 14% from the prior year. Of the increase, 60% related to the acquisition of various businesses in 1996 and 1997. The remaining increases were due to mix changes and improved per diem rates, resulting from more specialized care, such as subacute medical care and rehabilitative services for more acutely ill patients. The occupancy levels were 89% in 1996 and 1997. The mix of revenue from Medicare, private pay and insured patients increased from 68% in 1996 to 70% in 1997, primarily due to the growth in revenue from acquisitions. Operating expenses increased $80,536,000 or 13%. Of the increase, 60% related to the acquisition of various businesses in 1996 and 1997. The remaining increases were related to labor costs and general increases in other expenses. Labor costs, excluding those related to the acquisitions, represented 27% of the increase due to the average wage rate increases as well as growth in the staffing levels related to medical specialty units, rehabilitative services and home health care. 12 14 General and administrative expense approximated 4% of revenue in 1996 and 1997. The increase in depreciation of $3,285,000 related to the capital expenditures during 1996 and 1997 for new facilities, renovations and capital improvements. Amortization increased $3,433,000 due to the intangible assets recorded in connection with acquisitions in 1996 and 1997. The increase in interest expense of $5,405,000 was attributable to higher debt levels. The equity in earnings of the partnership increased as a result of the growth in supplying pharmaceutical needs of HCR centers and Omnicare pharmacies. HCR does not believe that inflation has had a material impact on the results of operations. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue increased $68,554,000 or 10% from the prior year. Of the increase, 59% related to the acquisition of various businesses in 1995 and 1996. The remaining increases were due to mix changes and improved per diem rates, resulting from more specialized care, such as subacute medical care and rehabilitative services for more acutely ill patients. The occupancy levels were 90% in 1995 and 89% in 1996. The mix of revenue from Medicare, private pay and insured patients increased from 66% in 1995 to 68% in 1996, primarily due to the growth in revenue from rehabilitation services. Operating expenses increased $49,869,000 or 9%. Of the increase, 70% related to the acquisition of various businesses in 1995 and 1996. The remaining increases were related to labor costs and general increases in other expenses. Labor costs, excluding those related to the acquisitions, represented 28% of the increase due to the average wage rate increases as well as growth in the staffing levels related to medical specialty units, rehabilitative services and home health care. General and administrative expense, which approximated 4% of revenue in 1995 and 1996, increased $1,742,000 from the prior year. The increase in depreciation of $4,155,000 related to the capital expenditures during 1995 and 1996 for renovations, capital improvements and medical specialty units. Amortization increased $549,000 due to the intangible assets generated from the various acquisitions in 1995 and 1996. The increase in interest expense of $1,139,000 was attributable to higher debt levels. The equity in earnings of the partnership increased as a result of internal expansion and an acquisition in 1996. HCR does not believe that inflation has had a material impact on the results of operations. NEW ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), which is effective December 31, 1998, with interim disclosures beginning in 1999. Comparative information for prior years is required to be restated. This Statement requires public business enterprises to report certain information about operating segments, their products and services, the geographic areas in which they operate, and their major customers. The operating segments should be based on the structure of the enterprise's internal organization whose operating results are regularly reviewed by the company's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Management has not determined the effect, if any, of FAS 131 on the consolidated financial statements. 13 15 CAPITAL RESOURCES AND LIQUIDITY During 1997, HCR satisfied its cash requirements from a combination of cash generated from operating activities and borrowing under a bank credit agreement. HCR used the cash principally for capital expenditures, acquisition of businesses, repayment of debt and the purchase of HCR common stock. At December 31, 1997, the Company maintained $7,455,000 in cash and cash equivalents, of which $2,700,000 was invested in short-term investments. Cash used in investing activities amounted to $105,160,000 in 1997. Expenditures for property and equipment consisted of $39,862,000 for renovations, capital improvements and information systems, and $9,670,000 for the construction of a 180-bed facility in Ann Arbor, Michigan, which was completed in the second quarter, and the start of construction of a 120-bed facility near Milwaukee, Wisconsin. As part of the diversification into other health care services, HCR acquired various businesses and paid contingent consideration for prior years' acquisitions for a total of $55,028,000 in 1997. Net cash provided by financing activities amounted to $37,615,000. The increase in debt under the credit agreement of $92,600,000 was partially used to repay other long-term debt of $20,667,000 which included debt assumed in the first quarter acquisitions and to purchase 1,139,100 shares of HCR stock for $38,113,000. As of December 31, 1997, a total of 6,264,650 HCR shares have been purchased, pursuant to the authority to purchase up to 8,000,000 HCR shares through December 31, 1998. During 1997, a major portion of HCR's credit agreement was extended for another year in accordance with a provision under which HCR may annually request an extension of the commitment and, if the lenders agree, the maturity of the agreement will be extended for an additional year. At December 31, 1997, the credit agreement permitted HCR to borrow up to $325,000,000 through August 2, 2001; then the borrowing capacity is reduced to $295,000,000 through August 2, 2002. HCR had borrowed $285,000,000 and issued letters of credit totalling $12,359,000, which left a remaining unused borrowing capacity of $27,641,000 at December 31, 1997. The letters of credit benefit certain third party insurers and relate to recorded liabilities. HCR had obligations under noncancellable operating leases totalling $37,283,000 at December 31, 1997. HCR believes that its cash flow from operations will be sufficient to cover debt payments, future capital expenditures and operating needs. It is likely that HCR 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. 14 16 OTHER HCR is in the process of changing substantially all of its information systems related to financial reporting and benefits to accommodate its growth strategy. These information systems are anticipated to be operational by the end of the first quarter of 1999 and will be Year 2000 compatible. The estimated costs of these systems is expected to be less than $15 million. Most of these costs will be capitalized and amortized over a five to twelve year period. HCR has a Year 2000 task force which is determining the extent to which it is vulnerable to any third party failures to remediate their own Year 2000 issues. The task force is having, and will continue to have, formal communications with all of the Company's significant suppliers and large customers to determine the extent, if any, and the remedies, if needed, to which the Company's interface systems are vulnerable. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on HCR's systems. 15 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- Report of Ernst & Young LLP Independent Auditors 17 Consolidated Balance Sheets 18 Consolidated Statements of Income 19 Consolidated Statements of Cash Flows 20 Consolidated Statements of Stockholders' Equity 21 Notes to Consolidated Financial Statements 22 Supplementary Data (Unaudited) - Summary of Quarterly Results 35
16 18 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS The Board of Directors and Stockholders Health Care and Retirement Corporation We have audited the accompanying consolidated balance sheets of Health Care and Retirement Corporation and subsidiaries (HCR) as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HCR and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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. ERNST & YOUNG LLP Toledo, Ohio January 27, 1998 17 19 HEALTH CARE AND RETIREMENT CORPORATION CONSOLIDATED BALANCE SHEETS
December 31 ----------- 1997 1996 ---- ---- (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 7,455 $ 2,389 Receivables, less allowances for doubtful accounts of $19,184 and $13,335 138,049 114,777 Prepaid expenses 5,408 10,023 Deferred income taxes 19,839 19,801 -------- -------- Total current assets 170,751 146,990 Net property and equipment 552,973 533,457 Intangible assets, net of amortization of $13,764 and $7,602: Goodwill 102,078 43,664 Other 32,124 32,472 Other assets 78,425 46,201 -------- -------- Total assets $936,351 $802,784 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 36,580 $ 32,218 Employee compensation and benefits 36,855 34,425 Accrued insurance liabilities 17,873 23,943 Other accrued liabilities 29,162 32,448 Long-term debt due within one year 854 1,417 -------- -------- Total current liabilities 121,324 124,451 Long-term debt 292,951 202,295 Deferred income taxes 67,276 66,798 Other liabilities 20,794 16,206 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized Common stock, $.01 par value, 80,000,000 shares authorized, 48,860,406 shares issued 489 489 Capital in excess of par value 273,325 268,036 Retained earnings 275,519 210,306 -------- -------- 549,333 478,831 Less treasury stock, at cost (4,637,597 and 3,999,541 shares) (115,327) (85,797) -------- -------- Total stockholders' equity 434,006 393,034 -------- -------- Total liabilities and stockholders' equity $936,351 $802,784 ======== ========
See accompanying notes. 18 20 HEALTH CARE AND RETIREMENT CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31 ---------------------- 1997 1996 1995 ---- ---- ---- (In thousands, except per share amounts) Revenues $891,963 $782,023 $713,469 Expenses: Operating 705,867 625,331 575,462 General and administrative 34,983 32,182 30,440 Depreciation and amortization 37,395 30,677 25,973 -------- -------- -------- 778,245 688,190 631,875 -------- -------- -------- Income from operations 113,718 93,833 81,594 Interest expense (17,203) (11,798) (10,659) Interest income 1,864 1,383 824 Equity in earnings of partnership 2,806 1,500 531 -------- -------- -------- Income before income taxes 101,185 84,918 72,290 Income taxes 31,064 25,475 21,687 -------- -------- -------- Net income $ 70,121 $ 59,443 $ 50,603 ======== ======== ======== Earnings per share: Basic $ 1.57 $ 1.30 $ 1.08 Diluted $ 1.51 $ 1.24 $ 1.03
See accompanying notes. 19 21 HEALTH CARE AND RETIREMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 ---------------------- 1997 1996 1995 ---- ---- ---- (In thousands) OPERATING ACTIVITIES Net income $70,121 $59,443 $50,603 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,709 32,020 27,630 Provision for bad debts 10,644 8,073 5,288 Deferred income taxes 3,537 2,750 4,391 Equity in earnings of partnership (2,806) (1,500) (531) Gain from sale of property and equipment (1,538) Changes in assets and liabilities, excluding businesses acquired: Receivables (23,656) (21,835) (17,307) Prepaid expenses and other assets (24,770) 4,110 (18,137) Accounts payable 3,172 (1,683) (1,013) Employee compensation and benefits 2,507 4,227 2,800 Accrued insurance and other liabilities (3,847) 5,870 7,333 -------- -------- -------- Total adjustments 2,490 32,032 8,916 -------- -------- -------- Net cash provided by operating activities 72,611 91,475 59,519 -------- -------- -------- INVESTING ACTIVITIES Purchases and construction of property and equipment (49,532) (51,901) (33,877) Proceeds from sale of property and equipment 5,486 Cash paid to acquire businesses (55,028) (36,548) (35,236) Investment in partnership (600) (3,945) (1,975) -------- -------- -------- Net cash used in investing activities (105,160) (92,394) (65,602) -------- -------- -------- FINANCING ACTIVITIES Net borrowings under bank credit agreement 92,600 42,400 14,000 Principal payments of long-term debt (20,667) (1,896) (4,950) Proceeds from exercise of stock options 3,795 2,573 3,084 Purchase of common stock for treasury (38,113) (47,511) (28,161) -------- -------- -------- Net cash provided by (used in) financing activities 37,615 (4,434) (16,027) -------- -------- -------- Net increase (decrease) in cash 5,066 (5,353) (22,110) Cash and cash equivalents at beginning of year 2,389 7,742 29,852 -------- -------- -------- Cash and cash equivalents at end of year $ 7,455 $ 2,389 $ 7,742 ======== ======== ========
See accompanying notes. 20 22 HEALTH CARE AND RETIREMENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Total in Excess Stock- Common of Par Retained Treasury holders Stock Value Earnings Stock Equity ----- ----- -------- ------ ------ (In thousands, except share data) Balance at January 1, 1995 $326 $259,863 $107,266 $(22,954) $344,501 Vesting of restricted stock 1,012 1,012 Purchase of treasury stock (1,483,500 shares) (28,161) (28,161) Exercise of stock options (522,675 shares issued from treasury shares) (3,336) 6,530 3,194 Tax benefit from restricted stock and exercise of stock options 3,281 3,281 Net income 50,603 50,603 ------ -------- -------- -------- -------- Balance at December 31, 1995 326 264,156 154,533 (44,585) 374,430 Vesting of restricted stock 1,012 1,012 Purchase of treasury stock (1,939,400 shares) (47,511) (47,511) Exercise of stock options (370,939 shares issued from treasury shares) (3,670) 6,299 2,629 Tax benefit from restricted stock and exercise of stock options 3,031 3,031 Effect of 50% stock distribution 163 (163) Net income 59,443 59,443 ------ -------- -------- -------- -------- Balance at December 31, 1996 489 268,036 210,306 (85,797) 393,034 Purchase of treasury stock (1,149,897 shares, including 10,797 shares from employees) (38,510) (38,510) Exercise of stock options (511,841 shares issued from treasury shares) (4,908) 8,980 4,072 Tax benefit from exercise of stock options 5,289 5,289 Net income 70,121 70,121 ------ -------- -------- -------- -------- Balance at December 31, 1997 $489 $273,325 $275,519 $(115,327) $434,006 ====== ======== ======== ========= ========
See accompanying notes. 21 23 HEALTH CARE AND RETIREMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES NATURE OF OPERATIONS Health Care and Retirement Corporation (HCR or Company) is a provider of a range of health care services, including long term care, subacute medical care, rehabilitation therapy, home health care, pharmacy services and management services for subacute care, rehabilitation therapy, vision care and eye surgery. The most significant portion of HCR's business relates to long term care, operating 129 centers in 16 states with more than half located in Ohio, Michigan and Florida. Within HCR's centers, there are 63 medical specialty units which provide subacute medical care, rehabilitation programs or Alzheimer's care programs. HCR provides rehabilitation therapy in nursing centers of HCR and others, and 73 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 Ohio, Michigan, Indiana, Illinois and Florida. HCR owns 50% of a pharmacy partnership that provides pharmaceutical products to long term care centers and pharmacies. Management services are provided to 53 subacute care and acute rehabilitation programs in hospitals and skilled nursing centers and 10 comprehensive outpatient rehabilitation facilities (CORFs) located in 14 states. HCR has entered into long-term agreements that provide capital and management services to physician practices in the midwestern states, specializing in vision care and refractive eye surgery. BASIS OF PRESENTATION The consolidated financial statements include the accounts of HCR and its majority owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. HCR's 50% ownership investment in a pharmacy partnership is recorded under the equity method. 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. 22 24 PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, generally 5 to 10 years for equipment and furnishings and 20 to 40 years for buildings and improvements. INTANGIBLE ASSETS Goodwill and other intangible assets of businesses acquired are amortized by the straight-line method over periods ranging from 5 to 15 years for noncompete agreements, 40 years for management contracts which represent the related term of the contracts and 40 years for goodwill. Deferred financing costs are amortized to interest expense over the life of the related borrowings, using the interest method. 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. HCR 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. As of December 31, 1997, HCR does not believe there is any indication that the carrying value or the amortization period of its assets needs to be adjusted. 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. INCOME TAXES HCR accounts for income taxes under the liability method as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." HCR and its subsidiaries file a consolidated federal income tax return. TREASURY STOCK HCR records the purchase of its common stock for treasury at cost. Differences between the proceeds for reissuance of treasury stock and the cost of the treasury stock, based on the first-in, first-out method, are 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 value of the shares at the date of grant. HCR 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. 23 25 EARNINGS PER SHARE Effective December 31, 1997, HCR changed its method of computing earnings per share (EPS) as required by Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS 128). FAS 128 replaced the previously reported primary and fully diluted EPS with basic and diluted EPS. Basic EPS is computed by dividing net income (income available to common stockholders) 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 HCR include shares issuable upon exercise of HCR's nonqualified stock options and restricted stock that has not vested. EPS amounts for prior periods have been restated. NEW ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), which is effective December 31, 1998, with interim disclosures beginning in 1999. Comparative information for prior years is required to be restated. This Statement requires public business enterprises to report certain information about operating segments, their products and services, the geographic areas in which they operate, and their major customers. The operating segments should be based on the structure of the enterprise's internal organization whose operating results are regularly reviewed by the company's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Management has not determined the effect, if any, of FAS 131 on the consolidated financial statements. 2. EARNINGS PER SHARE The calculation of earnings per share (EPS) is as follows:
1997 1996 1995 ---- ---- ---- (In thousands, except EPS) Numerator: Net income (income available to common stockholders) $70,121 $59,443 $50,603 Denominator: Denominator for basic EPS - weighted- average shares 44,548 45,708 46,833 Effect of dilutive securities: Stock options 1,967 2,127 2,130 ------- ------- ------- Denominator for diluted EPS - adjusted weighted-average shares and assumed conversions 46,515 47,835 48,963 ======= ======= ======= Basic EPS $1.57 $1.30 $1.08 Diluted EPS $1.51 $1.24 $1.03
24 26 Options to purchase shares of HCR common stock were outstanding but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares as follows: 408,275 shares granted in December 1997 at $39.44 for the 1997 calculation, 370,550 shares granted in December 1996 at $27.75 for the 1996 calculation and 455,700 shares granted in November 1995 at $21.50 for the 1995 calculation. Restricted stock awards of 339,500 shares in 1997 were not included in the computation of diluted EPS because the effect would be antidilutive. 3. ACQUISITIONS HCR paid $55,028,000, $36,548,000 and $35,236,000 in 1997, 1996 and 1995, respectively, for the acquisition of various businesses, including home health care, rehabilitation therapy and management services agreements for subacute care, rehabilitation therapy, vision care and eye surgery. The acquisitions were accounted for under the purchase method of accounting. In 1997 HCR acquired assets of $12,000,000, assumed liabilities of $21,000,000 and recorded $64,000,000 of intangible assets. HCR also recorded intangible assets of $34,100,000 and $32,225,000 in 1996 and 1995, respectively. Certain of these agreements contain a provision for additional consideration contingent upon the future financial results of the business. The maximum contingent consideration aggregates $54,288,000 and will, if earned, be paid over the next five 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 1997 and 1996. 4. REVENUES HCR receives reimbursement under the federal Medicare program and various state Medicaid programs. Revenues under these programs totalled $500,000,000, $469,000,000 and $437,000,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 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 receivable amounted to $8,972,000 and $11,381,000 at December 31, 1997 and 1996, respectively. There were no non-governmental receivables which represented amounts in excess of 10% of total receivables at December 31, 1997 and 1996. 25 27 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following: 1997 1996 ---- ---- (In thousands) Land and improvements $ 66,966 $ 63,154 Buildings and improvements 476,687 450,496 Equipment and furnishings 131,958 111,124 Construction in progress 14,846 15,445 -------- -------- 690,457 640,219 Less accumulated depreciation 137,484 106,762 -------- -------- Net property and equipment $552,973 $533,457 ======== ========
Depreciation expense amounted to $30,747,000, $27,462,000 and $23,307,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 6. LONG-TERM DEBT
Long-term debt consists of the following: 1997 1996 ---- ---- (In thousands) Debt under the Credit Agreement $285,000 $192,400 Real estate mortgage and installment notes 1,234 2,046 Industrial development revenue bonds 3,130 3,290 Capital lease obligations (see Note 7) 4,441 5,976 -------- -------- 293,805 203,712 Less amounts due within one year 854 1,417 -------- -------- $292,951 $202,295 ======== ========
At December 31, 1997, HCR has an unsecured credit agreement with a group of banks (the Credit Agreement) which provides for an extendible $325,000,000 revolving loan commitment through August 2, 2001, then the borrowing capacity is reduced to $295,000,000 through August 2, 2002. The Credit Agreement includes a provision under which HCR may annually request an extension of the commitment and, if the lenders agree, the maturity of the agreement will be extended for an additional year. The amount available for additional direct borrowing and letters of credit was $27,641,000 at December 31, 1997. Loans under the Credit Agreement bear interest at variable rates which reflect, at the election of the Company, either the agent bank's base lending rate, an increment of .225% to .55% over Eurodollar indices depending on the quarterly performance of a key ratio, or rates offered by any of the participating banks under bid procedures. The average interest rate on loans under the Credit Agreement was 6.19% and 5.94% at December 31, 1997 and 1996, respectively. A commitment fee is charged on unused credit availability ranging from an annual rate of .08% to .20% depending on the quarterly performance of a key ratio. 26 28 The Credit Agreement contains various covenants, restrictions and events of default. Among other things, these provisions require HCR to maintain certain financial ratios and restrict its ability to incur indebtedness, create liens or dispose of assets in excess of specified levels. The real estate mortgage notes and certain industrial development revenue bonds are collateralized by real estate. Amounts under these facilities are payable monthly at varying interest rates from 9.75% to 11.58%. Maturities range from 2000 to 2008. Long-term debt maturities for the five years subsequent to December 31, 1997 are as follows: 1998 - $854,000; 1999 - $1,006,000; 2000 - $962,000; 2001 - $590,000 and 2002 - $285,642,000. Capitalized interest costs amounted to $436,000, $655,000 and $257,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest paid amounted to $16,206,000, $10,496,000 and $9,794,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 7. LEASES HCR 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. The cost and accumulated amortization of property and equipment under capital leases were:
1997 1996 ---- ---- (In thousands) Land and improvements $ 1,330 $ 1,426 Buildings and improvements 15,636 18,975 Equipment and furnishings 2,580 3,016 ------- ------- 19,546 23,417 Less accumulated amortization 1,509 1,480 ------- ------- $18,037 $21,937 ======= =======
27 29 Payments under noncancellable operating leases, minimum lease payments and the present value of net minimum lease payments under capital leases as of December 31, 1997 are as follows:
Operating Capital Leases Leases --------- ------- (In thousands) 1998 $ 8,779 $449 1999 8,003 453 2000 6,567 456 2001 5,519 461 2002 4,521 465 Later years 3,894 11,540 ------- ------ Total minimum lease payments $37,283 13,824 ======= Less amount representing interest 9,383 ------ Present value of net minimum lease payments (included in long-term debt - see Note 6) $4,441 ======
Rental expense was $11,476,000, $9,361,000 and $7,704,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 8. INCOME TAXES The provision for income taxes consists of the following:
1997 1996 1995 ---- ---- ---- (In thousands) Current: Federal $25,541 $21,025 $15,809 State and local 1,986 1,700 1,487 ------- ------- ------- 27,527 22,725 17,296 Deferred: Federal 2,993 2,327 3,715 State and local 544 423 676 ------- ------- ------- 3,537 2,750 4,391 ------- ------- ------- $31,064 $25,475 $21,687 ======= ======= =======
28 30 The reconciliation of the amount computed by applying the statutory federal income tax rate to income before income taxes to the provision for income taxes is as follows:
1997 1996 1995 ---- ---- ---- (In thousands) Income taxes computed at statutory rate $35,415 $29,721 $25,302 Differences resulting from: State and local income taxes 1,644 1,380 1,406 Corporate owned life insurance (6,455) (5,620) (5,329) Other 460 (6) 308 ------- ------- ------- Provision for income taxes $31,064 $25,475 $21,687 ======= ======= =======
Under FAS 109, 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 HCR's federal and state deferred tax assets and liabilities are as follows:
1997 1996 ---- ---- (In thousands) Net current deferred tax assets: Allowances for receivables and settlements $8,523 $6,710 Accrued insurance reserves 6,927 9,214 Employee compensation and benefits 5,195 5,066 Other (806) (1,189) ------- ------- $19,839 $19,801 ======= ======= Net noncurrent deferred tax liabilities: Fixed asset bases and depreciation differences $69,712 $66,008 Pension receivable 5,984 5,388 Deferred compensation (5,118) (3,312) Life insurance (1,561) (1,184) Noncompete agreements (1,404) (1,404) Other (337) 1,302 ------- ------- $67,276 $66,798 ======= =======
Income taxes payable amounted to $17,250,000 and $19,601,000 at December 31, 1997 and 1996, respectively. Income taxes paid amounted to $24,986,000, $18,380,000 and $13,623,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 9. STOCK PLANS HCR has stock option plans for key employees and for outside directors which authorize the grant of options for up to 8,199,000 and 300,000 shares, respectively. There were 1,936,687 and 2,297,634 shares available for future grant at December 31, 1997 and 1996, respectively. Generally, the exercise price of each option equals the market price of HCR's stock on the date of grant and an option's maximum term is ten years. The options for key employees vest at the end of three years and the options for outside directors vest immediately. 29 31 In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), HCR 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 1997,1996 and 1995. If HCR had accounted for its 1997, 1996 and 1995 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:
1997 1996 1995 ---- ---- ---- Net income - as reported $70,121 $59,443 $50,603 Net income - pro forma $68,531 $58,558 $50,373 Earnings per share - as reported: Basic $1.57 $1.30 $1.08 Diluted $1.51 $1.24 $1.03 Earnings per share - pro forma: Basic $1.54 $1.28 $1.08 Diluted $1.47 $1.23 $1.03
The pro forma effect on net income for 1997, 1996 and 1995 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. The pro forma effect will not be fully reflected until 1998. 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 1997, 1996 and 1995, respectively: dividend yield of 0% for all years; expected volatility of 20% in all years; risk-free interest rates of 5.92%, 5.95% and 5.78%; and expected lives of 5.7, 5.9 and 5.7 years. The weighted average fair value of options granted is $13.01, $9.45 and $7.10 per share in 1997, 1996 and 1995, 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 transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since HCR'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. 30 32 Information regarding these option plans for 1995, 1996 and 1997 is as follows:
Weighted Average Exercise Shares Price ------ -------- Options outstanding at January 1, 1995 5,170,156 $7.60 Options granted 491,700 $21.31 Options forfeited (111,187) $11.49 Options exercised (522,675) $5.90 --------- Options outstanding at December 31, 1995 5,027,994 $9.03 Options granted 406,550 $27.40 Options forfeited (77,400) $16.34 Options exercised (370,939) $6.94 --------- Options outstanding at December 31, 1996 4,986,205 $10.57 Options granted 455,072 $38.77 Options forfeited (94,125) $21.58 Options exercised (511,841) $7.80 --------- Options outstanding at December 31, 1997 4,835,311 $13.31 ========= Options exercisable at December 31, 1995 3,098,807 $6.42 December 31, 1996 3,781,167 $6.86 December 31, 1997 3,701,561 $8.23
The following tables summarize information about options outstanding and options exercisable at December 31, 1997:
Options Outstanding ------------------- Weighted Weighted Average Range of Average Remaining Exercise Number Exercise Contractual Prices Outstanding Price Life ------ ----------- -------- ----------- $5 - $10 2,874,614 $5.82 4.0 $10 - $20 747,250 $15.21 6.4 $20 - $30 759,273 $24.52 8.4 $30 - $40 454,174 $38.78 9.7 --------- 4,835,311 $13.31 5.5 ==========
31 33
Options Exercisable ------------------- Weighted Range of Average Exercise Number Exercise Prices Exercisable Price - ---------- ----------- ---------- $5 - $10 2,874,614 $5.82 $10 - $20 743,650 $15.23 $20 - $30 37,398 $23.90 $30 - $40 45,899 $32.97 ---------- 3,701,561 $8.23 ==========
HCR has a restricted stock plan for corporate officers and certain key senior management employees which authorizes up to 1,392,866 restricted shares to be issued. During 1991 corporate officers were issued 892,866 restricted shares that vested 20% of the shares each year. During 1997 executive officers and key senior management employees 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 will be issued in early 1998 after certification by the Board of Directors that the criteria were achieved. The restrictions associated with the restricted stock will lapse as of December 31, 2000 for key senior management employees and the later of December 31, 2000 or retirement for corporate officers. Compensation expense related to stock options granted in October, 1991 and restricted stock was $450,000, $1,010,000 and $1,221,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 10. EMPLOYEE BENEFIT PLANS HCR has a qualified, defined benefit pension plan (Pension Plan) with benefits based on compensation and length of service. The Pension Plan was amended in 1994 to freeze all future benefits under the plan. The Pension Plan covered substantially all full-time employees as of December 31, 1994.
The funded status of the Pension Plan is as follows: 1997 1996 ---- ---- (In thousands) Actuarial present value of benefit obligations: Vested $ 16,795 $ 18,216 Nonvested 996 2,517 --------- --------- Accumulated benefit obligation $ 17,791 $ 20,733 ========= ========= Projected benefit obligation $ 17,791 $ 20,733 Plan assets at fair value 37,922 33,295 --------- --------- Plan assets in excess of projected benefit obligation (20,131) (12,562) Unrecognized net gain (loss) 4,632 (1,254) --------- --------- Prepaid pension cost at end of year $ (15,499) $ (13,816) ========= =========
32 34 The components of the net pension income for the Pension Plan are as follows:
1997 1996 1995 ---- ---- ---- (In thousands) Interest cost on projected benefit obligation $ 1,266 $ 1,507 $ 1,381 Actual return on plan assets (6,445) (4,146) (6,776) Net amortization and deferral 3,496 1,165 3,998 -------- -------- -------- Net pension income $ (1,683) $ (1,474) $ (1,397) ======== ======== ========
The actuarial present value of benefit obligations is based on a discount rate of 7.5% at December 31, 1997 and 1996. The freezing of future pension benefits during 1994 eliminated any future salary increases from the computation effective December 31, 1994. The expected long-term rate of return on assets is 10% for 1997 and 1996. Plan assets include commingled funds with investments in marketable equity securities, international equity securities and government and corporate debt securities. HCR has a Senior Executive Retirement Plan (SERP) which is a non-qualified plan designed to provide pension benefits and life insurance for corporate officers (15 employees). Pension benefits are based on compensation and length of service. The benefits under the SERP are provided from a combination of the benefits to which the corporate officers are entitled under the Pension Plan and from life insurance policies that are owned by the corporate officers who have assigned the corporate interest (HCR's share of premiums paid) in the policies to HCR. HCR's share of the cash surrender value of the policies was $14,200,000 and $11,879,000 at December 31, 1997 and 1996, respectively, and was included in other assets. The accrued and unfunded liability was $3,683,000 and $2,697,000 at December 31, 1997 and 1996, respectively, and was included in other long-term liabilities. HCR maintains a savings program qualified under Section 401(k) of the Internal Revenue Code (401(k)) which allows an eligible employee the opportunity to invest in the 401(k)'s various investment funds. In order to maintain the qualified status of the 401(k), it was amended to exclude highly compensated employees after December 31, 1992. In conjunction with this amendment, HCR adopted the Senior Management Savings Plan (SMSP) which is a non-qualified, unfunded deferred compensation program designed to provide essentially the same benefits as the 401(k). HCR contributes an amount equal to one-half of the participant's 401(k) contributions up to a maximum matching contribution of 2% or 3% of the participant's base salary depending on the participant's date of employment. Company matching contributions to the 401(k) amounted to $1,510,000, $1,172,000 and $898,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in matching contributions was due to additional employees from acquisitions and the participation of previously ineligible employees. 33 35 Under the SMSP, HCR accrues an amount equal to one-half of the participant's SMSP salary deferral up to a maximum matching amount of 3% of the participant's compensation, as defined, and accrues the earnings calculated on each participant's unit investments. HCR's expense for the matching amount and the earnings amounted to $2,539,000, $1,180,000 and $1,220,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in expense relates primarily to growth in earnings on the unit investments. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and fair value of the financial instruments are as follows:
1997 1996 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- (In thousands) Cash and cash equivalents $ 7,455 $ 7,455 $ 2,389 $ 2,389 Long-term debt, excluding capitalized leases 289,364 289,989 197,736 198,279
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 the long-term debt, excluding capitalized lease obligations, approximates its fair value due to the significant amount of variable rate, long-term debt. The fair value is estimated using discounted cash flow analyses, based on HCR's current incremental borrowing rates. 12. STOCKHOLDER RIGHTS PLAN On May 2, 1995, the Board of Directors of HCR declared a dividend of one right for each outstanding share of HCR's common stock. An exercisable right, 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 $100, subject to adjustment. The rights expire on May 2, 2005. Such rights will not be exercisable nor transferable apart from the common stock until ten days after a person or group acquires 15% of HCR's common stock or initiates a tender offer or exchange offer that would result in ownership of 15% of HCR's common stock. In the event that HCR 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% discount. Under certain other circumstances, the rights can become rights to purchase HCR's common stock at a 50% discount. The rights may be redeemed by HCR for one cent per right at any time prior to the first date that a person or group acquires a beneficial ownership of 15% of HCR's common stock. 34 36 HEALTH CARE AND RETIREMENT CORPORATION SUPPLEMENTARY DATA (UNAUDITED) SUMMARY OF QUARTERLY RESULTS
Year ended December 31, 1997 ---------------------------- First Second Third Fourth Year ----- ------- ----- ------ ---- (In thousands, except per share amounts) Revenues $213,912 $220,356 $226,606 $231,089 $891,963 Income from operations 26,923 28,209 29,310 29,276 113,718 Net income 16,324 17,219 18,151 18,427 70,121 Earnings per share: Basic $0.37 $0.39 $0.41 $0.41 $1.57 Diluted $0.35 $0.37 $0.39 $0.40 $1.51
Year ended December 31, 1996 ---------------------------- First Second Third Fourth Year ----- ------- ----- ------ ---- Revenues $187,645 $194,267 $199,205 $200,906 $782,023 Income from operations 22,235 22,895 24,192 24,511 93,833 Net income 13,931 14,630 15,232 15,650 59,443 Earnings per share: Basic $0.30 $0.32 $0.34 $0.35 $1.30 Diluted $0.29 $0.30 $0.32 $0.33 $1.24
The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." 35 37 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, 1998. The names, ages, offices and positions held during the last five years of each of the Company's executive officers and other corporate officers is set forth below. EXECUTIVE OFFICERS
NAME AGE OFFICE AND EXPERIENCE - ---- --- --------------------- PAUL A. ORMOND 48 Chairman of the Board, President and Chief Executive Officer of HCR since August 1991 and President and Chief Executive Officer of Health Care and Retirement Corporation of America (HCRA), a subsidiary of the Company, since October 1991. Member of Class I of the Board of Directors of the Company, with a term expiring in 1998. M. KEITH WEIKEL 59 Senior Executive Vice President and Chief Operating Officer of HCR since August 1991 and Senior Executive Vice President and Chief Operating Officer of HCRA since October 1991. Member of Class III of the Board of Directors of the Company, with a term expiring in 2000. GEOFFREY G. MEYERS 53 Executive Vice President, Chief Financial Officer and Treasurer of HCR since August 1991 and Executive Vice President and Chief Financial Officer of HCRA since October 1991. Member of Class II of the Board of Directors of the Company, with a term expiring in 1999. R. JEFFREY BIXLER 52 Vice President and General Counsel of HCR and HCRA since November 1991 and Secretary of HCR and HCRA since December 1991.
36 38
NANCY A. EDWARDS 47 Vice President and General Manager of Central Division of HCR and HCRA since December 1993; Assistant Vice President and General Manager of HCRA from June 1993 to December 1993; and Florida Regional Manager of HCRA from October 1991 to June 1993. JEFFREY W. FERGUSON 49 Vice President and General Manager of Midwest Division of HCR and HCRA since February 1995; Vice President and Director of Marketing of HCR from August 1991 to February 1995; and Vice President and Director of Marketing of HCRA from October 1991 to February 1995. SPENCER C. MOLER 50 Vice President and Controller of HCR since August 1991 and Controller and Treasurer of HCRA since October 1991. F. JOSEPH SCHMITT 49 Vice President and General Manager of Southern Division of HCR and HCRA since December 1993 and Florida Senior Regional Manager of HCRA from October 1991 to December 1993. PAUL G. SIEBEN 51 Vice President and Director of Development and Construction of HCR since August 1991 and Vice President and Director of Development and Construction of HCRA since October 1991. OTHER CORPORATE OFFICERS J. SUSAN HINES 44 Vice President and Director of Medical Specialty Programs of HCR and HCRA since December 1996; Vice President and Director of Clinical Services and Specialty Programs of HCR and HCRA from May 1993 to December 1996; Assistant Vice President for Clinical Services and Specialty Programs of HCRA from April 1993 to May 1993; and Assistant Vice President and Director of Professional Services of HCRA from October 1991 to April 1993. WILLIAM H. KINSCHNER 50 Vice President and Director of Management Support Services of HCR since December 1995; Vice President and Director of Planning of HCR and HCRA from May 1993 to December 1995; Vice President and Director of Planning and Reimbursement of HCR from August 1991 to May 1993; and Vice President and Director of Planning and Reimbursement of HCRA from October 1991 to May 1993.
37 39
BARRY A. LAZARUS 46 Vice President and Director of Reimbursement of HCR and HCRA since May 1993 and Executive Vice President for AmCorps, Inc. from February 1992 to May 1993. WADE B. O'BRIAN 54 Vice President and Director of Human Resources and Labor Relations of HCR since August 1991 and Vice President and Director of Human Resources and Labor Relations of HCRA since October 1991. JOYCE C. SMITH 53 Vice President and Director of Professional Services of HCR and HCRA since December 1995; Assistant Vice President and Director of Professional Services of HCRA from June 1994 to December 1995; Director of Professional Services of HCRA from April 1994 to June 1994; Manager of Nursing Services of HCRA from April 1993 to April 1994; and Manager of Quality Standards of HCRA from October 1991 to April 1993.
ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation is incorporated herein by reference under the heading "Executive Compensation" in the Registrant's Proxy Statement which will be filed with the Commission prior to April 30, 1998. 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, 1998. 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, 1998. 38 40 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 Health Care and Retirement Corporation and subsidiaries are filed as part of this Form 10-K in Item 8 on the pages indicated:
Page ---- Report of Ernst & Young LLP Independent Auditors 17 Consolidated Balance Sheets - December 31, 1997 and 1996 18 Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 19 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 20 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 21 Notes to Consolidated Financial Statements - December 31, 1997 22
The following consolidated financial statement schedule of Health Care and Retirement Corporation and subsidiaries is included in this Form 10-K on page 40: 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. 39 41 HEALTH CARE AND RETIREMENT CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Charged Additions Balance at to Costs Deduc- From Balance Beginning and tions Acquisi- at End of of Period Expenses (Note 1) tions Period ---------- -------- -------- --------- --------- Year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts $13,335 $10,644 $(5,935) $1,140 $19,184 ======= ======= ======== ====== ======= Year ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $11,485 $8,073 $(7,516) $1,293 $13,335 ======= ====== ======== ====== ======= Year ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts $11,882 $5,288 $(6,229) $544 $11,485 ======= ====== ======== ==== =======
(1) Uncollectible accounts written off, net of recoveries. 40 42 EXHIBITS
S-K Item 601 No. Document - ------------- 3.1 -- Certificate of Incorporation of Health Care and Retirement Corporation (filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 3.2 -- By-laws of Health Care and Retirement Corporation (filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 4 -- Amended and Restated Credit Agreement among Health Care and Retirement Corporation, various lenders and Continental Bank, as agent, dated as of August 2, 1994 (filed as Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). 4.1 -- First Amendment to the Amended and Restated Credit Agreement among Health Care and Retirement Corporation, various lenders and Bank of America National Trust and Savings Association, as agent, dated as of July 7, 1995 (filed as Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 4.2 -- Third Amendment to the Amended and Restated Credit Agreement among Health Care and Retirement Corporation, various lenders and Bank of America National Trust and Savings Association, as agent, dated as of January 24, 1997 (filed as Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 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 the Registrant'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 the Registrant'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 the Registrant'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 the Registrant's Registration Statement on Form S-8, File No. 33-83324 and incorporated herein by reference). 10.5 -- 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 the Registrant's Registration Statement on Form S-8, File No.33-48885 and incorporated herein by reference). 10.6 -- Amended Restricted Stock Plan (filed on pages A1 to A9 of the Registrant's Proxy Statement dated March 25, 1997 in connection with its Annual Meeting held on May 6, 1997 and incorporated herein by reference).
41 43
10.7 -- Revised form of Restricted Stock Plan Agreement between HCR and officers participating in Restricted Stock Plan (filed as Exhibit 10.7(a) to the Registrant's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 10.8 -- Form of Employment Agreement between HCRA and remaining executive officers (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). *10.9 -- Form of Second Amended Employment Agreement between HCRA, HCR and Paul A. Ormond. *10.10 -- Form of Second Amended Employment Agreement between HCRA, HCR and M. Keith Weikel. *10.11 -- Form of Second Amended Employment Agreement between HCRA, HCR and Geoffrey G. Meyers. *10.12 -- Form of Second Amended Employment Agreement between HCRA, HCR and R. Jeffrey Bixler. 10.13 -- Stock Option Plan for Outside Directors (filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8, File No. 33-48885 and incorporated herein by reference). 10.14 -- 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 to the Registrant's Registration Statement on Form S-8, File No, 33-48885 and incorporated herein by reference). 10.15 -- Executive Officer Deferred Compensation Plan dated December 18, 1991 (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the period ended December 31, 1991 and incorporated herein by reference). 10.16 -- Form of Indemnification Agreement between HCR and various officers and directors (filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, File No. 33-42535 and incorporated herein by reference). 10.17 -- Senior Executive Retirement Plan dated October 1, 1992 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). 10.18 -- Senior Management Savings Plan dated December 17, 1992 (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). *21 -- Subsidiaries of the Registrant *23 -- Consent of Independent Auditors *27 -- Financial Data Schedule for the year ended December 31, 1997
REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Registrant during the fourth quarter ended December 31, 1997. ____________ * Filed herewith. 42 44 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. HEALTH CARE AND RETIREMENT CORPORATION (Registrant) by /s/ R. Jeffrey Bixler --------------------------------------------- R. Jeffrey Bixler Vice President, General Counsel and Secretary DATE: February 17, 1998 43 45 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Health Care and Retirement Corporation and in the capacities and on the date indicated. SIGNATURE TITLE --------- ----- /s/ John J. Clair, Jr. - ------------------------ John J. Clair, Jr. Director /s/ Joseph H. Lemieux - ------------------------ Joseph H. Lemieux Director /s/ Geoffrey G. Meyers - ------------------------ Geoffrey G. Meyers Executive Vice President, Chief Financial Officer and Treasurer; Director (Principal Financial Officer) /s/ Spencer C. Moler - ------------------------ Spencer C. Moler Vice President and Controller (Principal Accounting Officer) /s/ Paul A. Ormond - ------------------------ Paul A. Ormond Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) /s/ Robert G. Siefers - ------------------------ Robert G. Siefers Director /s/ M. Keith Weikel - ------------------------ M. Keith Weikel Senior Executive Vice President and Chief Operating Officer; Director /s/ Thomas L. Young - --------------------- Thomas L. Young Director DATE: February 17, 1998 44 46 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 10.9 Form of Second Amended Employment Agreement between HCRA, HCR and Paul A. Ormond. 10.10 Form of Second Amended Employment Agreement between HCRA, HCR and M. Keith Weikel. 10.11 Form of Second Amended Employment Agreement between HCRA, HCR and Geoffrey G. Meyers. 10.12 Form of Second Amended Employment Agreement between HCRA, HCR and R. Jeffrey Bixler. 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule for the year ended December 31, 1997
45 EX-10.9 2 FORM OF SECOND AMENDED EMPLOYEE AGREEMENT 1 EXHIBIT 10.9 SECOND AMENDED EMPLOYMENT AGREEMENT This SECOND AMENDED EMPLOYMENT AGREEMENT ("Agreement"), effective as of April 1, 1997 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HEALTH CARE AND RETIREMENT CORPORATION, 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 employ Employee in the position and at the base rate of pay set forth on Schedule I. B. The Company has further agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. C. 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 transaction involving a Change in Control. D. 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 Change in Control. 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 the sum of Base Pay and Employee's cash bonuses pursuant to the Company's Annual Incentive Plan and Performance Award Plan as in effect at any time of determination. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination. (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: 2 (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 13d-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. Notwithstanding the foregoing provisions of Sections 1(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 1(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 2 3 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) "Director" means a member of the Board. (j) "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. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Excise Tax" is defined in Section 10(a). (m) "Gross-Up Payment" is defined in Section 10(a). (n) "ISO" is defined in Section 10(a). (o) "Payment" is defined in Section 10(a). (p) "Protected Term" means the period commencing as of the date hereof and expiring as of the close of business on March 31, 2000; provided, however, that: (i) commencing on April 1, 1998 and each April 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than December 31 of the immediately preceding year, the Company or Employee shall have given notice that it or Employee, as the case may be, 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 Change in Control, 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 1(p), 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. (q) "Severance Period" means the period of time commencing on the date of the occurrence of a Change in Control and continuing until the earliest of (i) the third anniversary of the occurrence of the Change in Control (ii) Employee's death, or (ii) Employee's attainment of age 65. (r) "Severance Benefits" are defined in Section 8(b). 3 4 (s) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (t) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(t), 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. (u) "Underpayment" is defined in Section 10(a). (v) "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 future employment, work assignments, compensation (including compensation upon termination), benefits, or any other term or condition of employment. 5. ENTIRE AGREEMENT. This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding any and all aspects 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 retirement and benefit plans set forth in Schedule II attached hereto in which Employee is entitled to participate 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 CHANGE IN CONTROL. 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. 4 5 (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 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 two 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 two 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 two 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 CHANGE IN CONTROL. (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 Change in Control, Employee may elect, within the 60-day period following the occurrence of one of the following events, 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 60-day period): 5 6 (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 or successor, as the case may be, which Employee held immediately prior to a Change in Control, or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) if Employee shall have been a Director immediately prior to the Change in Control; (B) The occurrence of any of the following: (I) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company or successor, as the case may be, which Employee held immediately prior to the Change in Control; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Change in Control; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to a Change in Control; or (IV) any material breach of this Agreement by the Company or any successor thereto, which situation is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee; (C) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company (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 of law) assumes all duties and obligations of the Company under this Agreement pursuant to Section 16(a); or (D) The Company or any successor, 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 Change in Control, 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 Change of Control without, in either case, his prior written consent. 6 7 (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 that falls within the Severance Period, Employee shall be entitled to the Severance Benefits. (b) Severance Benefits. If, following the occurrence of a Change in Control, Employee's employment with the Company is terminated pursuant to Section 8(a)(i), (ii) or (iii), 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 the highest Aggregate Cash Compensation paid or payable to Employee for any of the three calendar years preceding the year in which the Termination Date occurs or for the year in which the Termination Date occurs if the Termination Date occurs after the end of the first quarter; for purposes of this Section 8(b)(i), if the Company's financial performance for the year-to-date period preceding the Termination Date is consistent with budgeted levels (as certified by the Compensation Committee) then the Aggregate Cash Compensation for the year in which the Termination Date occurs shall be assumed to be equal to 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 150%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs as if the earnings per share growth rate for such year were assumed to be the actual growth rate for the year-to-date period prior to the Termination Date; (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 Change in Control; 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 Change in Control; 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 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. 7 8 (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 upon 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 Change in Control; and (v) 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 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 Change in Control prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Change in Control 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). 8 9 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Change in Control 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 (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 9 10 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 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; 10 11 (C) cooperate with the Company in good faith in order effectively to contest such claim; and (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 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under this 11 12 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 CHANGE IN CONTROL. 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 Change in Control. 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 Change in Control and ending on the date of consummation of such Change in Control shall be deemed to be a termination of Employee after a Change in Control for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) Covenant Not to Compete. Employee covenants and agrees that during the period of Employee's employment hereunder 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. (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 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. 12 13 (a) Upon the consummation of a Change in Control prior to the expiration of the Protected Term, (i) all options to purchase Company stock 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 Change in Control 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, 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. 13 14 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 conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 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. 14 15 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: -------------------------------- HEALTH CARE AND RETIREMENT CORPORATION By: -------------------------------- Its: -------------------------------- EMPLOYEE: ----------------------------------- Paul A. Ormond 15 16 SCHEDULE I Employee: Paul A. Ormond Current Base Rate: $510,000 Job Titles: Chairman, President and Chief Executive Officer 17 SCHEDULE II Annual Incentive Plan Performance Award Plan Stock Option Plan Amended Restricted Stock Plan Salary Retirement Plan (prior to January 1, 1993) Stock Purchase and Savings Program (prior to January 1, 1993) Senior Executive Retirement Plans Supplemental Offset Plan Excess and Supplemental Benefit Plans Corporate Officer and Senior Executive Life Insurance Program Senior Management Savings Plan Senior Management Savings Plan For Corporate Officers Such other benefit plans and arrangements as the Company provides, from time to time, to salaried employees generally participation in which is approved by the President. EX-10.10 3 EMPLOYEE AGREE. BETWEEN HCRA & M. KEITH WEIKEL 1 EXHIBIT 10.10 SECOND AMENDED EMPLOYMENT AGREEMENT This SECOND AMENDED EMPLOYMENT AGREEMENT ("Agreement"), effective as of April 1, 1997 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HEALTH CARE AND RETIREMENT CORPORATION, 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 employ Employee in the position and at the base rate of pay set forth on Schedule I. B. The Company has further agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. C. 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 transaction involving a Change in Control. D. 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 Change in Control. 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 the sum of Base Pay and Employee's cash bonuses pursuant to the Company's Annual Incentive Plan and Performance Award Plan as in effect at any time of determination. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination. (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: 2 (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 13d-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. Notwithstanding the foregoing provisions of Sections 1(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 1(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 2 3 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) "Director" means a member of the Board. (j) "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. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Excise Tax" is defined in Section 10(a). (m) "Gross-Up Payment" is defined in Section 10(a). (n) "ISO" is defined in Section 10(a). (o) "Payment" is defined in Section 10(a). (p) "Protected Term" means the period commencing as of the date hereof and expiring as of the close of business on March 31, 2000; provided, however, that: (i) commencing on April 1, 1998 and each April 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than December 31 of the immediately preceding year, the Company or Employee shall have given notice that it or Employee, as the case may be, 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 Change in Control, 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 1(p), 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. (q) "Severance Period" means the period of time commencing on the date of the occurrence of a Change in Control and continuing until the earliest of (i) the third anniversary of the occurrence of the Change in Control (ii) Employee's death, or (ii) Employee's attainment of age 65. (r) "Severance Benefits" are defined in Section 8(b). 3 4 (s) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (t) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(t), 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. (u) "Underpayment" is defined in Section 10(a). (v) "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 future employment, work assignments, compensation (including compensation upon termination), benefits, or any other term or condition of employment. 5. ENTIRE AGREEMENT. This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding any and all aspects 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 retirement and benefit plans set forth in Schedule II attached hereto in which Employee is entitled to participate 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 CHANGE IN CONTROL. 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. 4 5 (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 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 one year 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 one year 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 one year 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 CHANGE IN CONTROL. (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 Change in Control, Employee may elect, within the 60-day period following the occurrence of one of the following events, 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 60-day period): 5 6 (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 or successor, as the case may be, which Employee held immediately prior to a Change in Control, or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) if Employee shall have been a Director immediately prior to the Change in Control; (B) The occurrence of any of the following: (I) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company or successor, as the case may be, which Employee held immediately prior to the Change in Control; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Change in Control; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to a Change in Control; or (IV) any material breach of this Agreement by the Company or any successor thereto, which situation is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee; (C) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company (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 of law) assumes all duties and obligations of the Company under this Agreement pursuant to Section 16(a); or (D) The Company or any successor, 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 Change in Control, 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 Change of Control without, in either case, his prior written consent. 6 7 (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 that falls within the Severance Period, Employee shall be entitled to the Severance Benefits. (b) Severance Benefits. If, following the occurrence of a Change in Control, Employee's employment with the Company is terminated pursuant to Section 8(a)(i), (ii) or (iii), 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 the highest Aggregate Cash Compensation paid or payable to Employee for any of the three calendar years preceding the year in which the Termination Date occurs or for the year in which the Termination Date occurs if the Termination Date occurs after the end of the first quarter; for purposes of this Section 8(b)(i), if the Company's financial performance for the year-to-date period preceding the Termination Date is consistent with budgeted levels (as certified by the Compensation Committee) then the Aggregate Cash Compensation for the year in which the Termination Date occurs shall be assumed to be equal to 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 150%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs as if the earnings per share growth rate for such year were assumed to be the actual growth rate for the year-to-date period prior to the Termination Date; (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 Change in Control; 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 Change in Control; 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 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. 7 EX-10.11 4 EMPLOYEE AGREE. BETWEEN HCRA & GEOFFREY G. MEYERS 1 EXHIBIT 10.11 SECOND AMENDED EMPLOYMENT AGREEMENT This SECOND AMENDED EMPLOYMENT AGREEMENT ("Agreement"), effective as of April 1, 1997 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HEALTH CARE AND RETIREMENT CORPORATION, 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 employ Employee in the position and at the base rate of pay set forth on Schedule I. B. The Company has further agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. C. 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 transaction involving a Change in Control. D. 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 Change in Control. 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 the sum of Base Pay and Employee's cash bonuses pursuant to the Company's Annual Incentive Plan and Performance Award Plan as in effect at any time of determination. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination. (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: 2 (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 13d-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. Notwithstanding the foregoing provisions of Sections 1(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 1(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 2 3 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) "Director" means a member of the Board. (j) "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. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Excise Tax" is defined in Section 10(a). (m) "Gross-Up Payment" is defined in Section 10(a). (n) "ISO" is defined in Section 10(a). (o) "Payment" is defined in Section 10(a). (p) "Protected Term" means the period commencing as of the date hereof and expiring as of the close of business on March 31, 2000; provided, however, that: (i) commencing on April 1, 1998 and each April 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than December 31 of the immediately preceding year, the Company or Employee shall have given notice that it or Employee, as the case may be, 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 Change in Control, 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 1(p), 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. (q) "Severance Period" means the period of time commencing on the date of the occurrence of a Change in Control and continuing until the earliest of (i) the third anniversary of the occurrence of the Change in Control (ii) Employee's death, or (ii) Employee's attainment of age 65. (r) "Severance Benefits" are defined in Section 8(b). 3 4 (s) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (t) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(t), 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. (u) "Underpayment" is defined in Section 10(a). (v) "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 future employment, work assignments, compensation (including compensation upon termination), benefits, or any other term or condition of employment. 5. ENTIRE AGREEMENT. This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding any and all aspects 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 retirement and benefit plans set forth in Schedule II attached hereto in which Employee is entitled to participate 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 CHANGE IN CONTROL. 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. 4 5 (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 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 one year 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 one year 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 one year 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 CHANGE IN CONTROL. (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 Change in Control, Employee may elect, within the 60-day period following the occurrence of one of the following events, 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 60-day period): 5 6 (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 or successor, as the case may be, which Employee held immediately prior to a Change in Control, or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) if Employee shall have been a Director immediately prior to the Change in Control; (B) The occurrence of any of the following: (I) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company or successor, as the case may be, which Employee held immediately prior to the Change in Control; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Change in Control; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to a Change in Control; or (IV) any material breach of this Agreement by the Company or any successor thereto, which situation is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee; (C) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company (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 of law) assumes all duties and obligations of the Company under this Agreement pursuant to Section 16(a); or (D) The Company or any successor, 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 Change in Control, 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 Change of Control without, in either case, his prior written consent. 6 7 (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 that falls within the Severance Period, Employee shall be entitled to the Severance Benefits. (b) Severance Benefits. If, following the occurrence of a Change in Control, Employee's employment with the Company is terminated pursuant to Section 8(a)(i), (ii) or (iii), 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 the highest Aggregate Cash Compensation paid or payable to Employee for any of the three calendar years preceding the year in which the Termination Date occurs or for the year in which the Termination Date occurs if the Termination Date occurs after the end of the first quarter; for purposes of this Section 8(b)(i), if the Company's financial performance for the year-to-date period preceding the Termination Date is consistent with budgeted levels (as certified by the Compensation Committee) then the Aggregate Cash Compensation for the year in which the Termination Date occurs shall be assumed to be equal to 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 150%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs as if the earnings per share growth rate for such year were assumed to be the actual growth rate for the year-to-date period prior to the Termination Date; (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 Change in Control; 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 Change in Control; 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 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. 7 8 (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 upon 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 Change in Control; and (v) 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 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 Change in Control prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Change in Control 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). 8 9 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Change in Control 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 (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 9 10 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 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; 10 11 (C) cooperate with the Company in good faith in order effectively to contest such claim; and (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 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under this 11 12 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 CHANGE IN CONTROL. 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 Change in Control. 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 Change in Control and ending on the date of consummation of such Change in Control shall be deemed to be a termination of Employee after a Change in Control for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) Covenant Not to Compete. Employee covenants and agrees that during the period of Employee's employment hereunder 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. (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 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. 12 13 (a) Upon the consummation of a Change in Control prior to the expiration of the Protected Term, (i) all options to purchase Company stock 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 Change in Control 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, 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. 13 14 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 conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 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. 14 15 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: _____________________________ HEALTH CARE AND RETIREMENT CORPORATION By: _______________________________ Its: _____________________________ EMPLOYEE: ____________________________________ Geoffrey G. Meyers 15 16 SCHEDULE I Employee: Geoffrey G. Meyers Current Base Rate: $234,000 Job Titles: Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary 17 SCHEDULE II Annual Incentive Plan Performance Award Plan Stock Option Plan Amended Restricted Stock Plan Salary Retirement Plan (prior to January 1, 1993) Stock Purchase and Savings Program (prior to January 1, 1993) Senior Executive Retirement Plans Supplemental Offset Plan Excess and Supplemental Benefit Plans Corporate Officer and Senior Executive Life Insurance Program Senior Management Savings Plan Senior Management Savings Plan For Corporate Officers Such other benefit plans and arrangements as the Company provides, from time to time, to salaried employees generally participation in which is approved by the President. EX-10.12 5 EMPLOYEE AGREE. BETWEEN HCRA & R. JEFFERY BIXLER 1 EXHIBIT 10.12 SECOND AMENDED EMPLOYMENT AGREEMENT This SECOND AMENDED EMPLOYMENT AGREEMENT ("Agreement"), effective as of April 1, 1997 between HEALTH CARE AND RETIREMENT CORPORATION OF AMERICA, an Ohio corporation (the "Company"), HEALTH CARE AND RETIREMENT CORPORATION, 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 employ Employee in the position and at the base rate of pay set forth on Schedule I. B. The Company has further agreed to provide severance benefits to Employee upon a termination of Employee's employment resulting from certain specified events. C. 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 transaction involving a Change in Control. D. 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 Change in Control. 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 the sum of Base Pay and Employee's cash bonuses pursuant to the Company's Annual Incentive Plan and Performance Award Plan as in effect at any time of determination. (c) "Base Pay" means Employee's annual base salary as in effect at any time of determination. (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: 2 (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 13d-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. Notwithstanding the foregoing provisions of Sections 1(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 1(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 2 3 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) "Director" means a member of the Board. (j) "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. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Excise Tax" is defined in Section 10(a). (m) "Gross-Up Payment" is defined in Section 10(a). (n) "ISO" is defined in Section 10(a). (o) "Payment" is defined in Section 10(a). (p) "Protected Term" means the period commencing as of the date hereof and expiring as of the close of business on March 31, 2000; provided, however, that: (i) commencing on April 1, 1998 and each April 1 thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than December 31 of the immediately preceding year, the Company or Employee shall have given notice that it or Employee, as the case may be, 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 Change in Control, 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 1(p), 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. (q) "Severance Period" means the period of time commencing on the date of the occurrence of a Change in Control and continuing until the earliest of (i) the third anniversary of the occurrence of the Change in Control (ii) Employee's death, or (ii) Employee's attainment of age 65. (r) "Severance Benefits" are defined in Section 8(b). 3 4 (s) "Subsidiary" means any entity in which HCR directly or indirectly beneficially owns 50% or more of the then outstanding Voting Stock. (t) "Termination Date" means the effective date of Employee's termination of employment with the Company; provided that for purposes of this Section 1(t), 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. (u) "Underpayment" is defined in Section 10(a). (v) "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 future employment, work assignments, compensation (including compensation upon termination), benefits, or any other term or condition of employment. 5. ENTIRE AGREEMENT. This Agreement and the agreements listed in Schedule II attached hereto constitute the complete agreement between Employee and the Company regarding any and all aspects 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 retirement and benefit plans set forth in Schedule II attached hereto in which Employee is entitled to participate 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 CHANGE IN CONTROL. 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. 4 5 (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 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 one year 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 one year 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 one year 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 CHANGE IN CONTROL. (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 Change in Control, Employee may elect, within the 60-day period following the occurrence of one of the following events, 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 60-day period): 5 6 (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 or successor, as the case may be, which Employee held immediately prior to a Change in Control, or the removal of Employee as a Director (or as a member of the board of directors of any successor thereto) if Employee shall have been a Director immediately prior to the Change in Control; (B) The occurrence of any of the following: (I) a significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company or successor, as the case may be, which Employee held immediately prior to the Change in Control; (II) a reduction in Employee's Base Pay as in effect immediately prior to the Change in Control; (III) a material reduction in the scope or value of Employee Benefits as in effect immediately prior to a Change in Control; or (IV) any material breach of this Agreement by the Company or any successor thereto, which situation is not remedied within 10 calendar days after written notice to the Board (or the board of any successor) from Employee; (C) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the surviving or successor entity, if other than the Company (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 of law) assumes all duties and obligations of the Company under this Agreement pursuant to Section 16(a); or (D) The Company or any successor, 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 Change in Control, 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 Change of Control without, in either case, his prior written consent. 6 7 (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 that falls within the Severance Period, Employee shall be entitled to the Severance Benefits. (b) Severance Benefits. If, following the occurrence of a Change in Control, Employee's employment with the Company is terminated pursuant to Section 8(a)(i), (ii) or (iii), 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 the highest Aggregate Cash Compensation paid or payable to Employee for any of the three calendar years preceding the year in which the Termination Date occurs or for the year in which the Termination Date occurs if the Termination Date occurs after the end of the first quarter; for purposes of this Section 8(b)(i), if the Company's financial performance for the year-to-date period preceding the Termination Date is consistent with budgeted levels (as certified by the Compensation Committee) then the Aggregate Cash Compensation for the year in which the Termination Date occurs shall be assumed to be equal to 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 150%, and (C) the Employee's Performance Award Plan award payable for the award period ending with the year in which the Termination Date occurs as if the earnings per share growth rate for such year were assumed to be the actual growth rate for the year-to-date period prior to the Termination Date; (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 Change in Control; 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 Change in Control; 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 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. 7 8 (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 upon 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 Change in Control; and (v) 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 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 Change in Control prior to the expiration of the Protected Term; and (ii) the termination of Employee's employment for any reason whatsoever following a Change in Control 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). 8 9 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event that a Change in Control 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 (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 9 10 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 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; 10 11 (C) cooperate with the Company in good faith in order effectively to contest such claim; and (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 intended to be extended to Employee hereunder. Accordingly, if the Company fails to comply with any of its obligations under this 11 12 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 CHANGE IN CONTROL. 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 Change in Control. 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 Change in Control and ending on the date of consummation of such Change in Control shall be deemed to be a termination of Employee after a Change in Control for purposes of this Agreement. 13. NON-COMPETITION/NON-SOLICITATION. (a) Covenant Not to Compete. Employee covenants and agrees that during the period of Employee's employment hereunder 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. (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 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. 12 13 (a) Upon the consummation of a Change in Control prior to the expiration of the Protected Term, (i) all options to purchase Company stock 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 Change in Control 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, 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. 13 14 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 conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 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. 14 15 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: _____________________________ HEALTH CARE AND RETIREMENT CORPORATION By: _______________________________ Its: _____________________________ EMPLOYEE: ____________________________________ R. Jeffrey Bixler 15 16 SCHEDULE I Employee: R. Jeffrey Bixler Current Base Rate: $172,000 Job Titles: Vice President, General Counsel and Secretary 17 SCHEDULE II Annual Incentive Plan Performance Award Plan Stock Option Plan Amended Restricted Stock Plan Salary Retirement Plan (prior to January 1, 1993) Stock Purchase and Savings Program (prior to January 1, 1993) Senior Executive Retirement Plans Supplemental Offset Plan Excess and Supplemental Benefit Plans Corporate Officer and Senior Executive Life Insurance Program Senior Management Savings Plan Senior Management Savings Plan For Corporate Officers Such other benefit plans and arrangements as the Company provides, from time to time, to salaried employees generally participation in which is approved by the President. EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21
STATE OF INC. OR NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS - ------------------ ------------ ----------------- HCRC Inc. Delaware Same Ancillary Services Management, Inc. Ohio Same HCR Acquisition Corp. Ohio Same MileStone Healthcare, Inc. Delaware Same HCR Information Corporation Ohio Same Heartland CarePartners, Inc. Ohio Same RVA Management Services, Inc. Ohio Same Vision Management Services, Inc. Ohio Same (majority owned) HCR Home Health Care and Hospice, Inc. Ohio Same Heartland Home Health Care Services, Inc. Ohio Same Heartland Home Health Care Heartland Home Health Care and Hospice Heartland Hospice Services, Inc. Ohio Same Heartland Home Health Care Heartland Home Health Care and Hospice Heartland Services Corp. Ohio Same - -Heartland Healthcare Services Ohio Same (50% owned partnership) HCR Rehabilitation Corp. Ohio Same Heartland Rehabilitation Services, Inc. Ohio Same Heartland Home Care, Inc. Ohio Same Heartland Home Health Care Heartland Home Health Care and Hospice MileStone Health Systems, Inc. Texas Same MileStone Rehabilitation Services, Inc. Texas Same MileStone Therapy Services, Inc. Texas Same Health Care and Retirement Ohio Same Corporation of America Heartland - Beavercreek Heartland of Bellefontaine Heartland of Browning Heartland of Bucyrus Heartland of Centerburg Heartland of Chillicothe Heartland of Eaton Heartland - Fairfield Heartland of Greenville Heartland of Hillsboro Heartland - Holly Glen Heartland of Indian Lake N.C. Heartland of Jackson Heartland of Kettering Heartland - Lansing
2
STATE OF INC. OR NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS - ------------------ ------------ ----------------- Heartland of Marietta Heartland of Marysville Oak Pavilion Nursing Home Heartland of Oak Ridge Heartland of Perrysburg Perrysburg Commons Heartland of Piqua Heartland of Portsmouth Heartland of Riverview Heartland of Springfield Heartland of Urbana Heartland - Victorian Village Heartland of Wauseon The Village at Westerville NC The Village at Westerville RC Christopher East Health Care Center Heartland Health Care Center-Prestwick Glenside Nursing Center Hampton House Heartland Health Care Center (Pittsburgh) Shadyside Nursing & Rehab. Center Sky Vue Terrace Twinbrook Medical Center Wallingford Nursing & Rehab. Center Heartland of Beckley Heartland of Charleston Heartland of Clarksburg Heartland of Keyser Heartland of Preston County Heartland of Rainelle Heartland Health Care Center - Allen Park Heartland Health Care Center - Crestview Heartland Health Care Ctr-Dearborn Heights Heartland Health Care Center - Dorvin Heartland Health Care Center - Georgian East Heartland Health Care Center - Grand Rapids Heartland Health Care Ctr - Plymouth Court Heartland Health Care Center - University Marvin and Betty Danto Family, Health Care Center, a Health Care and Retirement Corporation facility Dulaney-Towson Health Care Center Heartland Health Care Center - Hyattsville Heartland Health Care Center - Adelphi Heartland Health Care Center - Charleston Oakmont East
3
STATE OF INC. OR NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS - ------------------ ------------ ----------------- Oakmont of Union Oakmont West Rosewood Manor Health Care Center Heartland of Willow Lane Medical Care Center Oak Meadow Nursing Center Heartland Health Care Center (Canton) Heartland Health Care Center - Galesburg Heartland Health Care Center (Henry) Heartland Health Care Center (Homewood) Heartland Health Care Center - Macomb Heartland Health Care Center - Moline Heartland Health Care Center (Paxton) Heartland Health Care and Rehabilitation Center of Boca Raton Heartland Health Care Ctr-Boynton Beach Heartland of Brooksville Community Convalescent Center Heartland Health Care Center-Ft. Myers Jacaranda Manor Heartland Health Care Ctr-Jacksonville Heartland Health Care Center-Kendall Heartland Health Care Ctr-Lauderhill Heartland Health Care Ctr-Miami Lakes Heartland Health Care Ctr-Orange Park Pasadena Manor Heartland Health Care Ctr-Prosperity Oaks Regents Park of Jacksonville Deerwood Place Regents Park of Winter Park The Westchester of Winter Park Rosedale Manor Heartland of St. Petersburg Heartland Health Care and Rehabilitation Center - Sunrise The Westchester of Sunrise Heartland of Tamarac Heartland of Zephyrhills Care Corporation Michigan Inactive Georgian Bloomfield, Inc. Michigan Heartland Health Care Center - Georgian Bloomfield Heartland of Indian Lake Ohio Heartland of Indian Lake Rehab. Center, Inc. Rehab. Center Heartland of Martinsburg, Inc. Ohio Heartland of Martinsburg HGCC of Allentown, Inc. Tennessee Liberty Nursing & Rehab. Center Lincoln Health Care, Inc. Ohio Heartland of Mentor
4
STATE OF INC. OR NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS - ------------------ ------------ ----------------- Washtenaw Hills Manor, Inc. Michigan Same Heartland Health Care Center - Ann Arbor HCRA of Texas, Inc. Texas Same Heartland Health Care Center (Austin) Heartland Health Care Center (Bedford) Heartland of Corpus Christi Holiday Nursing Center Heartland of San Antonio Heartland Health Care Center (Temple) Heartland Health Care Center at Willowbrook Heartland Health Care Ctr (West Houston) Care Corporation Holdings, Inc. Michigan Same Care Real Estate, Inc. Michigan Same Canterbury Village, Inc. Michigan Heartland Village Square Care Manors, Inc. Michigan Same Birchwood Manor, Inc. Michigan Holland Health Care Center Donahoe Manor, Inc. Pennsylvania Donahoe Manor East Michigan Care Corporation Michigan Heartland Health Care Center - Briarwood Heartland Health Care Center - Fostrian Heartland Health Care Center - Hampton Heartland Health Care Center - Marlin Greenview Manor, Inc. Michigan Heartland Health Care Center - Greenview Ionia Manor, Inc. Michigan Heartland Health Care Center - Ionia Knollview Manor, Inc. Michigan Heartland Health Care Center - Knollview Marina View Manor, Inc. Wisconsin Marina View Manor Heartland of Milwaukee Parkview Terrace Heartland of Shawano Washington Manor Ridgeview Manor, Inc. Michigan Heartland Health Care Center - Kalamazoo Springhill Manor, Inc. Michigan Heartland Health Care Center - Battle Creek Sun Valley Manor, Inc. Michigan Heartland Health Care Center - Saginaw Three Rivers Manor, Inc. Michigan Heartland Health Care Center - Three Rivers Whitehall Manor, Inc. Michigan Heartland Health Care Center - Whitehall Care Manors of New England, Inc. Delaware Same Crescent Hill Manor, Inc. Mass. Inactive Kensington Manor, Inc. Florida Kensington Manor Heartland Health Care and Rehabilitation Center (Sarasota) Mapleview Nursing Home, Inc. Mass. Inactive Meadows Manor, Inc. Conn. Inactive Spruce Manor Nursing Home, Inc. Mass. Inactive Union Square Nursing Center, Inc. Mass. Inactive Valley View Manor, Inc. Mass. Inactive Waterbury Manor, Inc. Conn. Inactive
EX-23 7 CONSENT OF ERNST & YOUNG LLP 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, and 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 of our report dated January 27, 1998, with respect to the consolidated financial statements and schedule of HCR included in the Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Toledo, Ohio February 17, 1998 EX-27 8 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 7,455 0 157,233 19,184 0 170,751 690,457 137,484 936,351 121,324 292,951 0 0 489 433,517 936,351 0 891,963 0 705,867 37,395 10,644 17,203 101,185 31,064 70,121 0 0 0 70,121 1.57 1.51
-----END PRIVACY-ENHANCED MESSAGE-----