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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on April 30, 1998.
Common stock, $0.01 par value - 44,791,042 shares
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TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
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(Unaudited) (Note)
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,460 $ 7,455
Receivables, less allowances for
doubtful accounts of $17,799 and $19,184 138,505 138,049
Prepaid expenses 5,320 5,408
Deferred income taxes 19,839 19,839
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Total current assets 167,124 170,751
Property and equipment, net of accumulated
depreciation of $145,873 and $137,484 555,214 552,973
Intangible assets, net of amortization of $14,886 and $13,764:
Goodwill 107,240 102,078
Other 31,679 32,124
Other assets 88,059 78,425
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Total assets $949,316 $936,351
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,742 $ 36,580
Employee compensation and benefits 32,951 36,855
Accrued insurance liabilities 18,117 17,873
Other accrued liabilities 39,119 29,162
Long-term debt due within one year 868 854
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Total current liabilities 122,797 121,324
Long-term debt 292,603 292,951
Deferred income taxes 67,276 67,276
Other liabilities 21,088 20,794
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized
Common stock, $.01 par value, 80,000,000 shares authorized,
49,199,906 and 48,860,406 shares issued 492 489
Capital in excess of par value 274,037 273,325
Retained earnings 287,972 275,519
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562,501 549,333
Less treasury stock, at cost (4,365,839 and 4,637,597 shares) (116,949) (115,327)
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Total stockholders' equity 445,552 434,006
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Total liabilities and stockholders' equity $949,316 $936,351
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<FN>
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.
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31
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1998 1997
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(In thousands, except earnings per share)
Revenues $226,512 $213,912
Expenses:
Operating 176,705 170,415
General and administrative 9,438 7,808
Depreciation and amortization 9,658 8,766
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195,801 186,989
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Income from operations 30,711 26,923
Interest expense, net (4,110) (3,812)
Equity in earnings of partnership 1,191 444
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Income before income taxes 27,792 23,555
Income taxes 8,532 7,231
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Net income $ 19,260 $ 16,324
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Earnings per share:
Basic $ .43 $ .37
Diluted $ .42 $ .35
See notes to consolidated financial statements.
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HEALTH CARE AND RETIREMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
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1998 1997
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(In thousands)
OPERATING ACTIVITIES
Net income $19,260 $16,324
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,970 8,836
Provision for bad debts 693 1,480
Equity in earnings of partnership (1,191) (444)
Changes in assets and liabilities, excluding businesses acquired:
Receivables (1,149) (6,793)
Prepaid expenses and other assets (8,533) (2,991)
Accounts payable (4,838) (2,644)
Employee compensation and benefits (3,300) (2,880)
Accrued insurance and other liabilities 1,872 8,417
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Total adjustments (6,476) 2,981
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Net cash provided by operating activities 12,784 19,305
INVESTING ACTIVITIES
Purchases and construction of property and equipment (10,521) (12,693)
Cash paid to acquire businesses (5,964) (45,201)
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Net cash used in investing activities (16,485) (57,894)
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FINANCING ACTIVITIES
Net borrowings under bank credit agreement 72,600
Principal payments of long-term debt (334) (18,473)
Proceeds from exercise of stock options 598 804
Purchase of common stock for treasury (558) (10,625)
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Net cash provided by (used in) financing activities (294) 44,306
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Net increase (decrease) in cash (3,995) 5,717
Cash and cash equivalents at beginning of year 7,455 2,389
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Cash and cash equivalents at end of period $ 3,460 $ 8,106
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See notes to consolidated financial statements.
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HEALTH CARE AND RETIREMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Principles of Consolidation and Presentation
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The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of HCR, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim periods. Operating
results for the three months ended March 31, 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.
NOTE 2 - Earnings Per Share
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The calculation of earnings per share (EPS) is as follows for the three months
ended March 31:
1998 1997
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(In thousands)
[S] [C] [C]
Numerator:
Net income (income available to
common stockholders) $19,260 $16,324
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Denominator:
Denominator for basic EPS -
weighted-average shares 44,327 44,673
Effect of dilutive securities:
Stock options 1,902 1,859
Nonvested restricted stock 31
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Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions 46,260 46,532
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Basic EPS $.43 $.37
Diluted EPS $.42 $.35
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NOTE 3 - New Accounting Standard
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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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1998 increased $12,600,000 or 6%
to $226,512,000 as compared to the same period in 1997. Of the increase, 73%
related to mix changes and improved per diem rates, and the remaining increase
was due to the acquisition of various businesses in 1997. The improved per diem
rates, resulted from more specialized care, such as subacute medical care and
rehabilitation services for more acutely ill patients. The occupancy levels and
quality mix, which reflects revenues from Medicare, private pay and insured
patients, were 90% and 70%, respectively, for the first quarter of both 1997 and
1998.
Operating expenses for the three months ended March 31, 1998 increased
$6,290,000 or 4% to $176,705,000 from the comparable period in 1997. Of the
increase, 60% related to labor costs offset by decreases in other general
expenses. The remaining increase was attributable to the acquisition of various
businesses in 1997. Labor costs, excluding those related to the acquisitions,
represented 62% of the increase which was attributable to average wage rate
increases, as well as growth in the staffing levels related to medical specialty
units and rehabilitative services.
General and administrative expense, which approximated 4% of revenue, increased
$1,630,000 in the first quarter of 1998 compared to 1997 due to increased labor
and consulting costs from the implementation of new information systems as well
as increases in other deferred costs. The increase in depreciation and
amortization of $892,000 between the first quarter of 1997 and 1998 related
primarily to additional depreciation on prior year capital expenditures. The
increase in net interest expense of $298,000 was attributable to an increase in
debt levels partially offset by additional interest income earned on cash
equivalents. The equity in earnings of the partnership increased $747,000 as a
result of the growth in supplying pharmaceutical needs of HCR centers and
Omnicare pharmacies.
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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.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, HCR satisfied its cash requirements primarily
from cash generated from operating activities. HCR used the cash principally for
capital expenditures and the acquisition of businesses. At March 31, 1998, the
Company maintained $3,460,000 in cash and cash equivalents, of which $600,000
was invested in short-term investments.
Cash used in investing activities amounted to $16,485,000. Expenditures for
property and equipment of $10,521,000 related to renovations, capital
improvements, information systems and the ongoing construction of a new facility
near Milwaukee, Wisconsin. As part of the diversification into other health care
services, HCR made an acquisition and paid contingent consideration for prior
year acquisitions for a total of $5,964,000 in the first quarter of 1998.
Net cash used in financing activities during the first quarter of 1998 amounted
to $294,000. This included $558,000 for the purchase of HCR common stock and
$334,000 to repay scheduled long-term debt maturities. This use was partially
offset by $598,000 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 March 31, 1998, HCR had borrowed $285,000,000 and issued
letters of credit totalling $9,966,000 which left a remaining unused borrowing
capacity of $30,034,000.
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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The Company is party to various legal proceedings arising in the
ordinary course of business. The Company does not believe that 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.
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None
Item 3. Defaults Upon Senior Securities.
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None
Item 4. Submission of Matters to a Vote of Security Holders.
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None
Item 5. Other Information.
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None
Item 6. Exhibits and Reports on Form 8-K.
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(a)Exhibits
S-K Item
601 No.
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10 Form of Second Amended Employment Agreement between HCRA,
HCR and M. Keith Weikel
27 Financial Data Schedule for the three months ended
March 31, 1998
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH CARE AND RETIREMENT
CORPORATION
(Registrant)
Date May 11, 1998 By /s/ Geoffrey G. Meyers
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Geoffrey G. Meyers,
Executive Vice President,
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
Exhibit
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10 Form of Second Amended Employment Agreement between HCRA, HCR
and M. Keith Weikel
27 Financial Data Schedule for the three months ended
March 31, 1998
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