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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
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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
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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,
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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
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