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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 March 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
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 April 30, 1997.
Common stock, $0.01 par value -- 44,552,321 shares
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TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income -
Three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 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
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited) (Note)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,106 $ 2,389
Receivables, less allowances for
doubtful accounts of $13,962 and $13,335 125,579 114,777
Prepaid expenses 9,166 10,023
Deferred income taxes 19,801 19,801
-------- --------
Total current assets 162,652 146,990
Property and equipment, net of accumulated
depreciation of $114,017 and $106,762 539,431 533,457
Intangible assets, net of amortization of $8,975 and $7,602
Goodwill 100,478 43,664
Other 36,512 32,472
Other assets 50,499 46,201
-------- --------
Total assets $889,572 $802,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,764 $ 32,218
Employee compensation and benefits 31,523 34,425
Accrued insurance liabilities 22,869 23,943
Other accrued liabilities 44,734 32,448
Long-term debt due within one year 2,373 1,417
-------- --------
Total current liabilities 132,263 124,451
Long-term debt 273,626 202,295
Deferred income taxes 66,798 66,798
Other liabilities 17,326 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 268,036 268,036
Retained earnings 225,345 210,306
-------- --------
493,870 478,831
Less treasury stock, at cost (4,264,606 and 3,999,541 shares) (94,311) (85,797)
-------- --------
Total stockholders' equity 399,559 393,034
-------- --------
Total liabilities and stockholders' equity $889,572 $802,784
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 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
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1997 1996
---- ----
(In thousands, except earnings per share)
<S> <C> <C>
Revenues $213,912 $187,645
Expenses:
Operating 170,415 150,296
General and administrative 7,808 7,889
Depreciation and amortization 8,766 7,225
-------- --------
186,989 165,410
-------- --------
Income from operations 26,923 22,235
Interest expense, net (3,812) (2,627)
Equity in earnings of partnership 444 294
-------- --------
Income before income taxes 23,555 19,902
Income taxes 7,231 5,971
-------- --------
Net income $ 16,324 $ 13,931
======== ========
Earnings per share - primary and fully diluted $ .35 $ .29
======== ========
Weighted average common and common equivalent
shares outstanding:
Primary 46,785 48,735
Fully diluted 46,821 48,735
</TABLE>
See notes to consolidated financial statements.
4
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $16,324 $13,931
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,836 7,618
Provision for bad debts 1,480 1,562
Equity in earnings of partnership (444) (294)
Changes in assets and liabilities,
excluding businesses acquired:
Receivables (6,793) (6,236)
Prepaid expenses and other assets (2,991) (3,073)
Accounts payable (2,644) 693
Employee compensation and benefits (2,880) (1,314)
Accrued insurance and other liabilities 8,417 11,172
------- -------
Total adjustments 2,981 10,128
------- -------
Net cash provided by operating activities 19,305 24,059
INVESTING ACTIVITIES
Purchases and construction of property and equipment (12,693) (7,529)
Investment in partnership (1,000)
Cash paid to acquire businesses (45,201) (12,945)
------- -------
Net cash used in investing activities (57,894) (21,474)
------- -------
FINANCING ACTIVITIES
Net borrowings under bank credit agreement 72,600 3,000
Principal payments of long-term debt (18,473) (762)
Proceeds from exercise of stock options 804 1,182
Purchase of common stock for treasury (10,625) (944)
------- -------
Net cash provided by financing activities 44,306 2,476
------- -------
Net increase in cash 5,717 5,061
Cash and cash equivalents at beginning of year 2,389 7,742
------- -------
Cash and cash equivalents at end of period $ 8,106 $12,803
======= =======
</TABLE>
See notes to consolidated financial statements.
5
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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 ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. 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, 1996.
NOTE 2 - ACQUISITIONS
In the first quarter of 1997, HCR paid $45,201,000 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 $6,000,000, assumed liabilities of $23,000,000 and
recorded $62,000,000 of intangible assets. At March 31, 1997, HCR operated 128
long term care facilities, 74 outpatient rehabilitation clinics and 33 home
health care offices. Management services are provided to 66 subacute and
rehabilitation units and 14 comprehensive outpatient rehabilitation facilities
(CORFs), as well as to vision surgery and other treatment centers.
NOTE 3 - LONG-TERM DEBT
Effective January 24, 1997, HCR's loan commitment increased from $225,000,000
to $325,000,000.
NOTE 4 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is effective December 31, 1997. At that time,
HCR will be required to change the method currently used to compute earnings
per share (EPS) and to restate all prior periods. Under the new requirements
there are two EPS calculations, basic and diluted earnings per share. Basic EPS
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Under
this method, EPS is expected to be $.37 and $.30 for the quarters ended March
31, 1997 and 1996, respectively. The second presentation, diluted EPS, gives
effect to all dilutive potential common shares and is expected to be the same
as the currently disclosed fully diluted EPS for the quarters ended March 31,
1997 and 1996.
6
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
In the first quarter of 1997, HCR paid $45,201,000 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 $6,000,000, assumed liabilities of $23,000,000 and
recorded $62,000,000 of intangible assets.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1997 increased $26,267,000 or 14%
to $213,912,000 as compared to the same period in 1996. Of the increase, 68%
related to the acquisition of various businesses in the first quarter of 1997
and the last three quarters of 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 rehabilitation services for more acutely ill
patients. The occupancy levels were 90% and 89% in the first quarter of 1996
and 1997, respectively. The mix of revenue from Medicare, private pay and
insured patients increased from 67% for the first quarter of 1996 to 70% for
the same period in 1997, primarily due to the growth in non-Medicaid revenue
from acquisitions.
Operating expenses for the three months ended March 31, 1997 increased
$20,119,000 or 13% to $170,415,000 from the comparable period in 1996. Of the
increase, 70% related to the acquisition of various businesses in the first
quarter of 1997 and the last three quarters of 1996. The remaining increases
were attributable to labor costs and other general expenses. Labor costs,
excluding those related to the acquisitions, represented 29% of the increase
which was attributable to 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 the
first quarter of 1996 and 1997, remained constant. The increase in depreciation
of $676,000 between the first quarter of 1996 and 1997 related to additional
depreciation on prior year capital expenditures. Amortization expense increased
$865,000 for the three months ended March 31, 1997 as compared to the same
period in the prior year, which was attributable to the intangible assets
recorded in connection with 1996 and 1997 acquisitions. The increase in net
interest expense of $1,185,000 was attributable to an increase in debt levels
partially offset by additional interest income earned on cash equivalents.
7
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NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is effective December 31, 1997. At that time,
HCR will be required to change the method currently used to compute earnings
per share (EPS) and to restate all prior periods. Under the new requirements
there are two EPS calculations, basic and diluted earnings per share. Basic EPS
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Under
this method, EPS is expected to be $.37 and $.30 for the quarters ended March
31, 1997 and 1996, respectively. The second presentation, diluted EPS, gives
effect to all dilutive potential common shares and is expected to be the same
as the currently disclosed fully diluted EPS for the quarters ended March 31,
1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1997, 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 March
31, 1997, the Company maintained $8,106,000 in cash and cash equivalents, of
which $5,986,000 was invested in short-term investments.
Cash used in investing activities amounted to $57,894,000. Expenditures for
property and equipment of $12,693,000 related to renovations, capital
improvements and the ongoing construction of a new facility in Ann Arbor,
Michigan. 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 $45,201,000 in the first quarter of 1997.
Net cash provided by financing activities during the first quarter of 1997
amounted to $44,306,000. The increase in debt under the credit agreement of
$72,600,000 was partially used to repay other long-term debt of $18,473,000
which included debt assumed in the first quarter acquisitions and to purchase
387,000 shares of HCR common stock for $10,625,000.
Effective January 24, 1997, the bank credit agreement was amended to increase
the loan commitment from $225,000,000 to $325,000,000. The bank credit
agreement matures on August 2, 2001. At March 31, 1997, HCR had borrowed
$265,000,000 and issued letters of credit totalling $12,689,000 which left a
remaining unused borrowing capacity of $47,311,000.
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
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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 three months ended
March 31, 1997
(b) Reports on Form 8-K
None
9
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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 May 12, 1997 By /s/ Geoffrey G. Meyers
--------------- ---------------------------------
Geoffrey G. Meyers, Executive
Vice President, Chief Financial
Officer and Treasurer
10
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EXHIBIT INDEX
Exhibit
-------
27 Financial Data Schedule for the three months ended March 31, 1997
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
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,106
<SECURITIES> 0
<RECEIVABLES> 139,541
<ALLOWANCES> 13,962
<INVENTORY> 0
<CURRENT-ASSETS> 162,652
<PP&E> 653,448
<DEPRECIATION> 114,017
<TOTAL-ASSETS> 889,572
<CURRENT-LIABILITIES> 132,263
<BONDS> 273,626
0
0
<COMMON> 489
<OTHER-SE> 399,070
<TOTAL-LIABILITY-AND-EQUITY> 889,572
<SALES> 0
<TOTAL-REVENUES> 213,912
<CGS> 0
<TOTAL-COSTS> 170,415
<OTHER-EXPENSES> 8,766
<LOSS-PROVISION> 1,480
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,555
<INCOME-TAX> 7,231
<INCOME-CONTINUING> 16,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,324
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
