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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10858
HEALTH CARE AND RETIREMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1687107
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE SEAGATE, TOLEDO, OHIO 43604-2616
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 252-5500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on July 31, 1998.
Common stock, $0.01 par value -- 44,776,477 shares
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
------
<S> <C> <C>
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited) (Note)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,461 $ 7,455
Receivables, less allowances for
doubtful accounts of $18,384 and $19,184 144,110 138,049
Prepaid expenses 4,704 5,408
Deferred income taxes 19,839 19,839
-------- --------
Total current assets 177,114 170,751
Property and equipment, net of accumulated
depreciation of $154,455 and $137,484 560,110 552,973
Intangible assets, net of amortization of $16,163 and $13,764:
Goodwill 110,047 102,078
Other 31,168 32,124
Other assets 93,816 78,425
-------- --------
Total assets $972,255 $936,351
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,937 $ 36,580
Employee compensation and benefits 34,138 36,855
Accrued insurance liabilities 19,310 17,873
Other accrued liabilities 48,073 29,162
Long-term debt due within one year 883 854
-------- ----------
Total current liabilities 138,341 121,324
Long-term debt 282,497 292,951
Deferred income taxes 67,276 67,276
Other liabilities 21,245 20,794
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized
Common stock, $.01 par value, 160,000,000 shares authorized,
49,199,906 and 48,860,406 shares issued 492 489
Capital in excess of par value 274,303 273,325
Retained earnings 308,352 275,519
-------- --------
583,147 549,333
Less treasury stock, at cost (4,437,529 and 4,637,597 shares) (120,251) (115,327)
--------- ---------
Total stockholders' equity 462,896 434,006
-------- --------
Total liabilities and stockholders' equity $972,255 $936,351
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 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 June 30 Six Months Ended June 30
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Revenues $229,766 $220,356 $456,278 $434,268
Expenses:
Operating 178,159 174,508 354,864 344,923
General and administrative 9,417 8,550 18,855 16,358
Depreciation and amortization 9,984 9,089 19,642 17,855
-------- -------- -------- --------
197,560 192,147 393,361 379,136
------- ------- ------- -------
Income from operations 32,206 28,209 62,917 55,132
Interest expense, net (3,943) (3,907) (8,053) (7,719)
Equity in earnings of partnership 1,260 546 2,451 990
--------- -------- -------- --------
Income before income taxes 29,523 24,848 57,315 48,403
Income taxes 9,064 7,629 17,596 14,860
-------- -------- -------- --------
Net income $ 20,459 $ 17,219 $ 39,719 $ 33,543
======== ======== ======== ========
Earnings per share:
Basic $ .46 $ .39 $ .89 $ .75
Diluted $ .44 $ .37 $ .86 $ .72
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $39,719 $33,543
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,261 17,991
Provision for bad debts 2,576 3,522
Equity in earnings of partnership (2,451) (990)
Gain from sale of property and equipment (887)
Changes in assets and liabilities, excluding businesses acquired:
Receivables (8,637) (6,887)
Prepaid expenses and other assets (12,585) (6,808)
Accounts payable (643) 1,854
Employee compensation and benefits (2,112) (489)
Accrued insurance and other liabilities 12,176 10,372
------ ------
Total adjustments 7,698 18,565
------- ------
Net cash provided by operating activities 47,417 52,108
INVESTING ACTIVITIES
Purchases and construction of property and equipment (24,028) (27,290)
Proceeds from sale of property and equipment 920
Cash paid to acquire businesses (9,536) (54,848)
------- -------
Net cash used in investing activities (32,644) (82,138)
------- -------
FINANCING ACTIVITIES
Net borrowings (repayments) under bank credit agreement (10,000) 61,500
Principal payments of long-term debt (425) (18,843)
Proceeds from exercise of stock options 752 1,337
Purchase of common stock for treasury (4,094) (14,753)
------- -------
Net cash provided by (used in) financing activities (13,767) 29,241
------- -------
Net increase (decrease) in cash 1,006 (789)
Cash and cash equivalents at beginning of year 7,455 2,389
------- -------
Cash and cash equivalents at end of period $ 8,461 $ 1,600
======= =======
</TABLE>
See notes to consolidated financial statements.
5
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HEALTH CARE AND RETIREMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Principles of Consolidation and Presentation
- -----------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of HCR, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim periods. Operating
results for the three months and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997.
At June 30, 1998 HCR operates 129 long term care facilities, 77 outpatient
rehabilitation clinics and 33 home health offices. Within its facilities, HCR
operates 65 medical specialty units which provide subacute, rehabilitation or
Alzheimer's programs. Management services are provided to 48 subacute and
rehabilitation units and 6 comprehensive outpatient rehabilitation facilities,
as well as to vision surgery and other treatment centers.
NOTE 2 - Earnings Per Share
- ---------------------------
The calculation of earnings per share (EPS) is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except earnings per share)
<S> <C> <C> <C> <C>
Numerator:
Net income (income available to
common stockholders) $20,459 $17,219 $39,719 $33,543
======= ======= ======= =======
Denominator:
Denominator for basic EPS -
weighted-average shares 44,444 44,562 44,386 44,617
Effect of dilutive securities:
Stock options 1,694 1,939 1,797 1,906
Nonvested restricted stock 30 30
------- ------- ------- -------
Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 46,168 46,501 46,213 46,523
====== ====== ====== ======
Basic EPS $.46 $.39 $.89 $.75
Diluted EPS $.44 $.37 $.86 $.72
</TABLE>
6
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NOTE 3 - New Accounting Standard
- --------------------------------
In June 1997, the Financial Accounting Standards Board 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.
NOTE 4 - Merger
- ---------------
HCR and Manor Care, Inc.,(Manor Care) have signed an Agreement and Plan of
Merger (Merger Agreement) dated June 10, 1998. The Merger Agreement provides
that, with certain limited exceptions, the owner of each issued and outstanding
share of Manor Care common stock shall be converted into the right to receive
one share of HCR common stock. Upon completion of the transaction, Manor Care
will be a wholly owned subsidiary of HCR and the stockholders of Manor Care will
become stockholders of HCR. The transaction will be accounted for as a pooling
of interests. The merger is subject to certain conditions, including stockholder
approval, regulatory approvals and the expiration of antitrust regulatory
waiting periods.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Revenues for the three months ended June 30, 1998 increased $9,410,000 or 4% to
$229,766,000 as compared to the same period in 1997. Revenues for the six months
ended June 30, 1998 increased $22,010,000 or 5% to $456,278,000 as compared to
the same period in 1997. The revenue increases related to improved per diem
rates from inflation that represented 90% of the increase for the three month
period and 80% for the six month period The remaining increases were due to the
acquisition of various businesses in 1997. The occupancy levels were 88% and 89%
for the three months and six months ended June 30, 1997, respectively, and 89%
for the same periods in 1998, respectively. The mix of revenue from Medicare,
private pay and insured patients remained constant at 70% for the three months
and six months ended June 30, 1997 and 1998.
Operating expenses for the three months ended June 30, 1998 increased $3,651,000
or 2% to $178,159,000 from the comparable period in 1997. Operating expenses for
the six months ended June 30, 1998 increased $9,941,000 or 3% to $354,864,000
from the same period in 1997. The major component of the operating expense
increases related to labor costs that were attributable to average wage rate
increases. Labor costs, excluding those related to acquisitions, represented 77%
of the increase for the three month period and 68% for the six month period. The
remainder of the increases were primarily attributable to the acquisition of
various businesses in 1997.
General and administrative expense, which approximated 4% of revenue, increased
$867,000 and $2,497,000 for the three months and six months ended June 30, 1998
as compared to the same periods in 1997, respectively, due to increased labor
and consulting costs from the implementation of new information systems as well
as normal inflationary increases in other expenses. The increase in depreciation
and amortization of $895,000 and $1,787,000 for the three months and six months
ended June 30, 1998, respectively, as compared to the same periods in the prior
year, related to additional depreciation for prior year capital expenditures.
The increase in net interest expense of $334,000 for the six months ended June
30, 1998 as compared to the same period in 1997 was due to an increase in debt
levels partially offset by additional interest income. The equity earnings of
the partnership increased $1,461,000 for the first half of 1998 as compared to
the same period in 1997 as a result of the growth in supplying pharmaceutical
needs of HCR centers and Omnicare pharmacies.
NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board 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.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998, HCR satisfied its cash requirements from cash
generated from operating activities. HCR used the cash principally for capital
expenditures, the acquisition of businesses and repayment of debt. At June 30,
1998, the Company maintained $8,461,000 in cash and cash equivalents, of which
$4,500,000 was invested in short-term investments.
Net cash used in investing activities amounted to $32,644,000. Expenditures for
property and equipment of $24,028,000 related to renovations, capital
improvements, information systems and the completion of construction of a new
facility near Milwaukee, Wisconsin that opened in July, 1998. As part of the
diversification into other health care services, HCR made one acquisition and
paid contingent consideration for prior year acquisitions for a total of
$9,536,000 in the first half of 1998.
Net cash used in financing activities during the first half of 1998 amounted to
$13,767,000. This included $10,000,000 to repay debt under the credit agreement
and $4,094,000 for the purchase of HCR common stock. This use was partially
offset by $752,000 received from the exercise of stock options.
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 June 30, 1998, HCR had borrowed $275,000,000 and issued
letters of credit totalling $9,966,000 which left a remaining unused borrowing
capacity of $40,034,000.
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.
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company is party to various legal proceedings arising in
the ordinary course of business. The Company does not believe
the results of such proceedings, even if unfavorable to the
Company, would have a material adverse effect on its financial
position.
Item 2. Changes in Securities.
----------------------
None
Item 3. Defaults Upon Senior Securities.
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Company's Annual Meeting of Stockholders held on May 5,
1998 the stockholders approved the following items: a) elect
John J. Clair, Jr., as a director, b) elect Paul A. Ormond as
a director, c) approve the increase in authorized common
shares and d) ratify selection of Ernst & Young LLP as
independent public accountants for the year ending December
31, 1998. The items were approved by a vote as follows:
<TABLE>
<CAPTION>
Item For Against Withheld Abstain Not Voted
---- --- ------- -------- ------- ---------
<S> <C> <C> <C> <C>
a 37,107,244 430,763
b 37,106,595 431,412
c 35,835,281 1,677,108 25,618
d 37,513,610 14,954 9,443
</TABLE>
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a)Exhibits
S-K Item
601 No.
-------
3 Certificate of Amendment of Certificate of
Incorporation dated June 5, 1998
27 Financial Data Schedule for the six months
ended June 30, 1998
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 16, 1998 and under Item 5
reported that HCR and Manor Care, Inc. announced a definitive
agreement to merge the two companies in an exchange of shares.
10
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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 August 14, 1998 By /s/ Geoffrey G. Meyers
------------------ ---------------------------------------
Geoffrey G. Meyers, Executive Vice President,
Chief Financial Officer and Treasurer
11
<PAGE> 12
EXHIBIT INDEX
Exhibit
- -------
3 Certificate of Amendment of Certificate of Incorporation dated
June 5, 1998
27 Financial Data Schedule for the six months ended June 30, 1998
12
<PAGE> 1
EXHIBIT 3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
HEALTH CARE AND RETIREMENT CORPORATION
--------------------------------------
Health Care and Retirement Corporation, a corporation existing under
the laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a regularly
scheduled meeting held on January 29, 1998 adopted resolutions proposing and
declaring advisable the following amendment to Article Four of the Certificate
of Incorporation of the Corporation:
RESOLVED, that the first paragraph of Article IV of the
Certificate of Incorporation is amended to increase from 80,000,000 to
160,000,000 the authorized shares of Common Stock of the Corporation
and that such first paragraph, after amendment, shall read:
"The total number of shares of capital stock which the
corporation shall have authority to issue is One Hundred Sixty-Five
Million (165,000,000), consisting of One Hundred Sixty Million
(160,000,000) shares of common stock, par value $.01 per share
(hereinafter called the "Common Stock") and Five Million (5,000,000)
shares of preferred stock, par value $.01 per share (hereinafter called
"Preferred Stock").
SECOND: The Board of Directors of the Corporation approved the
foregoing amendment pursuant to the provisions of Sections 141(f) and 242 of the
General Corporation Law of the State of Delaware.
THIRD: The stockholders of the Corporation approved the foregoing
amendment pursuant to the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware, and the foregoing amendments have been
duly adopted in accordance with Section 242 of the General Corporation Law of
the State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, Health Care and Retirement Corporation has caused
this Certificate of Amendment to be signed by R. Jeffrey Bixler its Vice
President this 5th day of June, 1998.
HEALTH CARE AND RETIREMENT
CORPORATION
By:
----------------------------------
R. Jeffrey Bixler, Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,461
<SECURITIES> 0
<RECEIVABLES> 162,494
<ALLOWANCES> 18,384
<INVENTORY> 0
<CURRENT-ASSETS> 177,114
<PP&E> 714,565
<DEPRECIATION> 154,455
<TOTAL-ASSETS> 972,255
<CURRENT-LIABILITIES> 138,341
<BONDS> 282,497
0
0
<COMMON> 492
<OTHER-SE> 462,404
<TOTAL-LIABILITY-AND-EQUITY> 972,255
<SALES> 0
<TOTAL-REVENUES> 456,278
<CGS> 0
<TOTAL-COSTS> 354,864
<OTHER-EXPENSES> 19,642
<LOSS-PROVISION> 2,576
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 57,315
<INCOME-TAX> 17,596
<INCOME-CONTINUING> 39,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,719
<EPS-PRIMARY> .89
<EPS-DILUTED> .86
</TABLE>
