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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10858
HEALTH CARE AND RETIREMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1687107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE SEAGATE, TOLEDO, OHIO 43604-2616
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on October 31, 1997.
Common stock, $0.01 par value -- 44,454,197 shares
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
<S> <C>
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Note)
------------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,904 $ 2,389
Receivables, less allowances for
doubtful accounts of $15,829 and $13,335 140,040 114,777
Prepaid expenses 6,498 10,023
Deferred income taxes 19,801 19,801
-------- --------
Total current assets 169,243 146,990
Property and equipment, net of accumulated
depreciation of $129,308 and $106,762 548,327 533,457
Intangible assets, net of amortization of $11,945 and $7,602
Goodwill 103,097 43,664
Other 35,636 32,472
Other assets 59,724 46,201
-------- --------
Total assets $916,027 $802,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,845 $ 32,218
Employee compensation and benefits 35,512 34,425
Accrued insurance liabilities 20,710 23,943
Other accrued liabilities 46,925 32,448
Long-term debt due within one year 2,058 1,417
-------- --------
Total current liabilities 140,050 124,451
Long-term debt 260,365 202,295
Deferred income taxes 66,798 66,798
Other liabilities 19,646 16,206
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized
Common stock, $.01 par value, 80,000,000 shares authorized,
48,860,406 shares issued 489 489
Capital in excess of par value 268,036 268,036
Retained earnings 258,433 210,306
-------- --------
526,958 478,831
Less treasury stock, at cost (4,259,084 and 3,999,541 shares) (97,790) (85,797)
-------- --------
Total stockholders' equity 429,168 393,034
-------- --------
Total liabilities and stockholders' equity $916,027 $802,784
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to consolidated financial statements.
3
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $ 226,606 $ 199,205 $ 660,874 $ 581,117
Expenses:
Operating 178,174 159,331 523,097 465,684
General and administrative 9,674 7,717 26,032 23,359
Depreciation and amortization 9,448 7,965 27,303 22,752
--------- --------- --------- ---------
197,296 175,013 576,432 511,795
--------- --------- --------- ---------
Income from operations 29,310 24,192 84,442 69,322
Interest expense, net (3,979) (2,793) (11,698) (7,734)
Equity in earnings of partnership 861 361 1,851 973
--------- --------- --------- ---------
Income before income taxes 26,192 21,760 74,595 62,561
Income taxes 8,041 6,528 22,901 18,768
--------- --------- --------- ---------
Net income $ 18,151 $ 15,232 $ 51,694 $ 43,793
========= ========= ========= =========
Earnings per share -
primary and fully diluted $ .39 $ .32 $ 1.10 $ .91
========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding:
Primary 46,832 47,372 46,807 48,074
Fully diluted 46,873 47,373 46,967 48,074
</TABLE>
See notes to consolidated financial statements.
4
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 51,694 $ 43,793
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,484 23,917
Provision for bad debts 6,418 4,328
Equity in earnings of partnership (1,851) (973)
Changes in assets and liabilities,
excluding businesses acquired:
Receivables (21,033) (14,237)
Prepaid expenses and other assets (7,921) (11,760)
Accounts payable 1,437 (129)
Employee compensation and benefits 1,132 3,333
Accrued insurance and other liabilities 10,769 20,957
-------- --------
Total adjustments 16,435 25,436
-------- --------
Net cash provided by operating activities 68,129 69,229
INVESTING ACTIVITIES
Purchases and construction of property and equipment (36,660) (29,085)
Investment in partnership (600) (2,955)
Cash paid to acquire businesses (55,497) (31,527)
-------- --------
Net cash used in investing activities (92,757) (63,567)
-------- --------
FINANCING ACTIVITIES
Net borrowings under bank credit agreement 59,600 27,900
Principal payments of long-term debt (19,049) (1,353)
Proceeds from exercise of stock options 2,705 1,748
Purchase of common stock for treasury (18,113) (38,269)
-------- --------
Net cash provided by (used in) financing activities 25,143 (9,974)
-------- --------
Net increase (decrease) in cash 515 (4,312)
Cash and cash equivalents at beginning of year 2,389 7,742
-------- --------
Cash and cash equivalents at end of period $ 2,904 $ 3,430
======== ========
</TABLE>
See notes to consolidated financial statements.
5
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HEALTH CARE AND RETIREMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Principles of Consolidation and Presentation
- -----------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of HCR, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim periods. Operating
results for the three months and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in HCR's annual report on Form 10-K
for the year ended December 31, 1996.
NOTE 2 - Acquisitions
- ---------------------
In the first nine months of 1997, HCR paid $55,497,000 for the acquisition of
various businesses including a privately held company, MileStone Healthcare,
Inc., and contingent consideration related to prior year acquisitions. The
businesses acquired provide rehabilitation therapy services and program
management services for comprehensive medical rehabilitation and subacute care.
The acquisitions were accounted for under the purchase method of accounting. HCR
acquired assets of $12,000,000, assumed liabilities of $23,000,000 and recorded
$67,000,000 of intangible assets. At September 30, 1997, HCR operated 129 long
term care facilities, 74 outpatient rehabilitation clinics and 33 home health
care offices. Within its facilities, HCR operated 63 medical specialty units
which provide subacute, rehabilitation or Alzheimer's programs. Management
services are provided to 62 subacute and rehabilitation units and 10
comprehensive outpatient rehabilitation facilities (CORFs), as well as to vision
surgery and other treatment centers.
NOTE 3 - New Accounting Standards
- ---------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," which is effective December 31, 1997.
At that time, HCR will be required to change the method currently used to
compute earnings per share (EPS) and to restate all prior periods. Under the new
requirements there are two EPS calculations, basic and diluted earnings per
share. Basic EPS is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Under this method, EPS is expected to be $.41 and $1.16 for the three months and
nine months ended September 30, 1997, respectively, and $.34 and $.95 for the
same periods in 1996, respectively. The second presentation, diluted EPS, gives
effect to all dilutive potential common shares and is expected to be the same as
the currently disclosed fully diluted EPS for the three months and nine months
ended September 30, 1997 and 1996.
6
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In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (FAS 131), which is effective December
31, 1998, with interim disclosures beginning in 1999. Comparative information
for prior years is required to be restated. This Statement requires public
business enterprises to report certain information about operating segments,
their products and services, the geographic areas in which they operate, and
their major customers. The operating segments should be based on the structure
of the enterprise's internal organization whose operating results are regularly
reviewed by the company's chief operating decision maker to make decisions about
resources to be allocated to the segment and assess its performance. Management
has not determined the effect, if any, of FAS 131 on the consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
FINANCIAL CONDITION
In the first nine months of 1997, HCR paid $55,497,000 for the acquisition of
various businesses including a privately held company, MileStone Healthcare,
Inc., and contingent consideration related to prior year acquisitions. The
businesses acquired provide rehabilitation therapy services and program
management services for comprehensive medical rehabilitation and subacute care.
The acquisitions were accounted for under the purchase method of accounting. HCR
acquired assets of $12,000,000, assumed liabilities of $23,000,000 and recorded
$67,000,000 of intangible assets.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1997 increased $27,401,000 or
14% to $226,606,000 as compared to the same period in 1996. Revenues for the
nine months ended September 30, 1997 increased $79,757,000 or 14% to
$660,874,000 as compared to the same period in 1996. Of the increases, 57% and
62% for the three months and nine months ended September 30, 1997, respectively,
related to the acquisition of various businesses in 1997 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 rehabilitation services
for more acutely ill patients. The occupancy levels were 89% for the three
months and nine months ended September 30, 1996 and 1997. The mix of revenue
from Medicare, private pay and insured patients increased from 68% for the three
months and nine months ended September 30, 1996 to 70% for the same periods in
1997, primarily due to the growth in non-Medicaid revenue from acquisitions.
Operating expenses for the three months ended September 30, 1997 increased
$18,843,000 or 12% to $178,174,000 from the comparable period in 1996. Operating
expenses for the nine months ended September 30, 1997 increased $57,413,000 or
12% to $523,097,000 from the same period in 1996. Of the increases, 62% and 65%
for the three months and nine months ended September 30, 1997, respectively,
related to the acquisition of various businesses in 1997 and 1996. The remaining
increases were attributable to labor costs and other general expenses. Labor
costs, excluding those related to the acquisitions, represented 32% and 33% of
the increases for the three months and nine months ended September 30, 1997 as
compared to the same periods in 1996, respectively. The increase in labor costs
was attributable to average wage rate increases as well as growth in the
staffing levels attributable to the medical specialty units, rehabilitative
services and home health care.
7
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General and administrative expense, which approximated 4% of revenue, increased
$2,673,000 for the nine months ended September 30, 1997 as compared to the same
period in 1996. The increase in depreciation of $781,000 and $2,096,000, for the
three months and nine months ended September 30, 1997 as compared to the same
periods in the prior year, related to additional depreciation for prior year
capital expenditures. Amortization expense increased $702,000 and $2,455,000 for
the three months and nine months ended September 30, 1997 as compared to the
same periods in 1996, which was attributable to the intangible assets recorded
in connection with 1996 and 1997 acquisitions. The increase in net interest
expense of $3,964,000 for the nine months ended September 30, 1997 as compared
to the same period in 1996 was due to an increase in debt levels.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," which is effective December 31, 1997.
At that time, HCR will be required to change the method currently used to
compute earnings per share (EPS) and to restate all prior periods. Under the new
requirements there are two EPS calculations, basic and diluted earnings per
share. Basic EPS is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Under this method, EPS is expected to be $.41 and $1.16 for the three months and
nine months ended September 30, 1997, respectively, and $.34 and $.95 for the
same periods in 1996, respectively. The second presentation, diluted EPS, gives
effect to all dilutive potential common shares and is expected to be the same as
the currently disclosed fully diluted EPS for the three months and nine months
ended September 30, 1997 and 1996.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (FAS 131), which is effective December
31, 1998, with interim disclosures beginning in 1999. Comparative information
for prior years is required to be restated. This Statement requires public
business enterprises to report certain information about operating segments,
their products and services, the geographic areas in which they operate, and
their major customers. The operating segments should be based on the structure
of the enterprise's internal organization whose operating results are regularly
reviewed by the company's chief operating decision maker to make decisions about
resources to be allocated to the segment and assess its performance. Management
has not determined the effect, if any, of FAS 131 on the consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, HCR satisfied its cash requirements from a
combination of cash generated from operating activities and borrowings under a
bank credit agreement. HCR used the cash principally for capital expenditures,
the acquisition of businesses, repayment of debt and the purchase of HCR common
stock. At September 30, 1997, HCR maintained $2,904,000 in cash and cash
equivalents, of which $1,500,000 was invested in short-term investments.
Cash used in investing activities amounted to $92,757,000. Expenditures for
property and equipment of $36,660,000 related to renovations, capital
improvements and the construction of a new facility in Ann Arbor, Michigan which
opened in the second quarter of this year. As part of the diversification into
other health care services, HCR acquired various businesses and paid contingent
consideration for prior year acquisitions for a total of $55,497,000 in the
first nine months of 1997.
8
<PAGE> 9
Net cash provided by financing activities during the first nine months of 1997
amounted to $25,143,000. The increase in debt under the credit agreement of
$59,600,000 was partially used to repay other long-term debt of $19,049,000
which included debt assumed in the first quarter acquisitions and to purchase
619,300 shares of HCR stock for $18,113,000.
The bank credit agreement permits HCR to borrow up to $325,000,000 through
August 2, 2001, then the borrowing capacity is reduced to $295,000,000 through
August 2, 2002. At September 30, 1997, HCR had borrowed $252,000,000 and issued
letters of credit totalling $12,359,000 which left a remaining unused borrowing
capacity of $60,641,000.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
There are no material pending legal proceedings other than
litigation arising in the ordinary course of business for
which the Company has insurance coverage. The Company does not
believe the results of such litigation, even if the outcome
were unfavorable to the Company, would have a material adverse
effect on its financial position.
Item 2. Changes in Securities.
----------------------
None
Item 3. Defaults Upon Senior Securities.
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a)Exhibits
S-K Item
601 No.
-------
27 Financial Data Schedule for the nine months
ended September 30, 1997
(b) Reports on Form 8-K
None
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH CARE AND RETIREMENT
CORPORATION
(Registrant)
Date November 7, 1997 By /s/ Geoffrey G. Meyers
--------------------- ----------------------
Geoffrey G. Meyers, Executive Vice-President,
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule for the nine months ended
September 30, 1997
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,904
<SECURITIES> 0
<RECEIVABLES> 155,869
<ALLOWANCES> 15,829
<INVENTORY> 0
<CURRENT-ASSETS> 169,243
<PP&E> 677,635
<DEPRECIATION> 129,308
<TOTAL-ASSETS> 916,027
<CURRENT-LIABILITIES> 140,050
<BONDS> 260,365
0
0
<COMMON> 489
<OTHER-SE> 428,679
<TOTAL-LIABILITY-AND-EQUITY> 916,027
<SALES> 0
<TOTAL-REVENUES> 660,874
<CGS> 0
<TOTAL-COSTS> 523,097
<OTHER-EXPENSES> 27,303
<LOSS-PROVISION> 6,418
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 74,595
<INCOME-TAX> 22,901
<INCOME-CONTINUING> 51,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,694
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
