<PAGE> 1
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, 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
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 ]
(Cover page 1 of 2 pages)
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Based on the closing price of $29.375 per share on March 13, 1997, the aggregate
market value of the registrant's voting stock held by non-affiliates was
$1,280,622,189. 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
March 13, 1997 was 44,592,100.
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 6, 1997 are incorporated by reference
in Part III.
(Cover page 2 of 2 pages)
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS .............................................2
ITEM 2. PROPERTIES ...........................................7
ITEM 3. LEGAL PROCEEDINGS ....................................8
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS ........................8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS ......................8
ITEM 6. SELECTED FINANCIAL DATA ..............................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS .......................................10
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA ..................................14
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ............................34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT ..........................34
ITEM 11. EXECUTIVE COMPENSATION ..............................36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ........................................36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K .............................37
SIGNATURES .....................................................41
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 rehabilitation therapy, vision care and eye surgery. The most
significant portion of HCR's business is long term care. The Company operates
128 nursing centers with 16,500 beds located in 16 states. The Company owns 119
of the centers, with 92 operating under the Heartland name. At December 31,
1996, HCR operated 58 medical specialty units with more than 1,800 beds, within
its nursing centers. Medical specialty units provide subacute medical care,
intense rehabilitation programs or Alzheimer's care programs.
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 32
clinics in 1996, making a total of 56 outpatient clinics at December 31, 1996.
HCR Home Health Care and Hospice, Inc., a wholly owned subsidiary, specializes
in all levels of home health, hospice care and rehabilitation therapy. This
subsidiary acquired 2 offices in 1996, making a total of 33 offices at December
31, 1996 located in Ohio, Michigan, Indiana and Florida.
Vision Management Services, Inc., a majority owned subsidiary, entered into
management contracts in 1996 with physician practices in the midwestern states,
specializing in vision care and refractive eye surgery.
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 service to patients
in all of its centers. These services include three basic types of care.
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Skilled Nursing Care. The Company operates 123 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,
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, functional and discharge planning objectives to achieve a safe and
successful discharge. Programs for medically complex patients cover
post-coronary surgery care, oncology, intravenous pain management, 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. Special 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.
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Health Care Services
HCR provides rehabilitation therapy in its centers, skilled centers of others,
hospitals and 56 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. HCR owns 50% of a partnership, Heartland Healthcare
Services, which provides high quality pharmaceutical products to long term care
centers and institutional pharmacies.
Labor
Labor costs account for approximately 62% 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 loss of a single
customer or group of related customers would not 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.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Medicaid 32.5% 33.6% 38.1%
Medicare 27.4% 28.2% 24.1%
Private pay & other 40.1% 38.2% 37.8%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
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.
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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. There have been, and the Company expects there will continue
to be, a number of proposals to limit Medicare and Medicaid reimbursement for
health care services. The Company is unable to predict whether any such
proposals will be adopted or, if adopted, what effect they might have on the
Company.
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, 1996, 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, 1996, the Company had three centers operating under a
provisional or conditional license and has subsequently demonstrated acceptable
compliance with the regulations. No centers were under notice of intent to
decertify under the federal Medicare program or the Medicaid program of any
state. As of December 31, 1996, the Company had 112 Medicaid certified
facilities and 123 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
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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 during the year for patient care services based on
each center's expected reimbursable cost. Based on the submission of year end
cost reports, the amount of reimbursement can be adjusted in favor of the
Company or the program.
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 128
centers in 16 states, competitive factors are dominated by local or regional
characteristics.
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.
Employees
As of December 31, 1996, the Company has approximately 20,000 full and part-time
employees. Approximately 2,300 of the employees are salaried and the remainder
are paid on an hourly basis. Approximately 2,300 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 128 long term
care centers located in 16 states, 56 outpatient therapy clinics located in
Ohio, New Jersey, Virginia, Kentucky and Florida, and 33 home health care
offices located in Michigan, Ohio, Indiana 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, 1996, 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, 1996.
<TABLE>
<CAPTION>
Number of Centers
-----------------
Owned Leased Number of Beds
----- ------ --------------
<S> <C> <C> <C>
Ohio 31(1) 3,489
Florida 19 6 3,298
Michigan 21 2 2,924
Texas 8 1,357
Pennsylvania 7(1) 1 1,127
West Virginia 7 940
Wisconsin 5(1) 826
Illinois 7 624
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
--- --- ------
119 9 16,534
=== === ======
</TABLE>
The Company subleases space for its corporate offices in Toledo, Ohio from
Owens-Illinois, Inc.
(1) Some or all of the property at five centers in these states is subject
to liens which encumber the properties in an aggregate amount of
approximately $1,923,000.
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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 1995 and 1996 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.
<TABLE>
<CAPTION>
Low High
1995 --- ----
<S> <C> <C>
First Quarter $18.2500 $21.8333
Second Quarter $17.0833 $22.2500
Third Quarter $16.7500 $22.8333
Fourth Quarter $18.5000 $24.0833
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
</TABLE>
No cash dividends have been declared or paid on the common stock.
The number of stockholders of record on January 31, 1997 was 286. 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 199 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
- --------------------------------
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL HISTORY 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share and other data)
<S> <C> <C> <C> <C> <C>
Results of Operations
- ---------------------
Revenues $782,023 $713,469 $615,103 $559,344 $497,144
Expenses:
Operating 625,331 575,462 492,990 450,720 400,778
General and administrative 32,182 30,440 29,897 27,747 25,527
Depreciation and amortization 30,677 25,973 21,283 18,567 15,665
--------- --------- --------- --------- ---------
688,190 631,875 544,170 497,034 441,970
--------- --------- --------- --------- ---------
Income from operations 93,833 81,594 70,933 62,310 55,174
Interest expense, net (10,415) (9,835) (8,662) (9,490) (12,721)
Equity in earnings of partnership 1,500 531
--------- --------- --------- --------- ---------
Income before taxes and cumulative effect 84,918 72,290 62,271 52,820 42,453
Income taxes 25,475 21,687 20,238 18,751 15,912
--------- --------- --------- --------- ---------
Income before cumulative effect 59,443 50,603 42,033 34,069 26,541
Cumulative effect as of December 31,
1992 of change in the method of
accounting for income taxes 1,430
--------- --------- --------- --------- ---------
Net income $59,443 $50,603 $42,033 $35,499 $26,541
========= ========= ========= ========= =========
Earnings per share - primary:
Income before cumulative effect $1.24 $1.03 $0.84 $0.68 $0.54
Cumulative effect of accounting change 0.03
--------- --------- --------- --------- ---------
Net income $1.24 $1.03 $0.84 $0.71 $0.54
========= ========= ========= ========= =========
Earnings per share - fully diluted:
Income before cumulative effect $1.24 $1.03 $0.84 $0.68 $0.53
Cumulative effect of accounting change 0.03
--------- --------- --------- --------- ---------
Net income $1.24 $1.03 $0.84 $0.71 $0.53
========= ========= ========= ========= =========
Cash provided by operating activities $91,475 $59,519 $74,557 $60,668 $41,816
Financial Position
- ------------------
Total assets $802,784 $729,191 $671,430 $635,994 $553,872
Working capital 22,539 14,391 20,154 11,411 14,959
Long-term debt 202,295 159,082 149,028 155,500 176,782
Stockholders' equity 393,034 374,430 344,501 316,919 287,183
Financial Measurements (Unaudited)
- ----------------------------------
Income from operations as a percent
of revenues 12.0% 11.4% 11.5% 11.1% 11.1%
Income before cumulative effect as a
percent of revenues 7.6 7.1 6.8 6.1 5.3
Net debt-to-capital ratio 34.1 29.8 26.6 32.1 38.4
Other Data (Unaudited)
- ----------------------
Number of facilities 128 127 129 124 124
Number of licensed beds 16,534 16,366 16,605 15,942 15,983
Percentage of occupied beds 89% 90% 91% 92% 91%
Number of employees 20,000 18,500 16,500 16,000 16,500
</TABLE>
All per share data have been adjusted to reflect the 3-for-2 stock split and
2-for-1 stock split effected in the form of a dividend in 1996 and 1993,
respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
Health Care and Retirement Corporation (HCR or Company) paid $36,548,000 and
$35,236,000 in 1996 and 1995, respectively, for the acquisition of various
businesses, including home health care, rehabilitation therapy, and management
services agreements for rehabilitation therapy, vision care and eye surgery. The
acquisitions were accounted for under the purchase method of accounting and
generated 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 $38,110,000 including acquisitions
subsequent to December 31, 1996 and will, if earned, be paid over the next six
years and treated as additions to the purchase price of the businesses.
Property and equipment increased $55,719,000 as a result of renovations and
capital improvements to existing facilities, the construction of a 165-bed
facility in West Bloomfield, Michigan, that opened in December, 1996 and the
partial construction of a 180-bed facility in Ann Arbor, Michigan, scheduled for
completion in mid-1997.
There was no valuation allowance related to the deferred tax assets at December
31, 1996 and 1995, 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 rehabilitation therapy, vision care and eye
surgery. The most significant portion of HCR's business relates to long term
care, operating 128 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, continued
improvement in the percentage of revenue from Medicare, private pay and insured
patients, and an increase in the number of medical specialty units within HCR
centers that provide subacute medical care, rehabilitation programs or
Alzheimer's care programs. During 1996, HCR added 2 medical specialty units,
bringing the total to 58 units with more than 1,800 beds at December 31, 1996,
compared to 56 units with 1,700 beds and 50 units with 1,500 beds at December
31, 1995 and 1994, respectively.
Aside from the long term care business, HCR has expanded its rehabilitation
operations, acquired home health care companies, formed alliances with physician
practices and invested in a pharmacy partnership.
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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 midwest and
mid-Atlantic states, Texas and Florida. This subsidiary expanded its operations
by acquiring or opening 32 clinics in 1996, 16 clinics in 1995 and 5 clinics in
1994, making a total of 56 outpatient clinics at December 31, 1996.
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, 1996.
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.
In February, 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. Heartland Healthcare Services commenced
operations in August, 1994. HCR accounts for the partnership under the equity
method of accounting.
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.
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<PAGE> 14
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue increased $98,366,000 or 16% from the prior year. Of the increase, 44%
related to mix changes and improved per diem rates, and the remaining increase
was due to the acquisition and expansion of various businesses. The improved per
diem rates resulted from more specialized care, such as subacute medical care
and rehabilitative services for more acutely ill patients. The occupancy levels
were 91% in 1994 and 90% in 1995. The mix of revenue from Medicare, private pay
and insured patients increased from 62% in 1994 to 66% in 1995, primarily due to
the growth in revenue from home health care, rehabilitative services and medical
specialty units. During 1995, HCR added 6 medical specialty units, bringing the
total to 56 with over 1,700 beds.
Operating expenses increased $82,472,000 or 17%. Of the increase, 45% related to
labor costs, ancillary costs and general increases in other expenses. The
remaining increases were attributable to the acquisition and expansion of
various businesses. 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 as a result of the higher acuity patients in
the medical specialty units. Ancillary services, excluding internal labor costs,
accounted for 12% of the increase, which include various types of therapies,
medical supplies and prescription drugs.
As a result of lower interest rates at year end, HCR decreased the interest rate
used to discount the obligation under its defined benefit pension plan from 8.5%
to 7.5% at December 31, 1995. This change did not have a material impact on 1996
pension expense due to the freezing of all future pension benefits in 1994.
General and administrative expense remained constant as compared to last year,
as a result of the Company controlling its support costs. The increase in
depreciation of $2,989,000 related to the capital expenditures during 1994 and
1995 for renovations, capital improvements and medical specialty units.
Amortization increased $1,701,000 which was primarily due to the intangible
assets generated from the various acquisitions in 1995. The increase in interest
expense of $1,516,000 was attributable to higher debt levels and higher average
interest rates. HCR accounts for its 50% ownership of the pharmacy partnership
under the equity method. The partnership commenced operations in August, 1994
and its 1994 earnings were not material.
The effective tax rate decreased from 32.5% in 1994 to 30.0% in 1995. The
decrease was primarily attributable to the increase in the cash surrender values
for employee insurance policies owned by HCR that were not taxable and a
decrease in the effective state income tax rate. These decreases were partially
offset by the elimination of the targeted jobs tax credit.
HCR does not believe that inflation has had a material impact on the results of
operations.
CAPITAL RESOURCES AND LIQUIDITY
During 1996, 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 and purchase of HCR's common stock. At December 31, 1996, the Company
maintained $2,389,000 in cash and cash equivalents.
12
<PAGE> 15
Cash used in investing activities amounted to $92,394,000 in 1996. Expenditures
for property and equipment consisted of $35,368,000 for renovations, capital
improvements and development of medical specialty units, and $16,533,000 for the
construction of new facilities and a clinic. 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 $36,548,000 in 1996.
Net cash used in financing activities amounted to $4,434,000. During 1996, HCR
purchased 1,939,400 shares of its common stock at a cost of $47,511,000. As of
December 31, 1996, a total of 5,125,550 HCR shares have been purchased. As of
February, 1997, management has the authority to purchase up to 8,000,000 HCR
shares through December 31, 1998. An additional $1,896,000 was used to repay
long-term debt and capitalized lease obligations. The use of cash was partially
offset by a $42,400,000 increase in debt under a bank credit agreement and
$2,573,000 from the exercise of stock options.
During 1996, 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, 1996, the credit agreement
permitted HCR to borrow up to $225,000,000 through August 2, 2001. HCR had
borrowed $192,400,000 and issued letters of credit totalling $12,689,000, which
left a remaining unused borrowing capacity of $19,911,000. The letters of credit
benefit certain third party insurers and relate to recorded liabilities. HCR had
obligations under noncancellable operating leases totalling $32,493,000 at
December 31, 1996.
Effective January 24, 1997, the loan commitment under the credit agreement was
increased to $325,000,000. Significant uses of cash during January, 1997
totalled $68,000,000 which included the purchase of HCR common stock, capital
expenditures for renovations and the construction of a new facility in Ann
Arbor, Michigan, and two acquisitions including MileStone Healthcare, Inc. At
January 31, 1997, HCR had a remaining unused borrowing capacity of $57,811,000.
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.
13
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Page
----
Report of Ernst & Young LLP Independent Auditors 15
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Cash Flows 18
Consolidated Statements of Stockholders' Equity 19
Notes to Consolidated Financial Statements 20
Supplementary Data (Unaudited) - Summary of Quarterly Results 33
14
<PAGE> 17
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, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, 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, 1997
15
<PAGE> 18
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------
1996 1995
---- ----
(In thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,389 $ 7,742
Receivables, less allowances for
doubtful accounts of $13,335 and $11,485 114,777 95,956
Prepaid expenses 10,023 9,862
Deferred income taxes 19,801 20,096
-------- --------
Total current assets 146,990 133,656
Net property and equipment 533,457 505,167
Intangible assets, net of amortization of $7,602 and $4,863:
Goodwill 43,664 25,862
Other 32,472 18,912
Other assets 46,201 45,594
-------- --------
Total assets $802,784 $729,191
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,218 $ 33,330
Employee compensation and benefits 34,425 29,393
Accrued insurance liabilities 23,943 24,797
Other accrued liabilities 32,448 30,470
Long-term debt due within one year 1,417 1,275
-------- --------
Total current liabilities 124,451 119,265
Long-term debt 202,295 159,082
Deferred income taxes 66,798 63,825
Other liabilities 16,206 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 shares issued 489 326
Capital in excess of par value 268,036 264,156
Retained earnings 210,306 154,533
-------- --------
478,831 419,015
Less treasury stock, at cost (3,999,541 and 2,431,080 shares) (85,797) (44,585)
-------- --------
Total stockholders' equity 393,034 374,430
-------- --------
Total liabilities and stockholders' equity $802,784 $729,191
======== ========
</TABLE>
See accompanying notes.
16
<PAGE> 19
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1996 1995 1994
---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues $782,023 $713,469 $615,103
Expenses:
Operating 625,331 575,462 492,990
General and administrative 32,182 30,440 29,897
Depreciation and amortization 30,677 25,973 21,283
-------- -------- --------
688,190 631,875 544,170
------- ------- -------
Income from operations 93,833 81,594 70,933
Interest expense (11,798) (10,659) (9,143)
Interest income 1,383 824 481
Equity in earnings of partnership 1,500 531
-------- -------- --------
Income before income taxes 84,918 72,290 62,271
Income taxes 25,475 21,687 20,238
-------- -------- --------
Net income $ 59,443 $ 50,603 $ 42,033
======== ======== ========
Earnings per share - primary and fully diluted $ 1.24 $ 1.03 $ .84
======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Primary 47,835 48,963 50,061
Fully diluted 47,985 49,127 50,236
</TABLE>
See accompanying notes.
17
<PAGE> 20
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $59,443 $50,603 $42,033
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 32,020 27,630 23,153
Provision for bad debts 8,073 5,288 6,467
Deferred income taxes 2,750 4,391 1,267
Equity in earnings of partnership (1,500) (531)
Gain from sale of property and equipment (1,538)
Changes in assets and liabilities,
excluding businesses acquired:
Receivables (21,835) (17,307) (6,491)
Prepaid expenses and other assets 4,110 (18,137) (6,622)
Accounts payable (1,683) (1,013) 4,386
Employee compensation and benefits 4,227 2,800 3,677
Accrued insurance and other liabilities 5,870 7,333 6,687
------- ----- -------
Total adjustments 32,032 8,916 32,524
------ ----- ------
Net cash provided by operating activities 91,475 59,519 74,557
INVESTING ACTIVITIES
Purchases and construction of property
and equipment (51,901) (33,877) (26,234)
Proceeds from sale of property and equipment 5,486 953
Cash paid to acquire businesses (36,548) (35,236) (7,300)
Investment in partnership (3,945) (1,975) (2,475)
------- ------- -------
Net cash used in investing activities (92,394) (65,602) (35,056)
------- ------- -------
FINANCING ACTIVITIES
Net borrowings under bank credit agreement 42,400 14,000 1,000
Principal payments of long-term debt (1,896) (4,950) (5,040)
Proceeds from exercise of stock options 2,573 3,084 1,002
Purchase of common stock for treasury (47,511) (28,161) (17,892)
------- ------- -------
Net cash used in financing activities (4,434) (16,027) (20,930)
-------- -------- -------
Net increase (decrease) in cash (5,353) (22,110) 18,571
Cash and cash equivalents at beginning of year 7,742 29,852 11,281
------- ------- -------
Cash and cash equivalents at end of year $ 2,389 $ 7,742 $29,852
======= ======= =======
</TABLE>
See accompanying notes.
18
<PAGE> 21
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Total
in Excess Stock-
Common of Par Retained Treasury holders
Stock Value Earnings Stock Equity
----- ----- -------- ----- ------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $326 $257,647 $66,011 $(7,065) $316,919
Vesting of restricted stock 1,012 1,012
Purchase of treasury stock
(1,036,200 shares) (17,892) (17,892)
Shares issued for employee benefit
plans (182,198 shares for exercise
of stock options and 9,858 shares
for 401(k) plan issued from
treasury shares) (778) 2,003 1,225
Tax benefit from restricted stock
and exercise of stock options 1,204 1,204
Net income 42,033 42,033
----- -------- ------- -------- --------
Balance at December 31, 1994 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
==== ======== ======== ======== ========
</TABLE>
See accompanying notes.
19
<PAGE> 22
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 rehabilitation therapy, vision care and eye surgery. The most
significant portion of HCR's business relates to long term care, operating 128
centers in 16 states with more than half located in Ohio, Michigan and Florida.
Within HCR's centers, there are 58 medical specialty units which provide
subacute medical care, rehabilitation programs or Alzheimer's care programs. HCR
provides rehabilitation therapy in its centers, other skilled centers and 56
outpatient therapy clinics serving the midwest 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 and Florida. HCR owns 50% of a pharmacy partnership that
provides pharmaceutical products to long term care centers and pharmacies. 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. All references in the
consolidated financial statements referring to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the three-for-two
stock split, effected in the form of a 50% stock dividend, paid on June 5, 1996
to stockholders of record on May 21, 1996.
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.
20
<PAGE> 23
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 analyzed and adjusted
accordingly. As of December 31, 1996, 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.
21
<PAGE> 24
EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted average
number of common stock and common stock equivalents outstanding during the year.
Common stock equivalents include shares issuable upon exercise of HCR's
nonqualified stock options (calculated on the treasury stock method).
RECLASSIFICATIONS
Certain reclassifications affecting goodwill and other intangible assets have
been made in the 1995 financial statements to conform with the 1996
presentation.
2. ACQUISITIONS
HCR paid $36,548,000, $35,236,000 and $7,300,000 in 1996, 1995 and 1994,
respectively, for the acquisition of various businesses, including home health
care, rehabilitation therapy, and management services agreements for
rehabilitation therapy, vision care and eye surgery. The acquisitions were
accounted for under the purchase method of accounting and generated intangible
assets of $34,100,000, $32,225,000 and $5,500,000 in 1996, 1995 and 1994,
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 $38,110,000 including acquisitions
subsequent to December 31, 1996 and will, if earned, be paid over the next six
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 1996 and 1995.
3. REVENUES
HCR receives reimbursement under the federal Medicare program and various state
Medicaid programs. Revenues under these programs totalled $469,000,000,
$437,000,000 and $371,000,000 for the years ended December 31, 1996, 1995 and
1994, 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 $11,381,000 and
$12,318,000 at December 31, 1996 and 1995, respectively. There were no
non-governmental receivables which represented amounts in excess of 10% of total
receivables at December 31, 1996 and 1995.
22
<PAGE> 25
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Land and improvements $ 63,154 $ 60,199
Buildings and improvements 450,496 422,541
Equipment and furnishings 111,124 93,394
Construction in progress 15,445 8,366
-------- --------
640,219 584,500
Less accumulated depreciation 106,762 79,333
-------- --------
Net property and equipment $533,457 $505,167
======== ========
</TABLE>
Depreciation expense amounted to $27,462,000, $23,307,000 and $20,317,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Debt under the Credit Agreement $192,400 $150,000
Real estate mortgage and installment notes 2,046 2,350
Industrial development revenue bonds 3,290 3,495
Capital lease obligations (see Note 6) 5,976 4,512
-------- --------
203,712 160,357
Less amounts due within one year 1,417 1,275
-------- --------
$202,295 $159,082
======== ========
</TABLE>
At December 31, 1996, HCR had an unsecured credit agreement with a group of
banks (the Credit Agreement) which provided for an extendible $225,000,000
revolving loan commitment that matures on August 2, 2001. The loan commitment
was increased to $325,000,000 effective January 24, 1997. 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 $19,911,000 at December 31, 1996.
Effective August 2, 1995, 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 5.94% and 6.09% at December 31, 1996 and
1995, 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.
23
<PAGE> 26
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. The installment notes, amounting to
$1,347,000, are unsecured. Amounts under these facilities are payable monthly at
varying interest rates from 9.75% to 13.5%. Maturities range from 1997 to 2008.
Long-term debt maturities for the five years subsequent to December 31, 1996 are
as follows: 1997 - $1,417,000; 1998 - $2,119,000; 1999 - $1,003,000; 2000 -
$963,000 and 2001 - $192,991,000.
Capitalized interest costs amounted to $655,000, $257,000 and $292,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
In 1994, an industrial development revenue bond obligation of $2,970,000 was
liquidated by offsetting a related receivable.
Interest paid amounted to $10,496,000, $9,794,000 and $7,603,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
6. LEASES
HCR leases certain property and equipment under both operating and capital
leases, which expire at various dates to 2036. Certain of the capital leases,
primarily facility leases, contain purchase options. Based upon management's
intent, the accompanying balance sheet and following schedule have been prepared
assuming such options will be exercised. The cost and accumulated amortization
of property and equipment under capital leases were:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Land and improvements $ 1,426 $ 184
Buildings and improvements 18,975 8,531
Equipment and furnishings 3,016 724
------- -------
23,417 9,439
Less accumulated amortization 1,480 1,190
------- -------
$21,937 $ 8,249
======= =======
</TABLE>
24
<PAGE> 27
Payments under noncancellable operating leases, minimum lease payments
(including purchase options when expected to be exercised) and the present value
of net minimum lease payments under capital leases as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(In thousands)
<C> <C> <C>
1997 $ 6,716 $ 927
1998 5,703 1,615
1999 5,058 459
2000 4,256 457
2001 3,629 461
Later years 7,131 12,005
------- -------
Total minimum lease payments $32,493 15,924
=======
Less amount representing interest 9,948
-------
Present value of net minimum
lease payments (included in
long-term debt - see Note 5) $ 5,976
=======
</TABLE>
Rental expense was $9,361,000, $7,704,000 and $5,776,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
Current:
<S> <C> <C> <C>
Federal $21,025 $15,809 $16,245
State and local 1,700 1,487 2,726
------- ------- -------
22,725 17,296 18,971
Deferred:
Federal 2,327 3,715 1,072
State and local 423 676 195
------- ------- -------
2,750 4,391 1,267
------- ------- -------
$25,475 $21,687 $20,238
======= ======= =======
</TABLE>
25
<PAGE> 28
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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Income taxes computed at statutory rate $29,721 $25,302 $21,795
Differences resulting from:
State and local income taxes 1,380 1,406 1,899
Corporate owned life insurance (5,620) (5,329) (2,373)
Jobs tax credits (284) (1,206)
Other (6) 592 123
------- ------- -------
Provision for income taxes $25,475 $21,687 $20,238
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Net current deferred tax assets:
Accrued insurance reserves $ 9,214 $ 9,554
Allowances for receivables and settlements 6,710 6,859
Employee compensation and benefits 5,066 4,603
Other (1,189) (920)
------- -------
$19,801 $20,096
======= =======
Net noncurrent deferred tax liabilities:
Fixed asset bases and depreciation differences $66,008 $61,785
Pension receivable 5,388 4,809
Deferred compensation (3,312) (2,083)
Noncompete agreements (1,404) (1,404)
Life insurance (1,184) (706)
Other 1,302 1,424
------- -------
$66,798 $63,825
======= =======
</TABLE>
Income taxes payable amounted to $19,601,000 and $18,286,000 at December 31,
1996 and 1995, respectively. Income taxes paid amounted to $18,380,000,
$13,623,000 and $15,857,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
26
<PAGE> 29
8. STOCK PLANS
HCR has stock option plans for key employees and for outside directors which
authorizes the grant of options for up to 8,199,000 and 300,000 shares,
respectively. There were 2,297,634 and 2,626,784 shares available for future
grant at December 31, 1996 and 1995, 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.
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 1996
and 1995. If HCR had accounted for its 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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income - as reported $59,443 $50,603
Net income - pro forma $58,558 $50,373
Earnings per share - as reported:
Primary and fully diluted $1.24 $1.03
Earnings per share - pro forma:
Primary $1.23 $1.03
Fully diluted $1.22 $1.03
</TABLE>
The pro forma effect on net income for 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 1996 and 1995, respectively: dividend yield of 0%
in both years; expected volatility of 20% in both years; risk-free interest
rates of 5.95% and 5.78%; and expected lives of 5.9 and 5.7 years. The weighted
average fair value of options granted is $9.45 per share in 1996 and $7.10 per
share in 1995. 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.
27
<PAGE> 30
Information regarding these option plans for 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------ --------
<S> <C> <C>
Options outstanding at
January 1, 1994 5,010,579 $6.50
Options granted 498,750 $18.05
Options forfeited (156,975) $7.94
Options exercised (182,198) $5.50
---------
Options outstanding at
December 31, 1994 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 exercisable at
December 31, 1994 2,273,208 $5.82
December 31, 1995 3,098,807 $6.42
December 31, 1996 3,781,167 $6.86
</TABLE>
The following tables summarize information about options outstanding and
options exercisable at December 31, 1996:
Options Outstanding
-------------------
<TABLE>
<CAPTION>
Weighted
Weighted Average
Range of Average Remaining
Exercise Number Exercise Contractual
Prices Outstanding Price Life
- -------- ----------- -------- -----------
<C> <C> <C> <C>
$ 5 - $10 3,280,917 $5.85 5.0
$10 - $20 872,588 $15.15 7.4
$20 - $28 832,700 $24.38 9.4
---------
4,986,205 $10.57 6.1
=========
</TABLE>
28
<PAGE> 31
Options Exercisable
-------------------
<TABLE>
<CAPTION>
Weighted
Range of Average
Exercise Number Exercise
Prices Exercisable Price
- -------- ----------- --------
<C> <C> <C>
$ 5 - $10 3,280,917 $5.85
$10 - $20 464,250 $12.73
$20 - $28 36,000 $23.75
---------
3,781,167 $6.86
=========
</TABLE>
In 1991, HCR also adopted a restricted stock plan under which 892,866 shares of
HCR's common stock have been awarded to its executive officers. In general,
shares of restricted stock become unrestricted shares in accordance with a
five-year vesting schedule beginning on the first anniversary of the date of
grant. At December 31, 1996 all such shares have vested.
Compensation expense related to the restricted stock and stock options granted
in October, 1991 was $1,010,000, $1,221,000 and $1,226,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
9. 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 covered
substantially all full-time employees as of December 31, 1994. In order to
maintain the qualified status of the Pension Plan, HCR amended the Pension Plan
to exclude participation by corporate officers for service after December 31,
1992. Also, HCR amended the Pension Plan on August 10, 1994 and November 18,
1994 which resulted in the freezing of all future benefits under the plan as of
August 31, 1994 for highly compensated employees and as of December 31, 1994 for
all other employees, respectively. As a result, HCR recognized the excess of the
projected benefit obligation over the accumulated benefit obligation, the
unrecognized prior service cost and the unrecognized net loss, all of which
totalled $2,075,000 and was included as a reduction of 1994 pension expense. In
conjunction with the curtailment of the Pension Plan, HCR accrued transition
payments of $1,339,000 which were contributed in early 1995 to the 401(k) and
allocated $320,000 to the Senior Management Savings Plan.
29
<PAGE> 32
The funded status of the Pension Plan is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 18,216 $ 16,854
Nonvested 2,517 3,600
------- --------
Accumulated benefit obligation $20,733 $ 20,454
======= ========
Projected benefit obligation $20,733 $ 20,454
Plan assets at fair value 33,295 31,775
-------- --------
Plan assets in excess of
projected benefit obligation (12,562) (11,321)
Unrecognized net loss (1,254) (1,020)
-------- --------
Prepaid pension cost at end of year $(13,816) $(12,341)
======== ========
</TABLE>
The components of the net pension income for the Pension Plan are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 2,367
Interest cost on projected benefit obligation $ 1,507 $1,381 1,558
Actual return on plan assets (4,146) (6,776) 452
Net amortization and deferral 1,165 3,998 (3,235)
Curtailment gain (2,075)
------- ------- -------
Net pension income $(1,474) $(1,397) $ (933)
======= ======= =======
</TABLE>
The actuarial present value of benefit obligations is based on a discount rate
of 7.5% at December 31, 1996 and 1995. 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 1996 and 1995. Plan assets include commingled funds with investments in
marketable equity securities, international equity securities and government and
corporate debt securities.
Effective October 1, 1992, HCR adopted a Senior Executive Retirement Plan (SERP)
which is a non-qualified plan designed to provide pension benefits and life
insurance for corporate officers (16 employees). Pension benefits are based on
compensation and length of service. The SERP is funded 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 policy to HCR. HCR's
share of the cash surrender value of the policies was $11,879,000 and $7,220,000
at December 31, 1996 and 1995, respectively, and was included in other assets.
The accrued and unfunded liability was $2,697,000 and $1,810,000 at December 31,
1996 and 1995, respectively, and was included in other long-term liabilities.
30
<PAGE> 33
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 $1,172,000, $898,000
and $338,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The increase in matching contributions was due to additional employees from
acquisitions and previously ineligible employees allowed to participate.
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 $1,180,000, $1,220,000 and $734,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,389 $ 2,389 $ 7,742 $ 7,742
Long-term debt, excluding
capitalized leases 197,736 198,279 155,845 156,713
</TABLE>
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.
31
<PAGE> 34
11. 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.
12. SUBSEQUENT EVENT
Effective January 1, 1997, HCR acquired a privately held company, MileStone
Healthcare, Inc. MileStone manages a broad range of clinical programs that
include inpatient acute physical rehabilitation, comprehensive outpatient
rehabilitation, skilled nursing and subacute care, geropsychiatric services,
cardiac outpatient services and sports and industrial medicine. These services
are provided in 67 inpatient rehabilitation and subacute units, 13 comprehensive
outpatient rehabilitation facilities (CORFs) and 7 outpatient therapy clinics.
The company is headquartered in Dallas, Texas, and operates in 14 states.
32
<PAGE> 35
HEALTH CARE AND RETIREMENT CORPORATION
SUPPLEMENTARY DATA (UNAUDITED)
SUMMARY OF QUARTERLY RESULTS
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
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-
primary and fully diluted $0.29 $0.30 $0.32 $0.33 $1.24
===== ===== ===== ===== =====
<CAPTION>
Year ended December 31, 1995
----------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Revenues $171,335 $176,886 $181,825 $183,423 $713,469
Income from operations (1) 19,810 19,976 20,690 21,118 81,594
Net income 11,985 12,449 12,836 13,333 50,603
Earnings per share-
primary and fully diluted $0.24 $0.25 $0.26 $0.27 $1.03
===== ===== ===== ===== =====
<FN>
(1) The income from operations reported for the first and second quarter of
1995 differ from the amounts reported in the respective 10-Qs due to the
reclassification of the equity in earnings of the partnership from
operating expenses to a separate line item beginning in the third quarter
of 1995. The equity in earnings of the partnership was $67,000 and $73,000
for the first and second quarter of 1995, respectively.
</TABLE>
Earnings per share has been adjusted to reflect the 3-for-2 stock split effected
in the form of a dividend in 1996.
33
<PAGE> 36
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
from pages 2-3 of the Registrant's Proxy Statement filed pursuant to Regulation
14A. 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 47 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 1997.
GEOFFREY G. MEYERS 52 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 51 Vice President and General Counsel of HCR
since November 1991 and Secretary of HCR
since December 1991.
34
<PAGE> 37
NANCY A. EDWARDS 46 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 49 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 50 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 49 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.
35
<PAGE> 38
BARRY A. LAZARUS 45 Vice President and Director of Reimbursement
of HCR and HCRA since May 1993; Executive
Vice President for AmCorps, Inc. from
February 1992 to May 1993; and Director of
Reimbursement for Integrated Health Services,
Inc., from May 1990 to February 1992.
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 52 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 from
pages 6-11 of the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information on security ownership of certain beneficial owners is incorporated
herein by reference from pages 4-5 of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information on certain relationships and related transactions is incorporated
herein by reference from pages 2-4 of the Registrant's Proxy Statement.
36
<PAGE> 39
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 15
Consolidated Balance Sheets - December 31, 1996 and 1995 16
Consolidated Statements of Income -
Years ended December 31, 1996, 1995 and 1994 17
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 18
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 19
Notes to Consolidated Financial Statements - December 31, 1996 20
The following consolidated financial statement schedule of Health Care and
Retirement Corporation and subsidiaries is included in this Form 10-K on page
38:
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.
37
<PAGE> 40
HEALTH CARE AND RETIREMENT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Charged Additions
Balance at to Costs Deduc- From Balance
Beginning and tions Acquisi- at End of
of Period Expenses (Note 1) tions Period
---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
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
======= ====== ======== ==== =======
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $10,575 $6,467 $(5,660) $500 $11,882
======= ====== ======== ==== =======
<FN>
(1) Uncollectible accounts written off, net of recoveries.
</TABLE>
38
<PAGE> 41
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.
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 -- Revised form of Restricted Stock Plan (filed as Exhibit
10.6(a) to the Registrant's Registration Statement on Form
S-1, File No. 33-42535 and incorporated herein by reference).
39
<PAGE> 42
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 various
employees (filed as Exhibits 10.10 through 10.13 to the
Registrant's Registration Statement on Form S-1, File No.
33-42535 and incorporated herein by reference).
10.9 -- 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).
10.10 -- 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).
10.11 -- 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
*11 -- Statement for Computation of Earnings per Share.
*21 -- Subsidiaries of the Registrant
*23 -- Consent of Independent Auditors
*27 -- Financial Data Schedule for the year ended December 31, 1996
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter ended December 31, 1996.
- ------------
* Filed herewith.
40
<PAGE> 43
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: March 24, 1997
41
<PAGE> 44
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: March 24, 1997
42
<PAGE> 45
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
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
11 Statement for Computation of Earnings Per Share
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule for the year ended December 31, 1996
43
<PAGE> 1
EXHIBIT 4.2
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------------------
THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as
of January 24, 1997 (this "Amendment"), amends the Amended and Restated Credit
Agreement, dated as of August 2, 1994, among HEALTH CARE AND RETIREMENT
CORPORATION, a Delaware corporation (the "Borrower"), the various financial
institutions parties thereto (collectively, the "Lenders") and Bank of America
National Trust and Savings Association, as agent for the Lenders, as amended by
a First Amendment dated July 7, 1995 and a Second Amendment dated as of July 25,
1996 (as so amended the "Credit Agreement"). Terms defined in the Credit
Agreement are, unless otherwise defined herein or the context otherwise
requires, used herein as defined therein.
WHEREAS, the parties hereto desire to (i) add The Bank of New York,
Mellon Bank N.A. and The Sanwa Bank, Limited, Chicago Branch (the "New Lenders")
as Lenders under the Credit Agreement and (ii) amend the Credit Agreement in
certain respects as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1. AMENDMENT TO CREDIT AGREEMENT.
Section 2.1.2 (a) (i) of the Credit Agreement is hereby
amended by deleting "$225,000,000" and substituting
"$325,000,000" in place thereof.
SECTION 2. ADDITION OF NEW LENDERS; CHANGE IN COMMITMENTS.
Concurrently with the effectiveness of this Amendment, each
New Lender shall become a "Lender" under and for all purposes
of the Credit Agreement and shall be bound thereby and
entitled to the benefits thereof. The parties hereto
acknowledge and agree that the address of each New Lender for
purposes of the Credit Agreement is set forth under such
Lender's name on the signature pages hereof.
Concurrently with the effectiveness of this Amendment, each
Lender will have a Commitment as set forth on the signature
page hereof and will make available their pro rata share of
the Contract Loans.
SECTION 3. CONDITIONS PRECEDENT. This Amendment shall become effective
when each of the conditions precedent set forth in this Section 3 shall have
been satisfied, and notice thereof shall have been given by the Agent to the
Borrower and the Lenders.
E-1
<PAGE> 2
SECTION 3.1. RECEIPT OF DOCUMENTS. The Agent shall have received (a)
this Amendment, duly executed by the Borrower, the Agent and the Lenders and a
(b) Consent in the form of Exhibit A hereto duly executed by the Obligors, other
than the Borrower.
SECTION 3.2. COMPLIANCE WITH WARRANTIES, NO DEFAULT, ETC. Both before
and after giving effect to the effectiveness of this Amendment, the following
statements by the Borrower shall be true and correct (and the Borrower, by its
execution of this Agreement, hereby represents and warrants to the Agent and
each Lender that such statements are true and correct as at such times):
(a) The representations and warranties set forth in Article
VIII of the Credit Agreement shall be true and correct with the same
effect as if then made (unless stated to relate solely to an earlier
date, in which case such representations and warranties shall be true
and correct as of such earlier date); and
(b) No default shall have then occurred and be continuing, and
neither the Borrower nor any of its Subsidiaries shall be in material
violation of any law or governmental regulation or court order or
decree.
SECTION 4. MISCELLANEOUS.
SECTION 4.1. CONTINUING EFFECTIVENESS, ETC. This Amendment shall be
deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as
amended hereby, shall remain in full force and effect and is hereby ratified,
approved and confirmed in each and every respect. The Borrower reaffirms its
obligations under the Credit Agreement, including, without limitation, those
under Section 4.8. After the effectiveness of this Amendment in accordance with
its terms, all references to the Credit Agreement in the Loan Documents or in
any other document, instrument, agreement or writing shall be deemed to refer to
the Credit Agreement as amended hereby.
SECTION 4.2. PAYMENT OF COSTS AND EXPENSES. The Borrower agrees to pay
on demand all expenses of the Agent (including the fees and out-of-pocket
expenses of counsel to the Agent (including allocated costs of internal
counsel)) in connection with the negotiation, preparation, execution and
delivery of this Amendment. The Borrower agrees to indemnify each Lender for any
loss or expense (including those incurred by reasons of the liquidation or
reemployment of deposits or other funds) as a result of Borrower's request for a
Eurodollar Rate Loan which is funded prior to the effectiveness of this
Amendment.
SECTION 4.3. SEVERABILITY. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Amendment
or affecting the validity or enforceability of such provision in any other
jurisdiction.
E-2
<PAGE> 3
SECTION 4.4. HEADINGS. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or any provisions hereof.
SECTION 4.5. EXECUTION IN COUNTERPARTS. This Amendment may be executed
by the parties hereto in several counterparts, each of which shall be deemed to
be an original and all of which shall constitute together but one and the same
agreement.
SECTION 4.6. GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS.
SECTION 4.7. SUCCESSORS AND ASSIGNS. This Amendment shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
E-3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
HEALTH CARE AND RETIREMENT
CORPORATION
By
----------------------------------
Title:
----------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
By
----------------------------------
Title:
----------------------------
Commitment: $42,500,000 BANK OF AMERICA ILLINOIS
-----------
By
----------------------------------
Title:
----------------------------
Commitment: $30,000,000 BANK OF MONTREAL, individually
----------- and as Co-Agent
By
----------------------------------
Title:
----------------------------
Commitment: $30,000,000 NATIONSBANK OF NORTH CAROLINA,
----------- N. A., individually and as Co-Agent
By
----------------------------------
Title:
----------------------------
Commitment: $32,500,000 THE TORONTO-DOMINION BANK,
----------- individually and as Co-Agent
By
----------------------------------
Title:
----------------------------
E-4
<PAGE> 5
Commitment: $30,000,000 PNC BANK, NATIONAL ASSOCIATION,
----------- individually and as Co-Agent
By
----------------------------------
Title:
----------------------------
Commitment: $15,000,000 THE LONG-TERM CREDIT BANK OF
----------- JAPAN, LTD., Chicago Branch
By
----------------------------------
Title:
----------------------------
Commitment: $25,000,000 HUNTINGTON NATIONAL BANK
-----------
By
----------------------------------
Title:
----------------------------
Commitment: $20,000,000 NATIONAL CITY BANK
-----------
By
----------------------------------
Title:
----------------------------
Commitment: $30,000,000 THE BANK OF TOKYO-MITSUBISHI,
----------- LTD., Chicago Branch
By
----------------------------------
Title:
----------------------------
Commitment: $25,000,000 MELLON BANK, N.A.
-----------
By
----------------------------------
Title:
----------------------------
Address: Two Mellon Bank Center
Room 152-0270
Pittsburgh, PA 15259
Telephone: 412-234-9055
FAX No: 412-234-9010
Attention: Gregory B. Anderson
E-5
<PAGE> 6
Commitment: $25,000,000 THE BANK OF NEW YORK
-----------
By
----------------------------------
Title:
----------------------------
Address: One Wall Street
New York, NY 10286
Telephone: 212-635-7842
Fax No: 212-635-6434
Attention: Edward J. Dougherty
Commitment: $20,000,000 THE SANWA BANK, LIMITED, Chicago
----------- Branch
By
----------------------------------
Title:
----------------------------
Address: 10 South Wacker Drive,
31st Floor
Chicago, IL 60606
Telephone: 216-736-3377
Fax No: 216-736-3381
Attention: James Byrnes
Total Commitments: $325,000,000
E-6
<PAGE> 1
EXHIBIT 11
Health Care and Retirement Corporation
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
---- ---- ----
(In thousands, except per share amounts)
EARNINGS
- --------
<S> <C> <C> <C>
Net income $59,443 $50,603 $42,033
======= ======= =======
PRIMARY
- -------
SHARES-
Weighted average number of
common shares outstanding
during the period 45,708 46,833 48,024
Additional shares assuming
conversion of stock options 2,127 2,130 2,037
------ ------ ------
Weighted average common and
common equivalent
shares outstanding 47,835 48,963 50,061
====== ====== ======
EARNINGS PER SHARE-
Net income $ 1.24 $ 1.03 $ .84
======= ======= =======
FULLY DILUTED
- -------------
SHARES-
Weighted average number of
common shares outstanding
during the period 45,708 46,833 48,024
Additional shares assuming
conversion of stock options 2,277 2,294 2,212
------ ------ ------
Weighted average common and
common equivalent
shares outstanding 47,985 49,127 50,236
====== ====== ======
EARNINGS PER SHARE-
Net income $ 1.24 $ 1.03 $ .84
======= ======= =======
</TABLE>
Shares and earnings per share have been adjusted to reflect the three-for-two
stock split effected in the form of a dividend in 1996.
E-7
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
STATE OF
INC. OR
NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS
- ------------------ ------------ -----------------
<S> <C> <C>
HCRC Inc. Delaware Same
Ancillary Services Management, Inc. Ohio Same
RVA Management Services, Inc. Ohio Same
Vision Management Services, Inc. Ohio Same
(majority owned)
HCR Acquisition Corp. Ohio Same
Heartland CarePartners, Inc. Ohio Same
HCR Home Health Care and Hospice,Inc. Ohio Same
Heartland Home Health Care Services,Inc. Ohio Same
Heartland Home Health Care
Heartland Hospice Services, Inc. Ohio Same
Heartland Home Health Care and Hospice
Heartland Services Corp. Ohio Same
-Heartland Healthcare Services Ohio Same
(50% owned partnership)
HCR Rehabilitation Corp. Ohio Same
Heartland Rehabilitation Services, Inc. Ohio Same
Health Care and Retirement Ohio Same
Corporation of America
Heartland - Beavercreek
Heartland of Bellefontaine
Heartland of Browning
Heartland of Bucyrus
Heartland of Centerburg
Heartland of Chillicothe
Heartland of Eaton
Heartland - Fairfield
Heartland of Greenville
Heartland of Hillsboro
Heartland - Holly Glen
Heartland of Indian Lake N.C.
Heartland of Jackson
Heartland of Kettering
Heartland - Lansing
Heartland of Marietta
Heartland of Marysville
Oak Pavilion Nursing Home
Heartland of Oak Ridge
Heartland of Perrysburg
Perrysburg Commons
Heartland of Piqua
Heartland of Portsmouth
Heartland of Riverview
</TABLE>
E-8
<PAGE> 2
<TABLE>
<CAPTION>
STATE OF
INC. OR
NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS
- ------------------ ------------ -----------------
<S> <C> <C>
Heartland of Springfield
Heartland of Urbana
Heartland - Victorian Village
Heartland of Wauseon
The Village at Westerville NC
The Village at Westerville RC
Christopher East Health Care Center
Heartland Health Care Center-Prestwick
Glenside Nursing Center
Hampton House
Heartland Health Care Center (Pittsburgh)
Shadyside Nursing & Rehab. Center
Sky Vue Terrace
Twinbrook Medical Center
Wallingford Nursing & Rehab. Center
Heartland of Beckley
Heartland of Charleston
Heartland of Clarksburg
Heartland of Keyser
Heartland of Preston County
Heartland of Rainelle
Heartland Health Care Center - Allen Park
Heartland Health Care Center - Crestview
Heartland Health Care Ctr-Dearborn Heights
Heartland Health Care Center - Dorvin
Heartland Health Care Center - Georgian East
Heartland Health Care Center - Grand Rapids
Heartland Health Care Ctr - Plymouth Court
Heartland Health Care Center - University
Marvin and Betty Danto Family, Health Care
Center, a Health Care and Retirement
Corporation facility
Dulaney-Towson Health Care Center
Heartland Health Care Center - Hyattsville
Heartland Health Care Center - Adelphi
Heartland Health Care Center - Charleston
Oakmont East
Oakmont of Union
Oakmont West
Rosewood Manor Health Care Center
Heartland of Willow Lane
Medical Care Center
Oak Meadow Nursing Center
Heartland Health Care Center (Canton)
Heartland Health Care Center - Galesburg
</TABLE>
E-9
<PAGE> 3
<TABLE>
<CAPTION>
STATE OF
INC. OR
NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS
- ------------------ ------------ -----------------
<S> <C> <C>
Heartland Health Care Center (Henry)
Heartland Health Care Center (Homewood)
Heartland Health Care Center - Macomb
Heartland Health Care Center - Moline
Heartland Health Care Center (Paxton)
Heartland Health Care and Rehabilitation
Center of Boca Raton
Heartland Health Care Ctr-Boynton Beach
Heartland of Brooksville
Community Convalescent Center
Heartland Health Care Center-Ft. Myers
Jacaranda Manor
Heartland Health Care Ctr-Jacksonville
Heartland Health Care Center-Kendall
Heartland Health Care Ctr-Lauderhill
Heartland Health Care Ctr-Miami Lakes
Heartland Health Care Ctr-Orange Park
Pasadena Manor
Heartland Health Care Ctr-Prosperity Oaks
Regents Park of Jacksonville
Deerwood Place
Regents Park of Winter Park
The Westchester of Winter Park
Rosedale Manor
Heartland of St. Petersburg
Heartland Health Care and Rehabilitation
Center - Sunrise
The Westchester of Sunrise
Heartland of Tamarac
Heartland of Zephyrhills
Care Corporation Michigan Inactive
Georgian Bloomfield, Inc. Michigan Heartland Health Care Center - Georgian
Bloomfield
Georgian Court Nursing Oklahoma Inactive
Home of Tulsa, Inc.
Heartland of Indian Lake Ohio Heartland of Indian Lake
Rehab. Center, Inc. Rehab. Center
Heartland of Martinsburg, Inc. Ohio Heartland of Martinsburg
HGCC of Allentown, Inc. Tennessee Liberty Nursing & Rehab. Center
Lincoln Health Care, Inc. Ohio Heartland of Mentor
River Hills Nursing Home, Inc. Iowa Inactive
Washtenaw Hills Manor, Inc. Michigan Same
HCRA of Texas, Inc. Texas Same
Heartland Health Care Center (Austin)
Heartland Health Care Center (Bedford)
</TABLE>
E-10
<PAGE> 4
<TABLE>
<CAPTION>
STATE OF
INC. OR
NAME OF SUBSIDIARY ORGANIZATION DOING BUSINESS AS
- ------------------ ------------ -----------------
<S> <C> <C>
Heartland of Corpus Christi
Holiday Nursing Center
Heartland of San Antonio
Heartland Health Care Center (Temple)
Heartland Health Care Center at Willowbrook
Heartland Health Care Ctr (West Houston)
Care Corporation Holdings, Inc. Michigan Same
Care Real Estate, Inc. Michigan Same
Canterbury Village, Inc. Michigan Heartland Village Square
Care Manors, Inc. Michigan Same
Birchwood Manor, Inc. Michigan Holland Health Care Center
Donahoe Manor, Inc. Pennsylvania Donahoe Manor
East Michigan Care Corporation Michigan Heartland Health Care Center - Briarwood
Heartland Health Care Center - Fostrian
Heartland Health Care Center - Hampton
Heartland Health Care Center - Marlin
Greenview Manor, Inc. Michigan Heartland Health Care Center - Greenview
Ionia Manor, Inc. Michigan Heartland Health Care Center - Ionia
Knollview Manor, Inc. Michigan Heartland Health Care Center - Knollview
Marina View Manor, Inc. Wisconsin Marina View Manor
Heartland of Milwaukee
Parkview Terrace
Heartland of Shawano
Washington Manor
Ridgeview Manor, Inc. Michigan Heartland Health Care Center - Kalamazoo
Springhill Manor, Inc. Michigan Heartland Health Care Center - Battle Creek
Sun Valley Manor, Inc. Michigan Heartland Health Care Center - Saginaw
Three Rivers Manor, Inc. Michigan Heartland Health Care Center - Three Rivers
Washington Manor Nursing Wisconsin Inactive
Home, Inc.
Whitehall Manor, Inc. Michigan Heartland Health Care Center - Whitehall
Care Manors of New England, Inc. Delaware Same
Birch Manor Nursing Home, Inc. Mass. Inactive
Crescent Hill Manor, Inc. Mass. Inactive
Elms Manor Nursing Home, Inc. Mass. Inactive
Kensington Manor, Inc. Florida Kensington Manor
Heartland Health Care and
Rehabilitation Center (Sarasota)
Mapleview Nursing Home, Inc. Mass. Inactive
Meadows Manor, Inc. Conn. Inactive
Oak Manor Nursing Home, Inc. Mass. Inactive
Pine Manor Nursing Home, Inc. Mass. Inactive
Spruce Manor Nursing Home, Inc. Mass. Inactive
Union Square Nursing Center, Inc. Mass. Inactive
Valley View Manor, Inc. Mass. Inactive
Waterbury Manor, Inc. Conn. Inactive
</TABLE>
E-11
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-44257) pertaining to the Health Care and Retirement Corporation of
America Stock Purchase and Savings Program of Health Care and Retirement
Corporation (HCR), the Registration Statement (Form S-8, No. 33-48885)
pertaining to the Health Care and Retirement Corporation Stock Option Plan for
Outside Directors and the Stock Option Plan for Key Employees of HCR, the
Registration Statement (Form S-8, No. 33-83324) pertaining to the Health Care
and Retirement Corporation Amended Stock Option Plan for Key Employees of HCR,
and the Registration Statement (Form S-8, No. 33-87640) pertaining to the HCR
Stock Purchase and Retirement Savings Plan (formerly known as Health Care and
Retirement Corporation of America Stock Purchase and Savings Program) of HCR of
our report dated January 27, 1997, with respect to the consolidated financial
statements and schedule of HCR included in the Annual Report (Form 10-K) for the
year ended December 31, 1996.
ERNST & YOUNG LLP
Toledo, Ohio
March 24, 1997
E-12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HEALTH CARE
AND RETIREMENT CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,389
<SECURITIES> 0
<RECEIVABLES> 128,112
<ALLOWANCES> 13,335
<INVENTORY> 0
<CURRENT-ASSETS> 146,990
<PP&E> 640,219
<DEPRECIATION> 106,762
<TOTAL-ASSETS> 802,784
<CURRENT-LIABILITIES> 124,451
<BONDS> 202,295
<COMMON> 489
0
0
<OTHER-SE> 392,545
<TOTAL-LIABILITY-AND-EQUITY> 802,784
<SALES> 0
<TOTAL-REVENUES> 782,023
<CGS> 0
<TOTAL-COSTS> 625,331
<OTHER-EXPENSES> 30,677
<LOSS-PROVISION> 8,073
<INTEREST-EXPENSE> 11,798
<INCOME-PRETAX> 84,918
<INCOME-TAX> 25,475
<INCOME-CONTINUING> 59,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,443
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
</TABLE>
