<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 September 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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on October 31, 1996.
Common stock, $0.01 par value -- 44,968,635 shares
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TABLE OF CONTENTS
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<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Page
Item 1. Financial Statements (Unaudited) Number
------
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
Nine months ended September 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>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited) (Note)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,430 $ 7,742
Receivables, less allowances for
doubtful accounts of $12,920 and $11,485 110,930 95,956
Prepaid expenses 5,232 9,862
Deferred income taxes 20,096 20,096
-------- --------
Total current assets 139,688 133,656
Property and equipment, net of accumulated
depreciation of $99,804 and $79,333 515,614 505,167
Intangible assets, net of amortization of $6,791 and $4,863 71,787 44,774
Other assets 65,396 45,594
-------- --------
Total assets $792,485 $729,191
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,772 $ 33,330
Employee compensation and benefits 34,466 29,393
Accrued insurance liabilities 26,041 24,797
Other accrued liabilities 50,422 30,470
Long-term debt due within one year 1,383 1,275
-------- --------
Total current liabilities 146,084 119,265
Long-term debt 186,471 159,082
Deferred income taxes 63,825 63,825
Other liabilities 14,367 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 195,801 154,533
-------- --------
460,283 419,015
Less treasury stock, at cost (3,750,700 and 1,620,720 shares) (78,545) (44,585)
-------- --------
Total stockholders' equity 381,738 374,430
-------- --------
Total liabilities and stockholders' equity $792,485 $729,191
======== ========
</TABLE>
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.
See notes to consolidated financial statements.
3
<PAGE> 4
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $199,205 $181,825 $581,117 $530,046
Expenses:
Operating 159,331 146,776 465,684 428,214
General and administrative 7,717 7,685 23,359 22,324
Depreciation and amortization 7,965 6,674 22,752 19,032
-------- -------- -------- --------
175,013 161,135 511,795 469,570
------- ------- ------- -------
Income from operations 24,192 20,690 69,322 60,476
Interest expense, net (2,793) (2,457) (7,734) (7,229)
Equity in earnings of partnership 361 104 973 244
-------- -------- -------- --------
Income before income taxes 21,760 18,337 62,561 53,491
Income taxes 6,528 5,501 18,768 16,221
-------- -------- -------- --------
Net income $ 15,232 $ 12,836 $ 43,793 $ 37,270
======== ======== ======== ========
Earnings per share -
primary and fully diluted $ .32 $ .26 $ .91 $ .76
======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding:
Primary 47,372 48,656 48,074 49,125
Fully diluted 47,373 48,715 48,074 49,211
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $43,793 $37,270
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 23,917 20,299
Provision for bad debts 4,328 3,244
Equity in earnings of partnership (973) (244)
Gain from sale of property and equipment (1,534)
Changes in assets and liabilities, excluding businesses acquired:
Receivables (14,237) (7,628)
Prepaid expenses and other assets (11,760) (21,265)
Accounts payable (129) 42
Employee compensation and benefits 3,333 2,256
Accrued insurance and other liabilities 20,957 24,178
------ ------
Total adjustments 25,436 19,348
------ ------
Net cash provided by operating activities 69,229 56,618
INVESTING ACTIVITIES
Purchases and construction of property and equipment (29,085) (22,844)
Proceeds from sale of property and equipment 5,472
Investment in partnership (2,955) (1,250)
Cash paid to acquire businesses (31,527) (31,273)
------- -------
Net cash used in investing activities (63,567) (49,895)
------- -------
FINANCING ACTIVITIES
Net borrowings under bank credit agreement 27,900 3,000
Principal payments of long-term debt (1,353) (4,515)
Proceeds from exercise of stock options 1,748 1,671
Purchase of common stock for treasury (38,269) (22,429)
------- -------
Net cash used in financing activities (9,974) (22,273)
-------- -------
Net decrease in cash (4,312) (15,550)
Cash and cash equivalents at beginning of year 7,742 29,852
------- -------
Cash and cash equivalents at end of period $ 3,430 $14,302
======= =======
</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 nine months ended September 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.
NOTE 2 - Acquisitions
- ---------------------
During 1996, HCR paid $31,527,000 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 $28,900,000 of intangible
assets. At September 30, 1996, HCR operated 127 long term care facilities, 55
outpatient rehabilitation clinics and 33 home health care offices. In addition,
Heartland Healthcare Services, Inc., HCR's 50% owned partnership, operated 4
institutional pharmacies.
NOTE 3 - Long-Term Debt
- -----------------------
Effective September 30, 1996, the bank credit agreement permits HCR to borrow up
to $225 million through August 2, 2001.
6
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
FINANCIAL CONDITION
During 1996, HCR paid $31,527,000 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 $28,900,000 of intangible
assets.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1996 increased $17,380,000 or
10% to $199,205,000 as compared to the same period in 1995. Revenues for the
nine months ended September 30, 1996 increased $51,071,000 or 10% to
$581,117,000 as compared to the same period in 1995. Of the increases, 72% and
62% for the three months and nine months ended September 30, 1996, respectively,
related to the acquisition of various businesses in 1996 and 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 91%and 90% for the
three months and nine months ended September 30, 1995, and 89% for the same
periods in 1996, respectively. The mix of revenue from Medicare, private pay and
insured patients increased from 66% for the three months and nine months ended
September 30, 1995 to 68% for the same periods in 1996, primarily due to the
growth in revenue from rehabilitation services. At September 30, 1996, HCR
operated 56 medical specialty units with 1,700 beds.
Operating expenses for the three months ended September 30, 1996 increased
$12,555,000 or 9% to $159,331,000 from the comparable period in 1995. Operating
expenses for the nine months ended September 30, 1996 increased $37,470,000 or
9% to $465,684,000 from the same period in 1995. Of the increases, 86% and 70%
for the three months and nine months ended September 30, 1996, respectively,
related to the acquisition of various businesses in 1996 and 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
32% and 37% of the increases for the three months and nine months ended
September 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 $1,035,000 for the nine months
ended September 30, 1996 as compared to the same period in 1995. However, the
expense as a percentage of revenue has remained at 4% for the nine months ended
September 30, 1996 and 1995. The increase in depreciation and amortization of
$1,291,000 and $3,720,000, for the three months and nine months ended September
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 $505,000 for the nine months ended September 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 nine months 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 September
30, 1996, the Company maintained $3,430,000 in cash and cash equivalents, of
which $26,000 was invested in short-term investments.
Cash used in investing activities amounted to $63,567,000. Expenditures for
property and equipment of $29,085,000 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 $31,527,000 in the first nine months of 1996.
Net cash used in financing activities during the first nine months of 1996
amounted to $9,974,000. The cash was used to purchase HCR common stock for
$38,269,000 and repay long-term debt of $1,353,000. This use was partially
offset by a $27,900,000 increase in debt under the bank credit agreement and
$1,748,000 from the exercise of stock options.
The bank credit agreement permits HCR to borrow up to $225,000,000 through
August 2, 2001. At September 30, 1996, HCR had borrowed $177,900,000 and issued
letters of credit totalling $12,689,000 which left a remaining unused borrowing
capacity of $34,411,000.
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.
----------------------------------------------------
None
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 nine months ended
September 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 November 5, 1996 By /s/ Geoffrey G. Meyers
-------------------- ----------------------
Geoffrey G. Meyers, Executive Vice-President,
Chief Financial Officer and Treasurer
10
<PAGE> 11
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule for the nine months ended
September 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 SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,430
<SECURITIES> 0
<RECEIVABLES> 123,850
<ALLOWANCES> 12,920
<INVENTORY> 0
<CURRENT-ASSETS> 139,688
<PP&E> 615,418
<DEPRECIATION> 99,804
<TOTAL-ASSETS> 792,485
<CURRENT-LIABILITIES> 146,084
<BONDS> 186,471
<COMMON> 489
0
0
<OTHER-SE> 381,249
<TOTAL-LIABILITY-AND-EQUITY> 792,485
<SALES> 0
<TOTAL-REVENUES> 581,117
<CGS> 0
<TOTAL-COSTS> 465,684
<OTHER-EXPENSES> 22,752
<LOSS-PROVISION> 4,328
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 62,561
<INCOME-TAX> 18,768
<INCOME-CONTINUING> 43,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,793
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
