<PAGE> 1
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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 June 30, 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 JULY 31, 1997.
Common stock, $0.01 par value -- 44,539,471 shares
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 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
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
(Unaudited) (Note)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,600 $ 2,389
Receivables, less allowances for
doubtful accounts of $14,099 and $13,335 128,917 114,777
Prepaid expenses 7,277 10,023
Deferred income taxes 19,801 19,801
-------- --------
Total current assets 157,595 146,990
Property and equipment, net of accumulated
depreciation of $121,467 and $106,762 546,714 533,457
Intangible assets, net of amortization of $10,480 and $7,602
Goodwill 103,579 43,664
Other 36,118 32,472
Other assets 56,564 46,201
-------- --------
Total assets $900,570 $802,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,262 $ 32,218
Employee compensation and benefits 33,905 34,425
Accrued insurance liabilities 22,335 23,943
Other accrued liabilities 45,931 32,448
Long-term debt due within one year 2,162 1,417
-------- --------
Total current liabilities 139,595 124,451
Long-term debt 262,367 202,295
Deferred income taxes 66,798 66,798
Other liabilities 18,618 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 268,036 268,036
Retained earnings 241,662 210,306
-------- --------
510,187 478,831
Less treasury stock, at cost (4,319,185 and 3,999,541 shares) (96,995) (85,797)
-------- --------
Total stockholders' equity 413,192 393,034
-------- --------
Total liabilities and stockholders' equity $900,570 $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
<PAGE> 4
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $220,356 $194,267 $434,268 $381,912
Expenses:
Operating 174,508 156,057 344,923 306,353
General and administrative 8,550 7,753 16,358 15,642
Depreciation and amortization 9,089 7,562 17,855 14,787
-------- -------- -------- --------
192,147 171,372 379,136 336,782
------- ------- ------- -------
Income from operations 28,209 22,895 55,132 45,130
Interest expense, net (3,907) (2,314) (7,719) (4,941)
Equity in earnings of partnership 546 318 990 612
-------- -------- -------- --------
Income before income taxes 24,848 20,899 48,403 40,801
Income taxes 7,629 6,269 14,860 12,240
-------- -------- -------- --------
Net income $ 17,219 $ 14,630 $ 33,543 $ 28,561
======== ======== ======== ========
Earnings per share -
primary and fully diluted $ .37 $ .30 $ .72 $ .59
======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding:
Primary 46,765 48,122 46,782 48,428
Fully diluted 46,821 48,122 46,907 48,429
</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>
Six Months Ended June 30
------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,543 $ 28,561
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17,991 15,553
Provision for bad debts 3,522 3,020
Equity in earnings of partnership (990) (612)
Changes in assets and liabilities, excluding businesses acquired:
Receivables (6,887) (6,709)
Prepaid expenses and other assets (6,808) (4,673)
Accounts payable 1,854 639
Employee compensation and benefits (489) 1,136
Accrued insurance and other liabilities 10,372 14,077
-------- --------
Total adjustments 18,565 22,431
-------- --------
Net cash provided by operating activities 52,108 50,992
INVESTING ACTIVITIES
Purchases and construction of property and equipment (27,290) (17,087)
Investment in partnership (1,000)
Cash paid to acquire businesses (54,848) (27,497)
-------- --------
Net cash used in investing activities (82,138) (45,584)
-------- --------
FINANCING ACTIVITIES
Net borrowings under bank credit agreement 61,500 16,000
Principal payments of long-term debt (18,843) (1,028)
Proceeds from exercise of stock options 1,337 1,546
Purchase of common stock for treasury (14,753) (24,922)
-------- --------
Net cash provided by (used in) financing activities 29,241 (8,404)
-------- --------
Net decrease in cash (789) (2,996)
Cash and cash equivalents at beginning of year 2,389 7,742
-------- --------
Cash and cash equivalents at end of period $ 1,600 $ 4,746
======== ========
</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 and six months ended June 30, 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 half of 1997, HCR paid $54,848,000 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 $12,000,000, assumed liabilities of $23,000,000 and recorded $66,000,000 of
intangible assets. At June 30, 1997, HCR operated 129 long term care facilities,
74 outpatient rehabilitation clinics and 33 home health care offices. Within its
facilities, HCR operated 63 medical specialty units which provide subacute,
rehabilitation or Alzheimer's programs. Management services are provided to 67
subacute and rehabilitation units and 12 comprehensive outpatient rehabilitation
facilities (CORFs), as well as to vision surgery and other treatment centers.
NOTE 3 - 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 $.39 and $.75 for the three months and six
months ended June 30, 1997, respectively, and $.32 and $.62 for the same periods
in 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 three months and six months ended June 30,
1997 and 1996.
NOTE 4 - Subsequent Event
- -------------------------
In accordance with a provision of the credit agreement, HCR requested and a
majority of the lenders approved a one-year extension of the commitment.
Effective August 2, 1997, HCR's credit facility included $295 million of
committed credit until August 2, 2002 and $30 million of committed credit until
August 2, 2001.
6
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
FINANCIAL CONDITION
In the first half of 1997, HCR paid $54,848,000 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 $12,000,000, assumed liabilities of $23,000,000 and recorded $66,000,000 of
intangible assets.
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1997 increased $26,089,000 or 13%
to $220,356,000 as compared to the same period in 1996. Revenues for the six
months ended June 30, 1997 increased $52,356,000 or 14% to $434,268,000 as
compared to the same period in 1996. Of the increases, 62% and 65% for the three
months and six months ended June 30, 1997, respectively, related to the
acquisition of various businesses in the first half of 1997 and the last half 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
89%and 90% for the three months and six months ended June 30, 1996,
respectively, and 88% and 89% for the same periods in 1997, respectively. The
mix of revenue from Medicare, private pay and insured patients increased from
68% for the three months and six months ended June 30, 1996 to 70% for the same
periods in 1997, primarily due to the growth in non-Medicaid revenue from
acquisitions.
Operating expenses for the three months ended June 30, 1997 increased
$18,451,000 or 12% to $174,508,000 from the comparable period in 1996. Operating
expenses for the six months ended June 30, 1997 increased $38,570,000 or 13% to
$344,923,000 from the same period in 1996. Of the increases, 64% and 67% for the
three months and six months ended June 30, 1997, respectively, related to the
acquisition of various businesses in the first half of 1997 and the last half of
1996. The remaining increases were attributable to labor costs offset by
decreases in other general expenses. Labor costs, excluding those related to the
acquisitions, represented 46% and 40% of the increases for the three months and
six months ended June 30, 1997 as compared to the same periods in 1996,
respectively. The increase in labor costs was attributable to average wage rate
increases, as well as growth in the staffing levels attributable to medical
specialty units, rehabilitative services and home health care.
General and administrative expense, which approximated 4% of revenue, increased
$797,000 and $716,000 for the three months and six months ended June 30, 1997 as
compared to the same periods in 1996, respectively. The increase in depreciation
of $639,000 and $1,315,000, for the three months and six months ended June 30,
1997, respectively, as compared to the same periods in the prior year, related
to additional depreciation for prior year capital expenditures. Amortization
expense increased $888,000 and $1,753,000 for the three months and six months
ended June 30, 1997 as compared to the same periods in 1996, which was
attributable to the intangible assets recorded in connection with 1996 and 1997
acquisitions. The increase in net interest expense of $2,778,000 for the six
months ended June 30, 1997 as compared to the same period in 1996 was due to an
increase in debt levels.
7
<PAGE> 8
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 $.39 and $.75 for the three months and six
months ended June 30, 1997, respectively, and $.32 and $.62 for the same periods
in 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 three months and six months ended June 30,
1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the first half 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 June 30,
1997, the Company maintained $1,600,000 in cash and cash equivalents, of which
$177,000 was invested in short-term investments.
Cash used in investing activities amounted to $82,138,000. Expenditures for
property and equipment of $27,290,000 related to renovations, capital
improvements and the construction of a new facility in Ann Arbor, Michigan which
opened in the second quarter of this year. 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 $54,848,000 in the
first half of 1997.
Net cash provided by financing activities during the first half of 1997 amounted
to $29,241,000. The increase in debt under the credit agreement of $61,500,000
was partially used to repay other long-term debt of $18,843,000 which included
debt assumed in the first quarter acquisitions and to purchase 524,300 shares of
HCR common stock for $14,753,000.
At June 30, 1997 the bank credit agreement permitted HCR to borrow up to $325
million through August 2, 2001. In accordance with a provision of the credit
agreement, HCR requested and a majority of the lenders approved a one-year
extension of the commitment. Effective August 2, 1997, HCR's credit facility
included $295 million of committed credit until August 2, 2002 and $30 million
of committed credit until August 2, 2001. At June 30, 1997, HCR had borrowed
$253,900,000 and issued letters of credit totalling $12,689,000 which left a
remaining unused borrowing capacity of $58,411,000.
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.
----------------------------------------------------
At the Company's Annual Meeting of Stockholders held on May 6,
1997 the stockholders approved the following items: a) elect
Robert G. Siefers as a director, b) elect M. Keith Weikel as a
director, c) elect Thomas L. Young as a director, d) approve
the Amended Restricted Stock Plan and e) ratify selection of
Ernst & Young LLP as independent public accountants for the
year ending December 31, 1997. The items were approved by a
vote as follows:
<TABLE>
<CAPTION>
Item For Against Withheld Abstain Not Voted
---- --- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
a 36,043,859 400,028
b 36,046,413 397,474
c 36,045,863 398,024
d 24,804,125 11,544,483 95,279
e 35,748,414 5,152 690,321
</TABLE>
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a)Exhibits
S-K Item
601 No.
-------
10 Health Care and Retirement Corporation
Amended Restricted Stock Plan is
incorporated herein by reference from pages
A-1 to A-9 of the Registrant's Proxy
Statement dated March 25, 1997 in connection
with its Annual Meeting held on May 6, 1997.
27 Financial Data Schedule for the six months
ended June 30, 1997
(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 11, 1997 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 six months ended June 30, 1997
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM HEALTH CARE AND
RETIREMENT CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,600
<SECURITIES> 0
<RECEIVABLES> 143,016
<ALLOWANCES> 14,099
<INVENTORY> 0
<CURRENT-ASSETS> 157,595
<PP&E> 668,181
<DEPRECIATION> 121,467
<TOTAL-ASSETS> 900,570
<CURRENT-LIABILITIES> 139,595
<BONDS> 262,367
0
0
<COMMON> 489
<OTHER-SE> 412,703
<TOTAL-LIABILITY-AND-EQUITY> 900,570
<SALES> 0
<TOTAL-REVENUES> 434,268
<CGS> 0
<TOTAL-COSTS> 344,923
<OTHER-EXPENSES> 17,855
<LOSS-PROVISION> 3,522
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 48,403
<INCOME-TAX> 14,860
<INCOME-CONTINUING> 33,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,543
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
