<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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
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 PRECEEDING 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE CLOSE OF BUSINESS ON JULY 31, 1996.
Common stock, $0.01 par value -- 45,380,856 shares
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
<S> <C> <C>
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- -----------
(Unaudited) (Note)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,746 $ 7,742
Receivables, less allowances for
doubtful accounts of $12,803 and $11,485 104,394 95,956
Prepaid expenses 7,122 9,862
Deferred income taxes 20,096 20,096
-------- --------
Total current assets 136,358 133,656
Property and equipment, net of accumulated
depreciation of $92,730 and $79,333 510,548 505,167
Intangible assets, net of amortization of $6,059 and $4,863 68,961 44,774
Other assets 54,328 45,594
-------- --------
Total assets $770,195 $729,191
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,538 $ 33,330
Employee compensation and benefits 31,954 29,393
Accrued insurance liabilities 25,361 24,797
Other accrued liabilities 44,505 30,470
Long-term debt due within one year 1,469 1,275
-------- --------
Total current liabilities 137,827 119,265
Long-term debt 174,831 159,082
Deferred income taxes 63,825 63,825
Other liabilities 14,062 12,589
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 and 32,573,627 shares issued 489 326
Capital in excess of par 263,993 264,156
Retained earnings 180,877 154,533
-------- --------
445,359 419,015
Less treasury stock, at cost (3,215,450 and 1,620,720 shares) (65,709) (44,585)
-------- --------
Total stockholders' equity 379,650 374,430
-------- --------
Total liabilities and stockholders' equity $770,195 $729,191
======== ========
<FN>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $194,267 $176,886 $381,912 $348,221
Expenses:
Operating 156,057 143,345 306,353 281,438
General and administrative 7,753 7,081 15,642 14,639
Depreciation and amortization 7,562 6,484 14,787 12,358
-------- -------- -------- --------
171,372 156,910 336,782 308,435
-------- -------- -------- --------
Income from operations 22,895 19,976 45,130 39,786
Interest expense, net (2,314) (2,265) (4,941) (4,772)
Equity in earnings of partnership 318 73 612 140
-------- -------- -------- --------
Income before income taxes 20,899 17,784 40,801 35,154
Income taxes 6,269 5,335 12,240 10,720
-------- -------- -------- --------
Net income $ 14,630 $ 12,449 $ 28,561 $ 24,434
======== ======== ======== ========
Earnings per share -
primary and fully diluted $ .30 $ .25 $ .59 $ .49
======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding:
Primary 48,122 49,135 48,428 49,362
Fully diluted 48,122 49,135 48,429 49,362
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $28,561 $24,434
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,553 13,203
Provision for bad debts 3,020 1,846
Equity in earnings of partnership (612) (140)
Gain from sale of property and equipment (1,254)
Changes in assets and liabilities, excluding businesses acquired:
Receivables (6,709) (6,959)
Prepaid expenses and other assets (4,673) (14,391)
Accounts payable 639 368
Employee compensation and benefits 1,136 1,261
Accrued insurance and other liabilities 14,077 13,312
------ ------
Total adjustments 22,431 7,246
------ -------
Net cash provided by operating activities 50,992 31,680
INVESTING ACTIVITIES
Purchases and construction of property and equipment (17,087) (13,965)
Proceeds from sale of property and equipment 3,056
Investment in partnership (1,000) (1,250)
Cash paid to acquire businesses (27,497) (28,458)
------- -------
Net cash used in investing activities (45,584) (40,617)
------- -------
FINANCING ACTIVITIES
Net borrowings under bank credit agreement 16,000 2,600
Principal payments of long-term debt (1,028) (4,255)
Proceeds from exercise of stock options 1,546 1,171
Purchase of common stock for treasury (24,922) (17,551)
------- -------
Net cash used in financing activities (8,404) (18,035)
-------- -------
Net decrease in cash (2,996) (26,972)
Cash and cash equivalents at beginning of year 7,742 29,852
------- -------
Cash and cash equivalents at end of period $ 4,746 $ 2,880
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
HEALTH CARE AND RETIREMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Principles of Consolidation and Presentation
- - -----------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of HCR, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim periods. Operating
results for the three months and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in HCR's annual report on Form 10-K
for the year ended December 31, 1995.
On May 7, 1996 the Board of Directors authorized a three-for-two stock split,
effected in the form of a 50% stock dividend, payable on June 5, 1996 to
stockholders of record on May 21, 1996. Accordingly, all per share data have
been restated to reflect the stock split.
A reclassification of the 1995 equity in earnings of the pharmacy partnership
with Omnicare has been made from operating expenses to a separate line item in
order to conform to the 1996 presentation.
NOTE 2 - Acquisitions
- - ---------------------
In the first half of 1996, HCR paid $27,497,000 for the acquisition of various
businesses and contingent consideration related to prior year acquisitions. The
businesses acquired include home health care, rehabilitation therapy services
and management contracts. The acquisitions were accounted for under the purchase
method of accounting and generated approximately $25,350,000 of intangible
assets. At June 30, 1996, HCR operated 127 long term care facilities, 51
outpatient rehabilitation clinics and 33 home health care offices. In addition,
Heartland Healthcare Services, Inc., HCR's 50% owned partnership, operated two
pharmaceutical distribution centers.
NOTE 3 - Subsequent Event
- - -------------------------
Effective August 2, 1996, HCR's credit facility included $215 million of
committed credit until August 2, 2001 and $10 million of committed credit until
August 2, 2000.
6
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
FINANCIAL CONDITION
In the first half of 1996, HCR paid $27,497,000 for the acquisition of various
businesses and contingent consideration related to prior year acquisitions. The
businesses acquired include home health care, rehabilitation therapy services
and management contracts. The acquisitions were accounted for under the purchase
method of accounting and generated approximately $25,350,000 of intangible
assets.
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1996 increased $17,381,000 or 10%
to $194,267,000 as compared to the same period in 1995. Revenues for the six
months ended June 30, 1996 increased $33,691,000 or 10% to $381,912,000 as
compared to the same period in 1995. Of the increases, 72% and 57% for the three
months and six months ended June 30, 1996, respectively, related to the
acquisition of various businesses in the first half of 1996 and the last half of
1995. The remaining increases were due to mix changes and improved per diem
rates, resulting from more specialized care, such as subacute medical care and
rehabilitation services for more acutely ill patients. The occupancy levels were
90% for the three months and six months ended June 30, 1995 and 89% and 90% for
the same periods in 1996, respectively. The mix of revenue from Medicare,
private pay and insured patients increased from 67% and 66% for the three months
and six months ended June 30, 1995 to 68% for the same periods in 1996,
primarily due to the growth in revenue from rehabilitation services. At June 30,
1996, HCR operated 56 medical specialty units with 1,700 beds.
Operating expenses for the three months ended June 30, 1996 increased
$12,712,000 or 9% to $156,057,000 from the comparable period in 1995. Operating
expenses for the six months ended June 30, 1996 increased $24,915,000 or 9% to
$306,353,000 from the same period in 1995. Of the increases, 81% and 62% for the
three months and six months ended June 30, 1996, respectively, related to the
acquisition of various businesses in the first half of 1996 and the last half of
1995. The remaining increases were attributable to labor costs offset by
decreases in other general expenses. Labor costs, excluding those related to the
acquisitions, represented 34% and 39% of the increases for the three months and
six months ended June 30, 1996 as compared to the same periods in 1995,
respectively. The increase in labor costs was attributable to average wage rate
increases as well as growth in the staffing levels attributable to the higher
acuity patients in the medical specialty units.
General and administrative expense increased $672,000 and $1,003,000 for the
three months and six months ended June 30, 1996 as compared to the same periods
in 1995, respectively. However, the expense as a percentage of revenue has
remained at 4% for the six months ended June 30, 1996 and 1995. The increase in
depreciation and amortization of $1,078,000 and $2,429,000, for the three months
and six months ended June 30, 1996 as compared to the same periods in the prior
year, relates primarily to additional depreciation for prior year capital
expenditures. The increase in net interest expense of $169,000 for the six
months ended June 30, 1996 as compared to the same period in 1995 was
attributable to an increase in debt levels partially offset by lower interest
rates and additional interest income earned on cash equivalents.
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996, HCR satisfied its cash requirements from a
combination of cash generated from operating activities and borrowings under a
bank credit agreement. HCR used the cash principally for capital expenditures,
the acquisition of businesses and the purchase of HCR common stock. At June 30,
1996, the Company maintained $4,746,000 in cash and cash equivalents, of which
$1,472,000 was invested in short-term investments.
Cash used in investing activities amounted to $45,584,000. Expenditures for
property and equipment of $17,087,000 related to renovations, capital
improvements, development of medical specialty units and construction of a new
facility. As part of the diversification into other health care services, HCR
acquired various businesses and paid contingent consideration for prior year
acquisitions for a total of $27,497,000 in the first half of 1996.
Net cash used in financing activities during the first half of 1996 amounted to
$8,404,000. The cash was used to purchase HCR common stock for $24,922,000 and
repay long-term debt of $1,028,000. This use was partially offset by a
$16,000,000 increase in debt under the bank credit agreement and $1,546,000 from
the exercise of stock options.
The bank credit agreement permits HCR to borrow up to $225,000,000 through
August 2, 2000. At June 30, 1996, HCR had borrowed $166,000,000 and issued
letters of credit totalling $12,669,000 which left a remaining unused borrowing
capacity of $46,331,000.
Effective August 2, 1996, HCR's credit facility included $215 million of
committed credit until August 2, 2001 and $10 million of committed credit until
August 2, 2000.
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.
8
<PAGE> 9
PART II. OTHER INFORMATION
Item 1. 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 2. Changes in Securities.
----------------------
None
Item 3. Defaults Upon Senior Securities.
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Company's Annual Meeting of Stockholders held on
May 7, 1996 the stockholders approved the following items:
a) elect Joseph H. Lemieux as a director, b) elect Geoffrey
G. Meyers as a director and c) select Ernst & Young LLP as
independent public accountants for the year ending December
31, 1996. The items were approved by a vote as follows:
Item For Against Withheld Abstain Not Voted
---- --- ------- -------- ------- ---------
a 26,792,571 276,137
b 26,672,679 396,029
c 26,623,697 10,362 434,649
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a)Exhibits
S-K Item
601 No.
-------
27 Financial Data Schedule for the six months ended
June 30, 1996
(b) Reports on Form 8-K
None
9
<PAGE> 10
SIGNATURES
Pursuant to the requirements 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)
Date August 12, 1996 By /s/ Geoffrey G. Meyers
-------------------- ----------------------------------
Geoffrey G. Meyers, Executive Vice-President,
Chief Financial Officer and Treasurer
10
<PAGE> 11
EXHIBIT INDEX
Exhibit Page No.
- - ------- --------
27 Financial Data Schedule for the six
months ended June 30, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HEALTH CARE
AND RETIREMENT CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,746
<SECURITIES> 0
<RECEIVABLES> 117,197
<ALLOWANCES> 12,803
<INVENTORY> 0
<CURRENT-ASSETS> 136,358
<PP&E> 603,278
<DEPRECIATION> 92,730
<TOTAL-ASSETS> 770,195
<CURRENT-LIABILITIES> 137,827
<BONDS> 174,831
<COMMON> 489
0
0
<OTHER-SE> 379,161
<TOTAL-LIABILITY-AND-EQUITY> 770,195
<SALES> 0
<TOTAL-REVENUES> 381,912
<CGS> 0
<TOTAL-COSTS> 306,353
<OTHER-EXPENSES> 14,787
<LOSS-PROVISION> 3,020
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 40,801
<INCOME-TAX> 12,240
<INCOME-CONTINUING> 28,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,561
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
