<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/X/ Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
Unison HealthCare Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Unison Common Stock (plus cash and notes totaling $38,200,000)
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
1,509,434
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$12.875 per Unison share, based on 9/12/96 closing price
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$57,633,962.75
------------------------------------------------------------------------
(5) Total fee paid:
$11,526.80
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
UNISON HEALTHCARE CORPORATION
7272 EAST INDIAN SCHOOL ROAD, SUITE 214
SCOTTSDALE, ARIZONA 85251
, 1996
Dear Stockholder:
The documents following this letter are a Notice of Special Meeting of
Stockholders, a Proxy Statement Supplement, a Prospectus/Proxy and Information
Statement and a Proxy Card for a special meeting of stockholders to be held at
10:00 a.m., local time, on , 1996 at The Marriott Suites
Hotel, 7325 East Third Avenue, Scottsdale, Arizona 85251. This meeting is of
great importance to the stockholders of Unison HealthCare Corporation
("Unison"). You will be asked to consider and approve a transaction which is
documented in five agreements and plans of merger, between each of the following
five companies: Signature Health Care Corporation ("Signature Health Care");
Arkansas, Inc. ("Arkansas"); Cornerstone Care, Inc. ("Cornerstone"); Douglas
Manor, Inc. ("Douglas"); Safford Care, Inc. ("Safford" and collectively with
Signature Health Care, Arkansas, Cornerstone and Douglas, "Signature"), and, in
each case, a newly formed wholly-owned subsidiary of Unison. Signature is
described starting on page 34 of the enclosed Proxy Statement Supplement. The
overall transaction also contemplates and is conditioned upon the acquisition by
Unison of a sixth company, RehabWest, Inc. ("RehabWest"), though no acquisition
agreement has yet been reached. As explained more fully in the Prospectus/Proxy
and Information Statement, Unison also expects to close mergers with American
Professional Holding, Inc. and Memphis Clinical Laboratory, Inc. (collectively,
the "Ampro Mergers"), although no vote of the Unison stockholders is required
(or will be taken) in connection with the Ampro Mergers.
If stockholder approval is obtained, and subject to regulatory approval and
satisfaction of other conditions precedent, including the offering of debt or
equity in an amount satisfactory to Unison (currently anticipated to be
satisfied through the placement of $100.0 million of Senior Notes, see "Recent
and Pending Unison Acquisitions and Other Commitments -- The Senior Notes" in
the Prospectus/Proxy and Information Statement), each of Signature Health Care,
Arkansas, Cornerstone, Douglas, Safford and RehabWest will become wholly-owned
subsidiaries of Unison through separate mergers with the newly formed
wholly-owned subsidiaries of Unison. In the Signature Health Care Merger, the
outstanding capital stock of Signature Health Care will be converted into the
right to receive shares of the $.001 par value common stock of Unison (the
"Unison Common Stock") and cash. In each of the other Signature Mergers, the
outstanding capital stock of the Signature company will be converted into the
right to receive cash and a promissory note. The promissory note will be
deposited into escrow to secure Signature's obligations. As described in greater
detail in the Proxy Statement Supplement, the total consideration to be given by
Unison in the Signature Mergers, including costs to redeem outstanding Signature
options and subject to the adjustments provided for in the Signature Merger
Agreements, will include 1,509,434 shares of Unison Common Stock (subject to
adjustment if its average price shortly before the Signature Merger is less than
$11.25 per share or greater than $15.25 per share) and approximately $38,200,000
of cash and notes.
Information regarding the proposed transaction, as well as other recent and
pending acquisitions by Unison, and information concerning Signature is set
forth in the accompanying Proxy Statement Supplement and Prospectus/Proxy and
Information Statement, which we urge you to examine carefully.
The Board of Directors of Unison has unanimously approved the terms of each
of the Signature Mergers and recommends that all stockholders vote to approve
and adopt the Signature agreements and plans of merger. The Board believes that
the Signature Mergers will benefit the stockholders of Unison in that the
transactions will permit Unison to access geographic markets it does not
currently serve.
Stockholders will also be asked to approve an amendment to Unison's
Certificate of Incorporation to increase the number of authorized shares of
Unison's $.001 par value Common Stock from 10,000,000 to 25,000,000 (the
"Certificate Amendment"). The Board of Directors of Unison has unanimously
approved the Certificate Amendment and recommends that all stockholders vote to
approve the Certificate Amendment.
<PAGE> 3
The Board of Directors anticipates that additional public or private sales
of Unison Common Stock may occur within the next twelve months to finance
further acquisitions and internal growth in accordance with Unison's business
plan, but the Board has no current plans for transactions involving Unison
Common Stock other than as described herein. The Board believes that the
amendment will allow Unison to continue to take advantage of appropriate
opportunities for growth.
Finally, the stockholders will also be asked to approve an amendment to
Unison's 1995 Stock Option Plan (the "Option Plan"): (i) to increase the total
number of shares of Common Stock authorized to be issued thereunder from 511,046
shares to 800,000 shares; and (ii) to change the formula grants of options to
nonemployee directors from 6,246 shares upon election to the Board of Directors
and on each fifth anniversary thereafter to 15,000 shares (17,500 shares in the
case of the chairman) beginning with September 1996 and at each annual meeting
thereafter (provided the recipient remains a nonemployee director) (the "Option
Plan Amendment"). As of September 30, 1996, options for a total of 344,703
shares are issued and outstanding under the Option Plan and, subject to
shareholder approval of the Option Plan Amendment, the Compensation Committee of
the Board of Directors has recommended, and the full Board has approved, the
issuance of options for an additional 416,850 shares.
IN ORDER TO AUTHORIZE THE SIGNATURE MERGERS AND AMEND UNISON'S CERTIFICATE
OF INCORPORATION, IT IS NECESSARY TO OBTAIN THE AFFIRMATIVE VOTE OF AT LEAST A
MAJORITY OF THE OUTSTANDING UNISON COMMON STOCK. TO INSURE THAT YOUR SHARES ARE
REPRESENTED IN VOTING ON THIS MATTER, PLEASE COMPLETE, DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING. If you do attend, you may, if you wish,
revoke your proxy and vote your shares in person.
Sincerely,
Jerry M. Walker
President
<PAGE> 4
UNISON HEALTHCARE CORPORATION
7272 EAST INDIAN SCHOOL ROAD, SUITE 214
SCOTTSDALE, ARIZONA 85251
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
You are invited to attend a Special Meeting of Stockholders (the "Unison
Special Meeting") of Unison HealthCare Corporation, a Delaware corporation
("Unison"), to be held on , 1996 at 10:00 a.m. (local time) at The
Marriott Suites Hotel, 7325 East Third Avenue, Scottsdale, Arizona 85251.
The purpose of the Unison Special Meeting is to consider and vote upon:
(1) A proposal to approve and adopt an overall transaction including
the Agreement and Plan of Merger dated as of August 2, 1996 (the "Signature
Health Care Merger Agreement") and four separate merger agreements (the
"Signature Affiliate Merger Agreements," and together with the Signature
Health Care Merger Agreement, the "Signature Merger Agreement") among
Unison, Signature Health Care Corporation, a Delaware corporation
("Signature Health Care"), David A. Kremser, John D. Filkoski and, with
respect to their separate agreements, Arkansas, Inc., Cornerstone Care,
Inc., Douglas Manor, Inc. and Safford Care, Inc. (each of which are
affiliates of Signature Health Care), and the proposed acquisition by
Unison of RehabWest, Inc. Pursuant to the Signature Health Care Merger
Agreement, (i) a Delaware corporation to be formed as a wholly-owned
subsidiary of Unison ("Newco") will be merged with and into Signature (the
"Signature Health Care Merger"), (ii) Signature Health Care will continue
as the surviving corporation and a wholly-owned subsidiary of Unison, and
the separate existence of Newco will cease, and (iii) the issued and
outstanding shares of the capital stock of Signature Health Care (the
"Signature Health Care Shares") outstanding at the effective time of the
Signature Health Care Merger will be converted into the right to receive
(a) cash equal to approximately $10,200,000 minus the amount paid to redeem
outstanding stock options and (b) 1,509,434 shares of Unison Common Stock
(subject to adjustment if the Average Daily Price of Unison Common Stock is
less than $11.25 per share or greater than $15.25 per share), all as more
fully described in the accompanying Proxy Statement Supplement and
Prospectus/Proxy and Information Statement. Pursuant to the Signature
Affiliate Merger Agreements, each Signature Affiliate will merge with a
wholly-owned subsidiary of Unison to be formed for effecting such mergers.
In each of these four mergers (collectively, the "Signature Affiliate
Mergers" and together with the Signature Health Care Merger, the "Signature
Mergers"), the shares of the Signature Affiliates will be converted into
the right to receive cash, subject to certain adjustments, aggregating
approximately $28,000,000, all as more fully described in the accompanying
Proxy Statement Supplement and Prospectus/Proxy and Information Statement.
These transactions are all conditioned upon Unison entering into a
definitive agreement to acquire the assets and business of RehabWest, Inc.,
for an aggregate purchase price of approximately $5,500,000 and subject to
other terms that are satisfactory to Unison and to Messrs. Kremser and
Filkoski;
(2) A proposal to amend Unison's Certificate of Incorporation to
increase the number of authorized shares of Unison's $.001 par value common
stock ("Unison Common Stock") from 10,000,000 to 25,000,000 (the
"Certificate Amendment");
(3) A proposal: (i) to amend Unison's 1995 Stock Option Plan to
increase the number of shares of Unison Common Stock authorized for
issuance thereunder from 511,046 to 800,000; and (ii) to increase formula
grants to nonemployee directors from 6,246 shares on the first election to
the Board of Directors and or each fifth anniversary thereafter to 15,000
shares (17,500 shares in the case of the Chairman of the Board) for 1996
and at each annual meeting hereafter (provided the recipient remains a
nonemployee director) (the "Option Plan Amendment"); and
(4) Such other matters relating to the foregoing as may be properly
brought before the meeting or any adjournment or postponement thereof.
Unison's Board of Directors has approved the Signature Merger Agreements,
the Certificate Amendment and the Option Plan Amendment as being in the best
interests of Unison and its stockholders. The Board unanimously recommends that
you vote for approval of the Signature Merger Agreements, for the Certificate
Amendment and the Option Plan Amendment.
<PAGE> 5
The Board of Directors has fixed the close of business on ,
1996 as the record date for determining the stockholders entitled to notice of
and to vote at the Unison Special Meeting and any adjournment thereof. Only
stockholders of record at the close of business on that date will be entitled to
notice and to vote.
A proxy, which is solicited on behalf of the Board of Directors, is
enclosed, together with a return envelope which requires no postage if mailed in
the United States. The minimum affirmative vote required to approve and adopt
the Signature Merger Agreements and the Option Plan Amendment will each be a
majority of the total votes cast on the proposal in person or by proxy. The
affirmative vote of a majority of the outstanding shares of Unison is required
to approve the Certificate Amendment. It is important that your shares be
represented at the Unison Special Meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE
UNISON SPECIAL MEETING, YOU ARE REQUESTED TO INDICATE YOUR VOTING DIRECTIONS,
SIGN, DATE AND PROMPTLY RETURN YOUR PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
IF YOU LATER DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE THE
VOTING BY GIVING WRITTEN NOTICE OF REVOCATION TO THE CORPORATE SECRETARY, BY
SUBMITTING A LATER DATED PROXY TO THE CORPORATE SECRETARY OR BY GIVING ORAL
NOTICE TO THE PRESIDING OFFICER DURING THE SPECIAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Jerry M. Walker,
President
Scottsdale, Arizona
, 1996
THE ACCOMPANYING DOCUMENTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF THE PROPOSED TRANSACTIONS DESCRIBED THEREIN OR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 6
PROXY STATEMENT SUPPLEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS OF UNISON HEALTHCARE CORPORATION
TO BE HELD ON , 1996
This Proxy Statement Supplement is being furnished to the stockholders of
Unison HealthCare Corporation, a Delaware corporation ("Unison"), in connection
with the Special Meeting of Stockholders of Unison to be held on ,
1996, including any adjournment or postponement thereof (the "Unison Special
Meeting"). At the Unison Special Meeting, the stockholders of Unison will be
asked to take action with respect to three matters: (1) to approve and adopt an
overall transaction comprised of five related Agreements and Plans of Merger
dated as of August 2, 1996, as each may be amended from time to time (the
"Signature Merger Agreements"), among, in each case, Unison and one of the
following entities: Signature Health Care Corporation ("Signature Health Care");
Arkansas, Inc. ("Arkansas"); Cornerstone Care, Inc. ("Cornerstone"); Douglas
Manor, Inc. ("Douglas"); Safford Care, Inc. ("Safford" and collectively with
Signature Health Care, Arkansas, Cornerstone and Douglas, "Signature"), each of
which is also conditioned upon the acquisition of RehabWest, Inc. ("RehabWest")
by Unison; (2) to amend Unison's Certificate of Incorporation, as previously
amended, to increase the number of authorized shares of $.001 par value common
stock (the "Unison Common Stock") from 10,000,000 to 25,000,000 (the
"Certificate Amendment"); and (3) to amend Unison's 1995 Stock Option Plan (the
"Option Plan"): (i) to increase the number of shares of Unison Common Stock
authorized for issuance thereunder from 511,046 to 800,000; and (ii) to increase
the number of shares under formula grants to nonemployee directors from 6,246
shares on first election to the Board of Directors and on each fifth anniversary
thereafter to 15,000 shares for 1996 and at each annual meeting (provided the
recipient remains a nonemployee director) (the "Option Plan Amendment").
The Agreement and Plan of Merger dated as of August 2, 1996 among Unison,
Signature Health Care, David A. Kremser and John D. Filkoski, the controlling
shareholders of Signature Health Care (the "Signature Health Care Merger
Agreement"), provides that a Delaware corporation be formed as a wholly-owned
subsidiary of Unison ("Newco") and merged with and into Signature Health Care
(the "Signature Health Care Merger") with Signature Health Care being the
surviving corporation and a wholly-owned subsidiary of Unison. The separate
existence of Newco will cease upon the Signature Health Care Merger, and the
issued and outstanding shares of the capital stock of Signature Health Care (the
"Signature Health Care Shares") outstanding at the effective time of the
Signature Health Care Merger will be converted into the right to receive (a)
cash equal to approximately $10,200,000 minus the amount paid to redeem
Signature Health Care's outstanding stock options and (b) 1,509,434 shares of
Unison Common Stock (subject to adjustment if the Average Daily Price of Unison
Common Stock is less than $11.25 per share or greater than $15.25 per share),
all as more fully described herein and in the Prospectus/Proxy and Information
Statement.
The four Agreements and Plans of Merger between Arkansas, Cornerstone,
Douglas and Safford (each of which are affiliates of Signature Health Care),
and, in each case, a wholly-owned subsidiary of Unison to be formed for
effecting such mergers (collectively, the "Signature Affiliate Mergers," and
together with the Signature Health Care Merger, the "Signature Mergers") provide
that the shares of the Signature Health Care affiliates will be converted into
the right to receive cash and promissory notes, subject to certain adjustments,
equal to approximately $28,000,000 in the aggregate, all as more fully described
herein and in the Prospectus/Proxy and Information Statement.
The Signature Mergers are conditioned upon, among other things, Unison
entering into a definitive agreement to acquire the assets and business of
RehabWest for an aggregate purchase price of approximately $5,500,000 and
subject to other terms and conditions satisfactory to Unison and to Messrs.
Kremser and Filkoski.
The Board of Directors of Unison is also seeking the approval of the
stockholders of Unison to amend Unison's Certificate of Incorporation to
increase the authorized number of shares of Unison Common Stock. Management
anticipates that additional public or private sales of Common Stock may occur
within the next twelve months to finance further acquisitions and internal
growth in accordance with Unison's business plan.
The Board of Directors is additionally seeking the approval of the
stockholders of Unison to amend the Option Plan: (i) to increase the number of
shares of Unison Common Stock authorized for issuance under the Option Plan from
511,046 to 800,000; and (ii) to increase the number of shares under formula
grants to nonemployee directors from 6,246 shares on their first election to the
Board of Directors and on each fifth anniversary thereafter to 15,000 shares
(17,500 shares for the chairman) at each annual meeting (provided the recipient
remains a nonemployee director), including an initial award for 1996 of 15,000
shares (17,500 shares for the Board Chairman) on September 6, 1996. The Option
Plan Amendment is necessary to make grants approved by the Board on September 6,
1996 and to provide additional shares under the Option Plan to attract and
retain the services of individuals important to Unison's success and to increase
the
<PAGE> 7
level of formula grants as part of an overall plan to reward nonemployee
directors for their contributions to Unison at a level comparable to
compensation for nonemployee directors of peer companies.
The information contained in this Proxy Statement Supplement concerning
Unison has been supplied by Unison, and the information concerning Signature has
been supplied by Signature. This Proxy Statement Supplement should be used only
in conjunction with the related Prospectus/Proxy and Information Statement dated
, 1996.
This Proxy Statement Supplement, the Prospectus/Proxy and Information
Statement and the form of proxy which is enclosed (see Annex F) are being mailed
to stockholders of Unison commencing on or about , 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT SUPPLEMENT AND THE RELATED
PROSPECTUS/PROXY AND INFORMATION STATEMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY UNISON OR SIGNATURE OR THEIR RESPECTIVE AFFILIATES. THE DELIVERY OF THIS
PROXY STATEMENT SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY AND INFORMATION
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
PURCHASE THE SECURITIES OFFERED HEREBY WITHIN ANY JURISDICTION TO ANY PERSON TO
WHOM SUCH OFFER OR SOLICITATION OF AN OFFER WOULD BE UNLAWFUL.
<PAGE> 8
TABLE OF CONTENTS
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INTRODUCTION.......................................................................... 4
SUMMARY............................................................................... 5
The Companies....................................................................... 5
Time, Place and Date of the Unison Special Meeting.................................. 5
Record Date; Voting Rights.......................................................... 5
Purposes of Unison Special Meeting, Vote Required and Quorum........................ 5
The Signature Merger Agreements and the Acquisition of RehabWest.................... 6
No Dissenters' Rights............................................................... 7
Opinion of Cruttenden Roth Incorporated............................................. 7
Recommendation of Unison's Board of Directors....................................... 7
Certain Conditions to the Signature Mergers; Termination and Amendment.............. 7
Regulatory Approvals................................................................ 8
Certain Effects of the Signature Mergers............................................ 8
Effective Time of the Signature Mergers............................................. 8
Interests of Certain Persons in the Signature Mergers; Conflicts of Interest........ 9
Certain Federal Income Tax Consequences............................................. 9
Anticipated Accounting Treatment.................................................... 9
Resale of Unison Shares Issued in the Signature Health Care Merger.................. 9
Market Price Data and Dividends..................................................... 9
Other Acquisitions.................................................................. 10
The Certificate Amendment........................................................... 10
The Option Plan Amendment........................................................... 10
Summary Historical and Pro Forma Combined Financial Data............................ 11
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS........................... 13
THE SIGNATURE MERGERS................................................................. 23
Background.......................................................................... 23
Opinion of Cruttenden Roth Incorporated............................................. 24
Reasons for the Signature Mergers; Recommendation of Unison's Board of Directors.... 28
Interests of Certain Persons in the Signature Mergers............................... 28
Certain Effects of the Signature Mergers............................................ 28
Anticipated Accounting Treatment.................................................... 28
Certain Federal Income Tax Consequences............................................. 29
THE SIGNATURE MERGER AGREEMENTS....................................................... 29
General; Effective Time............................................................. 30
Required Vote....................................................................... 30
Exchange of Signature Shares........................................................ 31
Conditions of the Signature Mergers................................................. 31
Representations and Warranties...................................................... 31
Covenants........................................................................... 32
No Solicitation..................................................................... 32
Amendment........................................................................... 32
Expenses............................................................................ 32
Indemnification..................................................................... 32
Termination......................................................................... 32
Termination Fees; Specific Performance.............................................. 33
DESCRIPTION OF SIGNATURE.............................................................. 34
Facilities.......................................................................... 34
Stock Ownership, Dividends and Related Stockholder Matters.......................... 35
Management of Signature............................................................. 36
SELECTED CONSOLIDATED FINANCIAL DATA OF SIGNATURE..................................... 36
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2
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SIGNATURE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 37
General............................................................................. 37
Results of Operations............................................................... 37
Liquidity and Capital Resources..................................................... 39
COMPARISON OF HISTORICAL AND EQUIVALENT PER SHARE DATA (UNAUDITED).................... 40
THE CERTIFICATE AMENDMENT............................................................. 41
THE OPTION PLAN AMENDMENT............................................................. 43
INDEPENDENT AUDITORS.................................................................. 48
OTHER MATTERS......................................................................... 48
STOCKHOLDER PROPOSALS................................................................. 48
</TABLE>
------------------------
AVAILABLE INFORMATION
Unison is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities Exchange Commission (the "Commission"). Unison Common Stock
is listed on the Nasdaq National Market under the symbol UNHC. Reports, proxy
statements and other information filed by Unison can be inspected at the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 10006 and can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Midwest Regional Office, Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, and the address of the Commission's site is:
http//www.sec.gov.
Unison has filed with the Commission a Registration Statement on Form S-4
(together with any amendments, schedules and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the shares of Unison Common
Stock to be issued in the Ampro Merger. The Prospectus/Proxy and Information
Statement, as supplemented, does not contain all of the information contained in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. The Registration Statement is
available for inspection and copying as set forth above. Statements contained in
the Prospectus/Proxy and Information Statement, as supplemented, or in any
document incorporated by reference into the Prospectus/Proxy and Information
Statement, as supplemented, as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
THIS PROXY STATEMENT SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY AND INFORMATION
STATEMENT INCORPORATE DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM CRAIG R.
CLARK, CHIEF FINANCIAL OFFICER, UNISON HEALTHCARE CORPORATION, 7272 EAST INDIAN
SCHOOL ROAD, SUITE 214, SCOTTSDALE, ARIZONA 85251 (TELEPHONE 602-423-1954). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY
, 1996. SUCH DOCUMENTS WILL BE PROVIDED WITHOUT CHARGE TO ANY
BENEFICIAL OWNER MAKING SUCH A REQUEST. SEE "THE SIGNATURE MERGER AGREEMENTS."
3
<PAGE> 10
INTRODUCTION
This Proxy Statement Supplement is being furnished to the stockholders of
Unison in connection with a special meeting of stockholders of Unison to be held
at The Marriott Suites Hotel, 7325 East Third Avenue, Scottsdale, Arizona 85251
on , 1996, or any adjournment thereof (the "Unison Special
Meeting"). The purposes of the Unison Special Meeting are (1) to obtain
stockholder approval of an overall transaction involving five mutually
contingent Agreements and Plans of Merger (the "Signature Merger Agreements")
among, in each case, Unison, David A. Kremser, John D. Filkoski, and one of the
five Signature entities (Signature Health Care, Arkansas, Cornerstone, Douglas
and Safford, collectively, the "Signature Entities") as well as the acquisition
of RehabWest, (2) to obtain stockholder approval of an amendment to Unison's
Certificate of Incorporation (the "Certificate Amendment") to increase the
number of authorized shares of Unison Common Stock from 10,000,000 to 25,000,000
and (3) to obtain stockholder approval of an amendment to Unison's 1995 Stock
Option Plan (the "Option Plan") to increase the number of shares of Unison
Common Stock authorized for issuance under the Option Plan from 511,046 to
800,000 and to increase formula grants to nonemployee directors to 15,000 shares
annually (the "Option Plan Amendment").
Each of the Signature Merger Agreements provides that, subject to the
approval of the agreement at a special meeting of stockholders of Unison and
subject to satisfaction of the other conditions contained in such agreement
(including regulatory approvals), a wholly-owned subsidiary of Unison to be
formed will be merged with and into the respective Signature entity with such
Signature entity being the surviving corporation. The outstanding shares of
capital stock of each Signature entity will be converted into, in the case of
Signature Health Care, the right to receive 1,509,434 shares (subject to
adjustment if the Average Daily Price is less than $11.25 or greater than
$15.25) of $.001 par value common stock of Unison ("Unison Common Stock") and
cash equal to approximately $10,200,000, and, in the case of the other Signature
Entities, cash and promissory notes aggregating approximately $28,000,000. See
"The Signature Merger Agreements -- General; Effective Time."
The Board of Directors of Unison has fixed the close of business on
, 1996 as the record date (the "Unison Record Date") for determining
the stockholders of Unison entitled to notice of and to vote at the Unison
Special Meeting and any adjournment thereof. Only stockholders of record at the
close of business on the Unison Record Date will be entitled to notice and to
vote. At such date, there were 3,989,815 shares of Unison Common Stock
outstanding. The minimum affirmative vote required to approve and adopt the
Signature Merger Agreements and the Option Plan Amendment will be a majority of
the total votes cast on the proposal in person or by proxy. Abstentions and
broker nonvotes will not be counted as votes "cast" and so will have no impact
on the vote regarding the Signature Merger Agreements. The affirmative vote of a
majority of the outstanding shares of Unison Common Stock is required to approve
the Certificate Amendment. Abstentions and broker nonvotes are not affirmative
votes and so have the same effect as a "no" vote regarding the Certificate
Amendment and the Option Plan Amendment.
The Board of Directors does not intend to present any other matter before
the Unison Special Meeting.
The information contained in this Proxy Statement Supplement and in the
Prospectus/Proxy and Information Statement concerning Unison and Signature has
been supplied by each of them, respectively.
4
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement Supplement. This summary does not purport to be complete
and is qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement Supplement, the Prospectus/Proxy and
Information Statement and the annexes hereto. Capitalized terms used but not
defined in this Summary shall have the meanings given to them elsewhere in this
Proxy Statement Supplement. Stockholders are urged to read this Proxy Statement
Supplement, the Prospectus/Proxy and Information Statement and the annexes in
their entirety.
THE COMPANIES
Unison, which has its principal executive offices at 7272 East Indian
School Road, Suite 214, Scottsdale, Arizona 85251 (telephone 602-423-1954), is a
Delaware corporation that provides long-term and specialty health care services
and ancillary services, including pharmacy and physical, occupational and speech
therapy services. As of August 31, 1996, Unison operated 45 skilled nursing
facilities, of which 40 are leased and five are managed, operated two pharmacy
outlets serving 25 Unison-operated facilities and 32 non-affiliated facilities
in four states, operated six assisted and independent living facilities and
provided therapy services to 15 Unison operated facilities and 41 non-affiliated
entities, including seven hospitals, seven outpatient clinics and sports
medicine centers and 16 long-term care facilities in six states. Unison will
form five wholly-owned subsidiaries in order to effectuate each of the Signature
Mergers. Each of those new subsidiaries will have the same address and telephone
number as Unison, and each will be incorporated in either Delaware or Colorado.
Signature has principal executive offices for each of the Signature
entities at 225 East 16th Avenue, Suite 670, Denver, Colorado 80203 (telephone
303-830-1845). Signature Health Care is a Delaware corporation, and Arkansas,
Cornerstone, Douglas, Safford and RehabWest are Colorado corporations. Signature
is a C corporation, and Arkansas, Cornerstone, Douglas, Safford and RehabWest
are each organized as S corporations, which elections shall terminate upon the
effective time of the respective mergers and the acquisition of RehabWest.
RehabWest is owned by its employees, and its principal creditors are the chief
executive officer and chief financial officer of Signature Health Care. See
"-- The Signature Merger Agreements and the Acquisition of RehabWest."
Collectively, Signature and the subsidiaries operate 11 skilled nursing
facilities and two assisted living facilities in Colorado and Arizona. Five of
the skilled nursing facilities and both of the assisted living facilities are
leased. Signature also operates a Medicare Part B Billing business, all revenues
of which are attributable to Signature's skilled nursing facilities.
Upon completion of the Signature Mergers, and assuming that no additional
facilities are added to the portfolios of either Unison or Signature prior to
the Signature Mergers, Unison and Signature will operate 56 long-term care
facilities and eight assisted and independent living facilities in 13 states.
TIME, PLACE AND DATE OF THE UNISON SPECIAL MEETING
The Unison Special Meeting will be held at 10:00 a.m. (local time) on
, 1996 at The Marriott Suites Hotel, 7325 East Third
Avenue, Scottsdale, Arizona 85251.
RECORD DATE; VOTING RIGHTS
The close of business on , 1996 has been fixed as the
Unison Record Date for the determination of those stockholders entitled to
notice of and to vote at the Unison Special Meeting. On such date, there were
3,989,815 shares of Unison Common Stock outstanding, each of which is entitled
to one vote. As of the Unison Record Date, there were approximately
record holders of Unison Common Stock. Unison has no other classes of equity
securities outstanding.
PURPOSES OF UNISON SPECIAL MEETING, VOTE REQUIRED AND QUORUM
At the Unison Special Meeting, holders of shares of Unison Common Stock
will be asked to consider and vote upon a proposal to approve and adopt an
overall transaction involving the acquisition of RehabWest and
5
<PAGE> 12
five mutually contingent Agreements and Plans of Merger between, in each case,
Unison, David A. Kremser, John D. Filkoski and one of the Signature entities
(Signature Health Care, Arkansas, Cornerstone, Douglas and Safford) (the
"Signature Merger Agreements"). Holders of a majority of the Unison Common
Stock, represented in person or by proxy, will constitute a quorum. The minimum
affirmative vote required to approve and adopt the Signature Merger Agreements
will be a majority of the total votes cast on the proposal in person or by
proxy. Abstentions and broker nonvotes will not be counted as votes "cast" and
so will have no impact on the vote regarding the Signature Merger Agreements.
See "The Signature Merger Agreements -- Required Vote."
Unison and its subsidiaries currently own no shares of any of the Signature
entities, and they do not expect to own any prior to the Signature Mergers.
Neither Mr. Kremser nor Mr. Filkoski own any shares of Unison Common Stock. Mr.
Kremser and Mr. Filkoski and other members of their families own all of the
issued and outstanding shares of all Signature entities. As of the Unison Record
Date, directors and executive officers of Unison beneficially owned 1,551,550
shares (38.0% of all outstanding shares) of Unison Common Stock, and all of them
have indicated that they will vote in favor of the Signature Mergers, the
Certificate Amendment and the Option Plan Amendment. See "The Signature
Mergers -- Interests of Certain Persons in the Signature Mergers," "Description
of Signature -- Stock Ownership of Management and Principal Stockholders" herein
and "Principal Stockholders" in the Prospectus/Proxy and Information Statement.
Holders of shares of Unison Common Stock will also be asked to consider and
vote upon a proposal to approve and adopt an amendment to Unison's Certificate
of Incorporation (the "Certificate Amendment") to increase the number of
authorized shares of Unison Common Stock from 10,000,000 to 25,000,000. This
increase is not necessary to complete the Signature Mergers. Rather, the Board
of Directors of Unison believes that the proposed increase will facilitate the
future growth of Unison. Under the Delaware General Corporation Law ("DGCL") and
Unison's Certificate of Incorporation, as amended, the affirmative vote of the
holders of a majority of the outstanding shares of Unison Common Stock on the
Unison Record Date will be required to approve and adopt the Certificate
Amendment. Abstentions and broker nonvotes are not affirmative votes and so have
the same effect as a "no" vote regarding the Certificate Amendment. See "The
Certificate Amendment."
Holders of shares of Unison Common Stock will also be asked to consider and
vote upon a proposal to approve and adopt an amendment to Unison's 1995 Stock
Option Plan (the "Option Plan"): (i) to increase the total number of shares
authorized for issuance under the Option Plan from 511,046 to 800,000; and (ii)
to change the formula grants of options to nonemployee directors from 6,246
shares upon election to the Board and on each fifth anniversary thereafter to
15,000 shares beginning with September 1996 and at each annual meeting
thereafter (the "Option Plan Amendment"). The minimum affirmative vote required
to approve and adopt the Option Plan Amendment will be a majority of the total
votes cast on the proposal in person or by proxy.
A Stockholder may revoke a proxy at any time before voting by giving
written notice to Unison's corporate Secretary, by submitting a later dated
proxy to Unison's corporate Secretary or by giving oral notice to the presiding
officer during the Unison Special Meeting.
THE SIGNATURE MERGER AGREEMENTS AND THE ACQUISITION OF REHABWEST
Unison, Mr. Kremser, Mr. Filkoski and the Signature entities have entered
into a series of Agreements and Plans of Merger. A copy of the Signature Health
Care Merger Agreement is attached hereto as Annex A and the form of agreement
for each of the Signature Affiliate Mergers is attached hereto as Annex B.
Generally, each of the Signature Merger Agreements provides that, subject to the
satisfaction or waiver of certain conditions to such Signature Merger, a newly
formed wholly-owned subsidiary of Unison will be merged with and into the
Signature entity and such Signature entity will be the surviving corporation,
then as a wholly-owned subsidiary of Unison. The S elections of Arkansas,
Cornerstone, Douglas, Safford and RehabWest will terminate upon the respective
mergers and the acquisition of RehabWest.
Except as provided in the next sentence, at the effective time of the
Signature Health Care Merger, the outstanding shares of Signature Health Care
(other than shares owned by Unison, the wholly-owned
6
<PAGE> 13
subsidiary of Unison formed to effectuate the merger, any other direct or
indirect wholly-owned subsidiary of Unison, any direct or indirect wholly-owned
subsidiary of Signature Health Care or held in the treasury of Signature Health
Care) will be converted into the right to receive, in the aggregate, 1,509,434
shares of Unison Common Stock and, subject to certain adjustments, $10,200,000
minus the amount paid to redeem Signature Health Care's outstanding stock
options. Notwithstanding the foregoing, the number of shares of Unison Common
Stock issued in the Signature Health Care Merger will be increased if the
Average Daily Price (as defined below) is less than $11.25 per share and will be
decreased if the Average Daily Price is greater than $15.25 so that the overall
product of the Average Daily Price times the total number of shares issued is
fixed at those points. "Average Daily Price" means the average daily closing
price for Unison Common Stock during the thirty day period ending five days
prior to the last trading day prior to the closing date of the Signature Health
Care Merger. Fractional shares of Unison Common Stock will not be issued;
instead, any fraction of a share will be rounded up to the nearest whole share.
At the effective time of each of the other Signature Mergers, the
outstanding shares of the applicable Signature entity (other than shares owned
by Unison, the wholly-owned subsidiary of Unison formed to effectuate the
merger, any other direct or indirect wholly-owned subsidiary of Unison, any
direct or indirect wholly-owned subsidiary of such Signature entity or held in
the treasury of such Signature entity) will be converted into the right to
receive cash equal to, in the aggregate and subject to certain adjustments,
$27,500,000 and Unison promissory notes totalling $500,000. The promissory notes
will be deposited into escrow to secure certain obligations of the warranting
shareholders of the Signature entity.
If the Signature Merger Agreements are approved, the shares of Unison
Common Stock issued in the Signature Health Care Merger will represent
approximately 27.4% of the outstanding Unison Common Stock (approximately 25.0%
of the outstanding Unison Common Stock if Unison completes its acquisition of
American Professional Holding, Inc. and Memphis Clinical Laboratory, Inc.) and
assuming no exercise of options or warrants or conversion of securities
convertible into shares of Unison Common Stock. See "The Signature Merger
Agreements -- General; Effective Time," Annex A to this Prospectus/Proxy
Statement Supplement and "Recent and Pending Unison Acquisitions and Other
Commitments" in the Prospectus/Proxy and Information Statement.
It is a condition to the Signature Merger Agreements that Unison enter
into, prior to the closing date for the Signature Mergers, a definitive purchase
agreement with the shareholders of RehabWest, Inc. ("RehabWest"), a provider of
rehabilitative physical, speech and occupational therapy services to health care
facilities and their patients, for the purchase of RehabWest or its business for
approximately $5,500,000 and subject to other terms that are satisfactory to
Unison and to the owners and creditors of RehabWest. The principal creditors of
RehabWest are David Kremser and John Filkoski, who sold RehabWest to its
employees in March 1996. As of June 30, 1996, RehabWest provided therapy
services to 11 skilled nursing facilities, all of which are owned by Signature
and its affiliates.
NO DISSENTERS' RIGHTS
Holders of shares of Unison Common Stock will not have dissenters' rights
under the DGCL with respect to the Signature Mergers or with respect to the
Certificate Amendment. Shareholders of Signature are entitled to dissenters'
rights under Delaware or Colorado law. However, Mr. Kremser and Mr. Filkoski,
who are the only shareholders of Signature Health Care, and who together with
members of their respective families are the only shareholders of the Signature
affiliates, have indicated that they will approve the Signature Mergers and so
will not be entitled to dissent from the Signature Mergers and require appraisal
of their shares.
OPINION OF CRUTTENDEN ROTH INCORPORATED
Unison has retained Cruttenden Roth Incorporated ("Cruttenden Roth") to
deliver its opinion, to be addressed to Unison's Board of Directors, as to the
fairness to the stockholders of Unison, from a financial point of view, of the
consideration to be paid by Unison in connection with the Signature Mergers. See
"The Signature Mergers -- Opinion of Cruttenden Roth Incorporated."
7
<PAGE> 14
RECOMMENDATION OF UNISON'S BOARD OF DIRECTORS
Unison's Board of Directors has approved and adopted the Signature Merger
Agreements and the Certificate Amendment. The Board of Directors has concluded
that the Signature Mergers are fair to, and in the best interests of, the
stockholders of Unison and has unanimously recommended a vote for the proposal
to approve and adopt the Signature Merger Agreements. See "The Signature
Mergers -- Reasons for the Signature Mergers, Recommendation of Unison's Board
of Directors." The Board of Directors has also concluded that the Certificate
Amendment is in the best interests of Unison because it maintains Unison's
ability to respond quickly to acquisition opportunities in which the sellers may
wish to receive Unison Common Stock in the transaction. See "The Certificate
Amendment."
CERTAIN CONDITIONS TO THE SIGNATURE MERGERS; TERMINATION AND AMENDMENT
The obligations of Unison, Mr. Kremser and Mr. Filkoski and the respective
Signature entities to consummate the Signature Mergers are subject to a number
of conditions, including (among others): (i) the absence of particular types of
litigation or court orders; (ii) the approval of the Signature Merger Agreements
by the stockholders of Unison by a vote satisfactory to Unison; (iii) Unison
shall have completed a public offering or private placement of subordinated debt
or common stock in an amount and on terms acceptable to Unison (in the case of
Unison's obligations); (iv) Unison shall have entered into a definitive
agreement to acquire the assets and business of RehabWest on specified terms and
conditions; and (v) concurrent completion of all of the Signature Mergers.
In addition to the foregoing, the Signature Merger Agreements may be
terminated by mutual written consent of Unison and Messrs. Kremser and Filkoski
and by either Unison or Messrs. Kremser and Filkoski if the Signature Mergers
shall not have been consummated on or before November 1, 1996. The Signature
Merger Agreements may also be terminated if the Average Daily Price either (i)
exceeds $16.25 or (ii) is less than $10.25. However, if Messrs. Kremser and
Filkoski elect to terminate the Signature Merger Agreements because the Average
Daily Price exceeds $16.25, the Merger Agreements will nevertheless not be
terminated if Unison elects to amend the Signature Health Care Agreement to
provide that the number of shares of Unison Common Stock issued in the Signature
Health Care Merger will be not less than 1,416,546.
The remainder of the Signature Merger Agreements (Arkansas, Cornerstone,
Douglas and Safford) may be terminated by mutual written consent of Unison and
Messrs. Kremser and Filkoski and by either Unison or Messrs. Kremser and
Filkoski if they shall not have been consummated on or before November 1, 1996,
or under certain other circumstances.
The Signature Merger Agreements may be amended by mutual consent of Unison
and Messrs. Kremser and Filkoski at any time prior to the Signature Mergers.
See "The Signature Merger Agreements -- Conditions to the Signature
Mergers," "-- Amendment" and "-- Termination."
REGULATORY APPROVALS
In addition, certain regulatory approvals or reviews are required in
connection with the consummation of the Signature Mergers, including under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). See "The Signature Merger Agreements -- Conditions to the Signature
Mergers."
CERTAIN EFFECTS OF THE SIGNATURE MERGERS
Upon the effectiveness of the Signature Mergers, current shareholders of
Signature will no longer have any continuing interest as shareholders in the
surviving corporations in the Signature Mergers, but will instead become
stockholders in Unison. The S elections of Arkansas, Cornerstone, Douglas and
Safford will terminate with such Mergers. See "The Signature Mergers -- Certain
Effects of the Signature Mergers."
8
<PAGE> 15
EFFECTIVE TIME OF THE SIGNATURE MERGERS
The Signature Mergers will be effective as of the date and time (the
"Signature Effective Time") that, with respect to Signature Health Care, a
Certificate of Merger is filed with the Secretary of State of the State of
Delaware in accordance with the DGCL and, with respect to Arkansas, Cornerstone,
Douglas and Safford, Articles of Merger are filed with the Secretary of State of
the State of Colorado in accordance with the Colorado Business Corporation Act.
If the Signature Mergers are approved by Unison's stockholders at the Unison
Special Meeting, it is currently anticipated that the Signature Mergers will
become effective as soon as practical thereafter (subject to compliance with or
waiver of the other conditions contained in the Signature Merger Agreements).
See "The Signature Merger Agreements -- General; Effective Time" and Annex A and
B to this Proxy Statement Supplement.
INTERESTS OF CERTAIN PERSONS IN THE SIGNATURE MERGERS; CONFLICTS OF INTEREST
In considering the Signature Mergers, stockholders of Unison should be
aware that directors and executive officers of Unison beneficially own an
aggregate of 1,551,550 (38.0%) of the issued and outstanding shares of Unison
Common Stock. An affiliate of a Unison director will receive advisory fees of
$127,000 in connection with the Ampro Merger and the Memphis Merger. Pursuant to
the Signature Merger Agreements, Mr. Kremser will be appointed a director of
Unison. See "The Signature Mergers -- Interests of Certain Persons in the
Signature Mergers" and "Risk Factors -- Conflicts of Interest Arising from
Benefits to Affiliates of the Company" in the Prospectus/Proxy and Information
Statement. Unison's Board of Directors was aware of these interests and
considered them among the other matters described under "The Signature
Mergers -- Background" and " -- Reasons for the Signature Mergers;
Recommendation of Unison's Board of Directors."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Signature Health Care Merger is intended to be a tax-free
reorganization so that no gain or loss would be recognized by Unison or
Signature Health Care and no gain or loss would be recognized by shareholders of
either Unison or Signature Health Care. However, no request has been or will be
made for a ruling from the Internal Revenue Service, and no legal opinions are
being provided in respect thereof. Unison has been advised, however, that the
Signature shareholders have received independent advice in this regard. The
other Signature Mergers have not been structured as tax-free reorganizations.
See "Certain Federal Income Tax Consequences."
ANTICIPATED ACCOUNTING TREATMENT
The Signature Mergers will be accounted for as purchases for accounting and
financial reporting purposes. See "The Signature Mergers -- Anticipated
Accounting Treatment."
RESALE OF UNISON SHARES ISSUED IN THE SIGNATURE HEALTH CARE MERGER
The issuance of shares of Unison Common Stock in the Signature Health Care
Merger has not been registered under the Securities Act of 1933, as amended (the
"Securities Act"). Accordingly, such shares may not be resold, transferred or
otherwise disposed of by the former owners of Signature Health Care without
registration under the Securities Act or an exemption therefrom. At the closing
of the Signature Health Care Merger, Unison and such former owners will enter
into a registration rights agreement providing for registration by Unison, under
certain circumstances, of the shares of Unison Common Stock issued in the
Signature Health Care Merger. See "The Signature Merger
Agreements -- Registration Rights" herein and "Description of Unison Capital
Stock -- Registration Rights" in the Prospectus/Proxy and Information
Statements.
MARKET PRICE DATA AND DIVIDENDS
Unison Common Stock is traded on the Nasdaq National Market under the
symbol UNHC. The following table sets forth, for the fiscal quarter indicated,
the high and low sale prices of Unison Common
9
<PAGE> 16
Stock, as reported on the Nasdaq National Market. There is no established public
trading market for the shares of Signature.
<TABLE>
<CAPTION>
UNISON
-----------------
HIGH LOW
------- -------
<S> <C> <C>
Year Ended December 31, 1995
Fourth Quarter (commencing December 19, 1995).................... $ 9.375 $ 9.000
Year Ending December 31, 1996
First Quarter.................................................... 11.750 8.875
Second Quarter................................................... 15.500 10.250
Third Quarter (through September 17, 1996)....................... 14.750 10.875
</TABLE>
On July 26, 1996, the last trading day prior to the announcement by Unison
of the proposed Signature Mergers, the closing sale price of Unison Common Stock
was $13.00 per share. On September 17, 1996, the closing sale price of Unison
Common Stock was $13.25 per share.
Neither Unison nor Signature Health Care has paid any dividends on their
respective shares of Common Stock, and the other Signature Entities have paid no
dividends other than quarterly S corporation distributions.
OTHER ACQUISITIONS
In August 1995, Unison acquired BritWill Healthcare Company, a long-term
health care company operating 28 facilities in Texas and Indiana. The
transaction was accounted for as a purchase.
On March 28, 1996, Unison entered into a definitive purchase and sale
agreement for the acquisition, effective February 1, 1996, of 90% of the common
stock of four rehabilitation therapy centers (collectively, "Sunbelt") which
provide physical, speech and occupational therapy services to 41 non-affiliated
entities primarily in the southeastern United States. The transaction was
accounted for as a purchase.
On July 3, 1996, Unison and certain Unison subsidiaries entered into merger
agreements with American Professional Holding, Inc. ("Ampro") and Memphis
Clinical Laboratory, Inc. ("Memphis"). Ampro operates medical reference
laboratories and, as of June 30, 1996, provided laboratory services to
approximately 275 health care facilities in Texas and Missouri. Memphis operates
a medical reference laboratory in Memphis, Tennessee. The Ampro merger and the
Memphis merger are mutually contingent transactions and will be accounted for as
a pooling-of-interests.
Effective August 1, 1996, Unison acquired the leasehold rights to two
skilled nursing facilities located in the State of Washington with an aggregate
of 222 beds. These facilities, Enumclaw and Walla Walla, were previously
operated by Unison under management contracts.
Unison has also acquired leasehold rights to several other facilities that
were not material to Unison, including Homestead of McKinney, in McKinney,
Texas, and Valley Vista, in Sandpoint, Idaho.
See "Recent and Pending Unison Acquisitions and Other Commitments" in the
Prospectus/Proxy and Information Statement.
THE CERTIFICATE AMENDMENT
Unison's Board of Directors has declared advisable and directed that there
be submitted to the stockholders of Unison at the Unison Special Meeting a
proposed amendment to Article 4 of Unison's Certificate of Incorporation, as
previously amended, which would effect an increase in the number of authorized
shares of Unison Common Stock from 10,000,000 shares to 25,000,000 shares. The
number of shares of Common Stock issued and outstanding as of the Unison Record
Date was 3,989,815. Additionally, as of the same date, approximately 4,165,139
shares are reserved for issuance in pending transactions or underlie convertible
securities of Unison. The availability of additional shares for issue, without
the delay and expense of obtaining the approval of stockholders at a special
meeting, will afford Unison continued flexibility in acting upon proposed
transactions. Such transactions could include, without limitation, issuance as
part or all of the consideration required to be paid by Unison for acquisitions
of other businesses or properties, issuance in public or private sales for cash
as a means of obtaining capital for use in Unison's business and operations,
10
<PAGE> 17
payment of stock dividends, subdivision of outstanding shares through stock
splits and issuance under employee benefit plans. The proposed Certificate
Amendment could also have certain anti-takeover effects. For example, shares of
Unison Common Stock could be issued by private placement or public offering, or
rights to purchase such shares could be issued to create voting impediments to
or to frustrate persons seeking to effect a takeover or otherwise to gain
control of Unison. See "The Certificate Amendment."
THE OPTION PLAN AMENDMENT
Unison's Board of Directors has declared advisable and directed that there
be submitted to the stockholders of Unison at the Unison Special Meeting a
proposed amendment to Unison's 1995 Stock Option Plan (the "Option Plan") to
increase the number of shares of Unison Common Stock authorized for issuance
under the Option Plan from 511,046 to 800,000 and to increase the number of
shares under formula grants to nonemployee directors from 6,246 on first
election to the Board of Directors and on each fifth anniversary thereafter to
15,000 beginning with September 1996 and at each annual meeting hereafter
(provided the recipient remains a nonemployee director). The increase in the
number of shares authorized for issuance under the Option Plan is necessary to
make grants approved by the Board of Directors on September 6, 1996, to provide
additional shares available under the Option Plan to attract and retain the
services of individuals important to the Company's success and to increase the
number of formula grants as part of an overall plan to reward nonemployee
directors for their contributions to Unison at a level comparable to
compensation for nonemployee directors of peer companies. On September 6, 1996,
the Board of Directors approved grants under the Option Plan for a total of
476,850 shares of Unison Common Stock to 37 directors, executive officers, vice
presidents and other employees of Unison. Of such grants, 416,850 were made
subject to approval by the stockholders of Unison of the Option Plan Amendment.
See "The Option Plan Amendment."
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of Unison and
Signature has been derived from their respective historical financial
statements, and should be read in conjunction with such financial statements and
the notes thereto, some of which are included in or incorporated by reference
into this Proxy Statement Supplement. The selected pro forma financial
information of Unison and Signature is derived from their respective condensed
financial statements. Historical and pro forma information for certain periods
is derived from financial statements not included in or incorporated herein by
reference.
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except share and selected operating data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------------- -------------------------------------------------
HISTORICAL
HISTORICAL PRO FORMA PRO FORMA PRO FORMA -------------------------------------
1996 1996(2) 1995(2) 1995(2) 1995 1994 1993 1992(1)
---------- --------- --------- --------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... $ 64,997 $95,534 $67,693 $157,311 $ 61,285 $12,406 $ 1,956 $ 379
Expenses:
Wages and related..................... 32,447 51,695 41,556 94,172 31,811 7,149 1,455 190
Other operating....................... 21,172 23,639 13,896 35,298 20,777 3,902 545 109
Rent.................................. 6,653 8,262 6,541 14,363 6,565 1,299 99 8
Interest.............................. 1,452 6,638 6,229 12,716 1,058 84 11 5
Depreciation and amortization......... 1,054 2,987 3,068 6,027 1,050 51 7 3
------- ------- ------ ---- -------- ------- ------- -------
Total expenses...................... 62,778 93,221 71,290 162,576 61,261 12,485 2,117 315
Income (loss) before income taxes....... 2,219 2,313 (3,597) (5,265 ) 24 (79) (161) 64
Income taxes (credit)................... 932 925 (1,439) (2,106 ) 50 1 (20) 26
------- ------- ------ ---- -------- ------- ------- -------
Net income (loss)....................... $ 1,287 $ 1,388 $(2,158) $ (3,159 ) $ (26) $ (80) $ (141) $ 38
======= ======= ====== ==== ======== ======= ======= =======
Per share data:
Net income (loss) per share........... $ .31 $ .25 $ (.78) $ (1.11 ) $ (.02) $ (.06) $ (.11) $ .03
Weighted average shares outstanding... 4,132 5,641 2,775 2,858 1,349 1,266 1,266 1,266
</TABLE>
11
<PAGE> 18
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------- -------------------------------------------------
HISTORICAL
HISTORICAL PRO FORMA PRO FORMA PRO FORMA -------------------------------------
1996 1996(2) 1995(2) 1995(2) 1995 1994 1993 1992(1)
---------- --------- --------- --------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA(2):
Leased and Owned Facilities(1):
Number of facilities................ 42 55 26 56 43 11 2 --
Number of licensed beds:
Long-term care.................... 3,787 4,837 1,830 4,922 3,872 631 74 --
Assisted and independent living... 134 262 232 240 112 104 30 --
Managed Facilities(1):
Number of facilities................ 8 8 9 10 10 9 5 4
Number of licensed beds............. 892 892 990 1,096 1,096 990 612 436
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
HISTORICAL PRO FORMA(3)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 847 $ 20,737
Working capital........................................................................... 4,848 41,698
Lease operating rights and other assets................................................... 42,588 84,499
Goodwill.................................................................................. 11,195 39,447
Total assets.............................................................................. 84,743 206,205
Total debt................................................................................ 31,111 128,635
Stockholders' equity...................................................................... 22,886 42,886
</TABLE>
- ---------------
(1) Number of facilities expressed are at end of period. Unison operations
commenced in July 1992.
(2) Gives effect to the BritWill Acquisition and other acquisitions in 1995 and
1996, the Signature Mergers and the sale of $100.0 million of Senior Notes
(See "Recent and Pending Unison Acquisitions and Other Commitments" in the
Prospectus/Proxy and Information Statement) as if such transactions had
occurred on January 1, 1995.
(3) Gives effect to the Signature Mergers and the sale of $100.0 million of
Senior Notes (see "Recent and Pending Unison Acquisitions and Other
Commitments" in the Prospectus/Proxy and Information Statement) as if they
had occurred on June 30, 1996. See the Unaudited Pro Forma Condensed
Combined Financial Statements and Notes thereto.
12
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
are presented assuming that the acquisitions of Signature and RehabWest will be
accounted for as purchases. Accordingly, the Unaudited Pro Forma Condensed
Combined Statements of Operations for the six months ended June 30, 1996 and
1995 and the year ended December 31, 1995 have been prepared as if the
acquisitions of Signature and RehabWest had been consummated as of January 1,
1995. The Unaudited Pro Forma Condensed Combined Balance Sheet has been prepared
as if the business combinations had been consummated as of June 30, 1996.
The Unaudited Pro Forma Condensed Combined Statements of Operations also
include the results of operations of BritWill and Sunbelt for the periods from
January 1, 1995 through the respective dates of acquisition. BritWill was
acquired on August 10, 1995 in a business combination accounted for as a
purchase. Sunbelt was acquired effective February 1, 1996 in a business
combination accounted for as a purchase.
The pro forma information is based on the historical statements of
operations of the acquired businesses giving effect to the placement of the
Senior Notes and the other assumptions and adjustments described in the
accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to present the results of operations of Unison had the business
combinations taken place on the dates specified, nor are they necessarily
indicative of the results of operations that may be achieved in the future. The
Unaudited Pro Forma Condensed Combined Financial Statements should be read in
conjunction with "Unison Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the separate historical financial
statements and notes thereto of Unison, BritWill, Signature and RehabWest,
included elsewhere in the Prospectus/Proxy and Information Statement.
13
<PAGE> 20
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------------------------------------------
PRO
SENIOR PRO FORMA FORMA
UNISON SIGNATURE(A) REHAB WEST NOTES(B) ADJUSTMENTS COMBINED
------- ------------ ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 847 $ -- $ 116 $ 62,974 $ (43,200)(c) $ 20,737
Accounts and notes receivable,
net............................ 22,152 7,761 402 -- 30,315
Other current assets............. 2,413 1,009 16 -- -- 3,438
------- ------- ----- -------- -------- --------
Total current assets...... 25,412 8,770 534 62,974 (43,200) 54,490
Lease operating rights and other
assets, net...................... 42,588 1,692 -- 3,800
1,750 34,669(c) 84,499
Goodwill, net...................... 11,195 1,721 -- -- 26,531(c) 39,447
Property and equipment, net........ 5,548 17,213 8 -- 5,000(c) 27,769
------- ------- ----- -------- -------- --------
Total assets.............. $84,743 $ 29,396 $ 542 $ 68,524 $ 23,000 $206,205
======= ======= ===== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt........................... $ 3,576 $ 312 $ -- $ 7,500
(10,602) $ 500(c) $ 1,286
(7,500)
Other current liabilities........ 16,988 3,223 295 (1,500) -- 11,506
------- ------- ----- -------- -------- --------
Total current
liabilities............. 20,564 3,535 295 (12,102) 500 12,792
Long-term debt..................... 27,535 19,188 -- 100,000
(19,374) -- 127,349
Deferred taxes..................... 9,030 2,921 -- -- 4,000(c) 15,951
Other long-term liabilities........ 4,728 2,499 -- -- -- 7,227
------- ------- ----- -------- -------- --------
Total liabilities......... 61,857 28,143 295 68,524 4,500 163,319
------- ------- ----- -------- -------- --------
Stockholders' equity:
Common stock..................... 3 7 -- -- (6)(d) 4
Additional paid-in capital....... 21,804 62 (472) -- 20,409(e) 41,803
Retained earnings (accumulated
deficit)....................... 1,079 1,184 719 -- (1,903)(f) 1,079
------- ------- ----- -------- -------- --------
Total stockholders'
equity.................. 22,886 1,253 247 -- 18,500 42,886
------- ------- ----- -------- -------- --------
Total liabilities and
stockholders' equity.... $84,743 $ 29,396 $ 542 $ 68,524 $ 23,000 $206,205
======= ======= ===== ======== ======== ========
Common shares outstanding.......... 3,871 1,509(g) 5,380
Book value per common share........ $ 5.91 $ 7.97
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
14
<PAGE> 21
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNISON PRO FORMA UNISON REHAB PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS(H) ADJUSTMENTS PRO FORMA SIGNATURE(L) WEST ADJUSTMENTS COMBINED
---------- --------------- ----------- --------- ------------ ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient...... $ 63,442 $ 5,140 $ -- $68,582 $ 21,984 $2,337 $ -- $92,903
Other............ 1,555 569 (249)(i) 1,875 268 -- 488(m) 2,631
------ ----- ----- ------ ------ ----- ------ ------
Total
revenues..... 64,997 5,709 (249) 70,457 22,252 2,337 488 95,534
Expenses:
Wages and
related........ 32,447 3,336 -- 35,783 14,263 1,649 -- 51,695
Other
operating...... 21,172 2,230 (249)(i) 23,153 4,684 132 (4,330)(n) 23,639
Rent............. 6,653 21 538(i) 7,212 1,044 6 -- 8,262
Interest, net.... 1,452 249 (247)(i)
23(j) 1,477 1,006 3 4,152(o) 6,638
Depreciation and
amortization... 1,054 121 (113)(i)
7(k) 1,069 845 1 125(p)
912(q)
35(r) 2,987
------ ----- ----- ------ ------ ----- ------ ------
Total
expenses..... 62,778 5,957 (41) 68,694 21,842 1,791 894 93,221
------ ----- ----- ------ ------ ----- ------ ------
Income (loss)
before income
taxes............ 2,219 (248) (208) 1,763 410 546 (406) 2,313
Income tax expense
(benefit)........ 932 -- (227) 705 (383) -- 603 925
------ ----- ----- ------ ------ ----- ------ ------
Net income
(loss)........... $ 1,287 $ (248) $ 19 $ 1,058 $ 793 $ 546 $(1,009) $ 1,388
====== ===== ===== ====== ====== ===== ====== ======
Net income per
share:
Primary.......... $ 0.32 $ 0.26 $ 0.25
Fully diluted.... 0.31 0.26 0.25
Weighed average
shares used in
per share
calculation:
Primary.......... 4,070 4,070 1,509(g) 5,579
Fully diluted.... 4,132 4,132 1,509(g) 5,641
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
15
<PAGE> 22
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER PRO FORMA UNISON REHAB PRO FORMA PRO FORMA
UNISON BRITWILL ACQUISITIONS(H) ADJUSTMENTS PRO FORMA SIGNATURE(L) WEST ADJUSTMENTS COMBINED
------- ------- -------------- ----------- --------- ------------ ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net
patient... $12,415 $32,723 $7,591 $ -- $52,729 $ 11,880 $1,465 $ -- $66,074
Other...... 1,029 269 22 (249)(i) 1,071 60 -- 488(m) 1,619
------- ------- ------ ----- ------- ------- ------ ------- -------
Total
revenues... 13,444 32,992 7,613 (249) 53,800 11,940 1,465 488 67,693
Expenses:
Wages and
related... 7,486 19,813 5,164 -- 32,463 7,931 1,162 -- 41,556
Other
operating... 4,587 7,422 2,302 (249)(i)
(750)(s) 13,312 2,129 229 (1,774)(n) 13,896
Rent....... 1,151 4,448 75 538(i)
94(t) 6,306 230 5 -- 6,541
Interest,
net...... 183 603 289 (338)(i)
140(j)
247(u) 1,124 947 6 4,152(o) 6,229
Depreciation
and
amortization... 88 500 127 (183)(i)
43(k)
589(v) 1,164 827 5 125(p)
912(q)
35(r) 3,068
------- ------- ------ ----- ------- ------- ------ ------- -------
Total
expenses... 13,495 32,786 7,957 131 54,369 12,064 1,407 3,450 71,290
------- ------- ------ ----- ------- ------- ------ ------- -------
Income (loss)
before
income
taxes...... (51) 206 (344) (380) (569) (124) 58 (2,962) (3,597)
Income tax
expense
(benefit)... 1 26 -- (254) (228) (41) -- (1,170) (1,439)
------- ------- ------ ----- ------- ------- ------ ------- -------
--
Net income
(loss)..... $ (52) $ 180 $ (344) $(126) $ (341) $ (83) $ 58 $(1,792) $(2,158)
======= ======= ====== ===== ======= ======= ====== ======= =======
Net loss per
share...... $ (0.04) $ (0.27) $ (0.78)
Weighed
average
shares used
in per
share
calculation... 1,266 1,266 1,509(g) 2,775
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
16
<PAGE> 23
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER PRO FORMA UNISON REHAB PRO FORMA PRO FORMA
UNISON BRITWILL ACQUISITIONS(H) ADJUSTMENTS PRO FORMA SIGNATURE(L) WEST ADJUSTMENTS COMBINED
------- ------- --------------- ----------- ---------- ------------ ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net
patient... $57,743 $38,378 $20,190 $ -- $116,311 $ 32,769 $3,382 $ -- $152,462
Other....... 3,542 476 73 (499)(i) 3,592 281 -- 976(m) 4,849
------ ------ ------ ---- ------- ----- ----- -------
Total
revenues... 61,285 38,854 20,263 (499) 119,903 33,050 3,382 976 157,311
Expenses:
Wages and
related... 31,811 23,280 14,427 -- 69,518 22,006 2,648 -- 94,172
Other
operating... 20,777 8,923 4,857 (499)(i)
(875)(s) 33,183 5,761 524 (4,170)(n) 35,298
Rent........ 6,565 5,223 364 1,076(i)
(110)(t) 13,118 1,235 10 -- 14,363
Interest,
net....... 1,058 793 693 (675)(i)
280(j)
288(u) 2,437 1,967 9 8,303(o) 12,716
Depreciation
and
amortization... 1,050 592 434 (366)(i)
86(k)
687(v) 2,483 1,550 6 250(p)
1,668(q)
70(r) 6,027
------ ------ ------ ---- ------- ----- ----- -------
Total
expenses... 61,261 38,811 20,775 (108) 120,739 32,519 3,197 6,121 162,576
------ ------ ------ ---- ------- ----- ----- -------
Income (loss)
before
income
taxes....... 24 43 (512) (391) (836) 531 185 (5,145) (5,265)
Income tax
expense
(benefit)... 50 30 -- (414) (334) (67) -- (1,705) (2,106)
------ ------ ------ ---- ------- ----- ----- -------
Net income
(loss)...... $ (26) $ 13 $ (512) $ 23 $ (502) $ 598 $ 185 $(3,440) $ (3,159)
====== ====== ====== ==== ======= ===== ===== =======
Net income
(loss) per
share....... $ (0.02) $ (0.37) $ (1.11)
Weighed
average
shares used
in per share
calculation... 1,349 1,349 1,509(g) 2,858
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
17
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
NOTE 1. PRO FORMA ADJUSTMENTS
The pro forma results do not purport to present the results of operations
of Unison had the business combinations taken place on the dates specified, nor
are they necessarily indicative of the financial position or results of
operations that may be achieved in the future. The Unaudited Pro Forma Condensed
Combined Financial Statements have been prepared under the assumptions set forth
in the following notes.
The adjustments to the pro forma statements of operations are discussed
below:
(a) Represents the combined balance sheets of Signature Health Care and the
Signature Affiliates as of June 30, 1996, as follows:
<TABLE>
<CAPTION>
SIGNATURE SIGNATURE SIGNATURE
HEALTH CARE AFFILIATES COMBINED
----------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts and notes receivable, net.................... $ 5,185 $ 2,576 $ 7,761
Other current assets.................................. 764 245 1,009
----------- ---------- ---------
Total current assets.......................... 5,949 2,821 8,770
Lease operating rights and other assets, net............ 1,507 185 1,692
Goodwill, net........................................... 1,721 -- 1,721
Property and equipment, net............................. 16,442 771 17,213
----------- ---------- ---------
Total assets.................................. $25,619 $ 3,777 $29,396
========= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................... $ 259 $ 53 $ 312
Other current liabilities............................. 2,184 1,039 3,223
----------- ---------- ---------
Total current liabilities..................... 2,443 1,092 3,535
Long-term debt.......................................... 18,519 669 19,188
Deferred taxes.......................................... 2,921 -- 2,921
Other long-term liabilities............................. 1,036 1,463 2,499
Stockholders' equity:
Common stock.......................................... 2 5 7
Additional paid-in capital............................ 1,611 (1,549) 62
Retained earnings (deficit)........................... (913) 2,097 1,184
----------- ---------- ---------
Total stockholders' equity.................... 700 553 1,253
----------- ---------- ---------
Total liabilities and stockholders' equity.... $25,619 $ 3,777 $29,396
========= ======= =======
</TABLE>
(b) In connection with the Signature Merger, Unison will issue unsecured
senior notes (the "Senior Notes") in the amount of $100,000,000. The Senior
Notes bear interest at 10.25% and mature in 2006. In
18
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
addition, in August 1996 Unison obtained interim financing in the amount of
$7,500,000 for working capital. Proceeds from the Senior Notes and working
capital note will be used as follows (in thousands):
<TABLE>
<S> <C>
Debt issue costs.......................................................... $ 3,800
Contingent payment to the former BritWill stockholders.................... 1,750
Repayment of short-term debt.............................................. 10,602
Repayment of long-term debt............................................... 19,374
Reduction of accounts payable............................................. 1,500
Funds available for acquisitions and working capital...................... 62,974
--------
$100,000
========
</TABLE>
Short-term debt repaid includes (i) the working capital note amounting to
$7,500,000 and (ii) the current portion of long-term debt refinanced with the
proceeds of the subordinated notes. The contingent payment to the former
BritWill stockholders is added to leasehold rights and amortized over 25 years.
(c) Consideration for the aggregate purchase price for Signature is
comprised of cash amounting to approximately $37,700,000, a promissory note in
the amount of $500,000 and Unison Common Stock with a market value of
approximately $20,000,000. Unison will pay $5,500,000 in cash to acquire
RehabWest.
The following is the allocation of the purchase price of Signature and
Rehab West (in thousands):
<TABLE>
<S> <C>
Purchase price for Signature............................................... $58,200
Purchase price for Rehab West.............................................. 5,500
-------
Total purchase price....................................................... 63,700
-------
Less net historical assets acquired:
Signature.................................................................. 1,253
Rehab West................................................................. 247
-------
1,500
-------
Excess of purchase price over net historical assets acquired............... $62,200
=======
Allocation of purchase price:
Lease operating rights..................................................... $34,669
Goodwill................................................................... 26,531
Property and equipment..................................................... 5,000
Deferred tax liability..................................................... (4,000)
-------
$62,200
=======
</TABLE>
Lease operating rights are being amortized over the lease terms, including
renewal options, not to exceed 35 years. Goodwill represents the amount of the
purchase price in excess of identifiable assets and is being amortized over 40
years. The adjustment to property and equipment is based on the estimated fair
value of the assets acquired as determined by independent appraisals.
(d) To adjust common stock based on 5,380,000 pro forma shares outstanding
with a par value of $.001, as follows (in thousands):
<TABLE>
<S> <C>
Unison historical common stock.................................................. $ 3
Shares issued in connection with Signature Merger............................... 1
---
Unison pro forma common stock................................................... $ 4
===
</TABLE>
19
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(e) The increase in additional paid-in capital is comprised of the
following:
<TABLE>
<S> <C>
Market value of stock issued in connection with the Signature Merger....... $20,000
Less amounts allocated to common stock..................................... (1)
Elimination of historical paid-in capital (deficit):
Signature................................................................ (62)
Rehab West............................................................... 472
-------
$20,409
=======
</TABLE>
(f) To eliminate the historical amounts of retained earnings recorded by
Signature ($1,184,000) and Rehab West ($719,000).
(g) To record 1,509,000 common shares to be issued in connection with the
Signature Merger.
(h) Other Acquisitions: The following table summarizes the operating
results for the following leases entered into from January 1, 1995 through the
later of the date of lease inception or the period of the statement of
operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER
30, 1996 31, 1995
ACQUISITION --------------------- ---------------------
ACQUISITION DATE REVENUES EXPENSES REVENUES EXPENSES
- ----------- ----------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nightingale............................. Oct. 1995 $ -- $ -- $ 4,438 $ 4,506
The Oaks of Boise....................... July 1995 -- -- 815 911
Sunbelt Therapy......................... Feb. 1996 544 568 5,942 5,725
Franciscan Enumclaw..................... Aug. 1996 2,060 2,294 3,860 4,313
Franciscan Walla Walla.................. Aug. 1996 969 999 1,371 1,507
Other acquisitions(1)................... July 1996 2,136 2,096 3,837 3,813
------ ------ -------- --------
$5,709 $5,957 $ 20,263 $ 20,775
====== ====== ======== ========
</TABLE>
- ---------------
(1) Represents less than 10% of Unison pro forma net income.
(i) Operating lease pro forma adjustments represent adjustments to the
pre-lease operating results of the facilities identified in note (h). The
historical results have been adjusted to include the lease expense incurred by
Unison, elimination of management fee income to Unison and elimination of the
lessor's depreciation, interest expense and management fees.
(j) Effective as of February 1, 1996, Unison purchased 90% of the
outstanding common stock of Sunbelt. In consideration for the $3,600,000
purchase price, Unison paid cash in the amount of $800,000, issued promissory
notes in the aggregate amount of $1,000,000 (the "Sunbelt Notes") and issued
subordinated convertible debentures in the aggregate amount of $1,800,000 (the
"Sunbelt Debentures"). The Sunbelt Notes and Sunbelt Debentures bear interest at
10.0%, which amounts to approximately $23,000 for the one month ended January
31, 1996, $140,000 for the six months ended June 30, 1995 and $280,000 annually.
The Sunbelt Notes and Sunbelt Debentures are convertible at the option of the
holder into shares of Unison common stock based on the average market price (85%
of the average market price with respect to the Sunbelt Notes) of Unison's stock
for the 20 trading days prior to the date of conversion. The effect of
conversion of the Sunbelt Notes and Debentures is not included in the
calculation of historical or pro forma net income per share because the effect
is antidilutive.
(k) To record amortization of goodwill related to the acquisition of
Sunbelt. Under the purchase method of accounting, assets acquired and
liabilities assumed were recorded at the estimated fair value. The excess of the
$3,600,000 purchase price over the net assets acquired was recorded as goodwill
in the amount of
20
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
$3,433,000 and is being amortized over 40 years. Such amortization amounts to
approximately $7,000 for the one month ended January 31, 1996, $43,000 for the
six months ended June 30, 1995 and $86,000 annually.
(l) The following table summarizes the operating results for Signature, as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------------- -------------------
REVENUES EXPENSES REVENUES EXPENSES
<S> <C> <C> <C> <C>
Signature Health Care........................... $ 12,848 $ 13,388 $ 24,410 $ 24,517
Signature Affiliates............................ 9,404 8,071 8,640 7,935
------ ------
$ 22,252 $ 21,459 $ 33,050 $ 32,452
====== ======
</TABLE>
(m) To record interest income on approximately $19,774,000 of excess
proceeds from the issuance of subordinated notes at an assumed interest rate of
5%.
(n) To eliminate management fees paid by Signature to Yankee Creek
Management Company, LLC which is wholly owned by Messrs. Kremser and Filkoski,
net of estimated incremental operating expenses incurred by Unison, as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------- YEAR ENDED
1996 1995 DECEMBER 31, 1995
------ ------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Signature management fees......................... $4,608 $2,052 $ 4,726
Less incremental operating expenses............... 278 278 556
------ ------ ------
$4,330 $1,774 $ 4,170
====== ====== ======
</TABLE>
(o) To record interest expense on the $100,000,000 of subordinated notes at
an estimated rate of 10.25%, net of repayments, as follows:
<TABLE>
<CAPTION>
SIX
MONTHS ANNUAL
------ -------
(IN THOUSANDS)
<S> <C> <C>
Interest on subordinated notes.................................... $5,125 $10,250
Less interest on refinanced debt.................................. 973 1,947
------ -------
Net increase in interest expense.................................. $4,152 $ 8,303
====== =======
</TABLE>
(p) To record additional depreciation expense related to the adjustment to
property and equipment set forth in note (c). The $5,000,000 asset will be
amortized over the estimated useful life of 20 years.
(q) To record amortization of the intangible assets described in note (c),
as follows:
<TABLE>
<CAPTION>
SIX
MONTHS ANNUAL
----- ------
(IN THOUSANDS)
<S> <C> <C>
Amortization of goodwill:
Signature........................................................ $ 266 $ 532
Rehab West....................................................... 66 131
Amortization of lease operating rights -- Signature Merger (35
years)........................................................... 495 991
Amortization of deferred financing costs -- Senior Notes (10
years)........................................................... 190 380
Elimination of Signature historical amortization................... (105) (366)
------
-
-------
Total......................................................... $ 912 $1,668
======= =======
</TABLE>
21
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(r) To record amortization of the payment to the former BritWill
stockholders described in note (b). The $1,750,000 payment was added to lease
operating rights and is being amortized over 25 years. Amortization expense
amounts to $35,000 for the six-month period and $70,000 annually.
(s) On August 10, 1995, Unison purchased all of the outstanding common
stock of BritWill, a long-term care company operating 28 facilities located in
Texas and Indiana (the "BritWill Acquisition"). In connection with the BritWill
Acquisition, other operating expenses have been reduced to give effect to the
following estimated annual cost savings to be realized (in thousands):
<TABLE>
<S> <C>
Elimination of duplicate corporate compensation and benefits................ $ 710
Reduction of insurance costs................................................ 300
Reduction of corporate office rent and operating costs...................... 468
Other....................................................................... 22
------
$1,500
======
</TABLE>
(t) To record amortization of a lease liability incurred in connection with
the BritWill Acquisition. The lease liability represents the excess of the value
of BritWill's lease obligations over market lease rates, based on independent
appraisals. Amortization expense related to the lease liability amounts to
approximately $188,000 annually.
(u) To record interest on debt incurred to acquire BritWill. In connection
with the BritWill Acquisition, Unison issued an $8,000,000 senior subordinated
note bearing interest initially at 8.0%, or $640,000 annually. Interest expense
related to other debt obligations was reduced by $147,000 based on the
anticipated replacement of the accounts receivable sales program with BritWill's
receivables financing program.
(v) Under the purchase method of accounting, the BritWill assets acquired
and liabilities assumed were recorded at the estimated fair value as determined
by an independent appraisal. The excess of the purchase price over the fair
value of net assets acquired is being amortized over 40 years, the noncompete
agreement and assembled work force intangible assets are being amortized over
five years, and the lease operating rights intangible assets are being amortized
over the respective lease terms, not to exceed 25 years. Such amortization is
approximately $2,007,000 annually. Amortization expense was reduced by $830,000
annually to eliminate BritWill's historical amortization of intangible assets.
NOTE 2. INCOME TAXES
Estimated provisions for income taxes related to pro forma adjustments are
based on an assumed combined federal and state income tax rate of 40%.
22
<PAGE> 29
THE SIGNATURE MERGERS
BACKGROUND
The terms of the Signature Merger Agreements are the result of arm's-length
negotiations between representatives of Unison and Signature. The following is a
brief discussion of the events that led to the negotiations, the Signature
Merger Agreements and related transactions.
In November, 1995, Mr. Walker, Unison's Chief Executive Officer and
President, was initially contacted by BA Partners of Chicago, Illinois to
determine if Unison had an interest in acquiring Signature. BA Partners is the
mergers and acquisitions arm of the Bank of America, and had been retained by
Signature to assist in the potential sale of the company. After brief
conversations between BA Partners, Mr. Walker and Mr. Kremser, Mr. Walker
determined that the asking price and terms were not economically desirable to
Unison, and he terminated discussions.
On April 11, 1996, Mr. Walker was again contacted by BA Partners on behalf
of Signature. At that time, BA Partners presented a revised proposal. Shortly
thereafter, Unison and Signature entered into a confidentiality agreement and
began the exchange of information regarding the companies. On May 8, 1996, Mr.
Walker met with Mr. Kremser and representatives of BA Partners in the offices of
Signature in Denver to discuss the general parameters of a transaction and to
determine if there were sufficient interest on both sides to continue the
discussions. As a result of that meeting, negotiations began between the parties
regarding acquisition price and terms. A series of proposals were exchanged
between the parties, and on June 7, 1996, Unison and Signature reached an
understanding regarding the general terms of the acquisition in meetings in
Chicago, Illinois. These understandings were subject to the preparation and
negotiation of the definitive agreements, and a number of material terms,
including such matters as closing contingencies, remained open.
As a result of the Chicago understandings, Unison engaged its attorneys,
Quarles & Brady, to prepare drafts of the definitive documents. A preliminary
negotiating session occurred in Denver in the offices of Signature on June 17
and 18, 1996. A second round of discussions, again in the Denver offices of
Signature, occurred on July 9 and 10, 1996, at which time the principals and
their respective attorneys conducted a comprehensive review of the documents and
identified areas requiring additional research and negotiation. After continuing
negotiation, Mr. Walker and Mr. Kremser met in Steamboat Springs, Colorado on
July 24 and 25 and reached an agreement in principle which was announced in a
press release issued on July 26, 1996.
On July 26, 1996, Unison issued the following press release:
Scottsdale, Arizona (July 26, 1996) -- Unison HealthCare Corporation
(Nasdaq/NM:UNHC) today announced that it had reached an agreement in
principle to merge with privately owned Signature Health Care Corporation
and four affiliated companies ("Signature"), which operate 13 long-term
care facilities in Colorado and Arizona, including 11 skilled nursing
facilities and two assisted living facilities. Unison is acquiring 100% of
the common stock of Signature in a purchase transaction which is expected
to be accretive to Unison's earnings. Terms of the transaction were not
disclosed.
The Company stated that consummation of this transaction is subject to
execution of definitive agreements, determination of compliance with
various regulatory requirements, and final approval of both company's Board
of Directors, among other matters. The transaction is expected to be
completed early in the fourth quarter.
For the year ended December 31, 1995, Signature Health Care
Corporation and its affiliates produced an operating margin (EBITDARM) of
32.7% on total revenues of approximately $33 million. Revenues for 1996 for
Signature are expected to be approximately $46 million.
Jerry M. Walker, president of Unison HealthCare Corporation, said,
"This acquisition is a major milestone for our company. It increases the
number of beds we operate by almost 25% and it substantially expands our
service area into the Colorado and Arizona markets. This acquisition is
consistent with our strategy of increasing the concentration of Unison
facilities in its Mountain region. Colorado and Arizona are especially
attractive states, in both demographic and economic terms, and the
communities in which
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the Signature facilities are located have substantial growth potential. In
addition to acquiring exceptional facilities, we will also benefit from
integrating into Unison's operations a very capable professional staff
which has been responsible for the superb performance of the Signature
Health Care facilities."
David A. Kremser, president and chief executive officer of Signature
Health Care Corporation, said, "This business combination of facilities and
professional staff is truly synergistic in nature. Our patients and
employees will benefit from being part of a larger organization which can
bring added value and provide access to additional services. Unison gains
entry into valuable markets which have enormous growth potential and good
patient demographics, with both the Colorado and Arizona markets having
substantial concentrations of elderly population. In addition, Signature
nursing homes in the Arizona market are the sole providers in each of the
communities they serve."
Unison HealthCare Corporation is a provider of quality long-term
specialty health care services. The Company provides a broad range of
health care services including nursing care, rehabilitation therapy,
pharmacy and other specialized services primarily to subacute patients. The
Company currently operates 46 skilled nursing facilities and five
independent living facilities, representing 4,912 beds.
Following the July 26, 1996 press release, the parties continued
negotiation of the definitive agreements, which were signed on August 2, 1996.
On August 6, 1996, Unison issued the following press release:
Scottsdale, Arizona (August 6, 1996) -- Unison HealthCare Corporation
(Nasdaq/NM:UNHC) today announced that it had signed a definitive agreement
with privately owned Signature Health Care Corporation and four affiliated
companies ("Signature"). Unison had previously announced that it had
reached an agreement in principle with Signature, which operates 13
long-term care facilities in Colorado and Arizona, including 11 skilled
nursing facilities and two assisted living facilities. Pursuant to
determination of compliance with various regulatory requirements and final
approval of both company's Board of Directors, the transaction is expected
to close in the fourth quarter of this year.
The Company also announced that David A. Kremser, president and chief
executive officer of Signature Health Care Corporation, will join Unison's
Board of Directors.
Jerry M. Walker, president of Unison HealthCare Corporation, said "We
are pleased with the progress being made on this transaction. After the
merger is completed, Unison will operate 64 facilities with 6,112 beds. We
are also delighted that Mr. Kremser has agreed to join Unison's Board of
Directors. We look forward to benefiting from the experience and expertise
Mr. Kremser had gained through working with the Signature facilities and
through his involvement in the long-term industry for the past 22 years."
Unison HealthCare Corporation is a provider of quality long-term and
specialty health care services. The Company provides a broad range of
health care services including nursing care, rehabilitation therapy,
pharmacy and other specialized services primarily to subacute patients. The
Company currently operates 46 skilled nursing facilities and five
independent living facilities, representing 4,912 beds.
Unison filed a copy of each of the Signature Merger Agreements as exhibits
to its Form 10-Q for the quarter ended June 30, 1996.
OPINION OF CRUTTENDEN ROTH INCORPORATED
Unison has retained Cruttenden Roth to render an opinion to the Unison
Board of Directors with respect to whether the consideration to be received by
the stockholders of Signature as specified in the Signature Merger Agreements
will be fair, from a financial point of view, to the stockholders of Unison.
Cruttenden Roth's opinion will be directed only to the Board of Directors
of Unison, will address only the fairness of the consideration from a financial
point of view and will not constitute a recommendation to any Unison stockholder
as to how such stockholder should vote at the Unison Special Meeting. Cruttenden
Roth was not requested to opine as to, and its opinion does not in any manner
address, Unison's underlying business
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decision to proceed with or effect the Signature Mergers. No limitations have
been placed on Cruttenden Roth by the Board of Directors of Unison with respect
to the investigation to be made or the procedures to be followed in preparing
and rendering its opinion.
The full text of the written opinion of Cruttenden Roth dated as of the
date of this Proxy Statement Supplement which sets forth the assumptions made,
procedures followed, matters considered and scope of the review undertaken, as
well as the limitations on Cruttenden Roth in rendering its opinion, is attached
as Annex C to this Proxy Statement. Unison stockholders are urged to read
Cruttenden Roth's opinion in its entirety. Cruttenden Roth did not recommend to
Unison that any specific exchange ratio constituted the appropriate exchange
ratio for the Signature Mergers. The summary of the opinion of Cruttenden Roth
set forth in this Proxy Statement Supplement is qualified in its entirety by
reference to the full text of such opinion.
To arrive at its opinion, Cruttenden Roth, among other things, (i) analyzed
certain publicly available financial statements and other information of Unison,
(ii) analyzed certain internal financial statements and other financial and
operating data concerning Unison and the Signature entities prepared by the
managements of Unison and Signature, respectively, (iii) analyzed certain
financial projections prepared by the managements of Unison and the Signature
entities, respectively, (iv) discussed the past and current operations and
financial condition and the prospects of Unison with senior executive officers
of Unison, and analyzed the pro forma impact of the mergers on Unison's earnings
per share, consolidated capitalization and certain financial ratios, (v)
reviewed the reported prices and trading activity for the Unison Common Stock,
(vi) compared the financial performances of Unison and Signature and the prices
and trading activities of Unison Common Stock with that of certain other
comparable publicly traded companies and their securities, (vii) reviewed the
financial terms, to the extent publicly available, of certain comparable
acquisition transactions, (viii) discussed with the management of Unison certain
synergies and other benefits expected to be derived from the Signature Mergers,
(ix) reviewed the Signature Merger Agreements and certain related documents and
(x) performed such other analyses as it deemed appropriate.
In rendering its opinion, Cruttenden Roth assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Cruttenden Roth for purposes of its opinion. With respect to the
financial projections including the synergies and other benefits expected to
result from the Signature Mergers, Cruttenden Roth assumed that they were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance of each of Unison and
Signature. Cruttenden Roth's opinion was necessarily based on economic, market
and other conditions as in effect on, and the information made available to
Cruttenden Roth and capable of evaluation as of, the date of its opinion. In
rendering its opinion, Cruttenden Roth assumed that the value of the Unison
Common Stock was equal to its closing stock price on September , 1996 for the
purpose of delivering its opinion dated as of the date of this Proxy Statement
Supplement.
The following is a brief summary of the analyses performed by Cruttenden
Roth in preparation of its opinion letter dated as of September , 1996.
Stock Trading History. Cruttenden Roth reviewed Unison's stock market
history and stock market performance, Unison's historical operating and
financial information and selected financial analysts' commentary of Unison. In
its review of the stock market trading history, Cruttenden Roth reviewed the
performance of the per share market price of the Unison Common Stock over the
period December 18, 1995 to September 6, 1996 and compared such per share market
price data to the Standard & Poor's industrial average of 400 stocks and to an
index comprised of 15 long-term healthcare companies, including Advocat Inc.,
Arbor Health Care Company, Beverly Enterprises, Inc., Community Care of America,
Inc., Genesis Health Ventures, Inc., GranCare, Inc., Health Care & Retirement
Corporation, Horizon/CMS Healthcare Corporation, Integrated Health Services,
Inc., Living Centers of America, Inc., Manor Care, Inc., The Multicare
Companies, Inc., Regency Health Services, Inc., Sun HealthCare Group, Inc., and
Vencor, Inc. (the "Comparable Companies") that, in Cruttenden Roth's judgment,
were comparable to Unison for purposes of this analysis.
Comparable Company Analysis. Cruttenden Roth reviewed and analyzed certain
available financial and market information for the Comparable Companies that, in
Cruttenden Roth's judgment, were comparable to Signature for purposes of this
analysis. Such financial and market information included, among other things,
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market value, earnings per share, market price as a multiple of earnings per
share and aggregate adjusted market value (market value plus debt plus 8.0x
rent) as a multiple of revenue and of earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The analysis indicated that, based on
financial statements provided to us by Unison, the purchase price of Signature
is 8.7x earnings for the trailing twelve months ended June 30, 1996 and the
adjusted market value of Signature is 11.4x and 2.0x EBITDA and revenue,
respectively. These multiples compared to the Comparable Companies' range of
multiples of 9.8x to 45.4x earnings for the trailing twelve months ended June
30, 1996 with a mean of 21.3x and a range of adjusted market value multiples of
8.7x to 23.1x EBITDA, with a mean of 12.7x, and .8x to 2.8x revenue, with a mean
of 1.5x.
Accretion/Dilution Analysis. Cruttenden Roth analyzed the accretion or
dilution on earnings per share to Unison and Signature on a combined basis for
the years 1996 and 1997 on a projected basis. The results indicated that the
transaction was slightly dilutive in 1996 and accretive in 1997.
Analysis of Comparable Acquisition Transactions. Cruttenden Roth reviewed
the financial terms, to the extent publicly available, of 15 selected pending
and completed merger and acquisition transactions in the healthcare services
industry announced since January 1, 1994 (collectively, the "Comparable
Acquisition Transactions"). Cruttenden Roth reviewed the prices paid in such
transactions in terms of the aggregate transaction value (defined as total value
of consideration paid by the acquiror, excluding fees and expenses (the
"Aggregate Transaction Value")) as a multiple of latest twelve months ("LTM")
revenue, as a multiple of LTM EBITDA and as a multiple of LTM earnings.
Cruttenden Roth noted that no transaction reviewed was identical to the
Signature Mergers and that, accordingly, the foregoing analysis necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of Signature and other factors that
would affect the acquisition value of the companies to which it is being
compared. The analysis indicated that, for the Comparable Acquisition
Transactions, the range of multiples of Aggregate Transaction Value to LTM
revenue was .61x to 3.24x, with a median of 1.13x, the range of multiples of
Aggregate Transaction Value to LTM EBITDA was 5.61x to 35.22x, with a median of
9.29x, and the range of multiples of Aggregate Transaction Value to LTM earnings
was 16.2x to 157.0x, with a median of 29.44x. This compared to the Signature
Aggregate Transaction Value to LTM revenue of 1.81x, the Aggregate Transaction
Value to LTM EBITDA of 11.7x and the Aggregate Transaction Value to LTM earnings
of 8.3x.
Discounted Cash Flow Analysis. Cruttenden Roth calculated the estimated
unlevered after tax cash flows that Signature could be expected to generate over
the period ending December 31, 1998, using Signature management's projections of
Signature's future financial performance. Using these projections, Cruttenden
Roth then calculated estimated terminal values for Signature at the end of 1998
by applying multiples ranging from 6.0x to 8.0x (which Cruttenden Roth believed
to be appropriate for Signature's business based on Cruttenden Roth's experience
and judgment) to such projections' projected 1998 unlevered free cash flow. The
unlevered cash flows for the projected period and the range of terminal values
were then discounted to December 31, 1996 using annual discount rates ranging
from 17.0% to 22.0% (chosen to reflect the weighted average cost of capital of
Signature derived from data of similar healthcare companies) to imply the
hypothetical equity value of Signature. The discounted cash flow analysis
indicated a hypothetical reference range for the Signature equity value of
between $53 and $71 million.
Pro Forma Merger Analysis. Cruttenden Roth analyzed certain pro forma
effects resulting from the Signature Mergers, including the effect of the
consummation of the Signature Mergers, assuming the exchange ratio, on the
earnings per share of Unison Common Stock following the Signature Mergers. In
arriving at its opinion, Cruttenden Roth's analysis considered, among other
things, (i) selected analysts' estimates of Unison's 1996 and 1997 earnings per
share before the Signature Mergers, (ii) Unison's and Signature's internal
management projections regarding future results and (iii) Unison's management
estimates of future synergies and cost savings associated with the Signature
Mergers. The actual operating results or financial position achieved by the
combined company may vary from the projected results and the variations may be
material.
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Contribution Analysis. Cruttenden Roth compared the relative contribution
of Unison and Signature to pro forma combined revenue, EBITDA and EBIT for the
calendar year 1996 and 1997 on a projected basis after giving effect to certain
anticipated cost savings. Cruttenden Roth noted that Signature would have
contributed on a pro forma basis during the two-year period approximately 23.0%
and 21.0% of combined revenue, approximately 51.0% and 50.0% of combined EBITDA
and approximately 57.0% and 49.0% of combined EBIT, respectively.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Cruttenden
Roth believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying its opinion. In addition, Cruttenden Roth may have given
various analyses more or less weight than other analyses, and may have deemed
various assumptions more or less probable than other assumptions, so that the
range of valuations resulting for any particular analysis described above should
not be taken to be Cruttenden Roth's view of the actual value of Unison or
Signature. In performing its analyses, Cruttenden Roth made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Unison or Signature.
Any estimates contained therein are not necessarily indicative of future results
or actual values, which may be significantly more or less favorable than those
suggested by such estimates. In addition, estimates relating to the value of
businesses or assets do not purport to be appraisals or to necessarily reflect
the prices at which businesses or assets may actually be sold. The analyses
performed were prepared solely as part of Cruttenden Roth's analysis of the
fairness of the consideration, from a financial point of view, to the holders of
Unison Common Stock of the consideration to be paid by Unison pursuant to the
Signature Merger Agreements.
Cruttenden Roth is a nationally recognized investment banking firm engaged
in, among other things, the valuation of businesses and securities in connection
with mergers, acquisitions, negotiated underwritings, sales and distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Cruttenden Roth has substantial experience in
merger and acquisition transactions and is familiar with Unison. In the ordinary
course of its business, Cruttenden Roth acts as a market maker in the publicly
traded securities of Unison and receives customary compensation in connection
therewith, may actively trade in the securities of Unison for its own account
and the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities for the accounts of its customers, the firm
and/or the officers of the firm. Cruttenden Roth acted as a co-managing
underwriter in December 1995 in connection with Unison's initial public
offering, acted as financial advisor to Unison in 1995 and 1996 in matters
unrelated to the Signature Mergers and received customary compensation for such
services. On August 16, 1996, an affiliate of Cruttenden Roth, along with
certain other unaffiliated third parties, made a bridge loan to Unison in the
aggregate principal amount of $5,000,000, the proceeds of which were to be used
for working capital. In addition, Cruttenden Roth's research department has,
from time to time, issued research reports regarding Unison.
Pursuant to the terms of an engagement letter, Unison will pay Cruttenden
Roth its customary fee for rendering its opinion. Unison has also agreed to
reimburse Cruttenden Roth for its out-of-pocket expenses, including reasonable
fees and expenses of its legal counsel, and to indemnify Cruttenden Roth and
certain related parties against certain liabilities, including liabilities under
the federal securities laws, arising out of or in connection with the services
rendered by Cruttenden Roth under the engagement letter. The terms of the fee
arrangement with Cruttenden Roth were negotiated at arm's length between the
management of Unison and Cruttenden Roth.
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REASONS FOR THE SIGNATURE MERGERS; RECOMMENDATION OF UNISON'S BOARD OF DIRECTORS
It is the strategy of Unison to grow its business by, in part, acquiring
additional existing providers of long-term and specialty health care,
particularly facilities in geographic clusters. The Board of Directors of Unison
believes that the acquisition of Signature through the Signature Merger
Agreements is in furtherance of this strategy. Signature, at June 30, 1996,
operated skilled nursing facilities with 1,050 beds in Arizona and Colorado all
of which may be served by an existing regional office within Unison's corporate
headquarters in Scottsdale, Arizona. Recent acquisitions by Signature have
already enabled Signature to achieve some operating efficiencies. Unison's
management believes that incorporating Signature within Unison's operations,
including the addition of Unison's existing Arizona facility to this cluster of
Signature facilities, will permit increased efficiencies. Unison's Board of
Directors as a whole believes that the Signature Merger Agreements are fair to,
and in the best interests of, Unison and its stockholders, and therefore
unanimously recommends that the shareholders vote FOR approval of the Signature
Merger Agreements. In reaching these conclusions, various factors were
considered by the Board of Directors. The material factors considered were:
1. The financial performance, condition, indebtedness, historical
earnings and operations of Signature and prospects for future growth in its
earnings, and the corresponding attributes of Unison.
2. Available information with respect to similar recent transactions.
3. Information with respect to the prospects of Unison and Signature
operating on a combined basis.
4. The proposed structure and terms of the transaction.
5. The ability through the transaction to gain access to the Denver,
Colorado market and to materially increase its stake in certain Arizona
markets.
6. The geographic concentration of Signature's Colorado facilities.
The Board of Directors did not quantify or otherwise attempt to assign
relative weights to any one of the various factors considered in reaching its
determination to recommend the proposed transaction. The Board of Directors also
believes that all of the factors generally support its recommendation that the
stockholders approve the Signature Mergers.
The Board of Directors unanimously recommends that the stockholders of
Unison vote FOR the proposal to approve and adopt the Signature Merger
Agreements.
INTERESTS OF CERTAIN PERSONS IN THE SIGNATURE MERGERS
In considering the recommendations of Unison's Board of Directors with
respect to the Signature Mergers, shareholders of Unison should be aware that
the Board of Directors and executive officers of Unison are beneficial owners of
38.0% of the issued and outstanding Unison Common Stock. Other than as a
stockholder of Unison, no director or executive officer of Unison has any
interest in the Signature Mergers.
Mr. David A. Kremser, the President, Chief Executive Officer and
controlling stockholder of Signature Health Care, will be appointed to Unison's
Board of Directors upon closing of the Signature Mergers.
CERTAIN EFFECTS OF THE SIGNATURE MERGERS
As a result of the Signature Mergers, Signature's current stockholders will
not have an opportunity to continue their equity interests in Signature as an
ongoing corporation, but they will have an opportunity to participate in the
earnings and potential growth of Unison through their receipt and ownership of
shares of Unison Common Stock pursuant to the Signature Mergers. Upon
consummation of the Signature Mergers, Unison will own all of the outstanding
shares of Signature and will be entitled to all of the benefits and be subject
to all the risks that will result from such ownership.
ANTICIPATED ACCOUNTING TREATMENT
The Signature Mergers are expected to be treated as "purchase" transactions
for accounting purposes.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses certain federal income tax consequences of
the Signature Health Care Merger and the Signature Affiliate Mergers. This
summary is provided for general information only and is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable regulations
thereunder, judicial authority and current administrative rulings and practices
as of the date hereof. This summary does not address the federal income tax
consequences applicable to special classes of taxpayers including without
limitation persons who acquired their Signature shares pursuant to the exercise
of employee stock options or otherwise as compensation. There can be no
assurance that future legislation, regulations, administrative rulings or
pronouncements or court decisions will not adversely affect the accuracy of the
statements contained herein. No rulings from the Internal Revenue Service or
legal opinions as to the federal income tax consequences of the Signature Health
Care Merger and the Signature Affiliate Mergers have been or will be requested.
It is intended that the Signature Health Care Merger will qualify as a
reorganization for federal income tax purposes under Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code, and as a result thereof:
(a) the Signature Health Care Merger would not result in recognition
of gain or loss by Unison, Newco or Signature;
(b) the cash received by the Signature shareholders in the Signature
Health Care Merger will be taxable to them;
(c) no gain or loss would be recognized by a Signature shareholder
with respect to the shares of Unison Common Stock received in exchange for
shares of Signature stock.
In the event that the Signature Health Care Merger does not qualify as a
reorganization for federal income tax purposes, no gain or loss would be
recognized by Unison, Newco or Signature, as the transaction would be treated
for such purposes as a taxable purchase of the Signature stock by Unison, with
the result that the Signature shareholders would be taxed on the receipt of cash
and Unison Common Stock in exchange for their Signature stock.
Each Signature Affiliate is an S corporation. The Signature Affiliate
Mergers would generally be treated for federal income tax purposes as a purchase
of the stock of each Signature Affiliate by Unison for cash and a promissory
note. However, it is intended that Unison and the shareholders of each Signature
Affiliate will elect under Section 338(h)(10) of the Code to treat each of the
Signature Affiliate Mergers as a taxable sale of the assets of each Signature
Affiliate, rather than as a purchase of stock. This election would permit the
assets of each Signature Affiliate to be stepped up for federal income tax
purposes and would cause each Signature Affiliate shareholder to include his or
her share of taxable gain or loss from such deemed asset sale as taxable income
under the applicable rules for S corporations. The status of each Signature
Affiliate as an S corporation would terminate upon the Signature Affiliate
Mergers.
Unison has been advised that the Signature shareholders and the
shareholders of each Signature Affiliate have received independent tax advice
with respect to the effect on them, respectively, of the Signature Health Care
Merger and the Signature Affiliate Mergers.
THE SIGNATURE MERGER AGREEMENTS
The following is a summary of certain provisions of the Signature Merger
Agreements, copies of which are attached as Annexes A and B to this
Prospectus/Proxy Statement Supplement. Except as noted in the following summary,
the Signature Merger Agreements contain substantially similar terms. Such
summary is qualified in its entirety by reference to the full text of the
Signature Merger Agreements. Capitalized terms not otherwise defined herein
shall have the meanings assigned to them in the Signature Merger Agreements,
which are incorporated into this Proxy Statement Supplement by this reference.
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GENERAL; EFFECTIVE TIME
The Signature Merger Agreements provide, subject to the approval by the
holders of a majority of the shares of Unison Common Stock outstanding on the
Record Date, and upon the satisfaction or waiver of certain other conditions set
forth in the Signature Merger Agreements, that newly formed wholly-owned
subsidiaries of Unison will be merged with and into each of the Signature
Entities (Signature Health Care, Arkansas, Cornerstone, Douglas and Safford),
each of which will be the surviving corporation of its merger and each of which
will become a wholly-owned subsidiary of Unison.
At the effective time of the Signature Health Care Merger, the outstanding
shares of Signature Health Care (other than shares owned by Unison, the
wholly-owned subsidiary of Unison formed to effectuate the merger, any other
direct or indirect wholly-owned subsidiary of Unison, any direct or indirect
wholly-owned subsidiary of Signature Health Care or shares held in the treasury
of Signature Health Care) will be converted into the right to receive, in the
aggregate, 1,509,434 shares of Unison Common Stock and $10,200,000 in cash,
minus the amount paid to retire employee options and increased or decreased for
changes in the consolidated stockholders' equity of Signature Health Care and
its subsidiaries through the month-end closest to the Closing Date for the
Signature Mergers. If the average daily closing price for Unison Common Stock
during the thirty day period ending five days prior to the last trading day
prior to the closing date of the Signature Health Care Merger (the "Average
Daily Price") is greater than $15.25 or is less than $11.25, then the number of
shares of Unison Common Stock to be issued as Merger Consideration shall be
adjusted for such variance. If the Average Daily Price is greater than $15.25,
the number of shares of Unison Common Stock to be issued will be reduced to a
number of shares that when multiplied by the Average Daily Price results in the
product $23,018,868.50. Similarly, if the Average Daily Price is less than
$11.25, the number of shares of Unison Common Stock will be increased such that
product of the Average Daily Price and such number equals $16,981,132.50. With
or without adjustment, 37,736 shares of Unison Common Stock will be escrowed and
applied in accordance with the Escrow Agreement. Fractional shares of Unison
Common Stock will not be issued; instead, any fraction of a share will be
rounded up to the nearest whole share.
At the effective time of each of the other Signature Mergers, the
outstanding shares of each other Signature Entity (other than shares owned by
Unison, the wholly-owned subsidiary of Unison formed to effectuate the merger,
any other direct or indirect wholly-owned subsidiary of Unison, any direct or
indirect wholly-owned subsidiary of such Signature Entity or held in the
treasury of such Signature Entity) will be converted into the right to receive
cash equal to, in the aggregate and subject to certain adjustments, $27,500,000
and promissory notes totaling $500,000. The cash consideration to be received in
the Arkansas, Cornerstone, Douglas and Safford Mergers will also be increased or
decreased for changes in stockholders equity for each of these entities through
the month-end closest to the Closing Date for the Signature Mergers, and the
promissory notes associated with each Merger will be deposited into escrow and
applied pursuant to their respective Merger Agreements.
If the Signature Merger Agreements are approved by the required vote of
Unison's stockholders, and if the other conditions to the Signature Mergers are
satisfied or waived, the Signature Mergers will become effective when Articles
of Merger are filed with the Secretary of State of the State of Colorado (with
respect to the Arkansas, Cornerstone, Douglas and Safford Mergers) and the
Certificate of Merger is filed with the Secretary of the State of Delaware (with
respect to the Signature Health Care Merger). It is currently contemplated that
such Effective Time will be as soon as practicable after the approval and
adoption of the Signature Merger Agreements by Unison's stockholders (subject to
compliance with, or waiver of, the other conditions contained in the Signature
Merger Agreements).
REQUIRED VOTE
The Signature Merger Agreements will be approved if a majority of the total
votes cast on the proposal at the Unison Special Meeting, whether cast in person
or by proxy, are cast in favor of the Signature Merger Agreements. No vote of
Unison stockholders is required, or will be sought, to consummate the Ampro and
Memphis transaction.
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<PAGE> 37
As of the Unison Record Date, directors and executive officers of Unison
beneficially owned 38.0% of the outstanding shares of Unison Common Stock. See
"Principal Stockholders" in the Prospectus/Proxy and Information Statement. All
of such persons have indicated that they intend for vote for approval of the
Signature Merger Agreements. The directors and executive officers of Unison and
their affiliates beneficially own no shares of Signature, and Signature and its
affiliates own no shares of Unison Common Stock.
EXCHANGE OF SIGNATURE SHARES
The shares held by Unison stockholders will not be affected by the
Signature Mergers. From and after the effective time of each of the Signature
Mergers, each holder of an outstanding certificate or certificates which
immediately prior to the effective time represented outstanding shares of a
Signature entity will be entitled to receive in exchange therefor the Merger
Consideration for such shares in such Merger. If the equity adjustment amount
has not yet been determined at the time of such exchange, the holders of shares
of each Signature entity will receive a pro rata portion of a base amount at
such time and a further payment, if any, after determination of any equity
adjustment. Until surrendered for exchange, certificates for shares of the
Signature entities will represent for all purposes solely the right to receive
the respective Merger Consideration, without any interest thereon or right to
receive any dividend or other distribution from Unison.
CONDITIONS OF THE SIGNATURE MERGERS
The Signature Mergers will occur only if the Signature Merger Agreements
and all other matters necessary to effect the transactions provided for therein
are approved at the Unison Special Meeting by the required vote of the
stockholders of Unison, in accordance with applicable law and Unison's
Certificate of Incorporation and Bylaws. In addition, the obligations of Unison,
on the one hand, and each of the Signature entities and Messrs. Kremser and
Filkoski, on the other, to consummate the transactions contemplated by the
Signature Merger Agreements are subject to the satisfaction of certain
conditions (any of which may be waived by the party or parties entitled to the
benefit thereof), including: (i) the absence of proceedings involving a
challenge to, or seeking damages or other relief in connection with, the
transactions contemplated by the Signature Merger Agreements (the "Contemplated
Transactions"), (ii) the absence of claims asserting ownership of shares of the
respective Signature entities or the right to receive payment for such shares,
(iii) consummation and performance of the Contemplated Transactions not
materially contravening, conflicting with or resulting in a material violation
of existing or proposed legal requirements, (iv) Unison having obtained
satisfactory reports or surveys with respect to environmental matters at
Signature facilities, (v) the completion by Unison of a public offering or
private placement of subordinated debt or common stock in an amount and on terms
acceptable to Unison, (vi) creation by Signature of certain financial statement
reserves (vii) entry into, by Unison, a definitive agreement for the purchase of
RehabWest from its shareholders on terms acceptable to Unison and to Messrs.
Kremser and Filkoski (as of the date hereof, Unison has not reached an agreement
for the acquisition of RehabWest), (viii) concurrent closing of each of the
other Signature Mergers, (ix) the accuracy of the representations and warranties
of each party to the Signature Merger Agreements, (x) the performance by the
other party in all material respects of all obligations required to be performed
by it under such respective Signature Merger Agreement and (xi) the receipt of
certain customary closing certificates and legal opinions.
REPRESENTATIONS AND WARRANTIES
The Signature Merger Agreements contain representations, warranties,
covenants and agreements by each of the parties regarding, among other things,
their organization, authority to enter the transaction, requisite consents and
approvals. In addition, Mr. Kremser and Mr. Filkoski make certain
representations and warranties regarding, among other things, Signature's
capitalization, litigation, employment agreements, employee benefit plans, tax
matters, compliance with applicable laws, title to its properties and
environmental matters. The representations and warranties of each of the parties
to the Signature Merger Agreements will survive consummation of the Signature
Mergers.
31
<PAGE> 38
COVENANTS
In the Signature Merger Agreements, Mr. Kremser and Mr. Filkoski have
agreed to cause each of the Signature entities to conduct its business in the
ordinary course, to seek to preserve its current business organization, to seek
to keep available the services of its current officers and employees and to seek
to preserve its relationships with customers and suppliers.
NO SOLICITATION
Until a termination of the Signature Merger Agreements pursuant to their
terms, Messrs. Kremser and Filkoski have agreed that they will not, directly or
indirectly, solicit, initiate or encourage any inquiries or proposals from,
provide any non-public information to, or consider the merits of unsolicited
inquiries with respect to the sale, of assets or stock, of any Signature entity.
Messrs. Kremser and Filkoski may negotiate for such an agreement that is
expressly conditioned upon lawful termination or expiration of the Signature
Merger Agreements.
AMENDMENT
Subject to the provisions of applicable law, the Signature Merger
Agreements may be amended by the written agreement of the parties at any time
prior to the Effective Time of the Signature Mergers.
EXPENSES
Each party to the Signature Merger Agreements is generally required to bear
its own expenses in connection with the negotiation and performance thereof,
except that the expenses of Signature in excess of $100,000 (if any) will be
paid by Messrs. Kremser and Filkoski.
INDEMNIFICATION
Unison is entitled to certain indemnities from Messrs. Kremser and
Filkoski, and Messrs. Kremser and Filkoski are entitled to certain indemnities
from Unison, for breaches of representations and covenants in the Signature
Merger Agreements. Unison's rights to receive indemnification are generally
limited to one year after the closing, are recoverable 50% in cash and 50% in
Unison shares (valued at $13.25 per share) and are subject to a "basket" and a
"cap" of $250,000 and $1,000,000, respectively. Unison is also entitled to a
indemnification in respect of certain reimbursement issues, subject to certain
conditions and limitations.
TERMINATION
The Signature Merger Agreements may be terminated and the Signature Mergers
may be abandoned at any time prior to the Effective Time of the Signature
Mergers by the mutual written consent of Unison, Mr. Kremser and Mr. Filkoski.
In addition, the Signature Merger Agreements may be terminated:
(i) by either Unison or Messrs. Kremser and Filkoski if a material
breach of any provision of the respective Signature Merger Agreement has
been committed by the other party and such breach has not been cured or
waived;
(ii) by either Unison or Messrs. Kremser and Filkoski if the other
party's obligations for closing shall not have been met or waived on or
prior to the date set for closing;
(iii) by Messrs. Kremser and Filkoski if Unison's registration of
Unison Common Stock under the Securities and Exchange Act of 1934, as
amended, is terminated or if the trading of Unison Common Stock is
suspended as of the Closing Date for the Signature Merger Agreements;
(iv) by Unison or Messrs. Kremser and Filkoski if the Closing has not
occurred on or before November 1, 1996.
It is generally a condition precedent to each party's obligation to close
the Signature Health Care Merger that the Average Daily Price not be lower than
$10.25 per share or more than $16.25 per share. Nevertheless,
32
<PAGE> 39
Messrs. Kremser and Filkoski's election to terminate the Signature Health Care
Merger Agreement if the Average Daily Price is greater than $16.25 per share
will not have any effect if, promptly after making such election, Unison agrees
to amend the Signature Health Care Merger Agreement so that the number of shares
of Unison Common Stock issued is not less than 1,416,546. In determining whether
to elect to so amend the Signature Merger Agreement in these circumstances,
Unison's Board of Directors will take into account, consistent with its
fiduciary duties, all relevant facts and circumstances existing at the time,
including, without limitation, the market for long-term health care facility
stocks in general, the relative value of Unison Common Stock in the market and
the advice of its advisors and legal counsel. By approving the Signature Merger
Agreements, Unison stockholders would be permitting the Board of Directors of
Unison to determine, in the exercise of its fiduciary duties, whether to proceed
with the Signature Mergers in such circumstances.
TERMINATION FEES; SPECIFIC PERFORMANCE
The Signature Merger Agreements provide that if Unison wrongfully
terminates the Signature Merger Agreements or has not or refuses or fails to
consummate the Signature Mergers without justification, Signature will be
entitled to receive an aggregate of $3,000,000 as liquidated damages. If
Signature, Mr. Kremser or Mr. Filkoski refuses or fails to consummate the
Signature Mergers without justification, the Signature Merger Agreements provide
that Unison is entitled to a court order specifically compelling them to do so.
In conjunction with the closing of the Signature Mergers, Unison is
required to execute and deliver an agreement (the "Registration Agreement")
pursuant to which the holders of the Unison shares issued in the Signature
Health Care Merger (the "Holders," initially Messrs. Kremser and Filkoski) will
have the right to cause Unison to register such shares (the "Registrable
Securities") for resale under federal and state securities laws. Under the
Registration Agreement, the holders of at least 51% of the Registrable
Securities to which the Agreement then applies can require Unison, subject to
certain limitations, to file a registration statement under the Securities Act
covering at least 150,000 shares of Unison Common Stock (a "Demand
Registration"). The Holders are entitled to up to three Demand Registrations,
two of which are limited to registrations on Form S-3 (or any successor form)
under the Securities Act and one of which may be made after July 1, 1997 on any
available registration form. The Holders are also entitled to "piggyback" on
other registrations by Unison of its securities under the Securities Act from
time to time, subject to certain restrictions and limitations. Unison generally
is obligated to pay all registration expenses (other than underwriting discounts
and commissions) in connection with such registrations.
33
<PAGE> 40
DESCRIPTION OF SIGNATURE
FACILITIES
Signature owns, operates and manages (directly or through subsidiaries)
skilled nursing facilities, which provide intermediate and skilled nursing care,
specialty therapies and subacute care, and two assisted living facilities. The
Company's facilities are located in the metropolitan Denver, Colorado area and
in a number of smaller communities in Arizona.
The following table summarizes certain information regarding Signature's
long-term care facilities and assisted living facilities as of August 1, 1996.
<TABLE>
<CAPTION>
MEDICARE
NUMBER OCCUPANCY CERTIFIED
FACILITY NAME LOCATION OF BEDS RATE BEDS
- ----------------------------------------------- ---------------------- ------- --------- ---------
<S> <C> <C> <C> <C>
Amberwood Court(1)............................. Denver, Colorado 81 88% 21
Brookshire House(1)............................ Denver, Colorado 70 90 10
Christopher House(1)........................... Wheat Ridge, Colorado 75 89 12
Arkansas Manor(2).............................. Denver, Colorado 116 91 24
Cornerstone Care Center(2)..................... Lakewood, Colorado 140 97 12
The Arbors(2).................................. Camp Verde, Arizona 116 84 20
Los Arcos(1)................................... Flagstaff, Arizona 80 98 20
Rio Verde(1)................................... Cottonwood, Arizona 80 95 16
Pueblo Norte(1)................................ Show Low, Arizona 100 84 10
Douglas Manor(2)............................... Douglas, Arizona 64 84 8
Village Catered Care(2)(3)..................... Douglas, Arizona 64 41 --
Safford Care Center(2)......................... Safford, Arizona 128 93 24
Peppertree Catered Care(2)(3).................. Safford, Arizona 64 96 --
------- ---
1,178 177
======= ========
</TABLE>
- ---------------
(1) The facility real estate is owned.
(2) The facility real estate is leased.
(3) Assisted living facility.
Amberwood Court is a 27,620 sq. ft. facility with 49 patient rooms located
in a stable, mature, middle-income residential area in southeast Denver,
Colorado. The facility is located near several hospitals and a major highway.
Its immediate surroundings consist of single-family homes and three- to
four-story, multi-family buildings.
Brookshire House is a 22,034 sq. ft. facility with 38 patient rooms, and is
also located in a stable, mature, middle-income residential area in southeast
Denver, Colorado. The nursing home's immediate surroundings consist of
single-family homes and three- to four-story, multi-family buildings.
Christopher House is a 26,659 sq. ft. facility with 38 patient rooms in a
neighborhood of medium priced residential homes with commercial development near
intersections of major arterials. The area is influenced by a near by major
medical center which has spawned a number of doctor offices and small medical
buildings. Next to Christopher House is an unrelated 11-story retirement
apartment building.
Arkansas Manor is a 33,450 sq. ft., 116 bed skilled nursing center with 65
patient rooms in Denver, Colorado. Located in a residential neighborhood, the
property's zoning of R-3 allows nursing homes.
Cornerstone Care Center in Lakewood (Denver area), Colorado, is a 140 bed
skilled nursing center with 66 patient rooms. Cornerstone is located in a
residential neighborhood and was last remodeled in 1990. Building construction
occurred in two stages: (i) in 1970, the first stage was built with 60 beds in
one story (10,850 square feet) with a partial basement (2,028 square feet); (ii)
in 1974, a second stage was built in two levels (25,200 square feet) consisting
of an upper level with 60 beds in 26 rooms and a lower level consisting of
34
<PAGE> 41
33 beds in 15 rooms and a kitchen, laundry room, and boiler room. The second
stage was built to support a third level.
The Arbors is a 40,551 sq. ft. facility with 64 patient rooms and is the
only nursing center in Camp Verde, Arizona. Camp Verde is located approximately
80 miles north of Phoenix, Arizona. This facility receives significant patient
overflow from the town's nearest hospital (in Cottonwood, Arizona, where the
Company also operates Rio Verde). The Arbors is in a neighborhood characterized
primarily as residential.
Los Arcos is a 23,400 sq. ft. facility with 42 patient rooms located in a
high growth residential area of Flagstaff, Arizona. The region's medical
community is dominated by a medical center which provides home health care
services and some subacute and skilled nursing services. This medical center
captures a significant percentage of Medicare Part A patients, resulting in a
reduced quality mix for Los Arcos.
Rio Verde is a 23,400 sq. ft. facility with 42 patient rooms, is the only
nursing home in Cottonwood, Arizona and is located next to the only hospital in
a three city area. Cottonwood is located approximately 100 miles north of
Phoenix, Arizona.
Pueblo Norte is a 28,150 sq. ft. facility with 52 patient rooms and is the
only nursing home in Show Low, Arizona, as well as in its surrounding regions.
The facility is located adjacent to a hospital. Show Low is located
approximately 150 miles northeast of Phoenix, Arizona.
Douglas Manor is a 23,668 sq. ft. 64 bed skilled nursing center with 34
patient rooms. It is located in a residential neighborhood adjacent to the local
high school in Douglas, Arizona. Douglas is located approximately 250 miles
southeast of Phoenix, Arizona.
Village Catered Care is a 29,335 sq. ft., 62 room assisted living center
located adjacent to Douglas Manor. The building was constructed in 1982 and
occupies 5.5 acres of land.
Safford Care Center is a 36,923 sq. ft., 128 bed skilled nursing center
with 68 patient rooms in a residential neighborhood of Safford, Arizona. Safford
is approximately 150 miles southeast of Phoenix, Arizona.
Peppertree Catered Care is a 29,335 sq. ft., 62 room assisted living center
located adjacent to Safford Care. The building was constructed in 1982 and
occupies 7.6 acres of land.
STOCK OWNERSHIP, DIVIDENDS AND RELATED STOCKHOLDER MATTERS
All of the 281,379 issued and outstanding shares of Signature Health Care
common stock are owned, beneficially and of record, by David Kremser (240,000
shares or 85%) and John Filkoski (41,379 shares or 15%). Messrs. Kremser and
Filkoski are also Signature Health Care's sole officers and are two of the five
directors. Mr. Kremser holds options to purchase 50,000 shares of Signature
Common Stock and Mr. Filkoski holds options to purchase 8,621 shares of
Signature Common Stock, all at $4.00 per Signature share, of a total of 80,171
options outstanding.
The issued and outstanding shares of each of the other Signature Entities
is described in the following table.
<TABLE>
<CAPTION>
HOLDER SHARES PERCENTAGE
---------------------------------------------------------- ------ ----------
<S> <C> <C>
David A. Kremser.......................................... 350 35%
Stanley Kremser(1)........................................ 125 12.5%
Bernice Kremser(1)........................................ 125 12.5%
Holly Kremser(2).......................................... 125 12.5%
Michael Kremser(2)........................................ 125 12.5%
John D. Filkoski.......................................... 39 3.9%
Michael Filkoski(3)....................................... 37 3.7%
Lisa Filkoski(3).......................................... 37 3.7%
David Filkoski(3)......................................... 37 3.7%
</TABLE>
- ---------------
(1) Parents of David A. Kremser.
(2) Children of David A. Kremser.
(3) Brothers and sister of John D. Filkoski.
35
<PAGE> 42
Neither Signature Health Care nor any of the other Signature entities has
paid dividends, excluding S corporation distributions in respect of income
taxes.
MANAGEMENT OF SIGNATURE
David A. Kremser, 48, co-founded Signature Health Care Corporation in July
1987 and has served as its Chairman, President, Chief Executive Officer and a
Director since then. Mr. Kremser also serves as the Chief Executive Officer for
each of Arkansas, Cornerstone, Douglas and Safford. From January 1985 through
June 1987, Mr. Kremser was a Director and Executive Vice President of Columbia
Corporation, a long-term care company, and the President of Columbia West
Corporation, a subsidiary of Columbia Corporation. Prior to joining Columbia
Corporation, he was affiliated with ARA Services, Inc., most recently with
responsibility for the ARA's operations in California, Colorado, Wyoming and
Texas.
John D. Filkoski, 38, co-founded Signature Health Care Corporation with Mr.
Kremser and has served as its Treasurer, Chief Financial Officer and a Director
since then. Mr. Filkoski also serves as the Chief Financial Officer for each of
Arkansas, Cornerstone, Douglas and Safford. From January 1985 through the
founding of Signature Health Care in July 1987, Mr. Filkoski was affiliated with
the Columbia Corporation and had responsibility there for the finance,
reimbursement and acquisitions for the western division.
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA OF SIGNATURE
The consolidated statements of operations data for the years ended December
31, 1993, 1994 and 1995 and the balance sheet data at December 31, 1994 and 1995
are derived from, and are qualified by reference to, the consolidated or
combined Financial Statements of Signature audited by Arthur Andersen LLP,
independent public accountants, included elsewhere in the Prospectus/Proxy and
Information Statement and should be read in conjunction with those Financial
Statements and Notes thereto and "Signature Management's Discussion and Analysis
of Financial Condition and Results of Operations" in this Proxy Statement
Supplement. The statement of operations data for the years ended December 31,
1991 and 1992 and the balance sheet data at December 31, 1991, 1992 and 1993 are
derived from Signature's audited financial statements not included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
SIX MONTHS
ENDED
JUNE 30,
1996
-----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Resident Revenues..................... $22,252 $33,050 $19,941 $18,296 $15,241 $10,355
Resident Expenses..................... 14,340 22,243 14,450 13,583 11,191 7,757
Income from Resident Services......... 7,912 10,807 5,491 4,713 4,050 2,598
Management, rent and interest
expenses............................ 6,657 8,726 4,356 2,340 2,143 1,716
Depreciation and amortization......... 845 1,550 1,079 727 597 406
Income before provision for taxes..... 410 531 56 1,646 1,310 476
Income tax provision (benefit)........ (383) (67) 28 642 531 95
Net income............................ 793 598 28 1,004 779 381
Net income per common share........... -- -- -- -- -- --
Common shares outstanding............. -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
JUNE 30,
1996
-----------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ -- $ 588 $ 919 $ 872 $ 1,351 $ 1,248
Working capital....................... 5,236 3,898 1,988 1,020 438 619
Total assets.......................... 29,397 28,870 24,720 17,218 17,269 11,163
Long-term debt, net of current
maturities.......................... 19,188 19,521 18,985 10,530 11,596 7,659
Stockholders' equity.................. 1,253 1,980 1,406 4,125 3,122 2,150
</TABLE>
36
<PAGE> 43
SIGNATURE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Signature owns, operates and manages skilled nursing facilities, which
provide intermediate and skilled nursing care, specialty therapies and subacute
care. Signature facilities are located in Colorado and Arizona.
The following discussion includes the results of operations of Signature
Health Care and the Signature Affiliates and should be read in conjunction with
Signature Health Care's consolidated financial statements and related notes
thereto for the six months ended June 30, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993 and the combined financial statements of
Arkansas, Cornerstone, Douglas and Safford and related notes thereto for the six
months ended June 30, 1996 and 1995 and the year ended December 31, 1995.
RESULTS OF OPERATIONS
The following table summarizes certain information regarding Signature's
long-term care and assisted living facilities.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
-------------- ----------------------
1996 1995 1995 1994 1993
------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nursing facilities:
Number of facilities.......................... 11 9 7 7 7
Number of licensed beds....................... 1,050 858 602 602 602
Assisted living facilities:
Number of facilities.......................... 2 -- -- -- --
Number of beds................................ 128 -- -- -- --
</TABLE>
Signature's revenues fluctuate from facility to facility based on various
factors, including total capacity, occupancy rates, reimbursement systems and
rates among the payor categories, payor mix and the scope and utilization of
Signature's ancillary services. Medicare patients generate the highest revenue
per patient day, although profitability is not always increased due to the
additional costs associated with the higher level of care required by such
patients. In general, private pay sources are more profitable to Signature than
governmental reimbursement sources. Signature generally derives a higher profit
margin from ancillary services than from basic nursing services.
Data for nursing center operations with respect to sources of patient
revenues by payor type are set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED JUNE 30, ----------------------
1996 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Medicaid......................................... 19% 17% 19% 16%
Medicare......................................... 30 33 20 19
Private and other................................ 51 50 61 65
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
In the six months ended June 30, 1996, Signature realized net income of
$793,000 compared to a net loss of $83,000 in the prior year period.
Patient revenue increased from $11,941,000 in the six months ended June 30,
1995 to $22,252,000 in the current period, an increase of 86.3%. Of this
increase, $8,929,000 or 74.8% is the result of the acquisition of the Signature
Affiliates in 1995. The remaining increase is due primarily to the growth in
sub-acute and rehabilitation services.
37
<PAGE> 44
Patient expenses increased by 79.0% to $14,340,000 in the six months ended
June 30, 1996 compared to the same period in the prior year. Of this increase,
$5,536,000 or 69.18% is the result of the acquisitions of the Signature
Affiliates in 1995. The remaining increase is due primarily to the increase in
nursing services which is attributable to the growth in sub-acute and
rehabilitation services.
Signature pays a management fee to Yankee Creek Management Company, LLC,
which is wholly owned by Messrs. Kremser and Filkoski. Such management fee
expense amounted to $4,244,000 and $1,653,000 for the six months ended June 30,
1996 and 1995, respectively.
Rent, interest, depreciation and amortization in the aggregate amounted to
$3,258,000 for the six months ended June 30, 1996 compared to $2,402,000 in the
prior year period. The increase is due primarily to the acquisitions of the
Signature Affiliates.
Twelve Months Ended December 31, 1995 Compared to Twelve Months Ended December
31, 1994
Signature realized net income of $598,000 in 1995 compared to $28,000 in
1994.
Patient revenue increased from $19,942,000 in 1994 to $33,050,000 in 1995,
an increase of 65.7%. Of this increase, $8,641,000 or 43.3% was the result of
the acquisitions of the Signature Affiliates. The remaining increase was due
primarily to the growth in sub-acute and rehabilitation services as well as
increases in Medicare and Medicaid reimbursement rates.
Patient expenses increased by 53.9% to $22,243,000 in 1995. Of this
increase, $6,190,000 or 42.8% is the result of the acquisitions of the Signature
Affiliates in 1995. The remaining increase is due primarily to the increase in
nursing services which is attributable to the growth in sub-acute and
rehabilitation services.
Signature pays a management fee to Yankee Creek Management Company, LLC,
which is wholly owned by Messrs. Kremser and Filkoski. Such management fees
amounted to $5,524,000 and $2,301,000 in 1995 and 1994, respectively.
Rent increased from $397,000 in 1994 to $1,235,000 due to the acquisitions
of the Signature Affiliates.
Net interest expense amounted to $1,967,000 in 1995 compared to $1,657,000
in 1994, an increase of 18.7%. On March 30, 1994, Signature completed a
long-term financing program. See "Liquidity and Capital Resources."
Depreciation and amortization increased from $1,079,000 in 1994 to
$1,550,000 in 1995, or 43.7%. The increase is due primarily to the amortization
of goodwill and deferred loan fees recorded in connection with the buyout of
preferred stockholders in March 1994. See "Liquidity and Capital Resources."
Twelve Months Ended December 31, 1994 Compared to Twelve Months Ended December
31, 1993
Signature realized net income of $28,000 in 1994 compared to $1,004,000 in
1993. The decrease in net income is due to the increase in management fees
payable to Yankee Creek Management Company, LLC, which is wholly owned by
Messrs. Kremser and Filkoski. Such management fees amounted to $2,302,000 in
1994 and $1,027,000 in 1993.
Patient revenue increased from $18,296,000 in 1993 to $19,941,000 in 1994,
an increase of 9.0%. The increase was due the growth in specialty services
(sub-acute and rehabilitation therapy and Alzheimers care) as well as increases
in Medicare and Medicaid reimbursement rates.
Patient expenses increased by 6.4% to $14,450,000 in 1994. The increase is
due primarily to the increase in nursing services which is attributable to the
growth in sub-acute and rehabilitation services.
Rent increased by 3.9% in 1994 to $397,000.
Net interest expense amounted to $1,657,000 in 1994 compared to $930,000 in
1993, an increase of 78.2%. On March 30, 1994, Signature completed a long-term
financing program See "Liquidity and Capital Resources."
38
<PAGE> 45
Depreciation and amortization increased from $727,000 in 1993 to $1,079,000
in 1994, or 48.3%. The increase is due primarily to the amortization of goodwill
recorded in connection with the buyout of preferred stockholders in March 1994.
See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities amounted to $597,000 in 1995 compared to
cash provided by operating activities of $241,000 in 1994 and $827,000 in 1993.
The decrease in cash from operations in 1995 is attributable to the start-up of
the Signature Affiliates.
Cash used in investing activities amounted to $591,000, $4,761,000
(discussed below) and $241,000 in the three years ended December 31, 1995, 1994
and 1993. Capital expenditures totaled $473,000 in 1995 compared to $513,000 in
1994 and $222,000 in 1993.
Cash provided by financing activities amounted to $857,000 in 1995. Loans
from affiliates, net of repayments, amounted to $1,084,000 in 1995. Cash
provided by financing activities totaled $4,567,000 in 1994 (discussed below)
and cash was used by financing activities in 1993 in the amount of $1,065,000 to
repay long-term debt.
On March 30, 1994, Signature completed a recapitalization program which
included the issuance of 10-year mortgage debt in the amount of $19,100,000. The
proceeds, net of loan fees amounting to $324,000, were used to retire existing
debt totaling $11,462,000 and redeem convertible preferred stock in the amount
of $2,747,000. Signature treated the redemption of preferred stock as a
leveraged buyout by the common stockholders and, accordingly, recorded an
increase in the basis of the assets amounting to $4,460,000 which was based on
the fair value of the transaction. As a result, the financial reporting basis of
Signature's assets exceeded their tax basis, as no step-up is allowed for income
tax purposes. Accordingly, Signature recognized a deferred tax liability of
$2,779,000 and recorded goodwill amounting to $2,645,000. At June 30, 1996, the
balance of the mortgage debt was $18,519,000 with interest payable at 10.5%.
On August 2, 1996, Signature entered into agreements with Unison for the
acquisition by Unison of Signature Health Care and the Signature Affiliates.
Through mergers with each of the Signature companies and subsidiaries of Unison,
each of the Signature companies will become wholly owned subsidiaries of Unison.
Outstanding shares of Signature Health Care will be converted into the right to
receive, subject to certain adjustments, cash equal to approximately $10,200,000
and shares of Unison Common Stock equal to approximately $20,000,000.
Outstanding shares of the Signature Affiliates will be converted into the right
to receive, subject to certain adjustments, cash equal to approximately
$28,000,000 in the aggregate. The Signature Merger agreements are subject to
regulatory and shareholder approval and will be accounted for as purchases. It
is a condition to the closing of the Signature Mergers that Unison have entered
into a definitive agreement for the acquisition of RehabWest, whose principal
creditors are Messrs. Kremser and Filkoski, who sold RehabWest to its employees
in March 1996. As of the date hereof, Unison has not reached an agreement for
the acquisition of RehabWest.
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<PAGE> 46
COMPARISON OF HISTORICAL AND EQUIVALENT PER SHARE DATA (UNAUDITED)
The following table summarizes certain unaudited selected financial
information on a pro forma and pro forma equivalent per share basis and is
derived from, and should be read in conjunction with, the Unaudited Pro Forma
Condensed Combined Financial Statements included herein and the historical
financial statements of Unison and Signature, which are included in the
Prospectus/Proxy and Information Statement. The information presented in this
table does not purport to present the financial position or results of
operations of Unison had the Signature Mergers taken place on the dates
specified, nor is such information necessarily indicative of the results of
operations that may be achieved in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------- ------------
1996 1995 1995
------ ----- ------------
<S> <C> <C> <C>
UNISON
Historical net income (loss) per common share, fully
diluted..................................................... $ .31 $(.04) $ (.02)
Pro forma combined income (loss) per common share (Unison and
previous acquisitions)...................................... .26 (.27) (.37)
Pro forma combined income (loss) per common share, fully
diluted..................................................... .25 (.78) (1.11)
Historical book value per common share(1)..................... 5.91 5.41
Pro forma combined book value per common share(1)............. 7.97 7.66
Historical cash dividends per common share(2)................. -- -- --
SIGNATURE
Historical net income (loss) per common share(3).............. 3.17 (.33) 20.68
Equivalent pro forma combined income (loss) per common
share(4).................................................... 1.34 (4.18) (5.95)
Historical book value per common share(5)..................... 5.25 4.92
Equivalent pro forma combined book value per common share..... 42.75 41.09
</TABLE>
- ---------------
(1) This calculation is based on the number of shares of Unison Common Stock
outstanding at the end of the period.
(2) Unison has not paid a common dividend and does not anticipate paying a
common dividend in the near future.
(3) This calculation is based on 250,000 shares of Signature common stock
outstanding during the period.
(4) Equivalent pro forma data were calculated by multiplying the pro forma
combined per share data of Unison by an assumed conversion ratio of 5.3644
for each share of Signature Health Care common stock.
(5) This calculation is based on 250,000 shares of Signature common stock
outstanding at the end of the period.
40
<PAGE> 47
THE CERTIFICATE AMENDMENT
Unison's Board of Directors has declared advisable and directed that there
be submitted to the stockholders of Unison at the Unison Special Meeting a
proposed amendment to Article 4 of Unison's Certificate of Incorporation, as
previously amended, which would effect an increase in the number of authorized
shares of Unison Common Stock, par value $.001 per share, from 10,000,000 shares
to 25,000,000 shares. The amendment will not affect the present amount of
authorized preferred stock. The number of shares of Unison Common Stock issued
and outstanding as of the Unison Record Date was 3,989,815. Additionally,
approximately 4,165,139 shares are reserved for issuance or underlie convertible
securities of Unison as follows: 511,046 shares are reserved for issuance
pursuant to Unison's 1995 Stock Option Plan (and the Board of Directors has
approved an amendment to the Option Plan, and will ask the stockholders of
Unison to vote on the amendment at the Unison Special Meeting, to increase the
number of shares authorized for issuance under the Option Plan from 511,046 to
800,000); 120,000 shares are reserved pursuant to warrants issued to the
underwriters of Unison's initial public offering of Unison Common Stock;
1,509,434, subject to certain adjustments, are to be issued, subject to
stockholder and regulatory approvals, in the Signature Mergers; 540,000, subject
to approval by shareholders of Ampro and Memphis, are to be issued in the Ampro
Merger and the Memphis Merger; 1,150,000 shares have been reserved for issuance
in connection with certain short-term financing from Imperial Bank (the
"Imperial Financing")(although the 800,000 shares reserved for issuance in
connection with the Imperial Financing loan agreement is only an estimate of the
number of shares required to be issued upon conversion of the Imperial Financing
loan and such conversion may only occur upon the occurrence of certain defaults
under such financing); approximately 233,333 underlie the notes and debentures
issued to Messrs. Henderson and Plash in connection with the acquisition by
Unison of 90% of the common stock of four rehabilitation therapy centers in
March 1996; approximately 84,659 shares underlie a convertible promissory note
issued to Red Line Healthcare Corporation; and 16,667 shares are reserved for
issuance under a warrant issued to HealthPartners Funding, L.P.
The additional shares of Unison Common Stock for which authorization is
sought would be identical to the presently authorized shares of Unison Common
Stock. Holders of Common Stock do not have preemptive rights to subscribe to
additional securities which may be issued by Unison.
If approved, the increased number of authorized shares of Unison Common
Stock will be available for use from time to time for such purposes and
consideration as the Board of Directors may approve, and no further vote of
stockholders of Unison will be required, except as provided under the DGCL or
the rules of any national securities exchange or automated quotation system on
which Unison Common Stock is at the time listed. The availability of additional
shares for issue, without the delay and expense of obtaining the approval of
stockholders at a special meeting, will afford Unison greater flexibility in
acting upon proposed transactions. Such transactions could include, without
limitation, issuance as part or all of the consideration required to be paid by
Unison for acquisitions of other businesses or properties, issuance in public or
private sales for cash as a means of obtaining capital for use in Unison's
business and operations, payment of stock dividends, subdivision of outstanding
shares through stock splits and issuance under employee benefit plans.
The proposed Certificate Amendment could also have certain anti-takeover
effects. For example, although Unison has no present intent to do so, shares of
Unison Common Stock could be issued by private placement or public offering, or
rights to purchase such shares could be issued, to create voting impediments to
or to frustrate persons seeking to effect a takeover or otherwise to gain
control of Unison. In addition, the proposed Certificate Amendment, together
with the staggered terms of the directors, could discourage an attempt by a
person to acquire control of Unison by a tender offer or other means. It could
therefore deprive stockholders of the benefit that could result from such an
attempt, such as the realization of a premium over the market price that such an
attempt could cause. The Board of Directors is not aware of any present effort
to gain control of Unison.
Although the Board of Directors anticipates that it may sell additional
shares of Common Stock for cash in a registered public offering within the next
six to nine months, the Board of Directors does not intend to issue any shares
of Unison Common Stock to be authorized under this proposed amendment except
upon
41
<PAGE> 48
terms that the Board deems to be in the best interests of Unison and its
stockholders. Unison has no present plans to adopt any additional certificate
provisions which may have anti-takeover effects.
If the amendment is authorized, the text of Article 4 of Unison's
Certificate of Incorporation, as previously amended, will be as follows:
4. Authorized Capital. The Corporation shall have the authority to
issue 25,000,000 shares of common stock, par value $.001 per share (the
"Common Stock") and 1,000,000 shares of preferred stock, par value, $.001
per share (the "Preferred Stock").
If this proposal is approved, the appropriate officers of Unison will
execute and file with the Delaware Secretary of State a Certificate of Amendment
in substantially the form attached hereto as Annex D to Unison's Certificate of
Incorporation and such other documents as are necessary to effect the increase
in the number of authorized shares of Unison Common Stock.
The Board of Directors unanimously recommends that the stockholders vote
FOR this proposal to increase the number of authorized shares of Unison Common
Stock from 10,000,000 shares to 25,000,000 shares.
42
<PAGE> 49
THE OPTION PLAN AMENDMENT
Unison's Board of Directors has declared advisable and directed that there
be submitted to the stockholders of Unison at the Unison Special Meeting a
proposed amendment to Unison's 1995 Stock Option Plan (the "Option Plan") which
would effect an increase in the number of shares of Unison Common Stock
authorized for issuance under the Option Plan from 511,046 to 800,000 and would
increase the number of shares under formula grants to nonemployee directors from
6,246 shares upon initial election and every fifth anniversary thereafter to
15,000 shares (17,500 shares in the case of the Chairman of the Board) at each
annual meeting (provided the recipient remains a nonemployee director) beginning
in 1996 (the "Option Plan Amendment"). As of the Record Date, including the
grant of an option for 60,000 shares confirmed on September 6, 1996 to Craig R.
Clark, Unison's Chief Financial Officer,not conditioned upon approval by the
stockholders of the Option Plan Amendment), options to purchase 334,703 shares
had been granted under the Option Plan. Additionally, options to purchase
416,850 shares of Unison Common Stock were granted on September 6, 1996 subject
to the approval of the stockholders of Unison of the Option Plan Amendment at
the Unison Special Meeting. If the Option Plan Amendment is not approved by the
stockholders at the Unison Special Meeting, grants for 416,850 of the shares
approved by the Board on September 6, 1996 will not be made and 166,343 shares
of Unison Common Stock will remain available for issuance under the Option Plan
(38,447 shares will remain if the Option Plan Amendment is approved and the
non-conditional and conditional grants are made).
To make the grants approved by the Board of Directors prior to the Record
Date, to effect the increase in the formula grants approved by the Board of
Directors (including the grant of options or 15,000 shares to each nonemployee
director (options for 17,500 shares for the Chairman of the Board) at September
6, 1996) and to assure that additional shares of Unison Common Stock will be
authorized to make additional option grants to eligible persons in the future,
Unison's Board of Directors has approved the following amendment to paragraphs 5
and 12 of the Option Plan. If the Option Plan Amendment is approved, paragraphs
5 and 12 will read as follows:
5. SHARES SUBJECT TO OPTION
The stock available for grant of options under the Plan shall be
shares of the Company's authorized but unissued or reacquired voting
common stock. The aggregate number of shares that may be issued pursuant
to exercise of options granted under the Plan shall be 800,000 shares. If
any outstanding option grant under the Plan for any reason expires or is
terminated, the shares of common stock allocable to the unexercised
portion of the option grant shall again be available for options under
the Plan as if no options had been granted with respect to such shares.
12. AUTOMATIC GRANTS TO CERTAIN DIRECTORS
(a) Initial Grant. Each Nonemployee Director on the effective date
of this Plan as set forth in paragraph 8 (July 10, 1995) thereafter
automatically shall be granted options to acquire 9,246 shares of the
Company's Common Stock, except that the Chairman of the Board shall
receive 10,496 shares of the Company's Common Stock.
(b) Additional Grants. On September 6, 1996, and immediately after
each annual meeting of shareholders, beginning with the 1997 annual
meeting, each person who is a Nonemployee Director at such time shall
automatically be granted options to acquire 15,000 shares of the
Company's Common Stock (a "Subsequent Grant") subject to the terms of
paragraph 12(c), provided that if the Chairman of the Board is a
Nonemployee Director on the date of any Subsequent Grant, he or she shall
also receive options to acquire an additional 2,500 shares of the
Company's Common Stock.
(c) Terms of Options. Notwithstanding anything in paragraph 6(c) to
the contrary, options granted pursuant to this paragraph 12 shall have a
10-year term, provided that any option held by a director who is removed
from the Board for cause shall expire on the date of such removal. The
options granted pursuant to this paragraph 12 shall become exercisable at
the following times: (i) 50% of the options shall become exercisable on
the first anniversary of the effective date of the
43
<PAGE> 50
grant; and (ii) 50% shall become exercisable on the second anniversary of
the effective date of grant. The exercise price of all options granted
pursuant to this paragraph 12 shall be the fair market value of the
Company's Common Stock on the date of grant.
(d) Limitation on Amendment. This paragraph 12 shall not be amended
more than once every six months other than to comport with changes in the
Code, the Employee Retirement Income Security Act, or the rules
thereunder.
The Board of Directors of Unison believes that it is in the best interests
of Unison and its stockholders to make the grants awarded subject to approval by
stockholders of the Option Plan Amendment, to increase the formula grants to
nonemployee directors and to have additional shares of Unison Common Stock
authorized for issuance under the Option Plan in order to attract, retain and
reward management and other employees, directors and other eligible persons
providing service to Unison and its subsidiaries and to strengthen the mutuality
of interests between such persons and Unison's stockholders.
The Option Plan is summarized below, but the description is subject to and
is qualified in its entirety by the full text of the Option Plan as proposed to
be amended, which is attached hereto as Annex E to this Proxy Statement
Supplement.
GENERAL
The Option Plan includes components: (i) a discretionary option grant
program (the "Discretionary Option Grant Program") under which eligible
individuals may, at the discretion of the Committee, be granted options to
purchase shares of Unison Common Stock at an exercise price determined by the
Committee and (ii) an automatic option grant program (the "Automatic Option
Grant Program") under which option grants will automatically be made at periodic
intervals to eligible non-employee members of the Board of Directors to purchase
shares of Unison Common Stock at an exercise price equal to 100% of their fair
market value on the grant date.
THE DISCRETIONARY OPTION GRANT PROGRAM
Eligibility and Participation. The discretionary Option Grant Program is
administered by the Compensation Committee (the "Committee") of the Board of
Directors, and the Committee, as the administrator of the Option Plan, has
complete discretion to determine which eligible individuals are to receive
option grants. In general, the only consideration received by Unison for the
grant of an award will be past services or the expectation of future services,
or both. The Option Plan does not confer on any participant in the Option Plan
(a "Participant") any right with respect to continued employment or other
services to Unison and will not interfere in any manner with the right of Unison
to terminate a Participant's employment or other services.
Administration. The Option Plan is administered by the Committee, which is
constituted to permit the Option Plan to comply with SEC Rule 16b-3. The
Committee is authorized to: (i) select Participants; (ii) approve forms for
grants under the Option Plan; (iii) determine the time or times when such option
grants are to be made, including the number of shares subject to each such
grant; (iv) designate the status of any granted option as either an incentive
stock option or a non-qualified stock option under the Federal tax laws (except
that Nonemployee Directors are only eligible to receive Nonqualified Stock
Options); (v) set the exercise price for any Nonqualified Stock Option; (vi) set
the vesting schedule and exercise period to be in effect for the option grant;
(vii) fix the maximum term for which any granted option is to remain
outstanding; (viii) extend and maintain, or arrange for the extension and
maintenance of, credit to a Participant to purchase shares pursuant to the
exercise of options (subject to applicable laws and regulations); (ix) designate
grants, or amend existing grants, which allow transfer between immediate family
members; (x) modify, extend or renew outstanding options granted under the
Option Plan, accept the surrender of outstanding options (to the extent not
previously exercised), reduce the exercise price of outstanding options, or
authorize the granting of new options in substitution therefor (to the extent
not previously exercised and with an exercise price per share based upon the
fair market value of the Unison Common Stock on the new grant date), none of
which shall alter or impair any rights of the Participant; (xi) modify grants to
foreign nationals to reflect foreign tax laws; (xii) include in grants other
terms consistent with the purposes of the Option Plan such as
44
<PAGE> 51
discretionary performance standards, tax withholding provisions, or other
forfeiture provisions regarding competition and confidential information.
Upon an acquisition of Unison by merger, consolidation or reorganization,
each outstanding option may be substituted with shares of the acquiring company
or such option may be canceled in consideration for a cash payment to the
Participant of an amount per option share equal to the excess of the highest
fair market value of the Unison Common Stock during the 60-day period preceding
the acquisition over the option exercise price. A similar cash payment will be
made to each Participant upon the dissolution or liquidation of Unison.
Limitations on Awards. Except pursuant to the Automatic Option Grant
Program, no grants are required to be made during any calendar year. No
Incentive Stock Option ("ISO") may be exercised more than ten years from the
date of grant (five years in the case of a grant to a Participant owning more
than 10% or more of the total combined voting power of all classes of stock of
Unison or any ISO Group Member), three months after the date the Participant
ceases to perform services for Unison or any ISO Group Member (for reasons other
than death or disability), one year after the date the Participant ceases to
perform services for Unison or any ISO Group Member if cessation is due to death
or disability, or the date the Participant ceases to perform services for Unison
or any ISO Group Member if cessation is for cause. No Nonqualified Stock Option
may be exercised more than ten years from the date of grant, two years after the
date the Participant ceases to perform services for Unison or any Affiliated
Group Member (for reasons other than death, disability, retirement or cause),
three years after the date the Participant cease to perform services for Unison
or any Affiliated Group Member if cessation is due to death, disability or
retirement, or the date the Participant ceases to perform services for Unison or
any Affiliated Group Member if cessation is for cause.
Pricing and Payment of Options. The per share exercise price of each stock
option granted under the Option Plan will be established by the Committee at the
time of grant. Subject to the provisions of the Internal Revenue Code of 1986,
as amended, grants to Participants may be either ISOs or Nonqualified Stock
Options. In the case of an ISO, the per share exercise price may be no less than
100% of the fair market value of a share of Unison Common Stock on the date of
grant (110% in the case of a participant who owns, directly or indirectly, 10%
or more of the outstanding voting power of all classes of stock of Unison). The
per share exercise price of a Nonqualified Stock Option may be any amount
determined in good faith by the Committee. With respect to ISOs, the aggregate
fair market value of the Unison Common Stock for which one or more options
granted to a participant may become exercisable during any one calendar year may
not exceed $100,000. The fair market value of the Unison Common Stock equals the
closing price on the date in question as reported by the Nasdaq National Market.
Under the Option Plan, the purchase price of an option is payable upon
exercise: (i) in cash; (ii) by check; (iii) to the extent permitted by the
particular option grant, by transferring to Unison shares of Unison Common Stock
at their fair market value as of the option exercise date (provided that the
Participant held the shares of stock for at least six months); or (iv) through a
sale and remittance procedure by which a Participant delivers concurrent written
instructions to a Unison-designated brokerage firm to sell immediately the
purchased Unison Common Stock and remit to Unison sufficient funds to pay for
the options exercised and by which the certificates for the purchased Unison
Common Stock are delivered directly to the brokerage firm. Unison may also
extend and maintain, or arrange for the extension and maintenance of, credit to
a Participant to finance the purchase of shares pursuant to the exercise of
options, on such terms as may be approved by the Board of Directors or the
Committee, subject to applicable regulations of the Federal Reserve Board and
any other applicable laws or regulations in effect at the time such credit is
extended.
The Committee may require, as a condition to exercise of an option, that
the Participant pay to Unison, in cash or in shares of Unison Common Stock, the
entire amount of taxes which Unison is required to withhold by reason of such
exercise, in such amount as the Committee or the Board of Directors may
determine. Alternatively, the Participant may elect, subject to rules adopted by
the Committee or the Board of Directors, or Unison may require that it withhold
from the shares to be issued that number of shares having a fair market value
equal to the amount which it is required to withhold.
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<PAGE> 52
Exercise. As described above, the Committee has the authority to determine
the vesting and exercise provisions of all grants under the Option Plan. In
general under the Option Plan, no option shall be exercisable during the
lifetime of a Participant by any person other than the Participant, his or her
guardian or legal representative.
THE AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, each individual serving as a
non-employee member of the Board of Directors of Unison on the date of adoption
of the Option Plan by the Board of Directors received an option grant on such
date for 9,246 shares of Common Stock, except that the Chairman of the Board of
Directors received an option for 10,496 shares. Prior to September 6, 1996, each
individual who first became a non-employee member of the Board of Directors
received a 9,246-share option grant on the date such individual joined the Board
of Directors. In addition, each individual who continued to serve as a non-
employee Board of Directors would have received an additional option grant to
purchase 6,246 shares of Unison Common Stock at every fifth annual meeting of
stockholders of Unison following an automatic option grant, beginning with the
fifth annual meeting of stockholders of Unison held after the initial grant. If
the Option Plan Amendment is approved, a grant of options for 15,000 shares
(17,500 shares in the case of the Chairman of the Board) of Unison Common Stock
will be made to each person who was a nonemployee director at September 6, 1996,
and each nonemployee director will receive, beginning with Unison's annual
meeting of stockholders held in 1997, a grant of options for 15,000 shares
(17,500 shares in the case of the Chairman of the Board) of Unison Common Stock
at each annual meeting of stockholders.
Each automatic grant will be exercisable 50% one year after the grant and
100% two years after the grant and will have a term of 10 years, subject to
earlier termination following the optionee's removal from the Board of Directors
for cause.
AMENDMENT AND TERMINATION OF THE OPTION PLAN; OPTION GRANTS
The Board of Directors may amend or modify the Option Plan at any time. The
Option Plan will terminate on July 9, 2005, unless sooner terminated by the
Board of Directors. In addition to the Option Plan Amendment, on September 6,
1996, the Board of Directors amended the Option Plan to increase the number of
shares under formula grants to non-employee directors from a 9,246 share option
grant on initial election to the Board of Directors and a 6,246 share option
grant at every fifth annual meeting of Unison stockholders thereafter to a
15,000 share option grant for non-employee directors at September 6, 1996
(provided the recipient remains a non-employee director) and a 15,000 share
option grant at each annual meeting thereafter.
Effective July 10, 1995, the Board of Directors granted options to purchase
306,126 shares of Unison Common Stock in the aggregate under the Option Plan to
certain employees of Unison, including each of the executive officers in the
following amounts: Jerry M. Walker, Philip R. Rollins, Craig R. Clark and Paul
J. Contris, 33,924 shares each which vest over a two-year period from the grant
date; and to L. Robert Oberfield and Terry Troxell-Gurka, 6,185 shares each,
which vest over a four-year period from the grant date. All of the options were
granted with an exercise price of $10.00 per share but were repriced to $9.00
per share in January 1996 to conform the exercise price to the per share price
of Unison Common Stock in Unison's initial public offering of common stock
during December 1995 and January 1996. In September 1996 the Compensation
Committee of the Board of Directors confirmed a special one-time grant
(originally framed in July 1996 subject to Compensation Committee approval) of
options for 60,000 shares to Craig R. Clark at an exercise price of $9.00 per
share. On the same date, but subject to approval of the Option Plan Amendment by
Unison's stockholders at the Unison Special Meeting, the Compensation Committee
recommended, and the full Board approved, the issuance of options for an
additional 324,350 shares to Unison employees at an exercise price of $13.75 per
share (its market value), including options for 40,000 shares to each of Messrs.
Rollins, Contris and Clark, options for 10,000 shares each to Messrs. Oberfield
and Henderson, and options for 7,500 shares to Ms. Troxell-Gurka.
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<PAGE> 53
FEDERAL INCOME TAX CONSIDERATIONS
The discussion that follows is a summary, based upon current law, of some
of the significant federal income tax considerations relating to awards under
the Option Plan. The following discussion does not address state, local or
foreign tax consequences.
A Participant will not recognize taxable income upon the grant or exercise
of an ISO except under certain circumstances when the exercise price is paid
with already-owned shares of Unison Common Stock that were acquired through the
previous exercise of an ISO. However, upon the exercise of an ISO, the excess of
the fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as a tax preference item for
purposes of the alternative minimum tax. In order for the exercise of an ISO to
qualify for the foregoing tax treatment, the Participant generally must be an
employee of Unison from the date the ISO is granted through the date three
months before the date of exercise, except in the case of death or disability,
where special rules apply. Unison will not be entitled to any deduction with
respect to the grant of an ISO.
If shares acquired upon exercise of an ISO are not disposed of by the
Participant within two years from the date of grant or within one year after the
transfer of such shares to the Participant (the "ISO Holding Period"), then (i)
no amount will be reportable as ordinary income with respect to such shares by
the Participant and (ii) Unison will not be allowed a deduction in connection
with such ISO or the Unison Common Stock acquired pursuant to the exercise of
the ISO. If a sale of such Unison Common Stock occurs after the ISO Holding
Period has expired, then any amount recognized in excess of the exercise price
will be reportable as a long-term capital gain, and any amount recognized below
the exercise price will be reportable as a long-term capital loss. The exact
amount of tax payable on a long-term capital gain will depend upon the tax rates
in effect at the time of the sale. The ability of a Participant to utilize a
long-term capital loss will depend upon the statutory limitations on capital
loss deductions not discussed herein.
A "disqualifying disposition" will generally result if Unison Common Stock
acquired upon the exercise of an ISO is sold before the ISO Holding Period has
expired. In such case, at the time of a disqualifying disposition, the
Participant will recognize ordinary income in the amount of the difference
between the exercise price and the lesser of (i) the fair market value on the
date of exercise or (ii) the amount realized on disposition. The Participant
will report as a capital gain any amount recognized in excess of the fair market
value on the date of exercise, and Unison will be allowed a deduction on its
federal income tax return in the year of the disqualifying disposition equal to
the ordinary income recognized by the Participant. If the amount realized on the
sale is less than the exercise price, then the Participant will recognize no
ordinary income, and the recognized loss will be reportable as a capital loss.
In general, a Participant to whom a Nonqualified Option is granted will
recognize no taxable income at the time of the grant. Upon exercise of a
Nonqualified Option, the Participant will recognize ordinary income in an amount
equal to the amount by which the fair market value of the Unison Common Stock on
the date of exercise exceeds the exercise price of the Nonqualified Option, and
Unison will generally be entitled to a deduction equal to the ordinary income
recognized by the Participant in the year the Participant recognizes ordinary
income, subject to the limitations of Section 162(m) of the Code.
Unison is required to withhold certain income taxes from Participants upon
exercises of Nonqualified Options. Unison will be entitled to a business expense
deduction for federal income tax purposes equal to the ordinary income
recognized by the Participant in the year the Participant recognizes ordinary
income from the exercise of Nonqualified Options.
The Board of Directors unanimously recommends that the stockholders vote
FOR this proposal to increase the number of shares of Unison Common Stock
authorized under the Option Plan from 511,046 to 800,000 and to increase the
formula grants to nonemployee directors.
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<PAGE> 54
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP are expected to be present at the
Unison Special Meeting and will have the opportunity to make a statement, if
they so desire, and to respond to appropriate questions.
OTHER MATTERS
Unison knows of no other matters to be submitted at the Unison Special
Meeting.
STOCKHOLDER PROPOSALS
Proposals of stockholders of Unison which are intended to be presented by
such stockholders at Unison's Annual Meeting for the fiscal year ending December
31, 1996 must be received by Unison no later than December 31, 1996 in order
that they may be considered for inclusion in the proxy statement and form of
proxy relating to that meeting. Additionally, if a stockholder wishes to present
to Unison an item for consideration as an agenda item for a meeting, the
stockholder must timely give notice to the Secretary and give a brief
description of the business desired to be discussed.
, 1996 THE BOARD OF DIRECTORS
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ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
UNISON HEALTHCARE CORPORATION
SIGNATURE HEALTH CARE CORPORATION
DAVID A. KREMSER
AND
JOHN D. FILKOSKI
DATED AS OF AUGUST 2, 1996
<PAGE> 56
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS.............................................................................. 1
AGREEMENT............................................................................. 1
1. DEFINITIONS..................................................................... 1
"Acquired Companies"........................................................... 1
"Ancillary Contracts".......................................................... 1
"Applicable Contract".......................................................... 1
"Audit Date"................................................................... 1
"Average Daily Price".......................................................... 1
"Balance Sheet"................................................................ 1
"Base Amount".................................................................. 1
"Best Efforts"................................................................. 1
"Breach"....................................................................... 1
"Closing"...................................................................... 2
"Closing Date"................................................................. 2
"Company"...................................................................... 2
"Consent"...................................................................... 2
"Contemplated Transactions".................................................... 2
"Contract"..................................................................... 2
"Damages"...................................................................... 2
"DCL".......................................................................... 2
"Disclosure Letter"............................................................ 2
"Disputed Medicare Receivables"................................................ 2
"Effective Time"............................................................... 2
"Encumbrance".................................................................. 2
"Environment".................................................................. 2
"Environmental, Health, and Safety Liabilities"................................ 2
"Environmental Law"............................................................ 3
"Equity Adjustment Amount"..................................................... 3
"ERISA"........................................................................ 3
"Escrow Agreement"............................................................. 3
"Exchange Act"................................................................. 3
"Facilities"................................................................... 3
"GAAP"......................................................................... 3
"Governmental Authorization"................................................... 3
"Governmental Body"............................................................ 4
"Hazardous Activity"........................................................... 4
"Hazardous Materials".......................................................... 4
"HCFA"......................................................................... 4
"HSR Act"...................................................................... 4
"Indemnified Persons".......................................................... 4
"Intellectual Property Assets"................................................. 4
"Interim Balance Sheet"........................................................ 4
"IRC".......................................................................... 4
"IRS".......................................................................... 4
"Knowledge".................................................................... 4
"Legal Requirement"............................................................ 4
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<TABLE>
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"Merger"....................................................................... 4
"Merger Consideration"......................................................... 4
"Merging Companies"............................................................ 5
"Newco"........................................................................ 5
"Noncompetition Agreements".................................................... 5
"Occupational Safety and Health Law"........................................... 5
"Order"........................................................................ 5
"Ordinary Course of Business".................................................. 5
"Organizational Documents"..................................................... 5
"Other Securityholders"........................................................ 5
"Per Share Cash Amount"........................................................ 5
"Per Share Conversion Amount".................................................. 5
"Parent"....................................................................... 5
"Parent Companies"............................................................. 5
"Parent Reports"............................................................... 5
"Parent Shares"................................................................ 5
"Person"....................................................................... 5
"Plan"......................................................................... 5
"Proceeding"................................................................... 5
"Registration Rights Agreement"................................................ 6
"Related Party Contracts"...................................................... 6
"Related Person"............................................................... 6
"Release"...................................................................... 6
"Representative"............................................................... 6
"SEC".......................................................................... 6
"Securities Act"............................................................... 6
"Securityholder Releases"...................................................... 6
"Shares"....................................................................... 6
"SNFs"......................................................................... 6
"Spread"....................................................................... 7
"Subsidiary"................................................................... 7
"Surviving Corporation"........................................................ 7
"Tax".......................................................................... 7
"Tax Return"................................................................... 7
"Threat of Release"............................................................ 7
"Threatened"................................................................... 7
"Warranting Shareholders"...................................................... 7
2. THE MERGER; CLOSING............................................................. 7
2.1 THE MERGER................................................................ 7
2.2 EFFECTIVE TIME............................................................ 7
2.3 CLOSING................................................................... 8
2.4 THE SURVIVING CORPORATION................................................. 8
2.5 CONSIDERATION FOR THE MERGER; CONVERSION OF SHARES IN THE
MERGER................................................................. 8
2.6 EXCHANGE OF CERTIFICATES; NO FRACTIONAL SHARES; RETURN OF
CERTIFICATES........................................................... 9
2.7 NO DISSENTING SHARES...................................................... 9
2.8 CLOSING OBLIGATIONS....................................................... 10
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<TABLE>
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2.9 EQUITY ADJUSTMENT AMOUNT.................................................. 10
2.10 EQUITY ADJUSTMENT PROCEDURE............................................... 11
3. REPRESENTATIONS AND WARRANTIES OF THE WARRANTING
SHAREHOLDERS................................................................ 11
3.1 ORGANIZATION AND GOOD STANDING............................................ 12
3.2 AUTHORITY; NO CONFLICT.................................................... 12
3.3 CAPITALIZATION............................................................ 13
3.4 FINANCIAL STATEMENTS...................................................... 13
3.5 BOOKS AND RECORDS......................................................... 14
3.6 TITLE TO PROPERTIES; ENCUMBRANCES......................................... 14
3.7 CONDITION AND SUFFICIENCY OF ASSETS....................................... 14
3.8 ACCOUNTS RECEIVABLE....................................................... 15
3.9 PREPAID SUPPLIES.......................................................... 15
3.10 NO UNDISCLOSED LIABILITIES................................................ 15
3.11 TAXES..................................................................... 15
3.12 NO MATERIAL ADVERSE CHANGE................................................ 16
3.13 EMPLOYEE BENEFITS......................................................... 16
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL
AUTHORIZATIONS......................................................... 17
3.15 LEGAL PROCEEDINGS; ORDERS................................................. 18
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS..................................... 19
3.17 CONTRACTS; NO DEFAULTS.................................................... 20
3.18 INSURANCE................................................................. 22
3.19 ENVIRONMENTAL MATTERS..................................................... 23
3.20 EMPLOYEES................................................................. 24
3.21 LABOR RELATIONS; COMPLIANCE............................................... 25
3.22 INTELLECTUAL PROPERTY..................................................... 25
3.23 CERTAIN PAYMENTS.......................................................... 26
3.24 DISCLOSURE................................................................ 26
3.25 RELATIONSHIPS WITH RELATED PERSONS........................................ 26
3.26 BROKERS OR FINDERS........................................................ 26
3.27 INVESTMENT INTENT......................................................... 27
3.28 SUITABILITY AND SOPHISTICATION............................................ 27
3.29 RECEIPT OF INFORMATION.................................................... 27
3.30 TERMINATION OF ANCILLARY CONTRACTS........................................ 27
4. REPRESENTATIONS AND WARRANTIES OF PARENT........................................ 28
4.1 ORGANIZATION AND GOOD STANDING............................................ 28
4.2 AUTHORITY; NO CONFLICT.................................................... 28
4.3 INVESTMENT INTENT......................................................... 28
4.4 CERTAIN PROCEEDINGS....................................................... 28
4.5 BROKERS OR FINDERS........................................................ 28
4.6 SUITABILITY AND SOPHISTICATION............................................ 29
4.7 RECEIPT OF INFORMATION.................................................... 29
4.8 CONFLICTING AGREEMENTS.................................................... 29
4.9 PARENT COMMON STOCK....................................................... 29
4.10 PARENT CAPITALIZATION..................................................... 29
4.11 REPORTS AND FINANCIAL STATEMENTS; NASDAQ COMPLIANCE....................... 29
4.12 ABSENCE OF CERTAIN CHANGES OR EVENTS...................................... 30
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<TABLE>
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5. COVENANTS OF THE WARRANTING SHAREHOLDERS PRIOR TO
CLOSING DATE...................................................................... 30
5.1 ACCESS AND INVESTIGATION.................................................. 30
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES..................... 30
5.3 NEGATIVE COVENANT......................................................... 30
5.4 REQUIRED APPROVALS........................................................ 30
5.5 NOTIFICATION.............................................................. 31
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS................................ 31
5.7 NO NEGOTIATION............................................................ 31
5.8 BEST EFFORTS.............................................................. 31
6. COVENANTS OF PARENT PRIOR TO CLOSING DATE....................................... 31
6.1 APPROVALS OF GOVERNMENTAL BODIES.......................................... 31
6.2 BEST EFFORTS.............................................................. 32
7. CONDITIONS PRECEDENT TO PARENT'S OBLIGATION TO CLOSE............................ 32
7.1 ACCURACY OF REPRESENTATIONS............................................... 32
7.2 WARRANTING SHAREHOLDERS' PERFORMANCE...................................... 32
7.3 CONSENTS.................................................................. 32
7.4 ADDITIONAL DOCUMENTS...................................................... 32
7.5 NO PROCEEDINGS............................................................ 33
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS....................... 33
7.7 NO PROHIBITION............................................................ 33
7.8 COMPLETION OF DILIGENCE................................................... 33
7.9 ENVIRONMENTAL REPORTS..................................................... 33
7.10 UNISON APPROVALS.......................................................... 33
7.11 UNISON FINANCING; AVERAGE DAILY PRICE..................................... 33
7.12 TREATMENT OF DISPUTED MEDICARE RECEIVABLES................................ 34
7.13 ACQUISITION OF REHABWEST, INC............................................. 34
7.14 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES...................... 34
8. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY AND THE
WARRANTING SHAREHOLDERS TO CLOSE.............................................. 34
8.1 ACCURACY OF REPRESENTATIONS............................................... 34
8.2 PARENT'S PERFORMANCE...................................................... 34
8.3 CONSENTS.................................................................. 34
8.4 ADDITIONAL DOCUMENTS...................................................... 34
8.5 NO INJUNCTION............................................................. 35
8.6 AVERAGE DAILY PRICE....................................................... 35
8.7 PARENT DIRECTOR........................................................... 35
8.8 ACQUISITION OF REHABWEST, INC............................................. 35
8.9 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES...................... 35
9. TERMINATION..................................................................... 35
9.1 TERMINATION EVENTS........................................................ 35
9.2 EFFECT OF TERMINATION..................................................... 36
9.3 WRONGFUL TERMINATION OR FAILURE TO CLOSE BY PARENT........................ 36
10. INDEMNIFICATION; REMEDIES....................................................... 36
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION LIMITED BY KNOWLEDGE.................. 36
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE
WARRANTING SHAREHOLDERS............................................... 37
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY PARENT......................... 37
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10.4 TIME LIMITATIONS......................................................... 37
10.5 LIMITATIONS ON AMOUNT -- WARRANTING SHAREHOLDERS......................... 38
10.6 LIMITATIONS ON AMOUNT -- PARENT.......................................... 38
10.7 ESCROW................................................................... 38
10.8 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS...................... 38
10.9 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS............................ 39
11. GENERAL PROVISIONS.............................................................. 39
11.1 EXPENSES................................................................. 39
11.2 PUBLIC ANNOUNCEMENTS..................................................... 39
11.3 CONFIDENTIALITY; ACCESS TO INFORMATION................................... 40
11.4 NOTICES.................................................................. 40
11.5 SPECIFIC PERFORMANCE; JURISDICTION; SERVICE OF PROCESS................... 41
11.6 FURTHER ASSURANCES....................................................... 41
11.7 WAIVER................................................................... 41
11.8 ENTIRE AGREEMENT AND MODIFICATION........................................ 41
11.9 DISCLOSURE LETTER........................................................ 42
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS....................... 42
11.11 SEVERABILITY............................................................. 42
11.12 SECTION HEADINGS, CONSTRUCTION........................................... 42
11.13 TIME OF ESSENCE.......................................................... 42
11.14 GOVERNING LAW............................................................ 42
11.15 COUNTERPARTS............................................................. 42
11.16 MUTUAL RELEASE........................................................... 42
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") is made as of August 2,
1996, by Unison HealthCare Corporation, a Delaware corporation ("Parent"),
Signature Health Care Corporation, a Delaware corporation ("Signature" or the
"Company"), David A. Kremser, an individual resident in Colorado ("Mr.
Kremser"), and John D. Filkoski, an individual resident in Colorado ("Mr.
Filkoski" and, collectively with Mr. Kremser, the "Warranting Shareholders").
RECITALS
The Boards of Directors of both Parent and the Company have, subject to the
conditions of this Agreement, determined that the Merger (as defined below) is
in the best interests of their respective shareholders and have approved and
adopted this Agreement and the transactions contemplated hereby. Parent and the
Warranting Shareholders desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and to cause the Merger
to occur on the terms set forth in this Agreement. This Agreement contemplates a
reorganization pursuant to IRC Sections 368(a)(1)(A) and 368(a)(2)(E).
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ACQUIRED COMPANIES" -- the Company and its Subsidiaries, collectively.
"ANCILLARY CONTRACTS" -- as defined in Section 3.30.
"APPLICABLE CONTRACT" -- any Contract (a) under which any Acquired Company
has or may acquire any rights, (b) under which any Acquired Company has or may
become subject to any obligation or liability, or (c) by which any Acquired
Company or any of the assets owned or used by it is or may become bound.
"AUDIT DATE" -- as defined in Section 2.10.
"AVERAGE DAILY PRICE" -- the average of the closing selling prices on the
Nasdaq Stock Market's National Market of the Parent's common stock, during the
30 consecutive trading days ending on the fifth trading day prior to the last
trading day immediately prior to the Closing Date, all as reported in The Wall
Street Journal.
"BALANCE SHEET" -- as defined in Section 3.4.
"BASE AMOUNT" -- as defined in Section 2.5(a).
"BEST EFFORTS" -- the efforts that a prudent Person desirous of achieving a
result would use in similar circumstances to ensure that such result is achieved
as expeditiously as reasonably possible.
"BREACH" -- except as otherwise expressly provided in Article 10 hereof for
purposes of applying the indemnification provisions, a "Breach" of a
representation, warranty, covenant, obligation, or other provision of this
Agreement or any instrument delivered pursuant to this Agreement will be deemed
to have occurred if there is or has been (a) any material inaccuracy in or
breach of, or any material failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, or (b) any
material claim (by any Person) or other occurrence or circumstance that is or
was inconsistent with such representation, warranty, covenant, obligation, or
other provision, and the term "Breach" means any such material inaccuracy,
breach, failure, claim, occurrence, or circumstance, provided, however, that if
any such representation, warranty, covenant, obligation or other provision is
itself limited to matters of a material nature (however that limitation
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may be expressed), an inaccuracy thereof shall constitute a Breach for all
purposes of this Agreement and no second level of materiality shall be required.
"CLOSING" -- as defined in Section 2.3.
"CLOSING DATE" -- the date and time as of which the Closing actually takes
place.
"COMPANY" -- as defined in the Recitals of this Agreement.
"CONSENT" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by this
Agreement, including:
(a) the Merger;
(b) the execution, delivery, and performance of the Noncompetition
Agreements, the Securityholders' Releases, and the Escrow Agreement;
(c) the performance by Parent and Warranting Shareholders of their
respective covenants and obligations under this Agreement; and
(d) Parent's acquisition and ownership of the Shares through the
Merger and exercise of control over the Acquired Companies.
"CONTRACT" -- any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"DAMAGES" -- as defined in Section 10.2.
"DCL" -- as defined in Section 2.1.
"DISCLOSURE LETTER" -- the disclosure letter delivered by the Warranting
Shareholders to Parent concurrently with the execution and delivery of this
Agreement.
"DISPUTED MEDICARE RECEIVABLES" -- as defined in Section 7.11.
"EFFECTIVE TIME" -- as defined in Section 2.2.
"ENCUMBRANCE" -- any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"ENVIRONMENT" -- soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES" -- any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and
health, and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or
response actions ("Cleanup") required by applicable Environmental Law or
Occupational
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Safety and Health Law (whether or not such Cleanup has been required or
requested by any Governmental Body or any other Person) and for any natural
resource damages; or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law or Occupational Safety and Health
Law. The terms "removal," "remedial," and "response action," include the
types of activities covered by the United States Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. ' 9601
et seq., as amended ("CERCLA").
"ENVIRONMENTAL LAW" -- any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction,
that could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes that are generated, including medical
wastes;
(d) assuring that products are designed, formulated, packaged, and
used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other
potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of them,
for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for
injuries done to public assets.
Environmental Laws include, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980; Clean Water Act
of 1977; Clean Air Act; Resource Conservation and Recovery Act of 1976; Federal
Insecticide, Fungicide, and Rodenticide Act; Toxic Substances Control Act;
Emergency Planning and Community Right-to-Know Act of 1986; Occupational Safety
and Health Act of 1970; and Safe Drinking Water Act; and state and local
counterparts to these acts.
"EQUITY ADJUSTMENT AMOUNT" -- as defined in Section 2.9.
"ERISA" -- the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"ESCROW AGREEMENT" -- as defined in Section 2.8.
"EXCHANGE ACT" -- the Securities Exchange Act of 1934, as amended.
"FACILITIES" -- any real property, leaseholds, or other interests currently
or formerly owned or operated by any Acquired Company and any buildings, plants,
structures, or equipment (including motor vehicles) currently or formerly owned
or operated by any Acquired Company.
"GAAP" -- generally accepted United States accounting principles, applied
on a basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in Section 3.4(b) were prepared.
"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
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"GOVERNMENTAL BODY" -- any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity
and any court or other tribunal); or
(d) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority
or power of any nature.
"HAZARDOUS ACTIVITY" -- the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use (including any withdrawal or other
use of groundwater) of Hazardous Materials in, on, under, about, or from the
Facilities or any part thereof into the Environment, and any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of the Facilities or the Acquired
Companies.
"HAZARDOUS MATERIALS" -- any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including (a) any substance, the presence of which requires investigation or
remediation under any Environmental Law or other common law; (b) any dangerous,
toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous substance; (c) any substance, the presence of
which causes or threatens to cause a nuisance upon any SNF or other property
presently and/or previously owned, leased or otherwise used by the Company or
the Subsidiaries of the Company (or poses or threatens to pose a hazard to the
health or safety of persons on or about the property or adjacent properties);
and (d) radon, ureaformaldehyde, polychlorinated biphenyls, asbestos or
asbestos-containing materials, petroleum and petroleum products.
"HCFA" -- the federal Health Care Financing Administration.
"HSR ACT" -- the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"INDEMNIFIED PERSONS" -- as defined in Section 10.2.
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 3.22.
"INTERIM BALANCE SHEET" -- as defined in Section 3.4.
"IRC" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"IRS" -- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"KNOWLEDGE" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, partner, executor, or trustee of such
Person (or in any similar capacity) has, or at any time had, Knowledge of such
fact or other matter.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, or other
administrative order, constitution, law, ordinance, principle of common law,
regulation, statute, or treaty.
"MERGER" -- as defined in Section 2.1.
"MERGER CONSIDERATION" -- as defined in Section 2.5.
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"MERGING COMPANIES" -- Signature Health Care Corporation, Arkansas, Inc.,
Cornerstone, Inc., Douglas Manor, Inc., and Safford Care, Inc.
"NEWCO" -- a newly organized, wholly owned subsidiary of Parent to be
merged with and into the Company in the Merger.
"NONCOMPETITION AGREEMENTS" -- as defined in Section 2.8.
"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, and any governmental program designed to provide safe and
healthful working conditions.
"ORDER" -- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) and is not required to be specifically authorized by the
parent company (if any) of such Person; and
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or
by any Person or group of Persons exercising similar authority), in the
ordinary course of the normal day-to-day operations of other Persons that
are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"OTHER SECURITYHOLDERS" -- persons, other than the Warranting Shareholders,
who hold shares or options to acquire shares of any Acquired Company immediately
prior to the Effective Time.
"PER SHARE CASH AMOUNT" -- as defined in Section 2.5.
"PER SHARE CONVERSION AMOUNT" -- as defined in Section 2.5.
"PARENT" -- as defined in the first paragraph of this Agreement.
"PARENT COMPANIES" -- any direct or indirect wholly-owned subsidiary of
Parent.
"PARENT REPORTS" -- as defined in Section 4.11.
"PARENT SHARES" -- shares of the voting common stock, $0.001 par value per
share, of Parent.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PLAN" -- as defined in Section 3.13.
"PROCEEDING" -- any action, arbitration, audit, hearing, investigation
(including Medicare and Medicaid survey and certification investigations and
proceedings), litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"REGISTRATION RIGHTS AGREEMENT" -- as defined in Section 2.8(d).
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"RELATED PARTY CONTRACTS" -- as defined in Section 2.8(a)(v) and listed
pursuant to Section 3.17(a)(xiv).
"RELATED PERSON" -- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material
Interest; and
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner, executor,
or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves as a
general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse and former spouses, (iii) any
other natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "Material Interest" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of voting securities or other voting interests representing at least 5% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 5% of the outstanding equity securities or
equity interests in a Person.
"RELEASE" -- any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"SEC" -- the federal Securities and Exchange Commission.
"SECURITIES ACT" -- the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"SECURITYHOLDER RELEASES" -- as defined in Section 2.8.
"SHARES" -- the shares of capital stock of the Company issued and
outstanding immediately prior to the Effective Time (other than Shares owned by
Parent, Newco, or any Parent Companies or any of the Company's direct or
indirect wholly-owned subsidiaries, or held in the treasury of the Company).
"SNFS" -- skilled nursing facilities and other licensed providers of health
care and related services owned or leased and operated by any Acquired Company.
"SPREAD" -- the amount by which (a) the excess of $6,430,532 over the
allocated fees to BA Partners in connection with the Merger, divided by (b)
80,171, exceeds (c) the per share exercise price of an outstanding
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employee option to purchase Company common stock, multiplied by the number of
shares of Company common stock to which the option relates.
"SUBSIDIARY" -- with respect to any Person (the "Owner"), any corporation
or other Person of which securities or other interests having the power to elect
a majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries; when
used without reference to a particular Person, "Subsidiary" means a Subsidiary
of the Company.
"SURVIVING CORPORATION" -- as defined in Section 2.1.
"TAX" -- any tax (including without limitation any income tax, capital
gains tax, value-added tax, sales tax, property tax, gift tax, or estate tax),
levy, assessment, tariff, duty (including any customs duty), deficiency, or
other fee, and any related charge or amount (including any fine, penalty,
interest, or addition to tax), imposed, assessed, or collected by or under the
authority of any Governmental Body or payable pursuant to any tax-sharing
agreement or any other Contract relating to the sharing of any such tax, levy,
assessment, tariff, duty, deficiency, or fee.
"TAX RETURN" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE" -- a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"THREATENED" -- a claim, Proceeding, dispute, action, or other matter will
be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
"WARRANTING SHAREHOLDERS" -- as defined in the first paragraph of this
Agreement.
2. THE MERGER; CLOSING
2.1 THE MERGER
Subject to the terms and conditions of this Agreement, at the Effective
Time (as defined in Section 2.2), the Company and Newco shall consummate a
merger (the "Merger") in which (a) Newco shall be merged with and into the
Company and the separate corporate existence of Newco shall thereupon cease, (b)
the Company shall be the successor or surviving corporation in the Merger and
shall continue to be governed by the laws of the State of Delaware, and (c) the
separate corporate existence of the Company with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger. The
corporation surviving the Merger is sometimes hereinafter referred to as the
"Surviving Corporation." The Company and Newco are sometimes collectively
referred to herein as the "Constituent Corporations." The Merger shall have the
effects set forth in the Delaware Corporation Law (the "DCL").
2.2 EFFECTIVE TIME
Parent, Newco and the Company will cause an appropriate Certificate of
Merger (the "Certificate of Merger") to be executed and filed on the date of the
Closing (or on such other date as Parent and the Company may agree) as provided
in the DCL. The Merger shall become effective on the date on which the
Certificate of Merger has been duly filed with the Secretary of State of the
State of Delaware or such time as is agreed upon by the parties and specified in
the Certificate of Merger, and such time is hereinafter referred to as the
"Effective Time."
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2.3 CLOSING
The closing of the Merger (the "Closing") provided for in this Agreement
will take place at the offices of Parent's counsel at Suite 400, One Camelback
Building, One East Camelback Road, Phoenix, Arizona, at 10:00 a.m. (local time)
on the later of (i) October 15, 1996 or (ii) subject to the provisions of
Section 9, the date that is two business days following the termination of the
applicable waiting period under the HSR Act and the satisfaction of the other
conditions specified in this Agreement, or at such other time and place as the
parties may agree. Subject to the provisions of Section 9, failure to consummate
the Merger provided for in this Agreement on the date and time and at the place
determined pursuant to this Section 2.3 will not result in the termination of
this Agreement and will not relieve any party of any obligation under this
Agreement.
2.4 THE SURVIVING CORPORATION
The Certificate of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation. The Bylaws of the Company, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation. The
directors of Newco at the Effective Time shall, from and after the Effective
Time, be the initial directors of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation, or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws. The officers of Newco at
the Effective Time shall, from and after the Effective Time, be the initial
officers of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and Bylaws. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Constituent Corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out and effectuate the purposes of this Agreement,
the officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of the Constituent
Corporations or otherwise, all such other actions and things as may be necessary
or desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in the Surviving Corporation
or otherwise to carry out and effectuate the purposes of this Agreement.
2.5 CONSIDERATION FOR THE MERGER; CONVERSION OF SHARES IN THE MERGER
At the Effective Time, by virtue of the Merger and without any action on
the part of the holders of capital stock of the Company or of capital stock of
Newco:
(a) Each Share shall, by virtue of the Merger and without any action
on the part of Newco, the Company or the holder thereof, be converted into:
(i) that number of Parent Shares determined by dividing (i)
1,509,434 Parent Shares by the number of Shares (the "Per Share
Conversion Amount"), provided, however, that
(A) if the Average Daily Price is greater than $15.25, then the
aggregate number of Parent Shares used in the foregoing calculation
shall be reduced to an amount that, when multiplied by the Average Daily
Price results in the product $23,018,868.50, and
(B) if the Average Daily Price is less than $11.25, then the
aggregate number of Parent Shares used in the foregoing calculation
shall be increased to an amount that, when multiplied by the Average
Daily Price results in the product $16,981,132.50.
Plus
(ii) an amount of cash (the "Per Share Cash Amount") determined by
dividing
(A) $10,200,000 minus the aggregate Spread on employee options
retired by the Company after the date hereof and prior to the Effective
Time (such excess being referred to herein as the
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"Base Amount"), plus or minus the Equity Adjustment Amount determined
pursuant to Sections 2.9 and 2.10, by
(B) the number of Shares.
(b) All calculations made pursuant to Section 2.5(a) shall be carried
out the third decimal place. No fractional Parent Shares shall be issued in
the Merger, but instead any fraction shall be rounded up to the nearest
whole Parent Share. The Per Share Conversion Amount plus the Per Share Cash
Amount is sometimes referred to herein as the "Merger Consideration."
(c) At the Effective Time, each share of capital stock of the Company
issued and outstanding and owned by any of the Parent Companies or any of
the Company's direct or indirect wholly-owned subsidiaries or authorized
but unissued shares held by the Company immediately prior to the Effective
Time shall cease to be outstanding, be canceled and retired without payment
of any consideration therefor and cease to exist.
(d) At the Effective Time, each share of common stock of Newco issued
and outstanding immediately prior to the Effective Time shall be converted
into one validly issued, fully paid and nonassessable share of common stock
of the Surviving Corporation.
(e) If, between the date of this Agreement and the Effective Time, the
outstanding Shares or the Parent Shares shall have been changed into a
different number of shares or a different class by reason of any
reclassification, recapitalization, split up, combination, exchange of
shares or readjustment, or with respect to any such event there be declared
a record date within said period with a distribution date after the
Effective Time or a stock dividend on the Shares or the Parent Common
Shares shall be declared with a record date within said period, the Merger
Consideration shall be appropriately adjusted.
2.6 EXCHANGE OF CERTIFICATES; NO FRACTIONAL SHARES; RETURN OF CERTIFICATES
Except as set forth in Section 2.5 above, from and after the Effective
Time, each holder of a certificate which immediately prior to the Effective Time
represented outstanding Shares shall be entitled to receive in exchange
therefor, upon surrender thereof to Parent, payment of the Merger Consideration,
provided, however, that if the Equity Adjustment Amount has not yet been
determined in accordance with Sections 2.9 and 2.10(a) hereof an amount equal to
the holder's pro rata share of the Base Amount shall initially be paid and the
parties will comply with the procedures required by Section 2.10(b) hereof, and
provided further that a portion of the Merger Consideration equal to 37,736
Parent Shares (allocated pro rata among the Warranting Shareholders in
proportion to their ownership of Shares immediately prior to the Effective Time)
shall be deposited by the Parent on the holders' behalf with the Escrow Agent in
accordance with Section 2.8 hereof and shall thereafter be held and applied in
accordance with the Escrow Agreement. No holder of a certificate or certificates
which immediately prior to the Effective Time represented Shares shall be
entitled to receive any dividend or other distribution from Parent until
surrender of such holder's certificate or certificates for a certificate or
certificates representing Parent Shares.
2.7 NO DISSENTING SHARES
The parties hereto acknowledge that the shareholders of the Company have
all indicated they will approve the Merger and they will not be entitled to
dissent from the Merger and require appraisal of their Shares.
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2.8 CLOSING OBLIGATIONS
At the Closing:
(a) the Warranting Shareholders, for themselves and as agents for all
Other Securityholders, will deliver to Parent:
(i) certificates representing the Shares;
(ii) releases in the form of Exhibit 2.8(a)(ii) executed by the
Warranting Shareholders, all Other Securityholders and each Related
Person of either Warranting Shareholder that is a party to any Related
Party Contract (collectively, "Securityholder Releases");
(iii) noncompetition agreements in the form of Exhibit 2.8(a)(iii),
executed by the Warranting Shareholders (collectively, the
"Noncompetition Agreements");
(iv) a certificate executed by the Warranting Shareholders
representing and warranting to Parent that each of the Warranting
Shareholders' representations and warranties in this Agreement was
accurate in all material respects as of the date of this Agreement and
is accurate in all material respects as of the Closing Date as if made
on the Closing Date (giving full effect to any supplements to the
Disclosure Letter that were delivered by the Warranting Shareholders to
Parent not less than five business days prior to the Closing Date in
accordance with Section 5.5), provided, that if an inaccuracy
constitutes a "Breach" as defined herein, no further threshold of
materiality shall be permitted hereby and the certificate called for by
this section cannot be given;
(v) mutual termination agreements in respect to each management and
other contracts with any Related Person of either Warranting Shareholder
other than the rehabilitation services contracts with RehabWest, Inc.
(the "Related Party Contracts"), properly executed and delivered by each
party thereto and providing for no future payments or other obligations
by the Company or the Parent with respect thereto; and
(vi) resignations of all directors and officers of each Acquired
Company, if and as requested by Parent;
(b) Parent will deliver to the Warranting Shareholders and Other
Securityholders:
(i) the payment specified by Section 2.6, with the Per Share Cash
Consideration paid by bank cashier's or certified check payable to the
order of or by wire transfer to accounts specified on behalf of each
Warranting Shareholder and Other Securityholder; and
(ii) a certificate executed by Parent to the effect that, except as
otherwise stated in such certificate, each of Parent's representations
and warranties in this Agreement was accurate in all material respects
as of the date of this Agreement and is accurate in all material
respects as of the Closing Date as if made on the Closing Date,
provided, that if an inaccuracy constitutes a "Breach" as defined
herein, no further threshold of materiality shall be permitted hereby
and the certificate required by this section cannot be given.
(c) Parent and the Warranting Shareholders will enter into an escrow
agreement in the form of Exhibit 2.8(c) (the "Escrow Agreement") with
Mellon Bank, F.S.B., and Parent will make the deposit into escrow on behalf
of the Warranting Shareholders that is required by Section 2.6.
(d) Parent and the Warranting Shareholders will enter into a
registration rights agreement in the form of Exhibit 2.8(d) (the
"Registration Rights Agreement").
2.9 EQUITY ADJUSTMENT AMOUNT
The Equity Adjustment Amount (which may be a positive or negative number)
will be equal to (a) the consolidated stockholders' equity of the Acquired
Companies as of the Audit Date determined in accordance with GAAP, plus (b) the
sum of the adjustments listed on Schedule 2.9, if and to the extent such
adjustments were taken into account in subpart (a), minus (c) $760,003.
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2.10 EQUITY ADJUSTMENT PROCEDURE
(a) The Warranting Shareholders will prepare and will cause Arthur Andersen
LLP, the Company's certified public accountants, to audit consolidated financial
statements ("Closing Financial Statements") of the Company through the calendar
month-end closest to the Closing Date (the "Audit Date") and for the period from
the date of the Balance Sheet through the Audit Date, including a computation of
consolidated stockholders' equity as of the Audit Date. The Warranting
Shareholders will deliver the Closing Financial Statements to Parent within
sixty days after the Closing Date. If within thirty days following delivery of
the Closing Financial Statements, Parent has not given the Warranting
Shareholders notice of its objection to the Closing Financial Statements (such
notice must contain a statement of the basis of Parent's objection), then the
consolidated stockholders' equity reflected in the Closing Financial Statements
will be used in computing the Equity Adjustment Amount. If Parent gives such
notice of objection, then the issues in dispute will be submitted to Price
Waterhouse LLP, certified public accountants (the "Accountants"), for
resolution. If issues in dispute are submitted to the Accountants for
resolution, (i) each party will furnish to the Accountants such workpapers and
other documents and information relating to the disputed issues as the
Accountants may request and are available to that party or its Subsidiaries (or
its independent public accountants), and will be afforded the opportunity to
present to the Accountants any material relating to the determination and to
discuss the determination with the Accountants; (ii) the determination by the
Accountants, as set forth in a notice delivered to both parties by the
Accountants, will be binding and conclusive on the parties; and (iii) Parent
will bear the fees of the Accountants for such determination.
(b) On the tenth business day following the final determination of the
Equity Adjustment Amount, if the Equity Adjustment Amount is positive, Parent
will pay the Equity Adjustment Amount to the Warranting Shareholders, and if the
Equity Adjustment Amount is negative, the Warranting Shareholders will pay the
absolute value of such amount to Parent, all as contemplated by and in
accordance with Section 2.5(a) hereof. Payments must be made in immediately
available funds. Payments to the Warranting Shareholders must be made in the
manner and will be allocated in the proportions set forth in Section 2.8(b)(i).
Payments to Parent must be made by wire transfer to such bank account as Parent
will specify.
3. REPRESENTATIONS AND WARRANTIES OF THE WARRANTING SHAREHOLDERS
The Disclosure Letter called for by the Warranting Shareholders'
representations and warranties in this Part 3 has been prepared by the
Warranting Shareholders without full involvement of other personnel of the
Acquired Companies because of the confidential nature of this Agreement. For the
same reasons, a portion of the due diligence investigation which Parent wishes
to complete in respect of the Acquired Companies and the SNFs has not yet been
completed. Although the Warranting Shareholders believe all of the information
in the Disclosure Letter is accurate and complete, the Warranting Shareholders
shall have the right to complete or supplement the Disclosure Letter not later
than August 16, 1996 (the "Disclosure Supplement"). Parent shall have the right
to continue its due diligence investigation after the date of this Agreement and
through the Closing Date. Parent shall have the right to terminate this
Agreement by written notice to the Warranting Shareholders within five business
days after receipt of the Disclosure Supplement if Parent in its sole discretion
determines that the information contained in the disclosures as supplemented, or
any other information or documentation learned or discovered in the course of
Parent's due diligence investigation, constitutes, has, or is likely to have, a
material adverse effect. In the event Parent terminates this Agreement pursuant
to the foregoing provision, this Agreement shall become null and void and have
no effect, without any liability on the part of any party hereto or its
affiliates, directors, officers or shareholders, except that the Confidentiality
Agreement shall survive and each party shall pay its own expenses incurred in
connection with this Agreement. In the event Parent does not terminate this
Agreement pursuant to the foregoing provision, the Disclosure Supplement shall
be deemed delivered as of the date of this Agreement and made a part of the
Disclosure Letter to this Agreement.
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The Warranting Shareholders represent and warrant to Parent as follows:
3.1 ORGANIZATION AND GOOD STANDING
(a) Part 3.1 of the Disclosure Letter contains a complete and accurate list
for each Acquired Company of its name, its jurisdiction of incorporation, other
jurisdictions in which it is authorized to do business, and its capitalization
(including the identity of each stockholder and the number of shares held by
each). Each Acquired Company is a corporation duly organized, validly existing,
and in good standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use, and to perform all its obligations under Applicable Contracts. Each
Acquired Company is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification.
(b) The Warranting Shareholders have made available to Parent copies of the
Organizational Documents of each Acquired Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding obligation of
the Company and the Warranting Shareholders, enforceable against the Company and
the Warranting Shareholders in accordance with its terms. Upon the execution and
delivery by the Warranting Shareholders of the Escrow Agreement, the
Registration Rights Agreement, the Warranting Shareholders' Releases, and the
Noncompetition Agreements (collectively, the "Warranting Shareholders' Closing
Documents"), the Warranting Shareholders' Closing Documents will constitute the
legal, valid, and binding obligations of the Warranting Shareholders,
enforceable against the Warranting Shareholders in accordance with their
respective terms. The Warranting Shareholders have the absolute and unrestricted
right, power, authority, and capacity to execute and deliver this Agreement and
the Warranting Shareholders' Closing Documents and to perform their obligations
under this Agreement and the Warranting Shareholders' Closing Documents.
(b) To the best of Warranting Shareholders' Knowledge, except as set forth
in Part 3.2 of the Disclosure Letter, neither the execution and delivery of this
Agreement nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with, or result in a violation of (A) any
provision of the Organizational Documents of the Acquired Companies, or (B)
any resolution adopted by the board of directors or the stockholders of any
Acquired Company;
(ii) contravene, conflict with, or result in a violation of, or give
any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which any Acquired Company,
any SNF or either Warranting Shareholder, or any of the assets owned or
used by any Acquired Company or any SNF, may be subject;
(iii) contravene, conflict with, or result in a violation of any of
the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by any Acquired Company or that otherwise
relates to any SNF or otherwise to the business of, or any of the assets
owned or used by, any Acquired Company;
(iv) cause Parent or any Acquired Company to become subject to, or to
become liable for the payment of, any Tax;
(v) cause any of the assets owned by any Acquired Company to be
reassessed or revalued by any taxing authority or other Governmental Body;
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(vi) contravene, conflict with, or result in a violation or breach of
any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of,
or to cancel, terminate, or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any Encumbrance upon or
with respect to any of the assets owned or used by any SNF or any Acquired
Company.
Except as set forth in Part 3.2 of the Disclosure Letter, no SNF,
Warranting Shareholder or Acquired Company is or will be required to give any
notice to or obtain any Consent from any Person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
3.3 CAPITALIZATION
The authorized and outstanding equity securities of Signature and the
record and beneficial ownership of such equity securities, are as described in
Part 3.3 of the Disclosure Letter. The Warranting Shareholders and the Other
Securityholders are and will be on the Closing Date the record and beneficial
owners and holders of the Shares, free and clear of all Encumbrances. With the
exception of the Shares and the options described in Part 3.3 of the Disclosure
Letter, all of the outstanding equity securities and other securities of each
Acquired Company are owned of record and beneficially by one or more of the
Acquired Companies. Except as described in Part 3.3 of the Disclosure Schedule,
such securities are owned free and clear of all Encumbrances. No legend or other
reference to any purported Encumbrance appears upon any certificate representing
equity securities of any Acquired Company. All of the outstanding equity
securities of each Acquired Company have been duly authorized and validly issued
and are fully paid and nonassessable. There are no Contracts relating to the
issuance, sale, or transfer of any equity securities or other securities of any
Acquired Company. No outstanding equity securities or other securities of any
Acquired Company were issued in violation of the Securities Act or any other
Legal Requirement. No Acquired Company owns, or has any Contract to acquire, any
equity securities or other securities of any Person (other than Acquired
Companies) or any direct or indirect equity or ownership interest in any other
business.
3.4 FINANCIAL STATEMENTS
The Warranting Shareholders have delivered to Parent: (a) consolidated
balance sheets of the Acquired Companies as of December 31 in each of the years
1988 through 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flow for each of the fiscal years then ended,
together with the report thereon of Arthur Anderson, LLP, independent certified
public accountants, (b) a consolidated balance sheet of the Acquired Companies
as of December 31, 1995 (including the notes thereto, the "Balance Sheet"), and
the related consolidated statements of income, changes in stockholders' equity,
and cash flow for the fiscal year then ended, together with the report thereon
of Arthur Andersen LLP, independent certified public accountants, and (c) an
unaudited consolidated balance sheet of the Acquired Companies as of June 30,
1996 (the "Interim Balance Sheet") and the related unaudited consolidated
statements of income, changes in stockholders' equity, and cash flow for the six
months then ended, including in each case the notes thereto. Such financial
statements and notes fairly present the financial condition and the results of
operations, changes in stockholders' equity, and cash flow of the Acquired
Companies as of the respective dates of and for the periods referred to in such
financial statements, all in accordance with GAAP, subject, in the case of
interim financial statements, to normal recurring year-end adjustments (the
effect of which will not, individually or in the aggregate, be materially
adverse) and the absence of notes (that, if presented, would not differ
materially from those included in the Balance Sheet); the financial statements
referred to in this Section 3.4 reflect the consistent application of such
accounting principles throughout the periods involved. No financial statements
of any Person other than the Acquired Companies are required by GAAP to be
included in the consolidated financial statements of the Company.
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3.5 BOOKS AND RECORDS
To the best of the Warranting Shareholders' Knowledge, the books of
account, minute books, stock record books, and other records of the Acquired
Companies, all of which have been made available to Parent, are complete and
correct and have been maintained in accordance with sound business practices,
including the maintenance of an adequate system of internal controls. The minute
books of the Acquired Companies contain accurate and complete records of all
meetings held of, and corporate action taken by, the stockholders, the Boards of
Directors, and committees of the Boards of Directors of the Acquired Companies,
and no meeting of any such stockholders, Board of Directors, or committee has
been held for which minutes have not been prepared and are not contained in such
minute books. At the Closing, all of those books and records will be in the
possession of the Acquired Companies.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES
To the best of the Warranting Shareholders' Knowledge, Part 3.6 of the
Disclosure Letter contains a complete and accurate list of all real property,
leaseholds, or other interests therein owned by any Acquired Company. The
Warranting Shareholders have delivered or made available to Parent copies of the
deeds and other instruments (as recorded) by which the Acquired Companies
acquired such real property and interests, and copies of all title insurance
policies, opinions, abstracts, and surveys in the possession of the Warranting
Shareholders or the Acquired Companies and relating to such property or
interests. The Acquired Companies own (with good and marketable title in the
case of real property, subject only to the matters permitted by the following
sentence) all the properties and assets (whether real, personal, or mixed and
whether tangible or intangible) that they purport to own, including all of the
properties and assets reflected in the Balance Sheet and the Interim Balance
Sheet (except for assets held under leases disclosed or not required to be
disclosed in Part 3.6 of the Disclosure Letter and personal property sold since
the date of the Balance Sheet and the Interim Balance Sheet, as the case may be,
in the Ordinary Course of Business), and all of the properties and assets
purchased or otherwise acquired by the Acquired Companies since the date of the
Balance Sheet (except for personal property acquired and sold since the date of
the Balance Sheet in the Ordinary Course of Business and consistent with past
practice). To the best of the Warranting Shareholders' Knowledge, all material
properties and assets reflected in the Balance Sheet and the Interim Balance
Sheet are free and clear of all Encumbrances and are not, in the case of real
property, subject to any rights of way, building use restrictions, exceptions,
variances, reservations, or limitations of any nature except, with respect to
all such properties and assets, (a) mortgages or security interests shown on the
Balance Sheet or the Interim Balance Sheet as securing specified liabilities or
obligations, with respect to which no default (or event that, with notice or
lapse of time or both, would constitute a default) exists, (b) mortgages or
security interests incurred in connection with the purchase of property or
assets after the date of the Interim Balance Sheet (such mortgages and security
interests being limited to the property or assets so acquired), with respect to
which no default (or event that, with notice or lapse of time or both, would
constitute a default) exists, (c) liens for current taxes not yet due, and (d)
with respect to real property, (i) minor imperfections of title, if any, none of
which is substantial in amount, materially detracts from the value or impairs
the use of the property subject thereto, or impairs the operations of any
Acquired Company, and (ii) zoning laws and other land use restrictions that do
not impair the present use of the property subject thereto. To the best of the
Warranting Shareholders' Knowledge, all buildings, plants, and structures owned
by the Acquired Companies lie wholly within the boundaries of the real property
owned by the Acquired Companies and do not encroach upon the property of, or
otherwise conflict with the property rights of, any other Person.
3.7 CONDITION AND SUFFICIENCY OF ASSETS
To the best of the Warranting Shareholders' Knowledge, all of the
buildings, plants, structures, and equipment of the SNFs and of the Acquired
Companies are structurally sound, are in good operating condition and repair,
and are adequate for the uses to which they are being put, and none of such
buildings, plants, structures, or equipment is in need of maintenance or repairs
except for ordinary, routine maintenance and repairs that are not material in
nature or cost. The building, plants, structures, and equipment of the SNFs and
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of the Acquired Companies are sufficient for the continued conduct of the SNFs
and of the Acquired Companies' businesses after the Closing in substantially the
same manner as conducted prior to the Closing.
3.8 ACCOUNTS RECEIVABLE
To the best of the Warranting Shareholders' Knowledge all accounts
receivable of the Acquired Companies that are reflected on the Balance Sheet or
the Interim Balance Sheet or on the accounting records of the Acquired Companies
as of the Closing Date (collectively, the "Accounts Receivable") represent or
will represent valid obligations arising from services actually performed in the
Ordinary Course of Business. Unless paid prior to the Closing Date and assuming
that after the Closing the Acquired Companies follow similar collection policies
to those followed by the Acquired Companies through the date hereof, the
Accounts Receivable (excluding only the Disputed Medicare Receivables), are or
will be as of the Closing Date collectible net of the respective reserves shown
on the Balance Sheet or the Interim Balance Sheet or on the accounting records
of the Acquired Companies as of the Closing Date (which reserves are adequate
and except for the reserves identified in Schedule 2.9, calculated consistent
with past practice and, in the case of the reserve as of the Closing Date, will
not represent a materially greater percentage of the Accounts Receivable as of
the Closing Date than the reserve reflected in the Interim Balance Sheet
represented of the Accounts Receivable reflected therein and will not represent
a material adverse change in the composition of such Accounts Receivable in
terms of aging). On the Closing Date each of the Acquired Companies will have
transmitted bills and invoices in the Ordinary Course of Business for all
services performed through the end of the most recent practicable month. To the
best of the Warranting Shareholders' Knowledge, there is no contest, claim, or
right of set-off, other than returns in the Ordinary Course of Business, under
any Contract with any obligor of an Accounts Receivable relating to the amount
or validity of such Accounts Receivable, other than the Disputed Accounts
Receivable. To the best of the Warranting Shareholders' Knowledge Part 3.8 of
the Disclosure Letter contains a complete and accurate list of all Accounts
Receivable as of the date of the Interim Balance Sheet, which list sets forth
the aging of such Accounts Receivable. Parent acknowledges that there are time
constraints with respect to the billing of Government Agencies and third party
payers which, if not followed, can result in a denial of payment.
3.9 PREPAID SUPPLIES
To the best of the Warranting Shareholders' Knowledge all inventory or
supplies and other materials of the Acquired Companies, whether or not reflected
in the Balance Sheet or the Interim Balance Sheet, consists of a quality and
quantity usable in the Ordinary Course of Business. The amounts thereof are not
excessive and are reasonable in the present circumstances of the Acquired
Companies and satisfy all Legal Requirements applicable to any Acquired Company
or SNF with respect to inventory and supplies.
3.10 NO UNDISCLOSED LIABILITIES
To the best of the Warranting Shareholders' Knowledge, except as set forth
in Part 3.10 of the Disclosure Letter, the Acquired Companies have no material
liabilities or obligations of any nature except for liabilities or obligations
reflected or reserved against in the Balance Sheet or the Interim Balance Sheet
and current liabilities incurred in the Ordinary Course of Business since the
respective dates thereof.
3.11 TAXES
(a) To the best of the Warranting Shareholders' Knowledge the Acquired
Companies have filed or caused to be filed (on a timely basis since 1990) all
Tax Returns that are or were required to be filed by or with respect to any of
them, either separately or as a member of a group of corporations, pursuant to
applicable Legal Requirements. The Warranting Shareholders have made available
to Parent copies of, and Part 3.11 of the Disclosure Letter contains a complete
and accurate list of, all such Tax Returns filed since January 1, 1993. Based
upon the Warranting Shareholders' inquiry and advice from Arthur Andersen, LLP,
the Acquired Companies have paid, or made provision for the payment of, all
Taxes that have or may have become due pursuant to those Tax Returns, or
pursuant to any assessment received by either of the Warranting Shareholders or
any Acquired Company, except such Taxes, if any, as are listed in Part 3.11 of
the Disclosure
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Letter and are being contested in good faith and as to which adequate reserves
(determined in accordance with GAAP) have been provided in the Balance Sheet and
the Interim Balance Sheet.
(b) Based upon the Warranting Shareholders' inquiry of and advice from
Arthur Andersen LLP, the United States federal and state income Tax Returns of
each Acquired Company subject to such Taxes have been audited by the IRS or
relevant state tax authorities or are closed by the applicable statute of
limitations for all taxable years through 1991. To the best of the Warranting
Shareholders' Knowledge Part 3.11 of the Disclosure Letter contains a complete
and accurate list of all audits of all such Tax Returns, including a reasonably
detailed description of the nature and outcome of each audit. No deficiencies
were proposed as a result of such audits. To the best of the Warranting
Shareholders' Knowledge, except as described in Part 3.11 of the Disclosure
Letter, no Warranting Shareholder or Acquired Company has given or been
requested to give waivers or extensions (or is or would be subject to a waiver
or extension given by any other Person) of any statute of limitations relating
to the payment of Taxes of any Acquired Company or for which any Acquired
Company may be liable.
(c) To the best of the Warranting Shareholders' Knowledge the charges,
accruals, and reserves with respect to Taxes on the respective books of each
Acquired Company are adequate (determined in accordance with GAAP) and are at
least equal to that Acquired Company's liability for Taxes, provided, however,
that this warranty is made prior to and without accruing for any Tax benefit or
liability related to the adjustments described on Schedule 2.9. To the best of
the Warranting Shareholders' Knowledge there exists no proposed tax assessment
against any Acquired Company except as disclosed in the Balance Sheet or in Part
3.11 of the Disclosure Letter. No Acquired Company has filed a consent under
Section 341(f) of the IRC concerning collapsible corporations. To the best of
the Warranting Shareholders' Knowledge all Taxes that any Acquired Company is or
was required by Legal Requirements to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Body or other Person.
(d) To the best of the Warranting Shareholders' Knowledge all Tax Returns
filed by (or that include on a consolidated basis) any Acquired Company are
true, correct, and complete. There is no tax sharing agreement that will require
any payment by any Acquired Company after the date of this Agreement.
3.12 NO MATERIAL ADVERSE CHANGE
Since the date of the Balance Sheet, there has not been any material
adverse change in the business, operations, properties, prospects, assets, or
condition of any SNF or any Acquired Company, and the best of the Warranting
Shareholders' Knowledge no event has occurred or circumstance exists that may
result in such a material adverse change.
3.13 EMPLOYEE BENEFITS
To the best of the Warranting Shareholders' Knowledge (provided that the
foregoing qualification shall cease to apply as to paragraphs (a) and (c) below
five (5) business days prior to the Closing Date):
(a) Except as set forth in Part 3.13(a) of the Disclosure Letter, none
of the Acquired Companies nor any member of its controlled group within the
meaning of Section 414 of the IRC maintains or contributes to, or at any
time in the preceding five calendar years maintained or contributed to: (i)
any non-qualified deferred compensation or retirement plans or
arrangements; (ii) any qualified defined contribution retirement plans or
arrangements; (iii) any qualified defined benefit pension plan; (iv) any
multiemployer plan (as defined in Section 3(37) of ERISA); (v) any other
plan, program, agreement or arrangement under which former employees of any
of the Acquired Companies or its beneficiaries are entitled, or current
employees of any of the Acquired Companies will be entitled following
termination of employment, to medical, health, life insurance or other
benefits other than pursuant to benefit continuation rights granted by
state of federal law; or (vi) any other employee benefit, health, welfare,
severance, vacation, medical, disability, life insurance, stock, stock
purchase or stock option plan, program, agreement, arrangement, custom,
practice or policy. The plans described in Part 3.13(a) are referred to
herein as the "Plans."
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(b) The Plans comply in all respects with the requirements of all
applicable laws, including ERISA, and the Plans meet any applicable
requirements for favorable tax treatment under the IRC in both form and
operation. The contributions to the Plans and the costs of administering
the Plans, including fees for the trustee and other service providers which
are customarily paid by any of the Acquired Companies, have been paid or
will be paid prior to the Closing Date or are reflected in the Interim
Balance Sheet. There have been no prohibited transactions as defined in
Section 406 of ERISA or Section 4975 of the IRC with respect to any of the
Plans or any parties in interest or disqualified persons with respect to
the Plans or any reduction or curtailment of accrued benefits with respect
to any of the Plans. There are no pending, or to the Knowledge of the
Warranting Shareholders, threatened claims, lawsuits, arbitrations, audits
or investigations which have been asserted or instituted against the Plans,
any fiduciaries thereof with respect to their duties to the Plans or the
assets of any of the trusts under any of the Plans. None of the Acquired
Companies has any plans, programs, agreements or arrangements or other
commitments to its employees, former employees or their beneficiaries under
which it has any obligation to provide any retiree or other employee
benefit payments which are not adequately funded through a trust or other
funding arrangement. No Warranting Shareholder, Acquired Company or ERISA
Affiliate has any liability to the IRS, the Department of Labor, or the
Pension Benefit Guaranty Company. No event has occurred or circumstance
exists that could result in a material increase in premium costs of Plans
that are insured, or a material increase in benefit costs of Plans that are
self-insured. No payment that is owed or may become due to any employee of
any Acquired Company will be characterized as an "excess parachute payment"
as defined in Code Section 280G, and the Merger contemplated by this
Agreement will not result in the payment, vesting, or acceleration of any
benefit.
(c) To the extent applicable, the Warranting Shareholders have made
available to Parent true and complete copies of: (i) the Plans and any
related trusts or funding vehicles, policies or contracts and the related
summary plan descriptions with respect to each Plan; (ii) the most recent
determination letters received from the IRS regarding the Plans and copies
of any pending applications, filings or notices with respect to any of the
Plans with the IRS, the Pension Benefit Guaranty Corporation, the
Department of Labor or any other governmental agency and any notices or
other communications from any governmental agency regarding any of the
Plans; (iii) the financial statements and annual reports for each of the
Plans and related trusts or funding vehicles, policies or contracts as of
the end of the most recent plan year with respect to which the filing date
for such information has passed and the two prior Plan years; (iv) the
reports of the most recent actuarial valuations for the Plans; (v) copies
of all corporate resolutions or other documents pertaining to the adoption
of the Plans or any amendments thereto or to the appointment of any
fiduciaries thereunder and copies of any investment policies,
administrative services agreements or other contracts with third parties,
surety bonds, rules, regulations or policies of the trustees or any
committee thereunder; and (vi) copies of any communications or notices
provided to employees or plan participants with respect to the Plans along
with information concerning the date and extent of distribution of such
communications.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS
(a) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.14 of the Disclosure Letter:
(i) each Acquired Company and each SNF is, and at all times since
January 1, 1995 has been, in substantial compliance with each Legal
Requirement that is or was applicable to it or to the conduct or operation
of its business or the ownership or use of any of its assets, and has every
Governmental Authorization required in connection therewith;
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a
violation by any Acquired Company or any SNF of, or a failure on the part
of any Acquired Company or any SNF to comply with, any Legal Requirement,
which violation or failure may have a material adverse effect on any
Acquired Company or SNF, or (B) may give rise to any obligation on the part
of any Acquired Company or any SNF to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature; and
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(iii) no Acquired Company or SNF has received, at any time since
January 1, 1995, any notice or other communication (whether oral or
written) from any Governmental Body or any other Person regarding (A) any
actual, alleged, possible, or potential violation of, or failure to comply
with, any Legal Requirement, or (B) any actual, alleged, possible, or
potential obligation on the part of any Acquired Company or SNF to
undertake, or to bear all or any portion of the cost of, any remedial
action of any nature, except for state and federal licensing and
certification surveys, all of which have been provided to Parent.
(b) To the best of the Warranting Shareholders' Knowledge Part 3.14 of the
Disclosure Letter contains a complete and accurate list of each Governmental
Authorization that is held by any Acquired Company or SNF or that otherwise
relates to the business of, or to any of the assets owned or used by, any
Acquired Company or any SNF. To the best of the Warranting Shareholders'
Knowledge each Governmental Authorization listed or required to be listed in
Part 3.14 of the Disclosure Letter is valid and in full force and effect. To the
best of the Warranting Shareholders' Knowledge, except as set forth in Part 3.14
of the Disclosure Letter:
(i) each Acquired Company and SNF is, and at all times since January
1, 1995 has been, in substantial compliance with all of the terms and
requirements of each Governmental Authorization identified or required to
be identified in Part 3.14 of the Disclosure Letter;
(ii) no event has occurred or circumstance exists that may (with or
without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or
requirement of any Governmental Authorization listed or required to be
listed in Part 3.14 of the Disclosure Letter, which violation or failure
may have a material adverse effect on any Acquired Company or any SNF, or
(B) result directly or indirectly in the revocation, withdrawal,
suspension, cancellation, or termination of, or any modification to, any
Governmental Authorization listed or required to be listed in Part 3.14 of
the Disclosure Letter;
(iii) no Acquired Company or SNF has received, at any time since
January 1, 1995, any notice or other communication (whether oral or
written) from any Governmental Body or any other Person regarding (A) any
actual, alleged, possible, or potential violation of or failure to comply
with any term or requirement of any Governmental Authorization, which
violation or failure may have a material adverse effect on any Acquired
Company or any SNF, or (B) any actual, proposed, possible, or potential
revocation, withdrawal, suspension, cancellation, termination of, or
modification to any Governmental Authorization; and
(iv) all applications required to have been filed for the renewal of
the Governmental Authorizations listed or required to be listed in Part
3.14 of the Disclosure Letter have been duly filed on a timely basis with
the appropriate Governmental Bodies, and all other filings required to have
been made with respect to such Governmental Authorizations have been duly
made on a timely basis with the appropriate Governmental Bodies.
To the best of the Warranting Shareholders' Knowledge, the Governmental
Authorizations listed in Part 3.14 of the Disclosure Letter collectively
constitute all of the Governmental Authorizations necessary to permit the
Acquired Companies to lawfully conduct and operate the SNFs and the other
aspects of their businesses in the manner they currently conduct and operate the
SNFs and such businesses and to permit the Acquired Companies to own and use
their assets in the manner in which they currently own and use such assets.
3.15 LEGAL PROCEEDINGS; ORDERS
(a) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.15 of the Disclosure Letter, there is no pending Proceeding:
(i) that has been commenced by or against any Acquired Company or that
otherwise relates to or may materially affect any SNF or the business of,
or any of the assets owned or used by, any Acquired Company; or
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(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
To the Knowledge of the Warranting Shareholders and the Acquired Companies,
(1) no such Proceeding has been Threatened, and (2) no event has occurred or
circumstance exists that may give rise to or serve as a basis for the
commencement of any such Proceeding. If requested by Parent, the Warranting
Shareholders will promptly deliver to Parent copies of all pleadings,
correspondence, and other documents relating to each or any Proceeding listed in
Part 3.15 of the Disclosure Letter. The Proceedings listed in Part 3.15 of the
Disclosure Letter will not have a material adverse effect on the business,
operations, assets, condition, or prospects of any SNF or any Acquired Company.
(b) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.15 of the Disclosure Letter:
(i) there is no Order to which any of the Acquired Companies, any SNF
or any of the assets owned or used by any Acquired Company, is subject, the
existence or violation of which could have a material adverse effect on any
Acquired Company or any SNF;
(ii) neither Warranting Shareholder is subject to any Order that
relates to the business of, or any of the assets owned or used by, any SNF
or any Acquired Company; and
(iii) no officer, director, agent, or employee of any Acquired Company
is subject to any Order or Legal Requirement that prohibits such officer,
director, agent, or employee from engaging in or continuing any conduct,
activity, or practice relating to any SNF or to the business of any
Acquired Company.
(c) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.15 of the Disclosure Letter:
(i) each Acquired Company and SNF is, and at all times since January
1, 1995 has been, in substantial compliance with all of the terms and
requirements of each Order to which it, or any of the assets owned or used
by it, is or has been subject;
(ii) no event has occurred or circumstance exists that may constitute
or result in (with or without notice or lapse of time) a violation of or
failure to comply with any term or requirement of any Order or Legal
Requirement to which any SNF or Acquired Company, or any of the assets
owned or used by any SNF or Acquired Company, is subject, the existence or
violation of which could have a material adverse effect on any Acquired
Company or any SNF; and
(iii) no SNF or Acquired Company has received, at any time since
January 1, 1995, any notice or other communication (whether oral or
written) from any Governmental Body or any other Person regarding any
actual, alleged, possible, or potential material violation of, or failure
to comply with, any material term or requirement of, any Order or Legal
Requirement to which any SNF or Acquired Company, or any of the assets
owned or used by any SNF or Acquired Company, is or has been subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS
To the best of the Warranting Shareholders' Knowledge, except as set forth
in Part 3.16 of the Disclosure Letter, since the date of the Interim Balance
Sheet, the Acquired Companies have operated the SNFs and conducted their
businesses only in the Ordinary Course of Business and there has not been any:
(a) change in any Acquired Company's authorized or issued capital
stock; grant of any stock option or right to purchase shares of capital
stock of any Acquired Company; issuance of any security convertible into
such capital stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by any Acquired Company of any shares of
any such capital stock; or declaration or payment of any dividend or other
distribution or payment in respect of shares of capital stock;
(b) amendment to the Organizational Documents of any Acquired Company;
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(c) payment or increase by any Acquired Company of any bonuses,
salaries, or other compensation to either Warranting Shareholder or their
Related Persons or to any stockholder, director, officer, or (except in the
Ordinary Course of Business) employee or entry into any employment,
severance, or similar Contract with any director, officer, or employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of any
Acquired Company;
(e) damage to or destruction or loss of any asset or property of any
SNF or Acquired Company, whether or not covered by insurance, materially
and adversely affecting the properties, assets, business, financial
condition, or prospects of any SNF or any of the Acquired Companies;
(f) entry into, termination of, or receipt of notice of termination of
(i) any license, joint venture, credit, or similar agreement, or (ii) any
Contract or transaction involving a total remaining commitment by or to any
Acquired Company (and prior to any unilateral right of termination by the
Acquired Company without any cost or penalty) of at least $50,000;
(g) sale, lease, or other disposition of any SNF or other asset or
property of any Acquired Company or mortgage, pledge, or imposition of any
lien or other encumbrance on any SNF or other material asset or property of
any Acquired Company, including the sale, lease, or other disposition of
any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to any
Acquired Company in excess of $10,000;
(i) material change in the accounting methods used by any Acquired
Company; or
(j) agreement, whether oral or written, by any Acquired Company to do
any of the foregoing.
3.17 CONTRACTS; NO DEFAULTS
(a) To the best of the Warranting Shareholders' Knowledge, Part 3.17(a) of
the Disclosure Letter contains a complete and accurate list, and the Warranting
Shareholders have made available to Parent, and if requested will promptly
deliver to Parent, true and complete copies, of:
(i) each Applicable Contract that involves performance of services or
delivery of goods or materials by one or more Acquired Companies (prior to
any unilateral right of termination by the Acquired Company without any
cost or penalty) of an amount or value in excess of $50,000;
(ii) each Applicable Contract that involves performance of services or
delivery of goods or materials to one or more Acquired Companies (prior to
any unilateral right of termination by the Acquired Company without any
cost or penalty) of an amount or value in excess of $50,000;
(iii) each Applicable Contract that was not entered into in the
Ordinary Course of Business or that involves expenditures or receipts of
one or more Acquired Companies (prior to any unilateral right of
termination by the Acquired Company without any cost or penalty) in excess
of $50,000;
(iv) each lease, rental or occupancy agreement, license, installment
and conditional sale agreement, and other Applicable Contract affecting the
ownership of, leasing of, title to, use of, or any leasehold or other
interest in, any real or personal property (except personal property leases
and installment and conditional sales agreements having a value per item or
aggregate payments of less than $50,000 or with terms of less than one
year);
(v) each licensing agreement or other Applicable Contract with respect
to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
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(vi) each collective bargaining agreement and other Applicable
Contract to or with any labor union or other employee representative of a
group of employees;
(vii) each joint venture, partnership, and other Applicable Contract
(however named) involving a sharing of profits, losses, costs, or
liabilities by any Acquired Company with any other Person;
(viii) each Applicable Contract containing covenants that in any way
purport to restrict the business activity of any Acquired Company or any
Affiliate of an Acquired Company or limit the freedom of any Acquired
Company or any Affiliate of an Acquired Company to engage in any line of
business or to compete with any Person;
(ix) each Applicable Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments
for goods;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Applicable Contract entered into other than in the Ordinary
Course of Business that contains or provides for an express undertaking by
any Acquired Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in excess of
$50,000;
(xiii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by any
Acquired Company other than in the Ordinary Course of Business;
(xiv) each Medicare and Medicaid provider contract for each SNF, and
evidence of appropriate certification of each SNF;
(xv) each Related Party Contract; and
(xvi) each amendment, supplement, and modification (whether oral or
written) in respect of any of the foregoing.
To the best of the Warranting Shareholders' Knowledge Part 3.17(a) of the
Disclosure Letter sets forth reasonably complete details concerning such
Contracts, including the parties to the Contracts, the amount of the remaining
commitment of the Acquired Companies under the Contracts, and the Acquired
Companies' office where details relating to the Contracts are located.
(b) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.17(b) of the Disclosure Letter:
(i) neither Warranting Shareholder (and no Related Person of either
Warranting Shareholder) has or may acquire any rights under, and neither
Warranting Shareholder has or may become subject to any obligation or
liability under, any Contract that relates to the business of, or any of
the assets owned or used by, any SNF or Acquired Company; and
(ii) no officer, director, agent, employee, consultant, or contractor
of any Acquired Company is bound by any Contract that purports to limit the
ability of such officer, director, agent, employee, consultant, or
contractor to (A) engage in or continue any conduct, activity, or practice
relating to the business of any Acquired Company, or (B) assign to any
Acquired Company or to any other Person any rights to any invention,
improvement, or discovery.
(c) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.17(c) of the Disclosure Letter, each Contract identified or
required to be identified in Part 3.17(a) of the Disclosure Letter is in full
force and effect and is valid and enforceable in accordance with its terms.
(d) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.17(d) of the Disclosure Letter:
(i) each Acquired Company is, and at all times since January 1, 1996
has been, in substantial compliance with all applicable terms and
requirements of each Contract under which such Acquired
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Company has or had any obligation or liability or by which such Acquired
Company or any of the assets owned or used by such Acquired Company is or
was bound;
(ii) each other Person that has or had any obligation or liability
under any Contract under which an Acquired Company has or had any rights
is, and at all times since January 1, 1996 has been, in substantial
compliance with all applicable terms and requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result
in a violation or breach of, or give any Acquired Company or other Person
the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate, or
modify, any Applicable Contract; and
(iv) no Acquired Company has given to or received from any other
Person, at any time since January 1, 1996, any notice or other
communication (whether oral or written) regarding any actual, alleged,
possible, or potential violation or breach of, or default under, any
Contract.
(e) There are no renegotiations of, attempts to renegotiate, or outstanding
rights to renegotiate any material amounts paid or payable to any Acquired
Company under current or completed Contracts with any Person and no such Person
has made written demand for such renegotiation.
(f) The Contracts relating to the sale or provision of services by the
Acquired Companies have been entered into in the Ordinary Course of Business and
have been entered into without the commission of any act alone or in concert
with any other Person, or any consideration having been paid or promised, that
is or would be in violation of any Legal Requirement.
3.18 INSURANCE
(a) To the best of the Warranting Shareholders' Knowledge, Part 3.18(a) of
the Disclosure Letter contains a complete and accurate list, and the Warranting
Shareholders have made available to Parent and, upon request will promptly
deliver to Parent:
(i) true and complete copies of all policies of insurance to which any
Acquired Company is a party or under which any Acquired Company, or any
director of any Acquired Company, is or has been covered at any time since
January 1, 1995;
(ii) true and complete copies of all pending applications for policies
of insurance; and
(iii) any statement by the auditor of any Acquired Company's financial
statements with regard to the adequacy of such entity's coverage or of the
reserves for claims.
(b) Part 3.18(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting any Acquired
Company, including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of insurance,
for the transfer or sharing of any risk by any Acquired Company; and
(iii) all obligations of the Acquired Companies to third parties with
respect to insurance (including such obligations under leases and service
agreements) and identifies the policy under which such coverage is provided
(unless such information is disclosed elsewhere in the Disclosure Letter).
(c) To the best of the Warranting Shareholders' Knowledge, except as set
forth on Part 3.18(c) of the Disclosure Letter:
(i) All policies to which any Acquired Company is a party or that
provide coverage to either Warranting Shareholder, any Acquired Company, or
any director or officer of an Acquired Company:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that is financially sound and
reputable;
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(C) are sufficient for compliance with all Legal Requirements and
Contracts to which any Acquired Company is a party or by which any of
them is bound;
(D) will continue in full force and effect following the
consummation of the Contemplated Transactions; and
(E) do not provide for any retrospective premium adjustment or
other experienced-based liability on the part of any Acquired Company.
(ii) No Warranting Shareholder or Acquired Company has received (A)
any refusal of coverage or any notice that a defense will be afforded with
reservation of rights, or (B) any notice of cancellation or any other
indication that any insurance policy is no longer in full force or effect
or will not be renewed or that the issuer of any policy is not willing or
able to perform its obligations thereunder.
(iii) The Acquired Companies have paid all premiums due, and have
otherwise performed all of their respective obligations, under each policy
to which any Acquired Company is a party or that provides coverage to any
Acquired Company or director thereof.
(iv) The Acquired Companies have given notice to the insurer of all
claims that may be insured thereby.
3.19 ENVIRONMENTAL MATTERS
To the best of the Warranting Shareholders' Knowledge, except as set forth
in part 3.19 of the Disclosure Letter:
(a) Each Acquired Company is, and at all times has been, in
substantial compliance with, and has not been and is not in violation of or
liable under, any Environmental Law. No Warranting Shareholder or Acquired
Company has any basis to expect, nor has any of them or any other Person
for whose conduct they are or may be held to be responsible received, any
actual or Threatened order, notice, or other communication from (i) any
Governmental Body or private citizen acting in the public interest, or (ii)
the current or prior owner or operator of any SNFs or other Facilities, of
any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or Threatened obligation to undertake
or bear the cost of any Environmental, Health, and Safety Liabilities with
respect to any of the SNFs or other Facilities or any other properties or
assets (whether real, personal, or mixed) in which either Warranting
Shareholder or any Acquired Company has had an interest, or with respect to
any property or SNFs or other Facility at or to which Hazardous Materials
were generated, manufactured, refined, transferred, imported, used, or
processed by either Warranting Shareholder, any Acquired Company, or any
other Person for whose conduct they are or may be held responsible, or from
which Hazardous Materials have been transported, treated, stored, handled,
transferred, disposed, recycled, or received.
(b) There are no pending or Threatened claims, Encumbrances, or other
restrictions of any nature, resulting from any Environmental, Health, and
Safety Liabilities or arising under or pursuant to any Environmental Law,
with respect to or affecting any of the SNFs or other Facilities or any
other properties and assets (whether real, personal, or mixed) in which
either Warranting Shareholder or any Acquired Company has or had an
interest.
(c) No Warranting Shareholder or Acquired Company has any basis to
expect, nor has any of them or any SNF or any other Person for whose
conduct they are or may be held responsible, received, any citation,
directive, inquiry, notice, Order, summons, warning, or other communication
that relates to Hazardous Activity, Hazardous Materials, or any alleged,
actual, or potential violation or failure to comply with any Environmental
Law, or of any alleged, actual, or potential obligation to undertake or
bear the cost of any Environmental, Health, and Safety Liabilities with
respect to any of the SNFs or other Facilities or any other properties or
assets (whether real, personal, or mixed) in which either Warranting
Shareholder or any Acquired Company had an interest, or with respect to any
property or facility to which Hazardous Materials generated, manufactured,
refined, transferred, imported, used, or
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processed by either Warranting Shareholder, any Acquired Company, or any
other Person for whose conduct they are or may be held responsible, have
been transported, treated, stored, handled, transferred, disposed,
recycled, or received.
(d) No Warranting Shareholder or Acquired Company, or any other Person
for whose conduct they are or may be held responsible, has any
Environmental, Health, and Safety Liabilities with respect to the
Facilities or with respect to any other properties and assets (whether
real, personal, or mixed) in which either Warranting Shareholder or any
Acquired Company (or any predecessor), has or had an interest, or at any
property geologically or hydrologically adjoining the SNFs or other
Facilities or any such other property or assets.
(e) There are no Hazardous Materials present on or in the Environment
at the SNFs or other Facilities or at any geologically or hydrologically
adjoining property, including any Hazardous Materials contained in barrels,
above or underground storage tanks, landfills, land deposits, dumps,
equipment (whether moveable or fixed) or other containers, either temporary
or permanent, and deposited or located in land, water, sumps, or any other
part of the Facilities or such adjoining property, or incorporated into any
structure therein or thereon. No Warranting Shareholder, Acquired Company,
any other Person for whose conduct they are or may be held responsible, or
any other Person, has permitted or conducted, or is aware of, any Hazardous
Activity conducted with respect to the SNFs or other Facilities or any
other properties or assets (whether real, personal, or mixed) in which
either Warranting Shareholder or any Acquired Company has or had an
interest.
(f) There has been no Release or Threat of Release of any Hazardous
Materials at or from the SNFs or other Facilities or at any other locations
where any Hazardous Materials were generated, manufactured, refined,
transferred, produced, imported, used, or processed from or by the
Facilities, or from or by any other properties and assets (whether real,
personal, or mixed) in which either Warranting Shareholder or any Acquired
Company has or had an interest, or any geologically or hydrologically
adjoining property, whether by a Warranting Shareholder, any Acquired
Company, or any other Person.
(g) The Warranting Shareholders have delivered to Parent true and
complete copies and results of any reports, studies, analyses, tests, or
monitoring possessed or initiated by the Warranting Shareholders or any
Acquired Company pertaining to Hazardous Materials or Hazardous Activities
in, on, or under the SNFs or other Facilities, or concerning compliance by
either Warranting Shareholder, any Acquired Company, or any other Person
for whose conduct they are or may be held responsible, with Environmental
Laws.
3.20 EMPLOYEES
(a) The Warranting Shareholders have provided Parent access to a complete
and accurate list of the following information for each employee or director of
the Acquired Companies, including each employee on leave of absence or layoff
status: employer; name; job title; current compensation paid or payable and any
change in compensation since January 1, 1996; vacation accrued; and service
credited for purposes of vesting and eligibility to participate under any
Acquired Company's pension, retirement, profit-sharing, thrift-savings, deferred
compensation, stock bonus, stock option, cash bonus, employee stock ownership
(including investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, other Employee Pension Benefit
Plan or Employee Welfare Benefit Plan, or any other employee benefit plan or any
Director Plan.
(b) To the best of the Warranting Shareholders' Knowledge, no employee or
director of any Acquired Company is a party to, or is otherwise bound by, any
agreement or arrangement, including any confidentiality, noncompetition, or
proprietary rights agreement, between such employee or director and any other
Person ("Proprietary Rights Agreement") that in any way adversely affects or
will affect (i) the performance of his duties as an employee or director of the
Acquired Companies, or (ii) the ability of any Acquired Company to conduct its
business, including any Proprietary Rights Agreement with the Warranting
Shareholders or the Acquired Companies by any such employee or director. Neither
Warranting Shareholder, and no employee or director of any Acquired Company, is
entitled to any severance or "parachute" payment of any kind in
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connection with a change in control of any Acquired Company. To the best of the
Warranting Shareholders' Knowledge, no director, officer, or other key employee
of any Acquired Company, excepting the Warranting Shareholders themselves,
intends to terminate his or her employment with such Acquired Company.
(c) Part 3.20 of the Disclosure Letter also contains a complete and
accurate list of the following information for each retired employee or director
of the Acquired Companies, or their dependents, receiving benefits or scheduled
to receive benefits in the future: name, pension benefit, pension option
election, retiree medical insurance coverage, retiree life insurance coverage,
and other benefits.
3.21 LABOR RELATIONS; COMPLIANCE
Except as disclosed in Part 3.21 of the Disclosure Letter, since January 1,
1996, no Acquired Company has been or is a party to any collective bargaining or
other labor Contract. Since January 1, 1996, there has not been, there is not
presently pending or existing, and there is not Threatened, (a) any strike,
slowdown, picketing, work stoppage, or employee grievance process, (b) any
Proceeding against or affecting any Acquired Company relating to the alleged
violation of any Legal Requirement pertaining to labor relations or employment
matters, including any charge or complaint filed by an employee or union with
the National Labor Relations Board, the Equal Employment Opportunity Commission,
or any comparable Governmental Body, organizational activity, or other labor or
employment dispute against or affecting any of the Acquired Companies or their
premises, or (c) any application for certification of a collective bargaining
agent. To the best of the Warranting Shareholders' Knowledge, no event has
occurred or circumstance exists that could provide the basis for any work
stoppage or other labor dispute. There is no lockout of any employees by any
Acquired Company, and no such action is contemplated by any Acquired Company. To
the best of the Warranting Shareholders' Knowledge, each Acquired Company has
complied in all respects with all Legal Requirements relating to employment,
equal employment opportunity, nondiscrimination, immigration, wages, hours,
benefits, collective bargaining, the payment of social security and similar
taxes, occupational safety and health, and plant closing. To the best of the
Warranting Shareholders' Knowledge, no Acquired Company is liable for the
payment of any compensation, damages, taxes, fines, penalties, or other amounts,
however designated, for failure to comply with any of the foregoing Legal
Requirements.
3.22 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets -- The term "Intellectual Property Assets"
includes:
(i) the names Signature Health Care Corporation, all fictional
business names (including all names under which any SNF or other Facility
is licensed or has done business at any time within the past three years),
trading names, registered and unregistered trademarks, service marks, and
applications (collectively, "Marks");
(ii) all patents, patent applications, and inventions and discoveries
that may be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished works
(collectively, "Copyrights"); and
(iv) all know-how, trade secrets, confidential information, customer
lists, software, technical information, data, process technology, plans,
drawings, and blue prints (collectively, "Trade Secrets"); owned, used, or
licensed by any Acquired Company as licensee or licensor.
(b) Agreements -- Part 3.22(b) of the Disclosure Letter contains a complete
and accurate list and summary description, including any royalties paid or
received by the Acquired Companies, of all Intellectual Property Assets owned or
used by any of the Acquired Companies since January 1, 1995, and all Contracts
relating to the Intellectual Property Assets to which any Acquired Company is a
party or by which any Acquired Company is bound, except for any license implied
by the sale of a product and perpetual, paid-up licenses for commonly available
software programs with a value of less than $25,000 under which an Acquired
Company is the licensee. There are no outstanding and, to the best of the
Warranting Shareholders' Knowledge, no Threatened disputes or disagreements with
respect to any such agreement.
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3.23 CERTAIN PAYMENTS
To the best of the Warranting Shareholders' Knowledge no Acquired Company
or director, officer, agent, or employee of any Acquired Company, or any other
Person associated with or acting for or on behalf of any Acquired Company, ever
has directly or indirectly (a) made any contribution, gift, bribe, rebate,
payoff, influence payment, kickback, or other payment to any Person, private or
public, regardless of form, whether in money, property, or services (i) to
obtain favorable treatment in securing business, (ii) to pay for favorable
treatment for business secured, (iii) to obtain special concessions or for
special concessions already obtained, for or in respect of any Acquired Company
or any Affiliate of an Acquired Company, or (iv) in violation of any Legal
Requirement, (b) established or maintained any fund or asset that has not been
recorded in the books and records of the Acquired Companies.
3.24 DISCLOSURE
(a) To the best of the Warranting Shareholders' Knowledge no representation
or warranty of the Warranting Shareholders in this Agreement and no statement in
the Disclosure Letter omits to state a material fact necessary to make the
statements herein or therein, in light of the circumstances in which they were
made, not misleading.
(b) To the best of the Warranting Shareholders' Knowledge no notice given
pursuant to Section 5.5 will contain any untrue statement or omit to state a
material fact necessary to make the statements therein or in this Agreement, in
light of the circumstances in which they were made, not misleading.
(c) There is no fact known to either Warranting Shareholder that has
specific application to either Warranting Shareholder, any SNF or any Acquired
Company (other than general economic or industry conditions) and that materially
adversely affects or, as far as either Warranting Shareholder can reasonably
foresee, materially threatens, the assets, business, prospects, financial
condition, or results of operations of any SNF or of any of the Acquired
Companies that has not been set forth in this Agreement or the Disclosure
Letter.
3.25 RELATIONSHIPS WITH RELATED PERSONS
To the best of the Warranting Shareholders' Knowledge no Warranting
Shareholder or any Related Person of either Warranting Shareholder or of any
Acquired Company has, or since January 1, 1995, has had, any interest in any
property (whether real, personal, or mixed and whether tangible or intangible),
used in or pertaining to any SNF or the Acquired Companies' businesses. Except
as set forth in Part 3.25 of the Disclosure Letter, no Warranting Shareholder or
any Related Person of either Warranting Shareholder or of any Acquired Company
is, or since January 1, 1995 has owned (of record or as a beneficial owner) an
equity interest or any other financial or profit interest in, a Person that has
(i) had business dealings or a material financial interest in any transaction
with any Acquired Company, or (ii) engaged in competition with any Acquired
Company with respect to any line of the products or services of such Acquired
Company (a "Competing Business") in any market presently served by such Acquired
Company. Except as set forth in Part 3.25 of the Disclosure Letter, no
Warranting Shareholder or any Related Person of either Warranting Shareholder or
of any Acquired Company is a party to any Contract with, or has any claim or
right against, any Acquired Company.
3.26 BROKERS OR FINDERS
The Warranting Shareholders and their agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement except
their obligations to BA Partners which will be paid in full on or before the
Closing Date.
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3.27 INVESTMENT INTENT
The Parent Shares to be acquired by the Warranting Shareholders hereunder
are being acquired by the Warranting Shareholders for their own accounts and not
with the view to, or for release in connection with, any distribution or public
offering thereof within the meaning of the Securities Act. The Warranting
Shareholders understand the Parent Shares have not been registered under the
Securities Act by reason of their issuance in transactions exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) thereof and agree to deliver to Parent, if requested by Parent,
an investment letter in customary form. The Warranting Shareholders understand
that the Parent Shares may not be sold, transferred or otherwise disposed of
without registration under the Securities Act or an exemption therefrom, and
that in the absence of effective registration statement covering the Parent
Shares, or an available exemption from registration under the Securities Act,
the Parent Shares must be held indefinitely. In particular, each Warranting
Shareholder is aware that the Parent Shares may not be sold pursuant to Rule 144
promulgated under the Securities Act unless all of the conditions of the Rule
are met. Each Warranting Shareholder further understands that the certificates
representing the Parent Shares will bear the following legend and agrees that he
will hold such shares subject thereto:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE AND THE COMPANY SHALL HAVE RECEIVED, AT THE
EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY
TO THE COMPANY (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY).
3.28 SUITABILITY AND SOPHISTICATION
The Warranting Shareholders have such knowledge and experience in financial
and business matters that the Warranting Shareholders are capable of evaluating
independently the risks and merits of acquiring the Parent Shares. The
Warranting Shareholders have independently evaluated the risks and merits of
acquiring the Parent Shares and have independently determined that the Parent
Shares are a suitable investment for each Warranting Shareholder.
3.29 RECEIPT OF INFORMATION
The Warranting Shareholders further represent that they have had or will be
provided an opportunity at an acceptable and appropriate time to ask questions
and receive answers from the officers and directors of Parent regarding the
business, properties, prospects, and financial condition of Parent and to obtain
additional information (to the extent Parent possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify the
accuracy of such information furnished to the Warranting Shareholders or to
which the Warranting Shareholders had access. The foregoing does not, however,
limit or modify the representations and warranties of Parent in Article 4 of
this Agreement or the right of the Warranting Shareholders to rely thereon.
3.30 TERMINATION OF ANCILLARY CONTRACTS
Except for the Contract with RehabWest, Inc. which has been provided to
Parent, all Contracts for management services or ancillary services (as that
term is commonly understood in the long term health care industry) (a) to which
any Acquired Company is a party or by which any Acquired Company or any of their
SNFs or other Facilities or properties may be bound, or (b) through which
medical or ancillary products or services are provided to any of the Acquired
Companies or to the patients or residents of any SNF or other
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Facility owned or operated by any Acquired Company (collectively, the "Ancillary
Contracts") are terminable without premium or penalty on not more than sixty
days notice at the option of the Acquired Companies.
4. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company and the Warranting
Shareholders as follows:
4.1 ORGANIZATION AND GOOD STANDING
Parent is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware. On the Closing Date and
immediately prior to the Effective Time, Newco will be a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding obligation of
Parent, enforceable against Parent in accordance with its terms. Upon the
execution and delivery by Parent of the Escrow Agreement and the Registration
Rights Agreement (the "Parent's Closing Documents"), the Parent's Closing
Documents will constitute the legal, valid, and binding obligations of Parent,
enforceable against Parent in accordance with their respective terms. Parent has
the absolute and unrestricted right, power, and authority to execute and deliver
this Agreement and the Parent's Closing Documents and to perform its obligations
under this Agreement and the Parent's Closing Documents.
(b) Except as set forth in Schedule 4.2, neither the execution and delivery
of this Agreement by Parent nor the consummation or performance of any of the
Contemplated Transactions by Parent will give any Person the right to prevent,
delay, or otherwise interfere with any of the Contemplated Transactions pursuant
to:
(i) any provision of Parent's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of Parent;
(iii) any Legal Requirement or Order to which Parent may be subject;
or
(iv) any Contract to which Parent is a party or by which Parent may be
bound.
Except as set forth in Schedule 4.2, Parent is not and will not be required
to obtain any Consent from any Person in connection with the execution and
delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
4.3 INVESTMENT INTENT
Parent is acquiring the Shares for its own account and not with a view to
their distribution within the meaning of Section 2(11) of the Securities Act.
4.4 CERTAIN PROCEEDINGS
To the best of Parent's Knowledge, there is no pending Proceeding that has
been commenced against Parent and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions, including registration of the Parent's Shares being
issued hereunder pursuant to the Registration Rights Agreement. To Parent's
Knowledge, no such Proceeding has been Threatened.
4.5 BROKERS OR FINDERS
Parent and its officers and agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold the Warranting Shareholders harmless from any such payment
alleged to be due by or through Parent as a result of the action of Parent or
its officers or agents.
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4.6 SUITABILITY AND SOPHISTICATION
Parent has such knowledge and experience in financial and business matters
that Parent is capable of evaluating independently the risks and merits of
acquiring the Shares of the Acquired Companies. Parent has independently
evaluated the risks and merits of acquiring such Shares and has independently
determined that such Shares are a suitable investment for Parent.
4.7 RECEIPT OF INFORMATION
Parent further represents that it has had or upon compliance by the
Warranting Shareholders with this Agreement will be provided an opportunity to
ask questions and receive answers from the Warranting Shareholders and the other
officers of the Acquired Companies regarding the business, properties,
prospects, and financial condition of the Acquired Companies and the SNFs and to
obtain additional information (to the extent the Warranting Shareholders
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify the accuracy of such information furnished to
Parent or to which Parent has had access or will have access pursuant to this
Agreement. The foregoing does not, however, limit or modify the representations
and warranties of the Warranting Shareholders in Article 3 of this Agreement or
the right of Parent to rely thereon.
4.8 CONFLICTING AGREEMENTS
Except as may be disclosed in Schedule 4.8 hereto, to the best of Parent's
Knowledge, Parent is not a party to any contract or agreement that will prevent
or materially interfere with Parent's ability to obtain the financing
contemplated by Section 7.11 hereof.
4.9 PARENT COMMON STOCK
Upon consummation of the Contemplated Transactions and the issuance and
delivery of the certificates representing the Parent Shares to the Warranting
Shareholders, the Parent Shares will be validly issued, fully paid and
non-assessable shares of Parent Common Stock.
4.10 PARENT CAPITALIZATION
The authorized capital stock of Parent consists of 10,000,000 shares of
Parent Common Stock and 1,000,000 shares of preferred stock. As of July 26,
1996, (i) 3,900,312 shares of Parent Common Stock were validly issued and
outstanding, fully paid and nonassessable, none of which were issued in
violation of any preemptive right of any stockholder of Parent; and (ii) no
shares of preferred stock were issued and outstanding.
4.11 REPORTS AND FINANCIAL STATEMENTS; NASDAQ COMPLIANCE
Except where failure to have done so did not and would not have a material
adverse effect on Parent, Parent has filed all reports, registrations and other
documents, together with any required amendments thereto, that it was required
to have filed with the SEC prior to the date hereof pursuant to the Exchange
Act, including but not limited to Forms 10-K, Forms 10-Q, Forms 8-K and proxy
statements (collectively, the "Parent Reports"). Parent has previously furnished
to the Warranting Shareholders copies of all Parent Reports filed with the SEC
since January 1, 1996, and Parent will promptly furnish to the Warranting
Shareholders all Parent Reports filed after the date of this Agreement and prior
to the Closing Date. To the best of Parent's Knowledge, as of their respective
dates (but taking into account any amendments filed prior to the date of this
Agreement, the Parent Reports complied, or, with respect to Parent Reports filed
after the date of this Agreement, will comply, in all material respects, with
all the rules and regulations promulgated by the SEC and did not contain, or,
with respect to Parent Reports filed after the date of this Agreement, will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were or will be made,
not misleading. Parent has taken all action within its reasonable control
necessary to ensure its
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continued inclusion in, and the continued eligibility of the Parent Common Stock
for trading on, the NASDAQ National Stock Market under all currently effective
inclusion requirements.
4.12 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as disclosed in Parent Reports filed by Parent with the SEC prior to
the date of this Agreement or set forth in Schedule 4.12 hereto, to the best of
Parent's Knowledge since December 31, 1995 to the date of this Agreement, there
has not been any change in the financial condition, results of operations or
business of Parent that either individually or in the aggregate would have a
material adverse effect on the financial condition of Parent.
5. COVENANTS OF THE WARRANTING SHAREHOLDERS PRIOR TO CLOSING DATE
5.1 ACCESS AND INVESTIGATION
Between the date of this Agreement and the Closing Date, the Warranting
Shareholders will, and will cause each Acquired Company and its Representatives
to, (a) afford Parent and its Representatives and prospective lenders and their
Representatives (collectively, "Parent's Advisors") full and free access during
normal business hours after reasonable notice to each Acquired Company's
personnel, properties (including subsurface testing), contracts, books and
records, and other documents and data, (b) furnish Parent and Parent's Advisors
with copies of all such contracts, books and records, and other existing
documents and data as Parent may reasonably request, and (c) furnish Parent and
Parent's Advisors with such additional financial, operating, and other data and
information as Parent may reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES
Between the date of this Agreement and the Closing Date, the Warranting
Shareholders will, and will cause each Acquired Company to:
(a) conduct the business of such Acquired Company only in the Ordinary
Course of Business;
(b) use their Best Efforts to preserve intact the current business
organization of such Acquired Company, keep available the services of the
current officers, employees, and agents of such Acquired Company, and maintain
the relations and good will with suppliers, customers, landlords, creditors,
employees, agents, and others having business relationships with such Acquired
Company;
(c) confer with Parent concerning operational matters of a material nature;
and
(d) otherwise report periodically to Parent concerning the status of the
business, operations, and finances of such Acquired Company.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement, between the date
of this Agreement and the Closing Date, the Warranting Shareholders will not,
and will cause each Acquired Company not to, without the prior consent of
Parent, take any affirmative action, or fail to take any reasonable action
within their or its control, as a result of which any of the changes or events
listed in Section 3.16 is likely to occur.
5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, the Warranting
Shareholders will, and will cause each Acquired Company to, make all filings
required by Legal Requirements to be made by them in order to consummate the
Contemplated Transactions (including all filings under the HSR Act), and it will
inform Parent in writing of all state licensing and Medicaid approvals, if any
necessary to consummate the Contemplated Transactions. Between the date of this
Agreement and the Closing Date, the Warranting Shareholders will, and will cause
each Acquired Company to, (a) cooperate with Parent with respect to all filings
that Parent elects to make or is required by Legal Requirements to make in
connection with the Contemplated Transactions, and (b) cooperate with Parent in
obtaining all consents identified in Schedule 4.2
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(including taking all actions requested by Parent to cause early termination of
any applicable waiting period under the HSR Act).
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, each Warranting
Shareholder will promptly notify Parent in writing if such Warranting
Shareholder or any Acquired Company becomes aware of any fact or condition that
causes or constitutes a Breach of any of Warranting Shareholders'
representations and warranties as of the date of this Agreement, or if such
Warranting Shareholder or any Acquired Company becomes aware of the occurrence
after the date of this Agreement of any fact or condition that would (except as
expressly contemplated by this Agreement) cause or constitute a Breach of any
such representation or warranty had such representation or warranty been made as
of the time of occurrence or discovery of such fact or condition. Should any
such fact or condition require any change in the Disclosure Letter if the
Disclosure Letter were dated the date of the occurrence or discovery of any such
fact or condition, the Warranting Shareholders will promptly deliver to Parent a
supplement to the Disclosure Letter specifying such change. During the same
period, each Warranting Shareholder will promptly notify Parent of the
occurrence of any Breach of any covenant of the Warranting Shareholders in this
Section 5 or of the occurrence of any event that may make the satisfaction of
the conditions in Section 7 impossible or unlikely.
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS
Except as expressly provided in this Agreement, the Warranting Shareholders
will cause all indebtedness owed to an Acquired Company by either Warranting
Shareholder or any Related Person of either Warranting Shareholder to be paid in
full prior to Closing.
5.7 NO NEGOTIATION
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, the Warranting Shareholders will not, and will cause each Acquired
Company and each of their Representatives not to, directly or indirectly
solicit, initiate, or encourage any inquiries or proposals from, discuss or
negotiate with, provide any non-public information to, or consider the merits of
any unsolicited inquiries or proposals from, any Person (other than Parent)
relating to any transaction involving the sale of the business or assets of any
Acquired Company, or any of the capital stock of any Acquired Company, or any
merger, consolidation, business combination, or similar transaction involving
any Acquired Company, provided, however, that after the public disclosure of
this Agreement the Warranting Shareholders shall have the right to negotiate for
such an agreement that is expressly conditioned upon the lawful termination or
expiration of this Agreement.
5.8 BEST EFFORTS
Between the date of this Agreement and the Closing Date, the Warranting
Shareholders will use their Best Efforts to cause the conditions in Sections 7
and 8 to be satisfied.
6. COVENANTS OF PARENT PRIOR TO CLOSING DATE
6.1 APPROVALS OF GOVERNMENTAL BODIES
As promptly as practicable after the date of this Agreement, Parent will,
and will cause each of its Related Persons to, make all filings required by
Legal Requirements to be made by them to consummate the Contemplated
Transactions (including all filings under the HSR Act). Between the date of this
Agreement and the Closing Date, Parent will, and will cause each Related Person
to, cooperate with the Warranting Shareholders with respect to all filings that
the Warranting Shareholders are required by Legal Requirements to make in
connection with the Contemplated Transactions, and (ii) cooperate with the
Warranting Shareholders in obtaining all consents identified in Part 3.2 of the
Disclosure Letter; provided that this Agreement will not require Parent to
dispose of or make any change in any portion of its business or to incur any
other burden to obtain a Governmental Authorization.
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6.2 BEST EFFORTS
Except as set forth in the proviso to Section 6.1, between the date of this
Agreement and the Closing Date, Parent will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.
7. CONDITIONS PRECEDENT TO PARENT'S OBLIGATION TO CLOSE
Each and every obligation of Parent and Newco under this Agreement to be
performed at the Closing is subject to the satisfaction, at or prior to the
Closing, of each of the following conditions specified in this Part 7 of this
Agreement (any of which may be waived by Parent, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of the Warranting Shareholders' representations and warranties in
this Agreement (considered collectively), and each of these representations and
warranties (considered individually), must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Disclosure Letter.
(b) Each of the Warranting Shareholders' representations and warranties in
Sections 3.3, 3.4, 3.12, and 3.24 must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Disclosure Letter.
7.2 WARRANTING SHAREHOLDERS' PERFORMANCE
(a) All of the covenants and obligations that the Warranting Shareholders
are required to perform or to comply with pursuant to this Agreement at or prior
to the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all material respects.
(b) Each document required to be delivered pursuant to Section 2.4 must
have been delivered, and each of the other covenants and obligations in Sections
5.4 and 5.8 must have been performed and complied with in all material respects.
7.3 CONSENTS
Each of the Consents identified in Part 3.2 of the Disclosure Letter, and
each Consent identified in Schedule 4.2, must have been obtained and must be in
full force and effect.
7.4 ADDITIONAL DOCUMENTS
Each of the following documents must have been delivered to or obtained by
Parent:
(a) an opinion of Houtchens Daniel & Greenfield, dated the Closing
Date, in the form of Exhibit 7.4(a);
(b) estoppel certificates executed on behalf of HealthPartners
Funding, L.P., National Health Investors,Inc., Health Care Reit, Inc.,
Whitehead Family Investments, Ltd. and Omega HealthCare Investors, Inc.,
and such of their related or affiliated persons as Parent may reasonably
require, dated as of a date not more than five (5) days prior to the
Closing Date, each substantially in the form of Exhibit 7.4(b);
(c) a consent and release signed by each Warranting Shareholder and
each of the Other Securityholders pursuant to which they sell or surrender
any equity interest in the Company (including any outstanding options) in
accordance with the form of option repurchase agreement attached as Exhibit
7.4(c).
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(d) the Certificate of Merger, duly approved by the Company and its
shareholders as required by law and duly executed on behalf of the Company;
(e) such other documents as Parent may reasonably request for the
purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of the Warranting
Shareholders' representations and warranties, (iii) evidencing the
performance by either Warranting Shareholder of, or the compliance by
either Warranting Shareholder with, any covenant or obligation required to
be performed or complied with by such Warranting Shareholder, (iv)
evidencing the satisfaction of any condition referred to in this Section 7,
or (v) otherwise facilitating the consummation or performance of any of the
Contemplated Transactions.
7.5 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Parent, or against any Person affiliated with Parent, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS
There must not have been made or Threatened by any Person any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, any of the Acquired Companies,
or (b) is entitled to all or any portion of the Purchase Price payable for the
Shares.
7.7 NO PROHIBITION
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Parent or any Person affiliated with Parent to suffer any
material adverse consequence under, (a) any applicable Legal Requirement or
Order, or (b) any Legal Requirement or Order that has been published,
introduced, or otherwise formally proposed by or before any Governmental Body.
7.8 COMPLETION OF DILIGENCE
Parent's review of the Company's businesses Assets Contracts, Governmental
Authorizations and similar matters shall have been completed to the satisfaction
of Parent and its counsel, provided, however, that this condition shall expire
on August 15, 1996.
7.9 ENVIRONMENTAL REPORTS
Parent shall have obtained at Parent's expense environmental surveys or
reports satisfactory to Parent in its sole discretion in respect of the
operations of each of the Acquired Companies and SNFs and in respect of each of
the properties owned or operated by any of the Acquired Companies or SNFs,
including leased properties.
7.10 UNISON APPROVALS
This Agreement and the Contemplated Transactions shall have been approved
by Unison's stockholders by a vote satisfactory to Parent.
7.11 UNISON FINANCING; AVERAGE DAILY PRICE
Parent shall have completed a public or private offering of subordinated
debt or common stock in an amount and on terms acceptable to Parent. In
addition, the Average Daily Price as of the Closing Date shall not be lower than
$10.25 per Parent Share nor higher than $16.25 per Parent Share.
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7.12 TREATMENT OF DISPUTED MEDICARE RECEIVABLES
The parties acknowledge that the Company's Closing Financial Statements are
expected to include certain Medicare accounts receivable that are currently in
dispute with HCFA (the" Disputed Medicare Receivables"). The Disputed Medicare
Receivables are identified or more fully described on Schedule 2.9, which
schedule shall be updated as of the Closing Date. It is a condition of Parent's
obligation to close that the Company shall have created an appropriate financial
statement reserve for the full amount of the Disputed Medicare Receivables and
shall have incurred and recorded any charge against income associated therewith.
7.13 ACQUISITION OF REHABWEST, INC.
Parent shall have entered into a definitive agreement to acquire the assets
and business of RehabWest, Inc. for an aggregate purchase price of $5,500,000
and subject to other terms that are satisfactory to Parent and to the
shareholders and creditors of RehabWest, Inc.
7.14 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES
The mergers between a subsidiary of Parent and each of the other Merging
Companies shall be consummated concurrently with the Merger.
8. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY AND
THE WARRANTING SHAREHOLDERS TO CLOSE
Each and every obligation of the Company and the Warranting Shareholders
under this Agreement to be performed at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
specified in this Part 8 of this Agreement (any of which may be waived by the
Company and the Warranting Shareholders, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS
All of Parent's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 PARENT'S PERFORMANCE
(a) All of the covenants and obligations that Parent is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
(b) Parent must have delivered each of the documents required to be
delivered by Parent pursuant to Section 2.4 and must have made the cash payments
required to be made by Parent pursuant to Sections 2.4(b)(i) and 2.4(b)(ii).
8.3 CONSENTS
Each of the Consents identified in Part 3.2 of the Disclosure Letter must
have been obtained and must be in full force and effect.
8.4 ADDITIONAL DOCUMENTS
The following documents must have been obtained by or delivered to the
Warranting Shareholders:
(a) an opinion of Quarles & Brady, dated the Closing Date, in the form
of Exhibit 8.4(a); and
(b) estoppel certificates executed on behalf of National Health
Investors, Inc., and Health Care Reit, Inc., and such of their related or
affiliated persons as the Warranting Shareholders may reasonably
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require, dated as of a date not more than five (5) days prior to the
Closing Date, each substantially in the form of Exhibit 7.4(b);
(c) a consent and release signed by each of the Other Securityholders
pursuant to which they sell or surrender any equity interest in the Company
(including any outstanding options) on terms reasonably satisfactory to the
Warranting Shareholders;
(d) a release by National Health Investors, Inc. of the guarantee of
Mr. Kremser, or the satisfaction of the obligation of the Company
underlying such guarantee (which satisfaction may occur concurrently with
the Closing;
(e) the Certificate of Merger, duly approved by Parent, Newco, and
their shareholders as required by law and duly executed on behalf of Newco;
and
(f) such other documents as the Company or the Warranting Shareholders
may reasonably request for the purpose of (i) enabling their counsel to
provide the opinion referred to in Section 7.4(a), (ii) evidencing the
accuracy of any representation or warranty of Parent, (iii) evidencing the
performance by Parent of, or the compliance by Parent with, any covenant or
obligation required to be performed or complied with by Parent, (ii)
evidencing the satisfaction of any condition referred to in this Section 8,
or (v) otherwise facilitating the consummation of any of the Contemplated
Transactions.
8.5 NO INJUNCTION
There must not be in effect any Legal Requirement or any injunction or
other Order that (a) prohibits the sale of the Shares by the Warranting
Shareholders to Parent, and (b) has been adopted or issued, or has otherwise
become effective, since the date of this Agreement.
8.6 AVERAGE DAILY PRICE
The Average Daily Price as of the Closing Date must not be lower than
$10.25 per Parent Share nor higher than $16.25 per Parent Share, provided that
the $16.25 condition shall not apply if, promptly after the Warranting
Shareholders elect to terminate this Agreement for failure of this condition,
Parent agrees to amend this Agreement and the Certificate of Merger so that the
number of Parent Shares issued in the Merger is not less than 1,416,546.
8.7 PARENT DIRECTOR
David A. Kremser shall have been elected or appointed as a director of
Parent.
8.8 ACQUISITION OF REHABWEST, INC.
Parent shall have entered into a definitive agreement to acquire the assets
and business of RehabWest, Inc. for an aggregate purchase price of $5,500,000
and subject to other terms and conditions that are satisfactory to Parent and to
the shareholders and creditors of RehabWest, Inc.
8.9 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES
The mergers between a subsidiary of Parent and each of the other Merging
Companies shall be consummated concurrently with the Merger.
9. TERMINATION
9.1 TERMINATION EVENTS
This Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Parent or the Warranting Shareholders if a Breach of any
provision of this Agreement has been committed by the other party and such
Breach has not been cured or waived within 10 days following the occurrence
or discovery thereof by the Breaching party, whichever is later;
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(b)(i) by Parent if any conditions in Section 7 have not been
satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Parent to comply
with its obligations under this Agreement) and Parent has not waived such
condition on or before the Closing Date; or (ii) by the Warranting
Shareholders, if any conditions in Section 8 have not been satisfied of the
Closing Date or if satisfaction of such a condition is or becomes
impossible (other than through the failure of the Warranting Shareholders
to comply with their obligations under this Agreement) and the Warranting
Shareholders have not waived such condition on or before the Closing Date;
(c) by the Warranting Shareholders if the registration of Parent's
Common Stock under the Exchange Act is terminated or if the trading thereof
on the NASDAQ National Stock Market is suspended as of the Closing Date; or
(d) by mutual consent of Parent and the Warranting Shareholders; or
(e) by either Parent or the Warranting Shareholders if the Closing has
not occurred (other than through the failure of any party seeking to
terminate this Agreement to comply fully with its obligations under this
Agreement) on or before November 1, 1996, or such later date as the parties
may agree upon.
9.2 EFFECT OF TERMINATION
If this Agreement is terminated pursuant to Section 9.1, all further
obligations of the parties under this Agreement will terminate, except that the
obligations in Sections 11.1 and 11.3 will survive; provided, however, that if
this Agreement is terminated by a party because of the Breach of the Agreement
by the other party or because one or more of the conditions to the terminating
party's obligations under this Agreement is not satisfied as a result of the
other party's failure to comply with its obligations under this Agreement, the
terminating party's right to pursue all legal remedies will survive such
termination unimpaired.
9.3 WRONGFUL TERMINATION OR FAILURE TO CLOSE BY PARENT
Notwithstanding anything to the contrary herein, in the event that Parent
wrongfully terminates this Agreement or refuses or fails to consummate the
Merger or any of the Contemplated Transactions without justification hereunder,
the Company shall be entitled to receive, as liquidated damages, the sum of
$1,600,000, which shall be the exclusive remedy of the Company and the
Warranting Shareholders therefor.
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION LIMITED BY KNOWLEDGE
All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the
certificate delivered pursuant to Section 2.8(a)(iv), and any other certificate
or document delivered pursuant to this Agreement will survive the Closing. The
right to indemnification, payment of Damages or other remedy based on such
representations, warranties, covenants, and obligations will be precluded if the
injured party had actual Knowledge thereof before Closing but otherwise will not
be affected by any investigation conducted with respect to, or any Knowledge
capable of being acquired (but not actually acquired) at any time, whether
before or after the execution and delivery of this Agreement or the Closing
Date, with respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant, or obligation. The party asserting that the
injured party's remedies are limited by its actual Knowledge in accordance with
the preceding sentence shall have the burden of proof in establishing such
actual Knowledge. The waiver of any condition based on the accuracy of any
representation or warranty, or on the performance of or compliance with any
covenant or obligation, will not affect the right to indemnification, payment of
Damages, or other remedy based on such representations, warranties, covenants,
and obligations.
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10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE
WARRANTING SHAREHOLDERS
The Warranting Shareholders, jointly and severally, will indemnify and hold
harmless Parent, the Acquired Companies, and their respective Representatives,
stockholders, controlling persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage (including incidental and consequential
damages), expense (including costs of investigation and defense and reasonable
attorneys' fees) or diminution of value, whether or not involving a third-party
claim (collectively, "Damages"), arising, directly or indirectly, from or in
connection with:
(a) any Breach of any representation or warranty made by the
Warranting Shareholders in this Agreement as of the time of its execution,
the Disclosure Letter or any other certificate or document delivered by the
Warranting Shareholders pursuant to this Agreement;
(b) any Breach of any representation or warranty made by the
Warranting Shareholders in this Agreement as if such representation or
warranty were made on and as of the Closing Date, other than any such
Breach that is disclosed in a supplement to the Disclosure Letter;
(c) any Breach by either Warranting Shareholder of any covenant or
obligation of such Warranting Shareholder in this Agreement;
(d) any services provided by any SNF or Acquired Company prior to the
Closing Date and any liability for Ancillary Contracts except as provided
in Section 3.30; or
(e) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either Warranting
Shareholder or any Acquired Company (or any Person acting on their behalf)
in connection with any of the Contemplated Transactions;
provided, however, that for purposes of this Section 10.2 and Section 10.3 (and
the limitations of Sections 10.5 and 10.6), the term "Breach" shall not be
limited or qualified by the materiality of the matter and all Damages therefrom
shall be applied against the limitations in Sections 10.5 and 10.6.
Except as expressly provided in Section 9.3, the remedies provided in this
Section 10.2 will be exclusive and will preclude any other remedies that may be
available to Parent or the other Indemnified Persons in respect of any breach of
this Agreement by the Warranting Shareholders.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY PARENT
Parent will indemnify and hold harmless the Warranting Shareholders, and
will pay to the Warranting Shareholders the amount of any Damages arising,
directly or indirectly, from or in connection with (a) any Breach of any
representation or warranty made by Parent in this Agreement or in any
certificate delivered by Parent pursuant to this Agreement, (b) any Breach by
Parent of any covenant or obligation of Parent in this Agreement, (c) any
services provided by any SNF, or Acquired Company after the Closing Date, (d)
liabilities accruing after the Closing Date pursuant to any Ancillary Contract
or other Contract or Encumbrance not terminated on or prior to the Closing Date,
or (e) any claim by any Person for brokerage or finder's fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by such Person with Parent (or any Person acting on its behalf) in
connection with any of the Contemplated Transactions.
10.4 TIME LIMITATIONS
If the Closing occurs, the Warranting Shareholders will have no liability
(for indemnification or otherwise) with respect to any representation or
warranty, or covenant or obligation to be performed and complied with prior to
the Closing Date, other than those in Sections 3.3, 3.11, 3.13, and 3.19, unless
on or before the first anniversary of the Closing Parent notifies the Warranting
Shareholders of a claim specifying the factual basis of that claim in reasonable
detail to the extent then known by Parent. A claim with respect to Section 3.3
or 3.13 must be made within two (2) years after the Closing Date; a claim
pursuant to
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Section 3.11 must be made within three (3) years after the Closing Date, and a
claim pursuant to Section 3.19 must be made within three (3) years after the
Closing Date. If the Closing occurs, Parent will have no liability (for
indemnification or otherwise) with respect to any representation or warranty, or
covenant or obligation to be performed and complied with prior to the Closing
Date, unless on or before the second anniversary of the Closing the Warranting
Shareholders notify Parent of a claim specifying the factual basis of that claim
in reasonable detail to the extent then known by the Warranting Shareholders.
10.5 LIMITATIONS ON AMOUNT -- WARRANTING SHAREHOLDERS
The limitations on the amount of the liability of the Warranting
Shareholders will be as set forth in the Escrow Agreement. However, this Section
10.5 will not apply to any Breach of any of the Warranting Shareholders'
representations and warranties of which either Warranting Shareholder had
Knowledge at any time prior to the date on which such representation and
warranty is made or any intentional Breach by either Warranting Shareholder of
any covenant or obligation, and the Warranting Shareholders will be jointly and
severally liable for all Damages with respect to such Breaches.
10.6 LIMITATIONS ON AMOUNT -- PARENT
Parent will have no liability (for indemnification or otherwise) with
respect to the matters described in clause (a) or (b) of Section 10.3 until the
total of all Damages with respect to such matters exceeds $125,000, at which
time all of such amounts shall become payable. Thereafter, amounts shall be
payable in $25,000 increments, up to a maximum of $500,000. However, this
Section 10.6 will not apply to any Breach of any of Parent's representations and
warranties of which Parent had Knowledge at any time prior to the date on which
such representation and warranty is made or any intentional Breach by Parent of
any covenant or obligation, and Parent will be liable for all Damages with
respect to such Breaches.
10.7 ESCROW
Except for breach of any of the Warranting Shareholders' representations
and warranties of which either Warranting Shareholder had Knowledge at any time
prior to the date on which such representation and warranty was made, or any
intentional Breach by either Warranting Shareholder of any covenant or
obligation, Parent's sole and only source to satisfy a Claim shall be against
the amount placed in escrow under the Escrow Agreement. Notwithstanding the
foregoing, if and to the extent that within the time limitations specified under
Section 10.4 for claims against the Warranting Shareholders any property has
been returned to the Warranting Shareholders from the General Accounts of the
Escrow Funds (upon expiration of the Escrow Agreement or otherwise), Parent may
make claims directly against the Warranting Shareholders or their property up to
the amount of the escrow proceeds that was returned to the Warranting
Shareholders from the General Accounts therein.
10.8 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under Section 10.2 or
10.3 of notice of the commencement of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any indemnified
party, except to the extent that the indemnifying party demonstrates that the
defense of such action is prejudiced by the indemnifying party's failure to give
such notice.
(b) If any Proceeding referred to in Section 10.8(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such Proceeding and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such Proceeding and
provide reasonable indemnification with respect to such Proceeding), to assume
the defense of such Proceeding with counsel reasonably satisfactory to the
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indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines in
good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise, or settle such Proceeding, but the indemnifying
party will not be bound by any determination of a Proceeding so defended or any
compromise or settlement effected without its consent (which may not be
unreasonably withheld).
(d) The Warranting Shareholders hereby consent to the non-exclusive
jurisdiction of any court in which a Proceeding is brought against any
Indemnified Person for purposes of any claim that an Indemnified Person may have
under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on the Warranting Shareholders
with respect to such a claim anywhere in the world.
10.9 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants. The Warranting Shareholders will pay all amounts
payable to BA Partners in connection with this Agreement and the Contemplated
Transactions. Parent will pay the HSR Act filing fee. The Warranting
Shareholders will cause the Acquired Companies not to incur any out-of-pocket
expenses in connection with this Agreement except for professional fees not in
excess of $100,000. In the event of termination of this Agreement, the
obligation of each party to pay its own expenses will be subject to any rights
of such party arising from a breach of this Agreement by another party.
11.2 PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to this Agreement
or the Contemplated Transactions will be issued, if at all, at such time and in
such manner as Parent and the Warranting Shareholders jointly determine, except
in instances where Parent determines in good faith that disclosure is necessary
to assure compliance with applicable law. Unless consented to by
Parent/Warranting Shareholders
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in advance or required by Legal Requirements, prior to the Closing the
Warranting Shareholders and Parent shall, and the Warranting Shareholders shall
cause the Acquired Companies to, keep this Agreement strictly confidential and
may not make any disclosure of this Agreement to any Person. The Warranting
Shareholders and Parent will consult with each other concerning the means by
which the Acquired Companies' employees, customers, and suppliers and others
having dealings with the Acquired Companies will be informed of the Contemplated
Transactions, and Parent will have the right to be present for any such
communication.
11.3 CONFIDENTIALITY; ACCESS TO INFORMATION
Between the date of this Agreement and the Closing Date, Parent and the
Warranting Shareholders will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Parent and the Acquired
Companies to maintain in confidence, any written information furnished by
another party or an Acquired Company in connection with this Agreement or the
Contemplated Transactions, unless (a) such information is already known to such
party or to others not bound by a duty of confidentiality or such information
becomes publicly available through no fault of such party, (b) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the Contemplated
Transactions, or (c) the furnishing or use of such information is required by or
necessary or appropriate in connection with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. Whether or not the Closing takes place, each party hereby
waives, and the Warranting Shareholders will upon Parent's request cause the
Acquired Companies to waive, any cause of action, right, or claim arising out of
the access of Parent or its representatives to any trade secrets or other
confidential information of the Acquired Companies except for the intentional
competitive misuse by Parent of such trade secrets or confidential information.
If the Contemplated Transactions are consummated, the Warranting
Shareholders shall have the right, after the Closing, to access to the books and
records of the Acquired Companies for inspection and copying by the Warranting
Shareholders or their duly authorized representatives, attorneys, accountants
and agents for purposes of defending any claim for indemnity under this
Agreement or for any other lawful purpose which does not violate the Warranting
Shareholders' confidentiality and noncompetition obligations. All books and
records of the Acquired Companies will be maintained by Parent and made
available to the Warranting Shareholders so long as the Warranting Shareholders
may have any obligation to indemnify Parent or may have any material liability
to third parties or Governmental Bodies. The Warranting Shareholders' right of
access for purposes of inspection and copying hereunder shall be limited to
inspections after reasonable notice and during normal business hours and shall
be subject to such other Company policies as Parent or the Company may
reasonably establish from time to time.
11.4 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
Company: Signature Health Care Corporation, 225 East 16th Avenue, Suite
670, Denver, CO 80203
Warranting Shareholders:
Attention: Mr. David A. Kremser, 784 Yankee Creek Road, Evergreen, CO 80439
Facsimile No.: 303-670-5207
Attention: Mr. John D. Filkoski, 4715 Eleventh Street, Greeley, CO
80634-2318
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Facsimile No.: 970-351-7068
with a copy to: Houtchens Daniel & Greenfield, 1007 Ninth Avenue, Greeley,
CO 80631-4094
Attention: John B. Houtchens, Esq.
Facsimile No.: 970-353-0151
Parent: Unison HealthCare Corporation, 7272 East Indian School Road, Suite
214,
Scottsdale, Arizona 85251.
Attention: Mr. Jerry M. Walker, President
Facsimile No.: 602-481-6479
with a copy to: Quarles & Brady, One East Camelback Road, Suite 400,
Phoenix, AZ 85012-1649
Attention: Mr. P. Robert Moya
Facsimile No.: 602-230-5598
11.5 SPECIFIC PERFORMANCE; JURISDICTION; SERVICE OF PROCESS
The Company and the Warranting Shareholders agree that the Parent shall
have a right of specific performance of the covenants and obligations contained
in this Agreement and the Ancillary Contracts. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of Arizona, County of Maricopa, or, if it has or can acquire jurisdiction, in
the United States District Court for the District of Arizona, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on any party anywhere in the world.
11.6 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
11.7 WAIVER
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement or the documents referred to
in this Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this Agreement
or the documents referred to in this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.
11.8 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including the Letter of Intent between Parent and
the Warranting Shareholders dated June 13, 1996) and constitutes (along with the
documents referred to in this Agreement) a complete and exclusive statement of
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the terms of the agreement between the parties with respect to its subject
matter. This Agreement may not be amended except by a written agreement executed
by the party to be charged with the amendment.
11.9 DISCLOSURE LETTER
In the event of any inconsistency between the statements in the body of
this Agreement and those in the Disclosure Letter (other than an exception
expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control. If a disclosure which is properly and fully made
under one part of the Disclosure Letter also relates to one or more other parts,
it shall be deemed made in all appropriate sections thereof even in the absence
of cross references.
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without the
prior consent of the other parties except that Parent may assign any of its
rights under this Agreement to any Subsidiary of Parent. Subject to the
preceding sentence, this Agreement will apply to, be binding in all respects
upon, and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement or any provision
of this Agreement. This Agreement and all of its provisions and conditions are
for the sole and exclusive benefit of the parties to this Agreement and their
successors and assigns.
11.11 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
11.12 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
11.13 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
11.14 GOVERNING LAW
This Agreement will be governed by the laws of the State of Arizona without
regard to conflicts of laws principles.
11.15 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
11.16 MUTUAL RELEASE
The consummation of the Closing shall act as a mutual release of the
Warranting Shareholders by the Parent and of the Parent by the Warranting
Shareholders in respect of any and all rights, damages, claims and
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causes of action arising on or before the Closing, whether known or unknown,
absolute or contingent, except rights, damages, claims and causes of action
arising under and governed by this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
<TABLE>
<S> <C>
Parent: Warranting Shareholders:
Unison HealthCare Corporation
By:
- --------------------------------------------- ---------------------------------------------
Paul J. Contris, David A. Kremser
Executive Vice President
Signature Health Care Corporation
By:
- --------------------------------------------- ---------------------------------------------
David A. Kremser, President John D. Filkoski
</TABLE>
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<PAGE> 104
ANNEX B
The following legend denotes the six pages that are changed in the
Agreement and Plan of Merger to reflect the differences between the subject
companies, Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc. and
Safford Care, Inc. The difference appears in the Agreements as a box with the
corresponding letter to cross reference to the table below.
<TABLE>
<CAPTION>
LETTER
PAGE NO. REFERENCE ENTRIES FOR BOX DESIGNATIONS
-------- --------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COVER A. Arkansas, Inc. Cornerstone Care, Inc. Douglas Manor, Inc. Safford Care, Inc.
1 B. Arkansas, Inc. Cornerstone Care, Inc. Douglas Manor, Inc. Safford Care, Inc.
8 C. $5,638,889 $6,805,556 $6,222,222 $9,333,333
9 D. $100,694 $121,528 $111,111 $1,666,667
37 E. Arkansas, Inc. Cornerstone Care, Inc. Douglas Manor, Inc. Safford Care, Inc.
40 F. Arkansas, Inc. Cornerstone Care, Inc. Douglas Manor, Inc. Safford Care, Inc.
</TABLE>
<PAGE> 105
AGREEMENT AND PLAN OF MERGER
Among
UNISON HEALTHCARE CORPORATION
(A)
DAVID A. KREMSER
AND
JOHN D. FILKOSKI
DATED AS OF AUGUST 2, 1996
<PAGE> 106
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
RECITALS.............................................................................. 1
AGREEMENT............................................................................. 1
1. DEFINITIONS.................................................................... 1
"Ancillary Contracts".......................................................... 1
"Applicable Contract".......................................................... 1
"Audit Date"................................................................... 1
"Balance Sheet"................................................................ 1
"Best Efforts"................................................................. 1
"Breach"....................................................................... 1
"CBCA"......................................................................... 1
"Closing"...................................................................... 1
"Closing Date"................................................................. 1
"Company"...................................................................... 1
"Consent"...................................................................... 2
"Contemplated Transactions".................................................... 2
"Contract"..................................................................... 2
"Damages"...................................................................... 2
"Disclosure Letter"............................................................ 2
"Disputed Medicare Receivables"................................................ 2
"Effective Time"............................................................... 2
"Encumbrance".................................................................. 2
"Environment".................................................................. 2
"Environmental, Health, and Safety Liabilities"................................ 2
"Environmental Law"............................................................ 3
"Equity Adjustment Amount"..................................................... 3
"ERISA"........................................................................ 3
"Escrow Agreement"............................................................. 3
"Exchange Act"................................................................. 3
"Facilities"................................................................... 3
"GAAP"......................................................................... 3
"Governmental Authorization"................................................... 3
"Governmental Body"............................................................ 3
"Hazardous Activity"........................................................... 4
"Hazardous Materials".......................................................... 4
"HCFA"......................................................................... 4
"HSR Act"...................................................................... 4
"Indemnified Persons".......................................................... 4
"Intellectual Property Assets"................................................. 4
"Interim Balance Sheet"........................................................ 4
"IRC".......................................................................... 4
"IRS".......................................................................... 4
"Knowledge".................................................................... 4
"Legal Requirement"............................................................ 4
"Merger"....................................................................... 4
"Merger Consideration"......................................................... 4
"Merging Companies"............................................................ 4
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
"Newco"........................................................................ 4
"Occupational Safety and Health Law"........................................... 5
"Order"........................................................................ 5
"Ordinary Course of Business".................................................. 5
"Organizational Documents"..................................................... 5
"Other Securityholders"........................................................ 5
"Parent"....................................................................... 5
"Parent Companies"............................................................. 5
"Parent Reports"............................................................... 5
"Person"....................................................................... 5
"Plan"......................................................................... 5
"Proceeding"................................................................... 5
"Related Party Contracts"...................................................... 5
"Related Person"............................................................... 5
"Release"...................................................................... 6
"Representative"............................................................... 6
"Shareholders"................................................................. 6
"SEC".......................................................................... 6
"Securities Act"............................................................... 6
"Securityholder Releases"...................................................... 6
"Shares"....................................................................... 6
"SNFs"......................................................................... 6
"Subsidiary"................................................................... 6
"Surviving Corporation"........................................................ 6
"Tax".......................................................................... 6
"Tax Return"................................................................... 7
"Threat of Release"............................................................ 7
"Threatened"................................................................... 7
"Warranting Shareholders"...................................................... 7
2. THE MERGER; CLOSING............................................................ 7
2.1 THE MERGER............................................................... 7
2.2 EFFECTIVE TIME........................................................... 7
2.3 CLOSING.................................................................. 7
2.4 THE SURVIVING CORPORATION................................................ 8
2.5 CONSIDERATION FOR THE MERGER; CONVERSION OF SHARES IN THE MERGER......... 8
2.6 PAYMENT OF CONSIDERATION................................................. 8
2.7 NO DISSENTING SHARES..................................................... 9
2.8 CLOSING OBLIGATIONS...................................................... 9
2.9 EQUITY ADJUSTMENT AMOUNT................................................. 10
2.10 EQUITY ADJUSTMENT PROCEDURE.............................................. 10
3. REPRESENTATIONS AND WARRANTIES OF THE WARRANTING 10
SHAREHOLDERS..................................................................
3.1 ORGANIZATION AND GOOD STANDING........................................... 11
3.2 AUTHORITY; NO CONFLICT................................................... 11
3.3 CAPITALIZATION........................................................... 12
3.4 FINANCIAL STATEMENTS..................................................... 12
3.5 BOOKS AND RECORDS........................................................ 12
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
3.6 TITLE TO PROPERTIES; ENCUMBRANCES........................................ 13
3.7 CONDITION AND SUFFICIENCY OF ASSETS...................................... 13
3.8 ACCOUNTS RECEIVABLE...................................................... 13
3.9 PREPAID SUPPLIES......................................................... 14
3.10 NO UNDISCLOSED LIABILITIES............................................... 14
3.11 TAXES.................................................................... 14
3.12 NO MATERIAL ADVERSE CHANGE............................................... 15
3.13 EMPLOYEE BENEFITS........................................................ 15
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL 16
AUTHORIZATIONS..........................................................
3.15 LEGAL PROCEEDINGS; ORDERS................................................ 17
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS.................................... 18
3.17 CONTRACTS; NO DEFAULTS................................................... 19
3.18 INSURANCE................................................................ 21
3.19 ENVIRONMENTAL MATTERS.................................................... 22
3.20 EMPLOYEES................................................................ 23
3.21 LABOR RELATIONS; COMPLIANCE.............................................. 23
3.22 INTELLECTUAL PROPERTY.................................................... 24
3.23 CERTAIN PAYMENTS......................................................... 24
3.24 DISCLOSURE............................................................... 24
3.25 RELATIONSHIPS WITH RELATED PERSONS....................................... 25
3.26 BROKERS OR FINDERS....................................................... 25
3.27 TERMINATION OF ANCILLARY CONTRACTS....................................... 25
4. REPRESENTATIONS AND WARRANTIES OF PARENT....................................... 25
4.1 ORGANIZATION AND GOOD STANDING........................................... 25
4.2 AUTHORITY; NO CONFLICT................................................... 26
4.3 INVESTMENT INTENT........................................................ 26
4.4 CERTAIN PROCEEDINGS...................................................... 26
4.5 BROKERS OR FINDERS....................................................... 26
4.6 SUITABILITY AND SOPHISTICATION........................................... 26
4.7 RECEIPT OF INFORMATION................................................... 26
4.8 CONFLICTING AGREEMENTS................................................... 27
5. COVENANTS OF THE WARRANTING SHAREHOLDERS PRIOR TO CLOSING DATE................. 27
5.1 ACCESS AND INVESTIGATION................................................. 27
5.2 OPERATION OF THE BUSINESSES OF THE COMPANY............................... 27
5.3 NEGATIVE COVENANT........................................................ 27
5.4 REQUIRED APPROVALS....................................................... 27
5.5 NOTIFICATION............................................................. 28
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS............................... 28
5.7 NO NEGOTIATION........................................................... 28
5.8 BEST EFFORTS............................................................. 28
6. COVENANTS OF PARENT PRIOR TO CLOSING DATE...................................... 28
6.1 APPROVALS OF GOVERNMENTAL BODIES......................................... 28
6.2 BEST EFFORTS............................................................. 29
7. CONDITIONS PRECEDENT TO PARENT'S OBLIGATION TO CLOSE........................... 29
7.1 ACCURACY OF REPRESENTATIONS.............................................. 29
7.2 WARRANTING SHAREHOLDERS' PERFORMANCE..................................... 29
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
7.3 CONSENTS................................................................. 29
7.4 ADDITIONAL DOCUMENTS..................................................... 29
7.5 NO PROCEEDINGS........................................................... 30
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS...................... 30
7.7 NO PROHIBITION........................................................... 30
7.8 COMPLETION OF DILIGENCE.................................................. 30
7.9 ENVIRONMENTAL REPORTS.................................................... 30
7.10 UNISON APPROVALS......................................................... 30
7.11 UNISON FINANCING......................................................... 30
7.12 TREATMENT OF DISPUTED MEDICARE RECEIVABLES............................... 31
7.13 ACQUISITION OF REHABWEST, INC............................................ 31
7.14 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES..................... 31
8. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY AND THE WARRANTING 31
SHAREHOLDERS TO CLOSE..........................................................
8.1 ACCURACY OF REPRESENTATIONS.............................................. 31
8.2 PARENT'S PERFORMANCE..................................................... 31
8.3 CONSENTS................................................................. 31
8.4 ADDITIONAL DOCUMENTS..................................................... 31
8.5 NO INJUNCTION............................................................ 32
8.6 PARENT DIRECTOR.......................................................... 32
8.7 ACQUISITION OF REHABWEST, INC............................................ 32
8.8 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES..................... 32
9. TERMINATION.................................................................... 32
9.1 TERMINATION EVENTS....................................................... 32
9.2 EFFECT OF TERMINATION.................................................... 33
9.3 WRONGFUL TERMINATION OR FAILURE TO CLOSE BY PARENT....................... 33
10. INDEMNIFICATION; REMEDIES...................................................... 33
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION LIMITED BY KNOWLEDGE................. 33
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE 33
SHAREHOLDERS...........................................................
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY PARENT........................ 34
10.4 TIME LIMITATIONS........................................................ 34
10.5 LIMITATIONS ON AMOUNT--WARRANTING SHAREHOLDERS.......................... 34
10.6 LIMITATIONS ON AMOUNT--PARENT........................................... 35
10.7 ESCROW.................................................................. 35
10.8 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS....................... 35
10.9 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS............................. 36
11. GENERAL PROVISIONS............................................................. 36
11.1 EXPENSES................................................................ 36
11.2 PUBLIC ANNOUNCEMENTS.................................................... 36
11.3 SECTION 338(h)(10) ELECTION............................................. 36
11.4 CONFIDENTIALITY; ACCESS TO INFORMATION.................................. 37
11.5 NOTICES................................................................. 37
11.6 SPECIFIC PERFORMANCE; JURISDICTION; SERVICE OF PROCESS.................. 38
11.7 FURTHER ASSURANCES...................................................... 38
11.8 WAIVER.................................................................. 38
11.9 ENTIRE AGREEMENT AND MODIFICATION....................................... 38
11.10 DISCLOSURE LETTER....................................................... 39
</TABLE>
(iv)
<PAGE> 110
<TABLE>
<CAPTION>
PAGE
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<S> <C>
11.11 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS...................... 39
11.12 SEVERABILITY............................................................ 39
11.13 SECTION HEADINGS, CONSTRUCTION.......................................... 39
11.14 TIME OF ESSENCE......................................................... 39
11.15 GOVERNING LAW........................................................... 39
11.16 COUNTERPARTS............................................................ 39
11.17 MUTUAL RELEASE.......................................................... 39
</TABLE>
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<PAGE> 111
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") is made as of August 2,
1996, by Unison HealthCare Corporation, a Delaware corporation ("Parent"), (B) a
Colorado corporation organized as an "S corporation" for federal income tax
purposes (the "Company"), David A. Kremser, an individual resident in Colorado
("Mr. Kremser"), and John D. Filkoski, an individual resident in Colorado ("Mr.
Filkoski" and, collectively with Mr. Kremser, the "Warranting Shareholders").
RECITALS
The Boards of Directors of both Parent and the Company have, subject to the
conditions of this Agreement, determined that the Merger (as defined below) is
in the best interests of their respective shareholders and have approved and
adopted this Agreement and the transactions contemplated hereby. Parent and the
Warranting Shareholders desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and to cause the Merger
to occur on the terms set forth in this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ANCILLARY CONTRACTS" -- as defined in Section 3.30.
"APPLICABLE CONTRACT" -- any Contract (a) under which the Company has or
may acquire any rights, (b) under which the Company has or may become subject to
any obligation or liability, or (c) by which the Company or any of the assets
owned or used by it is or may become bound.
"AUDIT DATE" -- as defined in Section 2.10.
"BALANCE SHEET" -- as defined in Section 3.4.
"BEST EFFORTS" -- the efforts that a prudent Person desirous of achieving a
result would use in similar circumstances to ensure that such result is achieved
as expeditiously as reasonably possible.
"BREACH" -- except as otherwise expressly provided in Article 10 hereof for
purposes of applying the indemnification provisions, a "Breach" of a
representation, warranty, covenant, obligation, or other provision of this
Agreement or any instrument delivered pursuant to this Agreement will be deemed
to have occurred if there is or has been (a) any material inaccuracy in or
breach of, or any material failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, or (b) any
material claim (by any Person) or other occurrence or circumstance that is or
was inconsistent with such representation, warranty, covenant, obligation, or
other provision, and the term "Breach" means any such material inaccuracy,
breach, failure, claim, occurrence, or circumstance, provided, however, that if
any such representation, warranty, covenant, obligation or other provision is
itself limited to matters of a material nature (however that limitation may be
expressed), an inaccuracy thereof shall constitute a Breach for all purposes of
this Agreement and no second level of materiality shall be required.
"CBCA" -- as defined in Section 2.1.
"CLOSING" -- as defined in Section 2.3.
"CLOSING DATE" -- the date and time as of which the Closing actually takes
place.
"COMPANY" -- as defined in the Recitals of this Agreement.
B-1
<PAGE> 112
"CONSENT" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by this
Agreement, including:
(a) the Merger;
(b) the execution, delivery, and performance of the Securityholders'
Releases and the Escrow Agreement;
(c) the performance by Parent and Warranting Shareholders of their
respective covenants and obligations under this Agreement; and
(d) Parent's acquisition and ownership of the Shares through the
Merger and exercise of control over the Company.
"CONTRACT" -- any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"DAMAGES" -- as defined in Section 10.2.
"DISCLOSURE LETTER" -- the disclosure letter delivered by the Warranting
Shareholders to Parent concurrently with the execution and delivery of this
Agreement.
"DISPUTED MEDICARE RECEIVABLES" -- as defined in Section 7.11.
"EFFECTIVE TIME" -- as defined in Section 2.2.
"ENCUMBRANCE" -- any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"ENVIRONMENT" -- soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES" -- any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and
health, and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or
response actions ("Cleanup") required by applicable Environmental Law or
Occupational Safety and Health Law (whether or not such Cleanup has been
required or requested by any Governmental Body or any other Person) and for
any natural resource damages; or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law or Occupational Safety and Health
Law.
The terms "removal," "remedial," and "response action," include the types
of activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. sec. 9601 et seq., as amended
("CERCLA").
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"ENVIRONMENTAL LAW" -- any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction,
that could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes that are generated, including medical
wastes;
(d) assuring that products are designed, formulated, packaged, and
used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other
potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of them,
for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for
injuries done to public assets.
Environmental Laws include, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980; Clean Water Act
of 1977; Clean Air Act; Resource Conservation and Recovery Act of 1976; Federal
Insecticide, Fungicide, and Rodenticide Act; Toxic Substances Control Act;
Emergency Planning and Community Right-to-Know Act of 1986; Occupational Safety
and Health Act of 1970; and Safe Drinking Water Act; and state and local
counterparts to these acts.
"EQUITY ADJUSTMENT AMOUNT" -- as defined in Section 2.9.
"ERISA" -- the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"ESCROW AGREEMENT" -- as defined in Section 2.8.
"EXCHANGE ACT" -- the Securities Exchange Act of 1934, as amended.
"FACILITIES" -- any real property, leaseholds, or other interests currently
or formerly owned or operated by the Company and any buildings, plants,
structures, or equipment (including motor vehicles) currently or formerly owned
or operated by the Company.
"GAAP" -- generally accepted United States accounting principles, applied
on a basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in Section 3.4(b) were prepared.
"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY" -- any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity
and any court or other tribunal); or
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(d) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority
or power of any nature.
"HAZARDOUS ACTIVITY" -- the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use (including any withdrawal or other
use of groundwater) of Hazardous Materials in, on, under, about, or from the
Facilities or any part thereof into the Environment, and any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of the Facilities or the Company.
"HAZARDOUS MATERIALS" -- any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including (a) any substance, the presence of which requires investigation or
remediation under any Environmental Law or other common law; (b) any dangerous,
toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous substance; (c) any substance, the presence of
which causes or threatens to cause a nuisance upon any SNF or other property
presently and/or previously owned, leased or otherwise used by the Company (or
poses or threatens to pose a hazard to the health or safety of persons on or
about the property or adjacent properties); and (d) radon, ureaformaldehyde,
polychlorinated biphenyls, asbestos or asbestos-containing materials, petroleum
and petroleum products.
"HCFA" -- the federal Health Care Financing Administration.
"HSR ACT" -- the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"INDEMNIFIED PERSONS" -- as defined in Section 10.2.
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 3.22.
"INTERIM BALANCE SHEET" -- as defined in Section 3.4.
"IRC" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"IRS" -- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"KNOWLEDGE" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, partner, executor, or trustee of such
Person (or in any similar capacity) has, or at any time had, Knowledge of such
fact or other matter.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, or other
administrative order, constitution, law, ordinance, principle of common law,
regulation, statute, or treaty.
"MERGER" -- as defined in Section 2.1.
"MERGER CONSIDERATION" -- as defined in Section 2.5.
"MERGING COMPANIES" -- Signature Health Care Corporation, Arkansas, Inc.,
Cornerstone Care, Inc., Douglas Manor, Inc., and Safford Care, Inc.
"NEWCO" -- a newly organized, wholly owned subsidiary of Parent to be
merged with and into the Company in the Merger.
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"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, and any governmental program designed to provide safe and
healthful working conditions.
"ORDER" -- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) and is not required to be specifically authorized by the
parent company (if any) of such Person; and
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or
by any Person or group of Persons exercising similar authority), in the
ordinary course of the normal day-to-day operations of other Persons that
are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"OTHER SECURITYHOLDERS" -- persons, other than the Warranting Shareholders,
who hold shares or options to acquire shares of the Company immediately prior to
the Effective Time.
"PARENT" -- as defined in the first paragraph of this Agreement.
"PARENT COMPANIES" -- any direct or indirect wholly-owned subsidiaries of
Parent.
"PARENT REPORTS" -- as defined in Section 4.11.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PLAN" -- as defined in Section 3.13.
"PROCEEDING" -- any action, arbitration, audit, hearing, investigation
(including Medicare and Medicaid survey and certification investigations and
proceedings), litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"RELATED PARTY CONTRACTS" -- as defined in Section 2.8(a)(v) and listed
pursuant to Section 3.17(a)(xiv).
"RELATED PERSON" -- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material
Interest; and
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(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified Person;
(c) each Person that serves as a director, officer, partner, executor,
or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material Interest;
(e) any Person with respect to which such specified Person serves as a
general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or (c).
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse and former spouses, (iii) any
other natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "Material Interest" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of voting securities or other voting interests representing at least 5% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 5% of the outstanding equity securities or
equity interests in a Person.
"RELEASE" -- any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"SHAREHOLDERS" -- the Warranting Shareholders and the Other Security
holders collectively.
"SEC" -- the federal Securities and Exchange Commission.
"SECURITIES ACT" -- the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"SECURITYHOLDER RELEASES" -- as defined in Section 2.8.
"SHARES" -- the shares of capital stock of the Company issued and
outstanding immediately prior to the Effective Time (other than Shares owned by
Parent, Newco, or any Parent Companies or held in the treasury of the Company).
"SNFS" -- skilled nursing facilities and other licensed providers of health
care and related services owned or leased and operated by the Company.
"SUBSIDIARY" -- with respect to any Person (the "Owner"), any corporation
or other Person of which securities or other interests having the power to elect
a majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries.
"SURVIVING CORPORATION" -- as defined in Section 2.1.
"TAX" -- any tax (including without limitation any income tax, capital
gains tax, value-added tax, sales tax, property tax, gift tax, or estate tax),
levy, assessment, tariff, duty (including any customs duty), deficiency, or
other fee, and any related charge or amount (including any fine, penalty,
interest, or addition to tax), imposed, assessed, or collected by or under the
authority of any Governmental Body or payable pursuant
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to any tax-sharing agreement or any other Contract relating to the sharing of
any such tax, levy, assessment, tariff, duty, deficiency, or fee.
"TAX RETURN" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE" -- a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"THREATENED" -- a claim, Proceeding, dispute, action, or other matter will
be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
"WARRANTING SHAREHOLDERS" -- as defined in the first paragraph of this
Agreement.
2. THE MERGER; CLOSING
2.1 THE MERGER
Subject to the terms and conditions of this Agreement, at the Effective
Time (as defined in Section 2.2), the Company and Newco shall consummate a
merger (the "Merger") in which (a) Newco shall be merged with and into the
Company and the separate corporate existence of Newco shall thereupon cease, (b)
the Company shall be the successor or surviving corporation in the Merger and
shall continue to be governed by the laws of the State of Colorado, and (c) the
separate corporate existence of the Company with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger. The
corporation surviving the Merger is sometimes hereinafter referred to as the
"Surviving Corporation." The Company and Newco are sometimes collectively
referred to herein as the "Constituent Corporations." The Merger shall have the
effects set forth in the Colorado Business Corporation Act (the "CBCA").
2.2 EFFECTIVE TIME
Parent, Newco and the Company will cause appropriate Articles of Merger
(the "Articles of Merger") to be executed and filed on the date of the Closing
(or on such other date as Parent and the Company may agree) as provided in the
CBCA. The Merger shall become effective on the date on which the Articles of
Merger has been duly filed with the Secretary of State of the State of Colorado
or such time as is agreed upon by the parties and specified in the Articles of
Merger, and such time is hereinafter referred to as the "Effective Time."
2.3 CLOSING
The closing of the Merger (the "Closing") provided for in this Agreement
will take place at the offices of Parent's counsel at Suite 400, One Camelback
Building, One East Camelback Road, Phoenix, Arizona, at 10:00 a.m. (local time)
on the later of (i) October 15, 1996 or (ii) subject to the provisions of
Section 9, the date that is two business days following the termination of the
applicable waiting period under the HSR Act and the satisfaction of the other
conditions specified in this Agreement, or at such other time and place as the
parties may agree. Subject to the provisions of Section 9, failure to consummate
the Merger provided for in this Agreement on the date and time and at the place
determined pursuant to this Section 2.3 will not result in the termination of
this Agreement and will not relieve any party of any obligation under this
Agreement.
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2.4 THE SURVIVING CORPORATION
The Articles of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation. The Bylaws of the Company, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation. The
directors of Newco at the Effective Time shall, from and after the Effective
Time, be the initial directors of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation, or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws. The officers of Newco at the
Effective Time shall, from and after the Effective Time, be the initial officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws. If, at any time after the Effective Time, the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Surviving Corporation its
right, title or interest in, to or under any of the rights, properties or assets
of either of the Constituent Corporations acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out and effectuate the purposes of this Agreement, the
officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of the Constituent
Corporations or otherwise, all such other actions and things as may be necessary
or desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in the Surviving Corporation
or otherwise to carry out and effectuate the purposes of this Agreement.
2.5 CONSIDERATION FOR THE MERGER; CONVERSION OF SHARES IN THE MERGER
At the Effective Time, by virtue of the Merger and without any action on
the part of the holders of capital stock of the Company or of capital stock of
Newco:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than Shares owned by Parent, Newco, or any direct or
indirect wholly owned subsidiary of Parent (collectively, "Parent
Companies") or any of the Company's direct or indirect wholly owned
subsidiaries or held in the treasury of the Company) shall, by virtue of
the Merger and without any action on the part of Newco, the Company or the
holder thereof, be converted into an amount consisting of cash and the
promissory note referred to in Section 2.6 below (the "Merger
Consideration") determined by dividing (i) (C) (the "Base Amount"), plus or
minus the Equity Adjustment Amount determined pursuant to Sections 2.9 and
2.10, by (ii) the number of Shares outstanding at the Effective Time.
(b) At the Effective Time, each share of common stock of Newco issued
and outstanding immediately prior to the Effective Time shall be converted
into one validly issued, fully paid and nonassessable share of common stock
of the Surviving Corporation.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding Shares shall have been changed into a different number of
shares or a different class by reason of any reclassification,
recapitalization, split up, combination, exchange of shares or
readjustment, or with respect to any such event there be declared a record
date within said period with a distribution date after the Effective Time
or a stock dividend on the Shares shall be declared with a record date
within said period, the Merger Consideration shall be appropriately
adjusted.
2.6 PAYMENT OF CONSIDERATION
Except as set forth in Section 2.5 above, from and after the Effective
Time, each holder of a certificate which immediately prior to the Effective Time
represented outstanding Shares shall be entitled to receive in exchange
therefor, upon surrender thereof to Parent, payment of the Merger Consideration,
provided, however, that if the Equity Adjustment Amount has not yet been
determined in accordance with Sections 2.9
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and 2.10(a) hereof an amount equal to the holder's pro rata share of the Base
Amount shall initially be paid and the parties will comply with the procedures
required by Section 2.10(b) hereof, and provided further, that a portion of the
Merger Consideration equal to (D) shall be withheld pro rata from the Warranting
Shareholders shall be deposited by the Parent on their behalf with the Escrow
Agent in the form of one or more promissory notes on the terms described in the
Escrow Agreement, all in accordance with Section 2.8 hereof and shall thereafter
be held and applied in accordance with the Escrow Agreement.
2.7 NO DISSENTING SHARES
The parties hereto acknowledge that the shareholders of the Company have
all indicated they will approve the Merger and they will not be entitled to
dissent from the Merger and require appraisal of their Shares.
2.8 CLOSING OBLIGATIONS
At the Closing:
(a) the Warranting Shareholders, for themselves and as agents for all
Other Securityholders, will deliver to Parent:
(i) certificates representing the Shares;
(ii) releases in the form of Exhibit 2.8(a)(ii) executed by the
Warranting Shareholders, all Other Securityholders and each Related
Person of either Warranting Shareholder that is a party to any Related
Party Contract (collectively, "Securityholder Releases");
(iii) a certificate executed by the Warranting Shareholders
representing and warranting to Parent that each of the Warranting
Shareholders' representations and warranties in this Agreement was
accurate in all material respects as of the date of this Agreement and
is accurate in all material respects as of the Closing Date as if made
on the Closing Date (giving full effect to any supplements to the
Disclosure Letter that were delivered by the Warranting Shareholders to
Parent not less than five business days prior to the Closing Date in
accordance with Section 5.5), provided, that if an inaccuracy
constitutes a "Breach" as defined herein, no further threshold of
materiality shall be permitted hereby and the certificate called for by
this section cannot be given;
(iv) mutual termination agreements in respect to each management
and other contracts with any Related Person of either Warranting
Shareholder other than the rehabilitation services contracts with
RehabWest, Inc. (the "Related Party Contracts"), properly executed and
delivered by each party thereto and providing for no future payments or
other obligations by the Company or the Parent with respect thereto; and
(v) resignations of all directors and officers of the Company, if
and as requested by Parent.
(b) Parent will deliver to the Shareholders:
(i) the payment to such Shareholders specified by Section 2.6, paid
by bank cashier's or certified check payable to the order of or by wire
transfer to accounts specified by or on behalf of each Shareholder; and
(ii) a certificate executed by Parent to the effect that, except as
otherwise stated in such certificate, each of Parent's representations
and warranties in this Agreement was accurate in all material respects
as of the date of this Agreement and is accurate in all material
respects as of the Closing Date as if made on the Closing Date,
provided, that if an inaccuracy constitutes a "Breach" as defined
herein, no further threshold of materiality shall be permitted hereby
and the certificate required by this section cannot be given.
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(c) Parent and the Warranting Shareholders will enter into an escrow
agreement in the form of Exhibit 2.8(c) (the "Escrow Agreement") with
Mellon Bank, F.S.B., and Parent will make the deposit into escrow on behalf
of the Shareholders that is required by Section 2.6.
2.9 EQUITY ADJUSTMENT AMOUNT
The Equity Adjustment Amount (which may be a positive or negative number)
will be equal to (a) the stockholders' equity of the Company as of the Closing
Date determined in accordance with GAAP, plus (b) the sum of any adjustments on
Schedule 2.9 that are applicable to the Company, if and to the extent such
adjustments were taken into account in subpart (a), minus (c) $391,420.
2.10 EQUITY ADJUSTMENT PROCEDURE
(a) The Warranting Shareholders will prepare and will cause Arthur Andersen
LLP, the Company's certified public accountants, to audit financial statements
("Closing Financial Statements") of the Company as of the through the calendar
month-end closest to the Closing Date (the "Audit Date") and for the period from
the date of the Balance Sheet through the Audit Date, including a computation of
stockholders' equity as of the Audit Date. The Warranting Shareholders will
deliver the Closing Financial Statements to Parent within sixty days after the
Closing Date. If within thirty days following delivery of the Closing Financial
Statements, Parent has not given the Warranting Shareholders notice of its
objection to the Closing Financial Statements (such notice must contain a
statement of the basis of Parent's objection), then the stockholders' equity
reflected in the Closing Financial Statements will be used in computing the
Equity Adjustment Amount. If Parent gives such notice of objection, then the
issues in dispute will be submitted to Price Waterhouse LLP, certified public
accountants (the "Accountants"), for resolution. If issues in dispute are
submitted to the Accountants for resolution, (i) each party will furnish to the
Accountants such workpapers and other documents and information relating to the
disputed issues as the Accountants may request and are available to that party
(or its independent public accountants), and will be afforded the opportunity to
present to the Accountants any material relating to the determination and to
discuss the determination with the Accountants; (ii) the determination by the
Accountants, as set forth in a notice delivered to both parties by the
Accountants, will be binding and conclusive on the parties; and (iii) Parent
will bear the fees of the Accountants for such determination.
(b) On the tenth business day following the final determination of the
Equity Adjustment Amount, if the Equity Adjustment Amount is positive, Parent
will pay the Equity Adjustment Amount to the Shareholders, and if the Equity
Adjustment Amount is negative, the Warranting Shareholders will pay the absolute
value of such amount to Parent, all as contemplated by and in accordance with
Section 2.5(a) hereof. Payments must be made in immediately available funds.
Payments to the Shareholders must be made in the manner and will be allocated in
the proportions of their stock ownership immediately prior to the Effective
Time. Payments to Parent must be made by wire transfer to such bank account as
Parent will specify by the Shareholders in the proportions of their stock
ownership immediately prior to the Effective Time.
3. REPRESENTATIONS AND WARRANTIES OF THE WARRANTING SHAREHOLDERS
The Disclosure Letter called for by the Warranting Shareholders'
representations and warranties in this Part 3 has been prepared by the
Warranting Shareholders without full involvement of other personnel of the
Company because of the confidential nature of this Agreement. For the same
reasons, a portion of the due diligence investigation which Parent wishes to
complete in respect of the Company and the SNFs has not yet been completed.
Although the Warranting Shareholders believe all of the information in the
Disclosure Letter is accurate and complete, the Warranting Shareholders shall
have the right to complete or supplement the Disclosure Letter not later than
August 16, 1996 (the "Disclosure Supplement"). Parent shall have the right to
continue its due diligence investigation after the date of this Agreement and
through the Closing Date. Parent shall have the right to terminate this
Agreement by written notice to the Warranting Shareholders within five business
days after receipt of the Disclosure Supplement if Parent in its sole discretion
determines that the information contained in the disclosures as supplemented, or
any other information or documentation learned or discovered in the course of
Parent's due diligence investigation, constitutes, has, or is likely to have,
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a material adverse effect. In the event Parent terminates this Agreement
pursuant to the foregoing provision, this Agreement shall become null and void
and have no effect, without any liability on the part of any party hereto or its
affiliates, directors, officers or shareholders, except that the Confidentiality
Agreement shall survive and each party shall pay its own expenses incurred in
connection with this Agreement. In the event Parent does not terminate this
Agreement pursuant to the foregoing provision, the Disclosure Supplement shall
be deemed delivered as of the date of this Agreement and made a part of the
Disclosure Letter to this Agreement.
The Warranting Shareholders represent and warrant to Parent as follows:
3.1 ORGANIZATION AND GOOD STANDING
(a) Part 3.1 of the Disclosure Letter contains a complete and accurate list
for the Company of its name, its jurisdiction of incorporation, other
jurisdictions in which it is authorized to do business, and its capitalization
(including the identity of each stockholder and the number of shares held by
each). The Company is a corporation duly organized, validly existing, and in
good standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use, and to perform all its obligations under Applicable Contracts. The Company
is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which either the
ownership or use of the properties owned or used by it, or the nature of the
activities conducted by it, requires such qualification.
(b) The Warranting Shareholders have made available to Parent copies of the
Organizational Documents of the Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding obligation of
the Company and the Warranting Shareholders, enforceable against the Company and
the Warranting Shareholders in accordance with its terms. Upon the execution and
delivery by the Warranting Shareholders of the Escrow Agreement and the
Warranting Shareholders' Releases (collectively, the "Warranting Shareholders'
Closing Documents"), the Warranting Shareholders' Closing Documents will
constitute the legal, valid, and binding obligations of the Warranting
Shareholders, enforceable against the Warranting Shareholders in accordance with
their respective terms. The Warranting Shareholders have the absolute and
unrestricted right, power, authority, and capacity to execute and deliver this
Agreement and the Warranting Shareholders' Closing Documents and to perform
their obligations under this Agreement and the Warranting Shareholders' Closing
Documents.
(b) To the best of Warranting Shareholders' Knowledge, except as set forth
in Part 3.2 of the Disclosure Letter, neither the execution and delivery of this
Agreement nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time):
(i) contravene, conflict with, or result in a violation of (A) any
provision of the Organizational Documents of the Company, or (B) any
resolution adopted by the board of directors or the stockholders of the
Company;
(ii) contravene, conflict with, or result in a violation of, or give
any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which the Company, any SNF or
either Warranting Shareholder, or any of the assets owned or used by the
Company or any SNF, may be subject;
(iii) contravene, conflict with, or result in a violation of any of
the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to any
SNF or otherwise to the business of, or any of the assets owned or used by,
the Company;
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(iv) cause Parent or the Company to become subject to, or to become
liable for the payment of, any Tax;
(v) cause any of the assets owned by the Company to be reassessed or
revalued by any taxing authority or other Governmental Body;
(vi) contravene, conflict with, or result in a violation or breach of
any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of,
or to cancel, terminate, or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any Encumbrance upon or
with respect to any of the assets owned or used by any SNF or the Company.
Except as set forth in Part 3.2 of the Disclosure Letter, no SNF,
Warranting Shareholder or the Company is or will be required to give any notice
to or obtain any Consent from any Person in connection with the execution and
delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
3.3 CAPITALIZATION
The authorized and outstanding equity securities of the Company and the
record and beneficial ownership of such equity securities are as described in
Part 3.3 of the Disclosure Letter. The Warranting Shareholders and the Other
Securityholders are and will be on the Closing Date the record and beneficial
owners and holders of the Shares, free and clear of all Encumbrances. No legend
or other reference to any purported Encumbrance appears upon any certificate
representing equity securities of the Company. All of the outstanding equity
securities of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. There are no Contracts relating to the issuance,
sale, or transfer of any equity securities or other securities of the Company.
No outstanding equity securities or other securities of the Company were issued
in violation of the Securities Act or any other Legal Requirement. The Company
does not own, or have any Contract to acquire, any equity securities or other
securities of any Person or any direct or indirect equity or ownership interest
in any other business.
3.4 FINANCIAL STATEMENTS
The Warranting Shareholders have delivered to Parent: (a) a balance sheet
of the Company as of December 31, 1995 (including the notes thereto, the
"Balance Sheet"), and the related statements of income, changes in stockholders'
equity, and cash flow for the fiscal year then ended, together with the report
thereon of Arthur Andersen LLP, independent certified public accountants, and
(b) an unaudited balance sheet of the Company as of June 30, 1996 (the "Interim
Balance Sheet") and the related unaudited consolidated statements of income,
changes in stockholders' equity, and cash flow for the six months then ended,
including in each case the notes thereto. Such financial statements and notes
fairly present the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of the Company as of the respective dates of
and for the periods referred to in such financial statements, all in accordance
with GAAP, subject, in the case of interim financial statements, to normal
recurring year-end adjustments (the effect of which will not, individually or in
the aggregate, be materially adverse) and the absence of notes (that, if
presented, would not differ materially from those included in the Balance
Sheet); the financial statements referred to in this Section 3.4 reflect the
consistent application of such accounting principles throughout the periods
involved. No financial statements of any Person other than the Company are
required by GAAP to be included in the financial statements of the Company.
3.5 BOOKS AND RECORDS
To the best of the Warranting Shareholders' Knowledge, the books of
account, minute books, stock record books, and other records of the Company, all
of which have been made available to Parent, are complete and correct and have
been maintained in accordance with sound business practices, including the
maintenance of an adequate system of internal controls. The minute books of the
Company contain accurate
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and complete records of all meetings held of, and corporate action taken by, the
stockholders, the Board of Directors, and committees of the Board of Directors
of the Company, and no meeting of any such stockholders, Board of Directors, or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of the Company.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES
To the best of the Warranting Shareholders' Knowledge, Part 3.6 of the
Disclosure Letter contains a complete and accurate list of all real property,
leaseholds, or other interests therein owned by the Company. The Warranting
Shareholders have delivered or made available to Parent copies of the deeds and
other instruments (as recorded) by which the Company acquired such real property
and interests, and copies of all title insurance policies, opinions, abstracts,
and surveys in the possession of the Warranting Shareholders or the Company and
relating to such property or interests. The Company owns (with good and
marketable title in the case of real property, subject only to the matters
permitted by the following sentence) all the properties and assets (whether
real, personal, or mixed and whether tangible or intangible) that it purports to
own, including all of the properties and assets reflected in the Balance Sheet
and the Interim Balance Sheet (except for assets held under leases disclosed or
not required to be disclosed in Part 3.6 of the Disclosure Letter and personal
property sold since the date of the Balance Sheet and the Interim Balance Sheet,
as the case may be, in the Ordinary Course of Business), and all of the
properties and assets purchased or otherwise acquired by the Company since the
date of the Balance Sheet (except for personal property acquired and sold since
the date of the Balance Sheet in the Ordinary Course of Business and consistent
with past practice). To the best of the Warranting Shareholders' Knowledge, all
material properties and assets reflected in the Balance Sheet and the Interim
Balance Sheet are free and clear of all Encumbrances and are not, in the case of
real property, subject to any rights of way, building use restrictions,
exceptions, variances, reservations, or limitations of any nature except, with
respect to all such properties and assets, (a) mortgages or security interests
shown on the Balance Sheet or the Interim Balance Sheet as securing specified
liabilities or obligations, with respect to which no default (or event that,
with notice or lapse of time or both, would constitute a default) exists, (b)
mortgages or security interests incurred in connection with the purchase of
property or assets after the date of the Interim Balance Sheet (such mortgages
and security interests being limited to the property or assets so acquired),
with respect to which no default (or event that, with notice or lapse of time or
both, would constitute a default) exists, (c) liens for current taxes not yet
due, and (d) with respect to real property, (i) minor imperfections of title, if
any, none of which is substantial in amount, materially detracts from the value
or impairs the use of the property subject thereto, or impairs the operations of
the Company, and (ii) zoning laws and other land use restrictions that do not
impair the present use of the property subject thereto. To the best of the
Warranting Shareholders' Knowledge, all buildings, plants, and structures owned
by the Company lie wholly within the boundaries of the real property owned by
the Company and do not encroach upon the property of, or otherwise conflict with
the property rights of, any other Person.
3.7 CONDITION AND SUFFICIENCY OF ASSETS
To the best of the Warranting Shareholders' Knowledge, all of the
buildings, plants, structures, and equipment of the SNFs and of the Company are
structurally sound, are in good operating condition and repair, and are adequate
for the uses to which they are being put, and none of such buildings, plants,
structures, or equipment is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs that are not material in nature or
cost. The building, plants, structures, and equipment of the SNFs and of the
Company are sufficient for the continued conduct of the SNFs and of the
Company's businesses after the Closing in substantially the same manner as
conducted prior to the Closing.
3.8 ACCOUNTS RECEIVABLE
To the best of the Warranting Shareholders' Knowledge all accounts
receivable of the Company that are reflected on the Balance Sheet or the Interim
Balance Sheet or on the accounting records of the Company as of the Closing Date
(collectively, the "Accounts Receivable") represent or will represent valid
obligations
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arising from services actually performed in the Ordinary Course of Business.
Unless paid prior to the Closing Date and assuming that after the Closing the
Company follows similar collection policies to those followed by the Company
through the date hereof, the Accounts Receivable (excluding only the Disputed
Medicare Receivables), are or will be as of the Closing Date collectible net of
the respective reserves shown on the Balance Sheet or the Interim Balance Sheet
or on the accounting records of the Company as of the Closing Date (which
reserves are adequate and calculated consistent with past practice and, in the
case of the reserve as of the Closing Date, will not represent a materially
greater percentage of the Accounts Receivable as of the Closing Date than the
reserve reflected in the Interim Balance Sheet represented of the Accounts
Receivable reflected therein and will not represent a material adverse change in
the composition of such Accounts Receivable in terms of aging). On the Closing
Date the Company will have transmitted bills and invoices in the Ordinary Course
of Business for all services performed through the end of the most recent
practicable month. To the best of the Warranting Shareholders' Knowledge, there
is no contest, claim, or right of set-off, other than returns in the Ordinary
Course of Business, under any Contract with any obligor of an Accounts
Receivable relating to the amount or validity of such Accounts Receivable, other
than the Disputed Accounts Receivable. To the best of the Warranting
Shareholders' Knowledge Part 3.8 of the Disclosure Letter contains a complete
and accurate list of all Accounts Receivable as of the date of the Interim
Balance Sheet, which list sets forth the aging of such Accounts Receivable.
Parent acknowledges that there are time constraints with respect to the billing
of Government Agencies and third party payers which, if not followed, can result
in a denial of payment.
3.9 PREPAID SUPPLIES
To the best of the Warranting Shareholders' Knowledge all inventory or
supplies and other materials of the Company, whether or not reflected in the
Balance Sheet or the Interim Balance Sheet, consists of a quality and quantity
usable in the Ordinary Course of Business. The amounts thereof are not excessive
and are reasonable in the present circumstances of the Company and satisfy all
Legal Requirements applicable to the Company or SNF with respect to inventory
and supplies.
3.10 NO UNDISCLOSED LIABILITIES
To the best of the Warranting Shareholders' Knowledge, except as set forth
in Part 3.10 of the Disclosure Letter, the Company have no material liabilities
or obligations of any nature except for liabilities or obligations reflected or
reserved against in the Balance Sheet or the Interim Balance Sheet and current
liabilities incurred in the Ordinary Course of Business since the respective
dates thereof.
3.11 TAXES
(a) The Company has been duly qualified as an S corporation for federal
income tax purposes at all times since it was organized. To the best of the
Warranting Shareholders' Knowledge the Company has filed or caused to be filed
(on a timely basis) all Tax Returns that are or were required to be filed by or
with respect to it, pursuant to applicable Legal Requirements. The Warranting
Shareholders have made available to Parent copies of, and Part 3.11 of the
Disclosure Letter contains a complete and accurate list of, all such Tax Returns
filed since the Company was organized. Based upon the Warranting Shareholders'
inquiry and advice from Arthur Andersen, LLP, the Company has paid, or made
provision for the payment of, all Taxes that have or may have become due
pursuant to those Tax Returns, or pursuant to any assessment received by either
of the Warranting Shareholders or the Company, except such Taxes, if any, as are
listed in Part 3.11 of the Disclosure Letter and are being contested in good
faith and as to which adequate reserves (determined in accordance with GAAP)
have been provided in the Balance Sheet and the Interim Balance Sheet, and Taxes
that are not required to be paid by the Company because of its status as an S
corporation.
(b) Based upon the Warranting Shareholders' inquiry of and advice from
Arthur Andersen LLP, the United States federal and state income Tax Returns of
the Company have not been audited by the IRS or relevant state tax authorities.
To the best of the Warranting Shareholders' Knowledge, except as described in
Part 3.11 of the Disclosure Letter, neither Warranting Shareholder nor the
Company has given or been requested to give waivers or extensions (or is or
would be subject to a waiver or extension given by any other
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Person) of any statute of limitations relating to the payment of Taxes of the
Company or for which the Company may be liable.
(c) To the best of the Warranting Shareholders' Knowledge the charges,
accruals, and reserves with respect to Taxes (if any) on the respective books of
the Company are adequate (determined in accordance with GAAP) and are at least
equal to that the Company's liability for Taxes. To the best of the Warranting
Shareholders' Knowledge there exists no proposed tax assessment against the
Company except as disclosed in the Balance Sheet or in Part 3.11 of the
Disclosure Letter. The Company has never filed a consent under Section 341(f) of
the IRC concerning collapsible corporations. To the best of the Warranting
Shareholders' Knowledge all Taxes that the Company is or was required by Legal
Requirements to withhold or collect have been duly withheld or collected and, to
the extent required, have been paid to the proper Governmental Body or other
Person.
(d) To the best of the Warranting Shareholders' Knowledge all Tax Returns
filed by the Company are true, correct, and complete. There is no tax sharing
agreement that will require any payment by the Company after the date of this
Agreement.
3.12 NO MATERIAL ADVERSE CHANGE
Since the date of the Balance Sheet, there has not been any material
adverse change in the business, operations, properties, prospects, assets, or
condition of any SNF or the Company, and the best of the Warranting
Shareholders' Knowledge no event has occurred or circumstance exists that may
result in such a material adverse change.
3.13 EMPLOYEE BENEFITS
To the best of the Warranting Shareholders' Knowledge (provided that the
foregoing qualification shall cease to apply as to paragraphs (a) and (c) below
five (5) business days prior to the Closing Date):
(a) Except as set forth in Part 3.13(a) of the Disclosure Letter,
neither the Company nor any member of its controlled group within the
meaning of Section 414 of the IRC maintains or contributes to, or at any
time in the preceding five calendar years maintained or contributed to: (i)
any non-qualified deferred compensation or retirement plans or
arrangements; (ii) any qualified defined contribution retirement plans or
arrangements; (iii) any qualified defined benefit pension plan; (iv) any
multiemployer plan (as defined in Section 3(37) of ERISA); (v) any other
plan, program, agreement or arrangement under which former employees of the
Company or its beneficiaries are entitled, or current employees of any of
the Company will be entitled following termination of employment, to
medical, health, life insurance or other benefits other than pursuant to
benefit continuation rights granted by state of federal law; or (vi) any
other employee benefit, health, welfare, severance, vacation, medical,
disability, life insurance, stock, stock purchase or stock option plan,
program, agreement, arrangement, custom, practice or policy. The plans
described in Part 3.13(a) are referred to herein as the "Plans."
(b) The Plans comply in all respects with the requirements of all
applicable laws, including ERISA, and the Plans meet any applicable
requirements for favorable tax treatment under the IRC in both form and
operation. The contributions to the Plans and the costs of administering
the Plans, including fees for the trustee and other service providers which
are customarily paid by the Company, have been paid or will be paid prior
to the Closing Date or are reflected in the Interim Balance Sheet. There
have been no prohibited transactions as defined in Section 406 of ERISA or
Section 4975 of the IRC with respect to any of the Plans or any parties in
interest or disqualified persons with respect to the Plans or any reduction
or curtailment of accrued benefits with respect to any of the Plans. There
are no pending, or to the Knowledge of the Warranting Shareholders,
threatened claims, lawsuits, arbitrations, audits or investigations which
have been asserted or instituted against the Plans, any fiduciaries thereof
with respect to their duties to the Plans or the assets of any of the
trusts under any of the Plans. The Company does not have any plans,
programs, agreements or arrangements or other commitments to its employees,
former employees or their beneficiaries under which it has any obligation
to provide any retiree or other employee benefit payments which are not
adequately funded through a trust or other funding arrange-
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ment. Neither the Company nor any Warranting Shareholder or ERISA Affiliate
has any liability to the IRS, the Department of Labor, or the Pension
Benefit Guaranty Company. No event has occurred or circumstance exists that
could result in a material increase in premium costs of Plans that are
insured, or a material increase in benefit costs of Plans that are
self-insured. No payment that is owed or may become due to any employee of
the Company will be characterized as an "excess parachute payment" as
defined in Code Section 280G, and the Merger contemplated by this Agreement
will not result in the payment, vesting, or acceleration of any benefit.
(c) To the extent applicable, the Warranting Shareholders have made
available to Parent true and complete copies of: (i) the Plans and any
related trusts or funding vehicles, policies or contracts and the related
summary plan descriptions with respect to each Plan; (ii) the most recent
determination letters received from the IRS regarding the Plans and copies
of any pending applications, filings or notices with respect to any of the
Plans with the IRS, the Pension Benefit Guaranty Corporation, the
Department of Labor or any other governmental agency and any notices or
other communications from any governmental agency regarding any of the
Plans; (iii) the financial statements and annual reports for each of the
Plans and related trusts or funding vehicles, policies or contracts as of
the end of the most recent plan year with respect to which the filing date
for such information has passed and the two prior Plan years; (iv) the
reports of the most recent actuarial valuations for the Plans; (v) copies
of all corporate resolutions or other documents pertaining to the adoption
of the Plans or any amendments thereto or to the appointment of any
fiduciaries thereunder and copies of any investment policies,
administrative services agreements or other contracts with third parties,
surety bonds, rules, regulations or policies of the trustees or any
committee thereunder; and (vi) copies of any communications or notices
provided to employees or plan participants with respect to the Plans along
with information concerning the date and extent of distribution of such
communications.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS
(a) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.14 of the Disclosure Letter:
(i) the Company and each SNF is, and at all times since January 1,
1995 has been, in substantial compliance with each Legal Requirement that
is or was applicable to it or to the conduct or operation of its business
or the ownership or use of any of its assets, and has every Governmental
Authorization required in connection therewith;
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a
violation by the Company or any SNF of, or a failure on the part of the
Company or any SNF to comply with, any Legal Requirement, which violation
or failure may have a material adverse effect on the Company or SNF, or (B)
may give rise to any obligation on the part of the Company or any SNF to
undertake, or to bear all or any portion of the cost of, any remedial
action of any nature; and
(iii) no the Company or SNF has received, at any time since January 1,
1995, any notice or other communication (whether oral or written) from any
Governmental Body or any other Person regarding (A) any actual, alleged,
possible, or potential violation of, or failure to comply with, any Legal
Requirement, or (B) any actual, alleged, possible, or potential obligation
on the part of the Company or SNF to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature, except for state
and federal licensing and certification surveys, all of which have been
provided to Parent.
(b) To the best of the Warranting Shareholders' Knowledge Part 3.14 of the
Disclosure Letter contains a complete and accurate list of each Governmental
Authorization that is held by the Company or SNF or that otherwise relates to
the business of, or to any of the assets owned or used by, the Company or any
SNF. To the best of the Warranting Shareholders' Knowledge each Governmental
Authorization listed or required to be
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listed in Part 3.14 of the Disclosure Letter is valid and in full force and
effect. To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.14 of the Disclosure Letter:
(i) the Company and each SNF are, and at all times since January 1,
1995 have been, in substantial compliance with all of the terms and
requirements of each Governmental Authorization identified or required to
be identified in Part 3.14 of the Disclosure Letter;
(ii) no event has occurred or circumstance exists that may (with or
without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or
requirement of any Governmental Authorization listed or required to be
listed in Part 3.14 of the Disclosure Letter, which violation or failure
may have a material adverse effect on the Company or any SNF, or (B) result
directly or indirectly in the revocation, withdrawal, suspension,
cancellation, or termination of, or any modification to, any Governmental
Authorization listed or required to be listed in Part 3.14 of the
Disclosure Letter;
(iii) neither the Company nor any SNF has received, at any time since
January 1, 1995, any notice or other communication (whether oral or
written) from any Governmental Body or any other Person regarding (A) any
actual, alleged, possible, or potential violation of or failure to comply
with any term or requirement of any Governmental Authorization, which
violation or failure may have a material adverse effect on the Company or
any SNF, or (B) any actual, proposed, possible, or potential revocation,
withdrawal, suspension, cancellation, termination of, or modification to
any Governmental Authorization; and
(iv) all applications required to have been filed for the renewal of
the Governmental Authorizations listed or required to be listed in Part
3.14 of the Disclosure Letter have been duly filed on a timely basis with
the appropriate Governmental Bodies, and all other filings required to have
been made with respect to such Governmental Authorizations have been duly
made on a timely basis with the appropriate Governmental Bodies.
To the best of the Warranting Shareholders' Knowledge, the Governmental
Authorizations listed in Part 3.14 of the Disclosure Letter collectively
constitute all of the Governmental Authorizations necessary to permit the
Company to lawfully conduct and operate the SNFs and the other aspects of its
businesses in the manner it currently conducts and operates the SNFs and such
businesses and to permit the Company to own and use its assets in the manner in
which it currently owns and uses such assets.
3.15 LEGAL PROCEEDINGS; ORDERS
(a) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.15 of the Disclosure Letter, there is no pending Proceeding:
(i) that has been commenced by or against the Company or that
otherwise relates to or may materially affect any SNF or the business of,
or any of the assets owned or used by, the Company; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
To the Knowledge of the Warranting Shareholders and the Company, (1) no
such Proceeding has been Threatened, and (2) no event has occurred or
circumstance exists that may give rise to or serve as a basis for the
commencement of any such Proceeding. If requested by Parent, the Warranting
Shareholders will promptly deliver to Parent copies of all pleadings,
correspondence, and other documents relating to each or any Proceeding listed in
Part 3.15 of the Disclosure Letter. The Proceedings listed in Part 3.15 of the
Disclosure Letter will not have a material adverse effect on the business,
operations, assets, condition, or prospects of any SNF or the Company.
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(b) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.15 of the Disclosure Letter:
(i) there is no Order to which the Company, any SNF or any of the
assets owned or used by the Company, is subject, the existence or violation
of which could have a material adverse effect on the Company or any SNF;
(ii) neither Warranting Shareholder is subject to any Order that
relates to the business of, or any of the assets owned or used by, any SNF
or the Company; and
(iii) no officer, director, agent, or employee of the Company is
subject to any Order or Legal Requirement that prohibits such officer,
director, agent, or employee from engaging in or continuing any conduct,
activity, or practice relating to any SNF or to the business of the
Company.
(c) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.15 of the Disclosure Letter:
(i) the Company and each SNF are, and at all times since January 1,
1995 have been, in substantial compliance with all of the terms and
requirements of each Order to which it, or any of the assets owned or used
by it, is or has been subject;
(ii) no event has occurred or circumstance exists that may constitute
or result in (with or without notice or lapse of time) a violation of or
failure to comply with any term or requirement of any Order or Legal
Requirement to which any SNF or the Company, or any of the assets owned or
used by any SNF or the Company, is subject, the existence or violation of
which could have a material adverse effect on the Company or any SNF; and
(iii) neither any SNF nor the Company has received, at any time since
January 1, 1995, any notice or other communication (whether oral or
written) from any Governmental Body or any other Person regarding any
actual, alleged, possible, or potential material violation of, or failure
to comply with, any material term or requirement of, any Order or Legal
Requirement to which any SNF or the Company, or any of the assets owned or
used by any SNF or the Company, is or has been subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS
To the best of the Warranting Shareholders' Knowledge, except as set forth
in Part 3.16 of the Disclosure Letter, since the date of the Interim Balance
Sheet, the Company has operated the SNFs and conducted their businesses only in
the Ordinary Course of Business and there has not been any:
(a) change in the Company's authorized or issued capital stock; grant
of any stock option or right to purchase shares of capital stock of the
Company; issuance of any security convertible into such capital stock;
grant of any registration rights; purchase, redemption, retirement, or
other acquisition by the Company of any shares of any such capital stock;
or declaration or payment of any dividend or other distribution or payment
in respect of shares of capital stock;
(b) amendment to the Organizational Documents of the Company;
(c) payment or increase by the Company of any bonuses, salaries, or
other compensation to either Warranting Shareholder or their Related
Persons or to any stockholder, director, officer, or (except in the
Ordinary Course of Business) employee or entry into any employment,
severance, or similar Contract with any director, officer, or employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company;
(e) damage to or destruction or loss of any asset or property of any
SNF or the Company, whether or not covered by insurance, materially and
adversely affecting the properties, assets, business, financial condition,
or prospects of any SNF or of the Company;
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(f) entry into, termination of, or receipt of notice of termination of
(i) any license, joint venture, credit, or similar agreement, or (ii) any
Contract or transaction involving a total remaining commitment by or to the
Company (and prior to any unilateral right of termination by the Company
without any cost or penalty) of at least $50,000;
(g) sale, lease, or other disposition of any SNF or other asset or
property of the Company or mortgage, pledge, or imposition of any lien or
other encumbrance on any SNF or other material asset or property of the
Company, including the sale, lease, or other disposition of any of the
Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to the
Company in excess of $10,000;
(i) material change in the accounting methods used by the Company; or
(j) agreement, whether oral or written, by the Company to do any of
the foregoing.
3.17 CONTRACTS; NO DEFAULTS
(a) To the best of the Warranting Shareholders' Knowledge, Part 3.17(a) of
the Disclosure Letter contains a complete and accurate list, and the Warranting
Shareholders have made available to Parent, and if requested will promptly
deliver to Parent, true and complete copies, of:
(i) each Applicable Contract that involves performance of services or
delivery of goods or materials by the Company (prior to any unilateral
right of termination by the Company without any cost or penalty) of an
amount or value in excess of $50,000;
(ii) each Applicable Contract that involves performance of services or
delivery of goods or materials to one or more Acquired Companies (prior to
any unilateral right of termination by the Company without any cost or
penalty) of an amount or value in excess of $50,000;
(iii) each Applicable Contract that was not entered into in the
Ordinary Course of Business or that involves expenditures or receipts of
the Company (prior to any unilateral right of termination by the Company
without any cost or penalty) in excess of $50,000;
(iv) each lease, rental or occupancy agreement, license, installment
and conditional sale agreement, and other Applicable Contract affecting the
ownership of, leasing of, title to, use of, or any leasehold or other
interest in, any real or personal property (except personal property leases
and installment and conditional sales agreements having a value per item or
aggregate payments of less than $50,000 or with terms of less than one
year);
(v) each licensing agreement or other Applicable Contract with respect
to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(vi) each collective bargaining agreement and other Applicable
Contract to or with any labor union or other employee representative of a
group of employees;
(vii) each joint venture, partnership, and other Applicable Contract
(however named) involving a sharing of profits, losses, costs, or
liabilities by the Company with any other Person;
(viii) each Applicable Contract containing covenants that in any way
purport to restrict the business activity of the Company or any Affiliate
of the Company or limit the freedom of the Company or any Affiliate of the
Company to engage in any line of business or to compete with any Person;
(ix) each Applicable Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments
for goods;
(x) each power of attorney that is currently effective and outstanding;
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(xi) each Applicable Contract entered into other than in the Ordinary
Course of Business that contains or provides for an express undertaking by
the Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in excess of
$50,000;
(xiii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by the Company
other than in the Ordinary Course of Business;
(xiv) each Medicare and Medicaid provider contract for each SNF, and
evidence of appropriate certification of each SNF;
(xv) each Related Party Contract; and
(xvi) each amendment, supplement, and modification (whether oral or
written) in respect of any of the foregoing.
To the best of the Warranting Shareholders' Knowledge Part 3.17(a) of the
Disclosure Letter sets forth reasonably complete details concerning such
Contracts, including the parties to the Contracts, the amount of the remaining
commitment of the Company under the Contracts, and the Company' office where
details relating to the Contracts are located.
(b) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.17(b) of the Disclosure Letter:
(i) neither Warranting Shareholder (and no Related Person of either
Warranting Shareholder) has or may acquire any rights under, and neither
Warranting Shareholder has or may become subject to any obligation or
liability under, any Contract that relates to the business of, or any of
the assets owned or used by, any SNF or the Company; and
(ii) no officer, director, agent, employee, consultant, or contractor
of the Company is bound by any Contract that purports to limit the ability
of such officer, director, agent, employee, consultant, or contractor to
(A) engage in or continue any conduct, activity, or practice relating to
the business of the Company, or (B) assign to the Company or to any other
Person any rights to any invention, improvement, or discovery.
(c) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.17(c) of the Disclosure Letter, each Contract identified or
required to be identified in Part 3.17(a) of the Disclosure Letter is in full
force and effect and is valid and enforceable in accordance with its terms.
(d) To the best of the Warranting Shareholders' Knowledge, except as set
forth in Part 3.17(d) of the Disclosure Letter:
(i) the Company is, and at all times since January 1, 1996 has been,
in substantial compliance with all applicable terms and requirements of
each Contract under which the Company has or had any obligation or
liability or by which the Company or any of the assets owned or used by the
Company is or was bound;
(ii) each other Person that has or had any obligation or liability
under any Contract under which the Company has or had any rights is, and at
all times since January 1, 1996 has been, in substantial compliance with
all applicable terms and requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result
in a violation or breach of, or give the Company or other Person the right
to declare a default or exercise any remedy under, or to accelerate the
maturity or performance of, or to cancel, terminate, or modify, any
Applicable Contract; and
(iv) the Company has not given to or received from any other Person,
at any time since January 1, 1996, any notice or other communication
(whether oral or written) regarding any actual, alleged, possible, or
potential violation or breach of, or default under, any Contract.
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(e) There are no renegotiations of, attempts to renegotiate, or outstanding
rights to renegotiate any material amounts paid or payable to the Company under
current or completed Contracts with any Person and no such Person has made
written demand for such renegotiation.
(f) The Contracts relating to the sale or provision of services by the
Company have been entered into in the Ordinary Course of Business and have been
entered into without the commission of any act alone or in concert with any
other Person, or any consideration having been paid or promised, that is or
would be in violation of any Legal Requirement.
3.18 INSURANCE
(a) To the best of the Warranting Shareholders' Knowledge, Part 3.18(a) of
the Disclosure Letter contains a complete and accurate list, and the Warranting
Shareholders have made available to Parent and, upon request will promptly
deliver to Parent:
(i) true and complete copies of all policies of insurance to which the
Company is a party or under which the Company, or any director of the
Company, is or has been covered at any time since January 1, 1995;
(ii) true and complete copies of all pending applications for policies
of insurance; and
(iii) any statement by the auditor of the Company's financial
statements with regard to the adequacy of such entity's coverage or of the
reserves for claims.
(b) Part 3.18(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting the Company,
including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of insurance,
for the transfer or sharing of any risk by the Company; and
(iii) all obligations of the Company to third parties with respect to
insurance (including such obligations under leases and service agreements)
and identifies the policy under which such coverage is provided (unless
such information is disclosed elsewhere in the Disclosure Letter).
(c) To the best of the Warranting Shareholders' Knowledge, except as set
forth on Part 3.18(c) of the Disclosure Letter:
(i) All policies to which the Company is a party or that provide
coverage to either Warranting Shareholder, the Company, or any director or
officer of the Company:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that is financially sound and
reputable;
(C) are sufficient for compliance with all Legal Requirements and
Contracts to which the Company is a party or by which any of them is
bound;
(D) will continue in full force and effect following the
consummation of the Contemplated Transactions; and
(E) do not provide for any retrospective premium adjustment or
other experienced-based liability on the part of the Company.
(ii) No Warranting Shareholder or the Company has received (A) any
refusal of coverage or any notice that a defense will be afforded with
reservation of rights, or (B) any notice of cancellation or any other
indication that any insurance policy is no longer in full force or effect
or will not be renewed or that the issuer of any policy is not willing or
able to perform its obligations thereunder.
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(iii) The Company has paid all premiums due, and has otherwise
performed all of their respective obligations, under each policy to which
the Company is a party or that provides coverage to the Company or director
thereof.
(iv) The Company has given notice to the insurer of all claims that may
be insured thereby.
3.19 ENVIRONMENTAL MATTERS
To the best of the Warranting Shareholders' Knowledge, except as set forth
in part 3.19 of the Disclosure Letter:
(a) The Company is, and at all times has been, in substantial
compliance with, and has not been and is not in violation of or liable
under, any Environmental Law. Neither Warranting Shareholder nor the
Company has any basis to expect, nor has any of them or any other Person
for whose conduct they are or may be held to be responsible received, any
actual or Threatened order, notice, or other communication from (i) any
Governmental Body or private citizen acting in the public interest, or (ii)
the current or prior owner or operator of any SNFs or other Facilities, of
any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or Threatened obligation to undertake
or bear the cost of any Environmental, Health, and Safety Liabilities with
respect to any of the SNFs or other Facilities or any other properties or
assets (whether real, personal, or mixed) in which either Warranting
Shareholder or the Company has had an interest, or with respect to any
property or SNFs or other Facility at or to which Hazardous Materials were
generated, manufactured, refined, transferred, imported, used, or processed
by either Warranting Shareholder, the Company, or any other Person for
whose conduct they are or may be held responsible, or from which Hazardous
Materials have been transported, treated, stored, handled, transferred,
disposed, recycled, or received.
(b) There are no pending or Threatened claims, Encumbrances, or other
restrictions of any nature, resulting from any Environmental, Health, and
Safety Liabilities or arising under or pursuant to any Environmental Law,
with respect to or affecting any of the SNFs or other Facilities or any
other properties and assets (whether real, personal, or mixed) in which
either Warranting Shareholder or the Company has or had an interest.
(c) The Warranting Shareholders and the Company have no basis to
expect, nor has any of them or any SNF or any other Person for whose
conduct they are or may be held responsible, received, any citation,
directive, inquiry, notice, Order, summons, warning, or other communication
that relates to Hazardous Activity, Hazardous Materials, or any alleged,
actual, or potential violation or failure to comply with any Environmental
Law, or of any alleged, actual, or potential obligation to undertake or
bear the cost of any Environmental, Health, and Safety Liabilities with
respect to any of the SNFs or other Facilities or any other properties or
assets (whether real, personal, or mixed) in which either Warranting
Shareholder or the Company had an interest, or with respect to any property
or facility to which Hazardous Materials generated, manufactured, refined,
transferred, imported, used, or processed by either Warranting Shareholder,
the Company, or any other Person for whose conduct they are or may be held
responsible, have been transported, treated, stored, handled, transferred,
disposed, recycled, or received.
(d) Neither any Warranting Shareholder nor the Company, nor any other
Person for whose conduct they are or may be held responsible, has any
Environmental, Health, and Safety Liabilities with respect to the
Facilities or with respect to any other properties and assets (whether
real, personal, or mixed) in which either Warranting Shareholder or the
Company (or any predecessor), has or had an interest, or at any property
geologically or hydrologically adjoining the SNFs or other Facilities or
any such other property or assets.
(e) There are no Hazardous Materials present on or in the Environment
at the SNFs or other Facilities or at any geologically or hydrologically
adjoining property, including any Hazardous Materials contained in barrels,
above or underground storage tanks, landfills, land deposits, dumps,
equipment (whether moveable or fixed) or other containers, either temporary
or permanent, and deposited or located
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in land, water, sumps, or any other part of the Facilities or such
adjoining property, or incorporated into any structure therein or thereon.
No Warranting Shareholder, the Company, any other Person for whose conduct
they are or may be held responsible, or any other Person, has permitted or
conducted, or is aware of, any Hazardous Activity conducted with respect to
the SNFs or other Facilities or any other properties or assets (whether
real, personal, or mixed) in which either Warranting Shareholder or the
Company has or had an interest.
(f) There has been no Release or Threat of Release of any Hazardous
Materials at or from the SNFs or other Facilities or at any other locations
where any Hazardous Materials were generated, manufactured, refined,
transferred, produced, imported, used, or processed from or by the
Facilities, or from or by any other properties and assets (whether real,
personal, or mixed) in which either Warranting Shareholder or the Company
has or had an interest, or any geologically or hydrologically adjoining
property, whether by a Warranting Shareholder, the Company, or any other
Person.
(g) The Warranting Shareholders have delivered to Parent true and
complete copies and results of any reports, studies, analyses, tests, or
monitoring possessed or initiated by the Warranting Shareholders or the
Company pertaining to Hazardous Materials or Hazardous Activities in, on,
or under the SNFs or other Facilities, or concerning compliance by either
Warranting Shareholder, the Company, or any other Person for whose conduct
they are or may be held responsible, with Environmental Laws.
3.20 EMPLOYEES
(a) The Warranting Shareholders have provided Parent access to a complete
and accurate list of the following information for each employee or director of
the Company, including each employee on leave of absence or layoff status:
employer; name; job title; current compensation paid or payable and any change
in compensation since January 1, 1996; vacation accrued; and service credited
for purposes of vesting and eligibility to participate under the Company's
pension, retirement, profit-sharing, thrift-savings, deferred compensation,
stock bonus, stock option, cash bonus, employee stock ownership (including
investment credit or payroll stock ownership), severance pay, insurance,
medical, welfare, or vacation plan, other Employee Pension Benefit Plan or
Employee Welfare Benefit Plan, or any other employee benefit plan or any
Director Plan.
(b) To the best of the Warranting Shareholders' Knowledge, no employee or
director of the Company is a party to, or is otherwise bound by, any agreement
or arrangement, including any confidentiality, noncompetition, or proprietary
rights agreement, between such employee or director and any other Person
("Proprietary Rights Agreement") that in any way adversely affects or will
affect (i) the performance of his duties as an employee or director of the
Company, or (ii) the ability of the Company to conduct its business, including
any Proprietary Rights Agreement with the Warranting Shareholders or the Company
by any such employee or director. Neither Warranting Shareholder, and no
employee or director of the Company, is entitled to any severance or "parachute"
payment of any kind in connection with a change in control of the Company. To
the best of the Warranting Shareholders' Knowledge, no director, officer, or
other key employee of the Company, excepting the Warranting Shareholders
themselves, intends to terminate his or her employment with the Company.
(c) Part 3.20 of the Disclosure Letter also contains a complete and
accurate list of the following information for each retired employee or director
of the Company, or their dependents, receiving benefits or scheduled to receive
benefits in the future: name, pension benefit, pension option election, retiree
medical insurance coverage, retiree life insurance coverage, and other benefits.
3.21 LABOR RELATIONS; COMPLIANCE
Except as disclosed in Part 3.21 of the Disclosure Letter, since January 1,
1996, the Company has not been and is not now a party to any collective
bargaining or other labor Contract. Since January 1, 1996, there has not been,
there is not presently pending or existing, and there is not Threatened, (a) any
strike, slowdown, picketing, work stoppage, or employee grievance process, (b)
any Proceeding against or affecting the Company relating to the alleged
violation of any Legal Requirement pertaining to labor relations or
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employment matters, including any charge or complaint filed by an employee or
union with the National Labor Relations Board, the Equal Employment Opportunity
Commission, or any comparable Governmental Body, organizational activity, or
other labor or employment dispute against or affecting the Company or its
premises, or (c) any application for certification of a collective bargaining
agent. To the best of the Warranting Shareholders' Knowledge, no event has
occurred or circumstance exists that could provide the basis for any work
stoppage or other labor dispute. There is no lockout of any employees by the
Company, and no such action is contemplated by the Company. To the best of the
Warranting Shareholders' Knowledge, the Company has complied in all respects
with all Legal Requirements relating to employment, equal employment
opportunity, nondiscrimination, immigration, wages, hours, benefits, collective
bargaining, the payment of social security and similar taxes, occupational
safety and health, and plant closing. To the best of the Warranting
Shareholders' Knowledge, the Company is not liable for the payment of any
compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
3.22 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets -- The term "Intellectual Property Assets"
includes:
(i) the names Arkansas, Inc., all fictional business names (including
all names under which any SNF or other Facility is licensed or has done
business at any time within the past three years), trading names,
registered and unregistered trademarks, service marks, and applications
(collectively, "Marks");
(ii) all patents, patent applications, and inventions and discoveries
that may be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished works
(collectively, "Copyrights"); and
(iv) all know-how, trade secrets, confidential information, customer
lists, software, technical information, data, process technology, plans,
drawings, and blue prints (collectively, "Trade Secrets"); owned, used, or
licensed by the Company as licensee or licensor.
(b) Agreements -- Part 3.22(b) of the Disclosure Letter contains a complete
and accurate list and summary description, including any royalties paid or
received by the Company, of all Intellectual Property Assets owned or used by
any of the Company since January 1, 1995, and all Contracts relating to the
Intellectual Property Assets to which the Company is a party or by which the
Company is bound, except for any license implied by the sale of a product and
perpetual, paid-up licenses for commonly available software programs with a
value of less than $25,000 under which the Company is the licensee. There are no
outstanding and, to the best of the Warranting Shareholders' Knowledge, no
Threatened disputes or disagreements with respect to any such agreement.
3.23 CERTAIN PAYMENTS
To the best of the Warranting Shareholders' Knowledge neither the Company
nor any director, officer, agent, or employee of the Company, or any other
Person associated with or acting for or on behalf of the Company, ever has
directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any Person, private or public,
regardless of form, whether in money, property, or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable treatment
for business secured, (iii) to obtain special concessions or for special
concessions already obtained, for or in respect of the Company or any Affiliate
of the Company, or (iv) in violation of any Legal Requirement, (b) established
or maintained any fund or asset that has not been recorded in the books and
records of the Company.
3.24 DISCLOSURE
(a) To the best of the Warranting Shareholders' Knowledge no representation
or warranty of the Warranting Shareholders in this Agreement and no statement in
the Disclosure Letter omits to state a
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material fact necessary to make the statements herein or therein, in light of
the circumstances in which they were made, not misleading.
(b) To the best of the Warranting Shareholders' Knowledge no notice given
pursuant to Section 5.5 will contain any untrue statement or omit to state a
material fact necessary to make the statements therein or in this Agreement, in
light of the circumstances in which they were made, not misleading.
(c) There is no fact known to either Warranting Shareholder that has
specific application to either Warranting Shareholder, any SNF or the Company
(other than general economic or industry conditions) and that materially
adversely affects or, as far as either Warranting Shareholder can reasonably
foresee, materially threatens, the assets, business, prospects, financial
condition, or results of operations of any SNF or of the Company that has not
been set forth in this Agreement or the Disclosure Letter.
3.25 RELATIONSHIPS WITH RELATED PERSONS
To the best of the Warranting Shareholders' Knowledge no Warranting
Shareholder or any Related Person of either Warranting Shareholder or of the
Company has, or since January 1, 1995, has had, any interest in any property
(whether real, personal, or mixed and whether tangible or intangible), used in
or pertaining to any SNF or the Company' businesses. Except as set forth in Part
3.25 of the Disclosure Letter, no Warranting Shareholder or any Related Person
of either Warranting Shareholder or of the Company is, or since January 1, 1995
has owned (of record or as a beneficial owner) an equity interest or any other
financial or profit interest in, a Person that has (i) had business dealings or
a material financial interest in any transaction with the Company, or (ii)
engaged in competition with the Company with respect to any line of the products
or services of the Company (a "Competing Business") in any market presently
served by the Company. Except as set forth in Part 3.25 of the Disclosure
Letter, no Warranting Shareholder or any Related Person of either Warranting
Shareholder or of the Company is a party to any Contract with, or has any claim
or right against, the Company.
3.26 BROKERS OR FINDERS
The Warranting Shareholders and their agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement except
their obligations to BA Partners which will be paid in full on or before the
Closing Date.
3.27 TERMINATION OF ANCILLARY CONTRACTS
Except for the Contract with RehabWest, Inc. which has been provided to
Parent, all Contracts for management services or ancillary services (as that
term is commonly understood in the long term health care industry) (a) to which
the Company is a party or by which the Company or any of their SNFs or other
Facilities or properties may be bound, or (b) through which medical or ancillary
products or services are provided to any of the Company or to the patients or
residents of any SNF or other Facility owned or operated by the Company
(collectively, the "Ancillary Contracts") are terminable without premium or
penalty on not more than sixty days notice at the option of the Company.
4. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company and the Warranting
Shareholders as follows:
4.1 ORGANIZATION AND GOOD STANDING
Parent is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware. On the Closing Date and
immediately prior to the Effective Time, Newco will be a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
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4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding obligation of
Parent, enforceable against Parent in accordance with its terms. Upon the
execution and delivery by Parent of the Escrow Agreement and the Registration
Rights Agreement (the "Parent's Closing Documents"), the Parent's Closing
Documents will constitute the legal, valid, and binding obligations of Parent,
enforceable against Parent in accordance with their respective terms. Parent has
the absolute and unrestricted right, power, and authority to execute and deliver
this Agreement and the Parent's Closing Documents and to perform its obligations
under this Agreement and the Parent's Closing Documents.
(b) Except as set forth in Schedule 4.2, neither the execution and delivery
of this Agreement by Parent nor the consummation or performance of any of the
Contemplated Transactions by Parent will give any Person the right to prevent,
delay, or otherwise interfere with any of the Contemplated Transactions pursuant
to:
(i) any provision of Parent's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of Parent;
(iii) any Legal Requirement or Order to which Parent may be subject;
or
(iv) any Contract to which Parent is a party or by which Parent may be
bound.
Except as set forth in Schedule 4.2, Parent is not and will not be required
to obtain any Consent from any Person in connection with the execution and
delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
4.3 INVESTMENT INTENT
Parent is acquiring the Shares for its own account and not with a view to
their distribution within the meaning of Section 2(11) of the Securities Act.
4.4 CERTAIN PROCEEDINGS
To the best of Parent's Knowledge, there is no pending Proceeding that has
been commenced against Parent and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions, including registration of the Parent's Shares being
issued hereunder pursuant to the Registration Rights Agreement. To Parent's
Knowledge, no such Proceeding has been Threatened.
4.5 BROKERS OR FINDERS
Parent and its officers and agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold the Warranting Shareholders harmless from any such payment
alleged to be due by or through Parent as a result of the action of Parent or
its officers or agents.
4.6 SUITABILITY AND SOPHISTICATION
Parent has such knowledge and experience in financial and business matters
that Parent is capable of evaluating independently the risks and merits of
acquiring the Shares of the Company. Parent has independently evaluated the
risks and merits of acquiring such Shares and has independently determined that
such Shares are a suitable investment for Parent.
4.7 RECEIPT OF INFORMATION
Parent further represents that it has had or upon compliance by the
Warranting Shareholders with this Agreement will be provided an opportunity to
ask questions and receive answers from the Warranting Shareholders and the other
officers of the Company regarding the business, properties, prospects, and
financial condition of the Company and the SNFs and to obtain additional
information (to the extent the Warranting
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Shareholders possessed such information or could acquire it without unreasonable
effort or expense) necessary to verify the accuracy of such information
furnished to Parent or to which Parent has had access or will have access
pursuant to this Agreement. The foregoing does not, however, limit or modify the
representations and warranties of the Warranting Shareholders in Article 3 of
this Agreement or the right of Parent to rely thereon.
4.8 CONFLICTING AGREEMENTS
Except as may be disclosed in Schedule 4.8 hereto, to the best of Parent's
Knowledge, Parent is not a party to any contract or agreement that will prevent
or materially interfere with Parent's ability to obtain the financing
contemplated by Section 7.11 hereof.
5. COVENANTS OF THE WARRANTING SHAREHOLDERS PRIOR TO CLOSING DATE
5.1 ACCESS AND INVESTIGATION
Between the date of this Agreement and the Closing Date, the Warranting
Shareholders will, and will cause the Company and its Representatives to, (a)
afford Parent and its Representatives and prospective lenders and their
Representatives (collectively, "Parent's Advisors") full and free access during
normal business hours after reasonable notice to the Company's personnel,
properties (including subsurface testing), contracts, books and records, and
other documents and data, (b) furnish Parent and Parent's Advisors with copies
of all such contracts, books and records, and other existing documents and data
as Parent may reasonably request, and (c) furnish Parent and Parent's Advisors
with such additional financial, operating, and other data and information as
Parent may reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE COMPANY
Between the date of this Agreement and the Closing Date, the Warranting
Shareholders will, and will cause the Company to:
(a) conduct the business of the Company only in the Ordinary Course of
Business;
(b) use their Best Efforts to preserve intact the current business
organization of the Company, keep available the services of the current
officers, employees, and agents of the Company, and maintain the relations
and good will with suppliers, customers, landlords, creditors, employees,
agents, and others having business relationships with the Company;
(c) confer with Parent concerning operational matters of a material
nature; and
(d) otherwise report periodically to Parent concerning the status of
the business, operations, and finances of the Company.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement, between the date
of this Agreement and the Closing Date, the Warranting Shareholders will not,
and will cause the Company not to, without the prior consent of Parent, take any
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in Section
3.16 is likely to occur.
5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, the Warranting
Shareholders will, and will cause the Company to, make all filings required by
Legal Requirements to be made by them in order to consummate the Contemplated
Transactions (including all filings under the HSR Act), and it will inform
Parent in writing of all state licensing and Medicaid approvals, if any
necessary to consummate the Contemplated Transactions. Between the date of this
Agreement and the Closing Date, the Warranting Shareholders will, and will cause
the Company to, (a) cooperate with Parent with respect to all filings that
Parent elects to make or is required by Legal Requirements to make in connection
with the Contemplated
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Transactions, and (b) cooperate with Parent in obtaining all consents identified
in Schedule 4.2 (including taking all actions requested by Parent to cause early
termination of any applicable waiting period under the HSR Act).
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, each Warranting
Shareholder will promptly notify Parent in writing if such Warranting
Shareholder or the Company becomes aware of any fact or condition that causes or
constitutes a Breach of any of Warranting Shareholders' representations and
warranties as of the date of this Agreement, or if such Warranting Shareholder
or the Company becomes aware of the occurrence after the date of this Agreement
of any fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or warranty
had such representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. Should any such fact or condition require
any change in the Disclosure Letter if the Disclosure Letter were dated the date
of the occurrence or discovery of any such fact or condition, the Warranting
Shareholders will promptly deliver to Parent a supplement to the Disclosure
Letter specifying such change. During the same period, each Warranting
Shareholder will promptly notify Parent of the occurrence of any Breach of any
covenant of the Warranting Shareholders in this Section 5 or of the occurrence
of any event that may make the satisfaction of the conditions in Section 7
impossible or unlikely.
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS
Except as expressly provided in this Agreement, the Warranting Shareholders
will cause all indebtedness owed to the Company by either Warranting Shareholder
or any Related Person of either Warranting Shareholder to be paid in full prior
to Closing.
5.7 NO NEGOTIATION
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, the Warranting Shareholders will not, and will cause the Company and
each of its Representatives not to, directly or indirectly solicit, initiate, or
encourage any inquiries or proposals from, discuss or negotiate with, provide
any non-public information to, or consider the merits of any unsolicited
inquiries or proposals from, any Person (other than Parent) relating to any
transaction involving the sale of the business or assets of the Company, or any
of the capital stock of the Company, or any merger, consolidation, business
combination, or similar transaction involving the Company, provided, however,
that after the public disclosure of this Agreement the Warranting Shareholders
shall have the right to negotiate for such an agreement that is expressly
conditioned upon the lawful termination or expiration of this Agreement.
5.8 BEST EFFORTS
Between the date of this Agreement and the Closing Date, the Warranting
Shareholders will use their Best Efforts to cause the conditions in Sections 7
and 8 to be satisfied.
6. COVENANTS OF PARENT PRIOR TO CLOSING DATE
6.1 APPROVALS OF GOVERNMENTAL BODIES
As promptly as practicable after the date of this Agreement, Parent will,
and will cause each of its Related Persons to, make all filings required by
Legal Requirements to be made by them to consummate the Contemplated
Transactions (including all filings under the HSR Act). Between the date of this
Agreement and the Closing Date, Parent will, and will cause each Related Person
to, cooperate with the Warranting Shareholders with respect to all filings that
the Warranting Shareholders are required by Legal Requirements to make in
connection with the Contemplated Transactions, and (ii) cooperate with the
Warranting Shareholders in obtaining all consents identified in Part 3.2 of the
Disclosure Letter; provided that this Agreement will not require Parent to
dispose of or make any change in any portion of its business or to incur any
other burden to obtain a Governmental Authorization.
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6.2 BEST EFFORTS
Except as set forth in the proviso to Section 6.1, between the date of this
Agreement and the Closing Date, Parent will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.
7. CONDITIONS PRECEDENT TO PARENT'S OBLIGATION TO CLOSE
Each and every obligation of Parent and Newco under this Agreement to be
performed at the Closing is subject to the satisfaction, at or prior to the
Closing, of each of the following conditions specified in this Part 7 of this
Agreement (any of which may be waived by Parent, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of the Warranting Shareholders' representations and warranties in
this Agreement (considered collectively), and each of these representations and
warranties (considered individually), must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Disclosure Letter.
(b) Each of the Warranting Shareholders' representations and warranties in
Sections 3.3, 3.4, 3.12, and 3.24 must have been accurate in all material
respects as of the date of this Agreement, and must be accurate in all material
respects as of the Closing Date as if made on the Closing Date, without giving
effect to any supplement to the Disclosure Letter.
7.2 WARRANTING SHAREHOLDERS' PERFORMANCE
(a) All of the covenants and obligations that the Warranting Shareholders
are required to perform or to comply with pursuant to this Agreement at or prior
to the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all material respects.
(b) Each document required to be delivered pursuant to Section 2.4 must
have been delivered, and each of the other covenants and obligations in Sections
5.4 and 5.8 must have been performed and complied with in all material respects.
7.3 CONSENTS
Each of the Consents identified in Part 3.2 of the Disclosure Letter, and
each Consent identified in Schedule 4.2, must have been obtained and must be in
full force and effect.
7.4 ADDITIONAL DOCUMENTS
Each of the following documents must have been delivered to or obtained by
Parent:
(a) an opinion of Houtchens Daniel & Greenfield, dated the Closing
Date, in the form of Exhibit 7.4(a);
(b) estoppel certificates executed on behalf of HealthPartners
Funding, L.P., AHP of Colorado, Inc., Whitehead Family Investments, Ltd.
and Omega HealthCare Investors, Inc., and such of their related or
affiliated persons as Parent may reasonably require, dated as of a date not
more than forty-five (45) days prior to the Closing Date, each
substantially in the form of Exhibit 7.4(b);
(c) a consent and release signed by each Shareholder pursuant to which
they sell or surrender any equity interest in the Company (including any
outstanding options) on terms reasonably satisfactory to Parent;
(d) the Articles of Merger, duly approved by the Company and its
shareholders as required by law and duly executed on behalf of the Company;
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(e) a release by AHP of Colorado, Inc. and its affiliates of the
guarantee of Yankee Creek Management Services, LLC; and
(f) such other documents as Parent may reasonably request for the
purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of the Warranting
Shareholders' representations and warranties, (iii) evidencing the
performance by either Warranting Shareholder of, or the compliance by
either Warranting Shareholder with, any covenant or obligation required to
be performed or complied with by such Warranting Shareholder, (iv)
evidencing the satisfaction of any condition referred to in this Section 7,
or (v) otherwise facilitating the consummation or performance of any of the
Contemplated Transactions.
7.5 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Parent, or against any Person affiliated with Parent, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS
There must not have been made or Threatened by any Person any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, any of the Company, or (b) is
entitled to all or any portion of the Purchase Price payable for the Shares.
7.7 NO PROHIBITION
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Parent or any Person affiliated with Parent to suffer any
material adverse consequence under, (a) any applicable Legal Requirement or
Order, or (b) any Legal Requirement or Order that has been published,
introduced, or otherwise formally proposed by or before any Governmental Body.
7.8 COMPLETION OF DILIGENCE
Parent's review of the Company's businesses, Assets, Contracts,
Governmental Authorizations and similar matters shall have been completed to the
satisfaction of Parent and its counsel, provided, however, that this condition
shall expire on August 15, 1996.
7.9 ENVIRONMENTAL REPORTS
Parent shall have obtained at Parent's expense environmental surveys or
reports satisfactory to Parent in its sole discretion in respect of the
operations of the Company and the SNFs and in respect of each of the properties
owned or operated by any of the Company or SNFs, including leased properties.
7.10 UNISON APPROVALS
This Agreement and the Contemplated Transactions shall have been approved
by Unison's stockholders by a vote satisfactory to Parent.
7.11 UNISON FINANCING
Parent shall have completed a public or private offering of subordinated
debt or common stock in an amount and on terms acceptable to Parent.
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7.12 TREATMENT OF DISPUTED MEDICARE RECEIVABLES
The parties acknowledge that the Company's Closing Financial Statements are
expected to include certain Medicare accounts receivable that are currently in
dispute with HCFA (the "Disputed Medicare Receivables"). The Disputed Medicare
Receivables are identified or more fully described on Schedule 2.9, which
schedule shall be updated as of the Closing Date. It is a condition of Parent's
obligation to close that the Company shall have created an appropriate financial
statement reserve for the full amount of the Disputed Medicare Receivables and
shall have incurred and recorded any charge against income associated therewith.
7.13 ACQUISITION OF REHABWEST, INC.
Parent shall have entered into a definitive agreement to acquire the assets
and business of RehabWest, Inc. for an aggregate purchase price of $5,500,000
and subject to other terms that are satisfactory to Parent and to the
shareholders and creditors of RehabWest, Inc.
7.14 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES
The mergers between a subsidiary of Parent and each of the other Merging
Companies shall be consummated concurrently with the Merger.
8. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY AND THE
WARRANTING SHAREHOLDERS TO CLOSE
Each and every obligation of the Company and the Warranting Shareholders
under this Agreement to be performed at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
specified in this Part 8 of this Agreement (any of which may be waived by the
Company and the Warranting Shareholders, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS
All of Parent's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 PARENT'S PERFORMANCE
(a) All of the covenants and obligations that Parent is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
(b) Parent must have delivered each of the documents required to be
delivered by Parent pursuant to Section 2.4 and must have made the cash payments
required to be made by Parent pursuant to Sections 2.4(b)(i) and 2.4(b)(ii).
8.3 CONSENTS
Each of the Consents identified in Part 3.2 of the Disclosure Letter must
have been obtained and must be in full force and effect.
8.4 ADDITIONAL DOCUMENTS
The following documents must have been obtained by or delivered to the
Warranting Shareholders:
(a) an opinion of Quarles & Brady, dated the Closing Date, in the form
of Exhibit 8.4(a); and
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(b) estoppel certificates executed on behalf of AHP of Colorado, Inc.,
and such of its related or affiliated persons as the Warranting
Shareholders may reasonably require, dated as of a date not more than 45
days prior to the Closing Date, each substantially in the form of Exhibit
7.4(b);
(c) a consent and release signed by each of the Other Securityholders
pursuant to which they sell or surrender any equity interest in the Company
(including any outstanding options) on terms reasonably satisfactory to the
Warranting Shareholders;
(d) a release by AHP of Colorado, Inc. and its affiliates of the
guarantee of Yankee Creek Management Services, LLC;
(e) the Articles of Merger, duly approved by Parent, Newco, and their
shareholders as required by law and duly executed on behalf of Newco; and
(f) such other documents as the Company or the Warranting Shareholders
may reasonably request for the purpose of (i) enabling their counsel to
provide the opinion referred to in Section 7.4(a), (ii) evidencing the
accuracy of any representation or warranty of Parent, (iii) evidencing the
performance by Parent of, or the compliance by Parent with, any covenant or
obligation required to be performed or complied with by Parent, (ii)
evidencing the satisfaction of any condition referred to in this Section 8,
or (v) otherwise facilitating the consummation of any of the Contemplated
Transactions.
8.5 NO INJUNCTION
There must not be in effect any Legal Requirement or any injunction or
other Order that (a) prohibits the sale of the Shares by the Warranting
Shareholders to Parent, and (b) has been adopted or issued, or has otherwise
become effective, since the date of this Agreement.
8.6 PARENT DIRECTOR
David A Kremser shall have been elected or appointed as a director of
Parent.
8.7 ACQUISITION OF REHABWEST, INC.
Parent shall have entered into a definitive agreement to acquire the assets
and business of RehabWest, Inc. for an aggregate purchase price of $5,500,000
and subject to other terms and conditions that are satisfactory to Parent and to
the shareholders and creditors of RehabWest, Inc.
8.8 CONSUMMATION OF MERGERS WITH OTHER MERGING COMPANIES
The mergers between a subsidiary of Parent and each of the other Merging
Companies shall be consummated concurrently with the Merger.
9. TERMINATION
9.1 TERMINATION EVENTS
This Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Parent or the Warranting Shareholders if a Breach of any
provision of this Agreement has been committed by the other party and such
Breach has not been cured or waived within 10 days following the occurrence
or discovery thereof by the Breaching party, whichever is later;
(b) (i) by Parent if any conditions in Section 7 have not been
satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Parent to comply
with its obligations under this Agreement) and Parent has not waived such
condition on or before the Closing Date; or (ii) by the Warranting
Shareholders, if any conditions in Section 8 have not been satisfied of the
Closing Date or if satisfaction of such a condition is or becomes
impossible (other than through the failure of the Warranting Shareholders
to comply with their obligations under this
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Agreement) and the Warranting Shareholders have not waived such condition
on or before the Closing Date;
(c) by mutual consent of Parent and the Warranting Shareholders; or
(d) by either Parent or the Warranting Shareholders if the Closing has
not occurred (other than through the failure of any party seeking to
terminate this Agreement to comply fully with its obligations under this
Agreement) on or before November 1, 1996, or such later date as the parties
may agree upon.
9.2 EFFECT OF TERMINATION
If this Agreement is terminated pursuant to Section 9.1, all further
obligations of the parties under this Agreement will terminate, except that the
obligations in Sections 11.1 and 11.3 will survive; provided, however, that if
this Agreement is terminated by a party because of the Breach of the Agreement
by the other party or because one or more of the conditions to the terminating
party's obligations under this Agreement is not satisfied as a result of the
other party's failure to comply with its obligations under this Agreement, the
terminating party's right to pursue all legal remedies will survive such
termination unimpaired.
9.3 WRONGFUL TERMINATION OR FAILURE TO CLOSE BY PARENT
Notwithstanding anything to the contrary herein, in the event that Parent
wrongfully terminates this Agreement or refuses or fails to consummate the
Merger or any of the Contemplated Transactions without justification hereunder,
the Company shall be entitled to receive, as liquidated damages, the sum of
$350,000, which shall be the exclusive remedy of the Company and the Warranting
Shareholders therefor.
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION LIMITED BY KNOWLEDGE
All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the
certificate delivered pursuant to Section 2.8(a)(iv), and any other certificate
or document delivered pursuant to this Agreement will survive the Closing. The
right to indemnification, payment of Damages or other remedy based on such
representations, warranties, covenants, and obligations will be precluded if the
injured party had actual Knowledge thereof before Closing but otherwise will not
be affected by any investigation conducted with respect to, or any Knowledge
capable of being acquired (but not actually acquired) at any time, whether
before or after the execution and delivery of this Agreement or the Closing
Date, with respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant, or obligation. The party asserting that the
injured party's remedies are limited by its actual Knowledge in accordance with
the preceding sentence shall have the burden of proof in establishing such
actual Knowledge. The waiver of any condition based on the accuracy of any
representation or warranty, or on the performance of or compliance with any
covenant or obligation, will not affect the right to indemnification, payment of
Damages, or other remedy based on such representations, warranties, covenants,
and obligations.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE SHAREHOLDERS
The Shareholders, jointly and severally, will indemnify and hold harmless
Parent, the Company, and their respective Representatives, stockholders,
controlling persons, and affiliates (collectively, the "Indemnified Persons")
for, and will pay to the Indemnified Persons the amount of, any loss, liability,
claim, damage (including incidental and consequential damages), expense
(including costs of investigation and defense and reasonable attorneys' fees) or
diminution of value, whether or not involving a third-party claim (collectively,
"Damages"), arising, directly or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by the
Warranting Shareholders in this Agreement (without giving effect to any
supplement to the Disclosure Letter), the Disclosure Letter or any other
certificate or document delivered by the Warranting Shareholders pursuant
to this Agreement;
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(b) any Breach of any representation or warranty made by the
Warranting Shareholders in this Agreement as if such representation or
warranty were made on and as of the Closing Date, other than any such
Breach that is disclosed in a supplement to the Disclosure Letter;
(c) any Breach by either Warranting Shareholder of any covenant or
obligation of such Warranting Shareholder in this Agreement;
(d) any services provided by any SNF or the Company prior to the
Closing Date and any liability for Ancillary Contracts except as provided
in Section 3.30; or
(e) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either Warranting
Shareholder or the Company (or any Person acting on their behalf) in
connection with any of the Contemplated Transactions;
provided, however, that for purposes of this Section 10.2 and Section 10.3 (and
the limitations of Sections 10.5 and 10.6), the term "Breach" shall not be
limited or qualified by the materiality of the matter and all Damages therefrom
shall be applied against the limitations in Sections 10.5 and 10.6.
Except as expressly provided in Section 9.3, the remedies provided in this
Section 10.2 will be exclusive and will preclude any other remedies that may be
available to Parent or the other Indemnified Persons in respect of any breach of
this Agreement by the Warranting Shareholders.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY PARENT
Parent will indemnify and hold harmless the Shareholders, and will pay to
the Shareholders the amount of any Damages arising, directly or indirectly, from
or in connection with (a) any Breach of any representation or warranty made by
Parent in this Agreement or in any certificate delivered by Parent pursuant to
this Agreement, (b) any Breach by Parent of any covenant or obligation of Parent
in this Agreement, (c) any services provided by any SNF or the Company after the
Closing Date, (d) liabilities accruing after the Closing Date pursuant to any
Ancillary Contract or other Contract or Encumbrance not terminated on or prior
to the Closing Date, or (e) any claim by any Person for brokerage or finder's
fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by such Person with Parent (or any
Person acting on its behalf) in connection with any of the Contemplated
Transactions.
10.4 TIME LIMITATIONS
If the Closing occurs, the Warranting Shareholders will have no liability
(for indemnification or otherwise) with respect to any representation or
warranty, or covenant or obligation to be performed and complied with prior to
the Closing Date, other than those in Sections 3.3, 3.11, 3.13, and 3.19, unless
on or before the first anniversary of the Closing Parent notifies the Warranting
Shareholders of a claim specifying the factual basis of that claim in reasonable
detail to the extent then known by Parent. A claim with respect to Section 3.3
or 3.13 must be made within two (2) years after the Closing Date; a claim
pursuant to Section 3.11 must be made within three (3) years after the Closing
Date, and a claim pursuant to Section 3.19 must be made within three (3) years
after the Closing Date. If the Closing occurs, Parent will have no liability
(for indemnification or otherwise) with respect to any representation or
warranty, or covenant or obligation to be performed and complied with prior to
the Closing Date, unless on or before the second anniversary of the Closing the
Warranting Shareholders notify Parent of a claim specifying the factual basis of
that claim in reasonable detail to the extent then known by the Warranting
Shareholders.
10.5 LIMITATIONS ON AMOUNT -- WARRANTING SHAREHOLDERS
The limitations on the amount of the liability of the Warranting
Shareholders will be as set forth in the Escrow Agreement. However, this Section
10.5 will not apply to any Breach of any of the Warranting Shareholders'
representations and warranties of which either Warranting Shareholder had
Knowledge at any time prior to the date on which such representation and
warranty is made or any intentional Breach by either
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Warranting Shareholder of any covenant or obligation, and the Warranting
Shareholders will be jointly and severally liable for all Damages with respect
to such Breaches.
10.6 LIMITATIONS ON AMOUNT -- PARENT
Parent will have no liability (for indemnification or otherwise) with
respect to the matters described in clause (a) or (b) of Section 10.3 until the
total of all Damages with respect to such matters for all of the Merging
Companies other than Signature Health Care Corporation exceeds $125,000, at
which time all of such amounts shall become payable. Thereafter, amounts shall
be payable in respect of all such Merging Companies in $25,000 increments, up to
a maximum of $500,000 for all Merging Companies other than Signature Health Care
Corporation. However, this Section 10.6 will not apply to any Breach of any of
Parent's representations and warranties of which Parent had Knowledge at any
time prior to the date on which such representation and warranty is made or any
intentional Breach by Parent of any covenant or obligation, and Parent will be
liable for all Damages with respect to such Breaches.
10.7 ESCROW
Except for breach of any of the Warranting Shareholders' representations
and warranties of which either Warranting Shareholder had Knowledge at any time
prior to the date on which such representation and warranty was made, or any
intentional Breach by either Warranting Shareholder or any covenant or
obligation, Parent's sole and only source to satisfy a Claim shall be against
the amount placed in escrow under the Escrow Agreement. Notwithstanding the
foregoing, if and to the extent that within the time limitations specified under
Section 10.4 for claims against the Warranting Shareholders any property has
been returned to the Warranting Shareholders from the General Accounts of the
Escrow Funds (upon expiration of the Escrow Agreement or otherwise), Parent may
make claims directly against the Warranting Shareholders or their property up to
the amount of the escrow proceeds that was returned to the Warranting
Shareholders from the General Accounts therein.
10.8 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under Section 10.2 or
10.3 of notice of the commencement of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any indemnified
party, except to the extent that the indemnifying party demonstrates that the
defense of such action is prejudiced by the indemnifying party's failure to give
such notice.
(b) If any Proceeding referred to in Section 10.8(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such Proceeding and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such Proceeding and
provide reasonable indemnification with respect to such Proceeding), to assume
the defense of such Proceeding with counsel reasonably satisfactory to the
indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
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paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines in
good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise, or settle such Proceeding, but the indemnifying
party will not be bound by any determination of a Proceeding so defended or any
compromise or settlement effected without its consent (which may not be
unreasonably withheld).
(d) The Warranting Shareholders hereby consent to the non-exclusive
jurisdiction of any court in which a Proceeding is brought against any
Indemnified Person for purposes of any claim that an Indemnified Person may have
under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on the Warranting Shareholders
with respect to such a claim anywhere in the world.
10.9 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants. The Warranting Shareholders will pay all amounts
payable to BA Partners in connection with this Agreement and the Contemplated
Transactions. Parent will pay the HSR Act filing fee. The Warranting
Shareholders will cause the Company not to incur any out-of-pocket expenses in
connection with this Agreement. In the event of termination of this Agreement,
the obligation of each party to pay its own expenses will be subject to any
rights of such party arising from a breach of this Agreement by another party.
11.2 PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to this Agreement
or the Contemplated Transactions will be issued, if at all, at such time and in
such manner as Parent and the Warranting Shareholders jointly determine, except
in instances where Parent determines in good faith that disclosure is necessary
to assure compliance with applicable law. Unless consented to by
Parent/Warranting Shareholders in advance or required by Legal Requirements,
prior to the Closing the Warranting Shareholders and Parent shall, and the
Warranting Shareholders shall cause the Company to, keep this Agreement strictly
confidential and may not make any disclosure of this Agreement to any Person.
The Warranting Shareholders and Parent will consult with each other concerning
the means by which the Company' employees, customers, and suppliers and others
having dealings with the Company will be informed of the Contemplated
Transactions, and Parent will have the right to be present for any such
communication.
11.3 SECTION 338(H)(10) ELECTION
The Warranting Shareholders will join, and will cause each Other
Securityholder to join, with Parent in making an election under Section
338(h)(10) of the IRC (and any corresponding elections under state and local tax
law (collectively a "Section 338(h)(10) Election")) with respect to the Merger
by which Parent
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acquires all of the stock of the Company hereunder. The Warranting Shareholders,
the Company and the Parent further agree that the Merger Consideration and the
liabilities of the Company (plus other relevant items) will be allocated to the
assets of the Company in view of such Section 338(h)(10) Election for all
purposes, including Tax and financial accounting purposes, as shown on Schedule
11.3 attached hereto. The parties will file all of their Tax returns and
information reports in a manner consistent with such allocation.
11.4 CONFIDENTIALITY; ACCESS TO INFORMATION
Between the date of this Agreement and the Closing Date, Parent and the
Warranting Shareholders will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Parent and the Company
to maintain in confidence, any written information furnished by another party or
the Company in connection with this Agreement or the Contemplated Transactions,
unless (a) such information is already known to such party or to others not
bound by a duty of confidentiality or such information becomes publicly
available through no fault of such party, (b) the use of such information is
necessary or appropriate in making any filing or obtaining any consent or
approval required for the consummation of the Contemplated Transactions, or (c)
the furnishing or use of such information is required by or necessary or
appropriate in connection with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. Whether or not the Closing takes place, each party hereby
waives, and the Warranting Shareholders will upon Parent's request cause the
Company to waive, any cause of action, right, or claim arising out of the access
of Parent or its representatives to any trade secrets or other confidential
information of the Company except for the intentional competitive misuse by
Parent of such trade secrets or confidential information.
If the Contemplated Transactions are consummated, the Warranting
Shareholders shall have the right, after the Closing, to access to the books and
records of the Company for inspection and copying by the Warranting Shareholders
or their duly authorized representatives, attorneys, accountants and agents for
purposes of defending any claim for indemnity under this Agreement or for any
other lawful purpose which does not violate the Warranting Shareholders'
confidentiality and noncompetition obligations. All books and records of the
Company will be maintained by Parent and made available to the Warranting
Shareholders so long as the Warranting Shareholders may have any obligation to
indemnify Parent or may have any material liability to third parties or
Governmental Bodies. The Warranting Shareholders' right of access for purposes
of inspection and copying hereunder shall be limited to inspections after
reasonable notice and during normal business hours and shall be subject to such
other Company policies as Parent or the Company may reasonably establish from
time to time.
11.5 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
Company: (E) ., 225 East 16th Avenue, Suite 670, Denver, CO 80203
Warranting Shareholders:
Attention: Mr. David A. Kremser, 784 Yankee Creek Road, Evergreen, CO 80439
Facsimile No.: 303-670-5207
Attention: Mr. John D. Filkoski, 4715 Eleventh Street, Greeley, CO
80634-2318
Facsimile No.: 970-351-7068
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with a copy to: Houtchens, Daniel & Greenfield, 1007 Ninth Avenue, Greeley, CO
80631-4094
Attention: John B. Houtchens, Esq.
Facsimile No.: 970-353-0151
Parent: Unison HealthCare Corporation, 7272 East Indian School Road, Suite
214, Scottsdale,
Arizona 85251.
Attention: Mr. Jerry M. Walker, President
Facsimile No.: 602-481-6479
with a copy to: Quarles & Brady, One East Camelback Road, Suite 400, Phoenix, AZ
85012-1649
Attention: Mr. P. Robert Moya
Facsimile No.: 602-230-5598
11.6 SPECIFIC PERFORMANCE; JURISDICTION; SERVICE OF PROCESS
The Company and the Warranting Shareholders agree that the Parent shall
have a right of specific performance of the covenants and obligations contained
in this Agreement and the Ancillary Contracts. Any action or proceeding seeking
to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of Arizona, County of Maricopa, or, if it has or can acquire jurisdiction, in
the United States District Court for the District of Arizona, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on any party anywhere in the world.
11.7 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
11.8 WAIVER
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement or the documents referred to
in this Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this Agreement
or the documents referred to in this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.
11.9 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including the Letter of Intent between Parent and
the Warranting Shareholders dated June 13, 1996) and constitutes (along with the
documents referred to in this Agreement) a complete and exclusive statement of
the terms of the agreement between the parties with respect to its subject
matter. This Agreement may not be amended except by a written agreement executed
by the party to be charged with the amendment.
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11.10 DISCLOSURE LETTER
In the event of any inconsistency between the statements in the body of
this Agreement and those in the Disclosure Letter (other than an exception
expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control. If a disclosure which is properly and fully made
under one part of the Disclosure Letter also relates to one or more other parts,
it shall be deemed made in all appropriate sections thereof even in the absence
of cross references.
11.11 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without the
prior consent of the other parties except that Parent may assign any of its
rights under this Agreement to any Subsidiary of Parent. Subject to the
preceding sentence, this Agreement will apply to, be binding in all respects
upon, and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement or any provision
of this Agreement. This Agreement and all of its provisions and conditions are
for the sole and exclusive benefit of the parties to this Agreement and their
successors and assigns.
11.12 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
11.13 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.
11.14 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
11.15 GOVERNING LAW
This Agreement will be governed by the laws of the State of Arizona without
regard to conflicts of laws principles.
11.16 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
11.17 MUTUAL RELEASE
The consummation of the Closing shall act as a mutual release of the
Warranting Shareholders by the Parent and of the Parent by the Warranting
Shareholders in respect of any and all rights, damages, claims and causes of
action arising on or before the Closing, whether known or unknown, absolute or
contingent, except rights, damages, claims and causes of action arising under
and governed by this Agreement.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
<TABLE>
<S> <C>
Parent: Warranting Shareholders:
Unison HealthCare Corporation
By:
- ---------------------------------------------- ---------------------------------------------
Paul J. Contris, David A. Kremser
Executive Vice President
(F)
By:
- ---------------------------------------------- ---------------------------------------------
David A. Kremser, President John D. Filkoski
</TABLE>
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ANNEX C
[LETTERHEAD OF CRUTTENDEN ROTH]
September , 1996
Board of Directors
Unison HealthCare Corporation
7272 East Indian School Road
Suite 214
Scottsdale, Arizona 85251
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of Unison HealthCare Corporation (the "Company") of the
consideration to be paid by the Company pursuant to the terms of five mutually
contingent Agreements and Plans of (the "Merger") dated August 2, 1996 (the
"Agreements") among, in each case, the Company, certain wholly-owned
subsidiaries of the Company ("Merger Subs"), David A. Kremser, John D. Filkoski,
and one of Signature Health Care Corporation ("Signature"), Arkansas, Inc.,
Cornerstone Care, Inc., Douglas Manor, Inc, or Stafford Care, Inc.
(collectively, the "Signature Entities"). We have not been requested to opine as
to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Merger.
Pursuant to the Agreement, the Company is proposing to issue 1,509,434
shares of its common stock (subject to adjustment if the Average Daily Price (as
defined) is less than $11.25 or greater than $15.25) for the outstanding shares
of Signature common stock and approximately $38,200,000 in cash and promissory
notes to the Signature Entities.
In arriving at our opinion, we have reviewed the Agreements and have
reviewed financial and other information that was publicly available or
furnished to us by the Company and the Signature Entities, including information
provided during discussions with the Company's management. Included in the
information provided were certain financial projections of the Signature
Entities prepared by the management of the Signature Entities, certain financial
projections of the Company prepared by the management of the Company and certain
financial projections of the Company and the Signature Entities on a combined
basis prepared by the Company. In addition, we have compared certain financial
and securities data of the Company and the Signature Entities with various other
companies whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of the common stock of the Company, reviewed
prices and premiums paid in other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company and
the Signature Entities or their respective representatives and financial
advisors, or that was otherwise reviewed by us. We have not independently
verified any of such information and have further relied on the assurances of
management of the Company that they are not aware of any facts that would make
such information inaccurate. In particular, we have relied upon the estimates of
the management of the Company of the operating synergies achievable as a result
of the Merger. With respect to the financial projections supplied to us, we have
assumed that they have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of the Company and
the Signature Entities as to the future operating and financial performances of
the Company and the Signature Entities. We have not made any independent
evaluation or appraisal of the Company's or the Signature Entities' assets or
liabilities
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or made any independent verification of any of the information reviewed by us.
We have relied as to all legal matters on advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us and
which can be evaluated as of, the date of this letter. It should be understood
that although subsequent developments may affect this opinion, we do not have
any obligation to update, revise or reaffirm this opinion. We are expressing no
opinion as to the prices at which the Company's common stock will actually trade
at any time. Our opinion does not constitute a recommendation to any stockholder
of the Company as to how such stockholder should vote on the proposed
transaction.
It is understood that this letter is for the information of the Board of
Directors of the Company only and may not be used for any other purpose without
our prior written consent. We hereby consent, however, to the inclusion of this
letter as an exhibit to any proxy statement distributed in connection with the
Merger.
Cruttenden Roth Incorporated ("CRI") as part of its investment banking
services, is engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions, negotiated underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. CRI has performed
investment banking and other financial advisory services for the Company in the
past and has been compensated for such services. On August 16, 1996, an
affiliate of CRI, along with certain other unaffiliated third parties, made a
bridge loan to the Company in the aggregate principal amount of $5 million, the
proceeds of which were to be used to fund the Company's near-term working
capital requirements. CRI also acted as an underwriter in connection with the
Company's 1995 initial public offering of common stock and was compensated for
such services. In addition, the Company has agreed to pay our customary fee in
connection with, and to indemnify us for certain liabilities arising out of, the
rendering of this opinion.
CRI maintains a market in the Company's common stock and regularly
publishes research reports regarding the health care industry and the business
of securities of publicly owned companies in that industry, including the
Company. In the ordinary course of business, CRI actively trades in the equity
securities of the Company for its own account and for the accounts of its
customers, and accordingly, may at any time hold a long or short position in
such securities.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that, as of the date hereof, the consideration to be paid by the
Company pursuant to the Agreements, is fair to the stockholders of the Company
from a financial point of view.
Very truly yours,
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<PAGE> 153
ANNEX D
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
OF
UNISON HEALTHCARE CORPORATION
The Certificate of Incorporation of Unison HealthCare Corporation is hereby
amended as follows:
FIRST: Section 4 is deleted and a new Section 4 is inserted as follows:
4. AUTHORIZED CAPITAL. The Corporation shall have the authority to
issue 25,000,000 shares of common stock, par value $.001 par value per
share (the "Common Stock"), and 1,000,000 shares of preferred stock, $.001
par value per share (the "Preferred Stock").
SECOND: All of the other provisions of the Certificate of Incorporation
shall remain unchanged and in full force and effect.
UNISON HEALTHCARE CORPORATION
By:
--------------------------------------
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ANNEX E
UNISON HEALTHCARE CORPORATION
1995 STOCK OPTION PLAN
(AS REVISED SEPTEMBER 6, 1996)
1. PURPOSE
The purposes of the Amended and Restated 1995 Stock Option Plan ("Plan") of
Unison HealthCare Corporation, a Delaware corporation, are to attract and retain
the best available employees and directors of Unison HealthCare Corporation or
any parent or subsidiary or affiliate of Unison HealthCare Corporation which now
exists or hereafter is organized or acquired by or acquires Unison HealthCare
Corporation (collectively or individually as the context requires the "Company")
as well as appropriate third parties who can provide valuable services to the
Company, to provide additional incentive to such persons and to promote the
success of the business of the Company. This Plan is intended to comply with
Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934, as amended
or any successor rule ("Rule 16b-3"), and the Plan shall be construed,
interpreted and administered to comply with Rule 16b-3.
2. DEFINITIONS
(a) "Affiliate" means any corporation, partnership, joint venture or other
entity, domestic or foreign, in which the Company, either directly or through
another affiliate or affiliates, has a 50% or more ownership interest.
(b) "Affiliated Group" means the group consisting of the Company and any
entity that is an "affiliate," a "parent" or a "subsidiary" of the Company.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation or Stock Option Committee of the
Board (as designated by the Board), if such a committee has been appointed.
(e) "Code" means the United States Internal Revenue Code of 1986, as
amended.
(f) "Incentive Stock Options" means options intended to qualify as
incentive stock options under Section 422 of the Code, or any successor
provision.
(g) "ISO Group" means the group consisting of the Company and any
corporation that is a "parent" or a "subsidiary" of the Company.
(h) "Nonemployee Director" shall have the meaning assigned in Section
4(a)(ii) hereof.
(i) "Nonqualified Stock Options" means options that are not intended to
qualify for favorable income tax treatment under Sections 421 through 424 of the
Code.
(j) "Parent" means a corporation that is a "parent" of the Company within
the meaning of Code Section 424(e).
(k) "Section 16" means Section 16 of the Securities Exchange Act of 1934,
as amended.
(l) "Subsidiary" means a corporation that is a "subsidiary" of the Company
within the meaning of Code Section 424(f).
3. INCENTIVE AND NONQUALIFIED STOCK OPTIONS
Two types of options (referred to herein as "options," without distinction
between such two types) may be granted under the Plan: Incentive Stock Options
and Nonqualified Stock Options.
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4. ELIGIBILITY AND ADMINISTRATION
(a) Eligibility. The following individuals shall be eligible to receive
grants pursuant to the Plan as follows:
(i) Any employee (including any officer or director who is an employee)
of the Company or any ISO Group member shall be eligible to receive either
Incentive Stock Options or Nonqualified Stock Options under the Plan. An
employee may receive more than one option under the Plan.
(ii) Any director who is not an employee of the Company or any
Affiliated Group member (a "Nonemployee Director") shall be eligible to receive
only Nonqualified Stock Options.
(iii) Any other individual whose participation the Board or the
Committee determines is in the best interests of the Company shall be eligible
to receive Nonqualified Stock Options.
(b) Administration. The Plan may be administered by the Board or by a
Committee appointed by the Board which is constituted so to permit the Plan to
comply under Rule 16b-3. The Company shall indemnify and hold harmless each
director and Committee member for any action or determination made in good faith
with respect to the Plan or any option. The Board or the Committee shall have
full and final authority to waive, in whole or in part, any limitations,
restrictions or conditions previously imposed on any option. Determinations by
the Committee or the Board shall be final and conclusive upon all parties.
5. SHARES SUBJECT TO OPTIONS
The stock available for grant of options under the Plan shall be shares of
the Company's authorized but unissued or reacquired voting common stock. The
aggregate number of shares that may be issued pursuant to exercise of options
granted under the Plan shall be 800,000 shares. If any outstanding option grant
under the Plan for any reason expires or is terminated, the shares of common
stock allocable to the unexercised portion of the option grant shall again be
available for options under the Plan as if no options had been granted with
respect to such shares.
6. TERMS AND CONDITION OF OPTIONS
Option grants under the Plan shall be evidenced by agreements in such form
and containing such provisions as are consistent with the Plan as the Board or
the Committee shall from time to time approve. Each agreement shall specify
whether the option(s) granted thereby are Incentive Stock Options or
Nonqualified Stock Options. Such agreements may incorporate all or any of the
terms hereof by reference and shall comply with and be subject to the following
terms and conditions:
(a) Shares Granted. Each option grant agreement shall specify the number of
Incentive Stock Options and/or Nonqualified Stock Options being granted; one
option shall be deemed granted for each share of stock. In addition, each option
grant agreement shall specify the exercisability and/or vesting schedule of such
options, if any.
(b) Purchase Price. The purchase price for a share subject to (i) a
Nonqualified Stock Option may be any amount determined in good faith by the
Committee, and (ii) an Incentive Stock Option shall not be less than 100% of the
fair market value of the share on the date the option is granted, provided,
however, the option price of an Incentive Stock Option shall not be less than
110% of the fair market value of such share on the date the option is granted to
an individual then owning (after the application of the family and other
attribution rules of Section 424(d) or any successor rule of the Code) more than
10% of the total combined voting power of all classes of stock of the Company or
any ISO Group member. For purposes of the Plan, "fair market value" at any date
shall be (i) the reported closing price of such stock on the New York Stock
Exchange or other established stock exchange or Nasdaq National Market on such
date, or if no sale of such stock shall have been made on that date, on the
preceding date on which there was such a sale, (ii) if such stock is not then
listed on an exchange or the Nasdaq National Market, the last trade price per
share for such stock in the over-the-counter market as quoted on Nasdaq or the
pink sheets or successor publication of the
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National Quotation Bureau on such date, or (iii) if such stock is not then
listed or quoted as referenced above, an amount determined in good faith by the
Board or the Committee.
(c) Termination. Unless otherwise provided herein or in a specific option
grant agreement which may provide for accelerated vesting and/or longer or
shorter periods of exercisability, no option shall be exercisable after the
expiration of the earliest of
(i) in the case of an Incentive Stock Option:
(1) 10 years from the date the option is granted, or five years
from the date the option is granted to an individual owning (after the
application of the family and other attribution rules of Section 424(d)
of the Code) at the time such option was granted, more than 10% of the
total combined voting power of all classes of stock of the Company or
any ISO Group member,
(2) three months after the date the optionee ceases to perform
services for the Company or any ISO Group member, if such cessation is
for any reason other than death, disability (within the meaning of Code
Section 22(e)[3]), or cause,
(3) one year after the date the optionee ceases to perform services
for the Company or any ISO Group member, if such cessation is by reason
of death or disability (within the meaning of Code Section 22(e)[3]), or
(4) the date the optionee ceases to perform services for the
Company or any ISO Group member, if such cessation is for cause, as
determined by the Board or the Committee in its sole discretion;
(ii) in the case of a Nonqualified Stock Option;
(1) 10 years from the date the option is granted,
(2) two years after the date the optionee ceases to perform
services for the Company or any Affiliated Group member, if such
cessation is for any reason other than death, permanent disability,
retirement or cause,
(3) three years after the date the optionee ceases to perform
services for the Company or any Affiliated Group member, if such
cessation is by reason of death, permanent disability or retirement, or
(4) the date the optionee ceases to perform services for the
Company or any Affiliated Group member, if such cessation is for cause,
as determined by the Board or the Committee in its sole discretion;
provided, that, unless otherwise provided in a specific option grant agreement,
an option shall only be exercisable for the periods above following the date an
optionee ceases to perform services to the extent the option was exercisable on
the date of such cessation.
(d) Method of Payment. The purchase price for any share purchased pursuant
to the exercise of an option granted under the Plan shall be paid in full upon
exercise of the option by any of the following methods, (i) by cash, (ii) by
check, or (iii) to the extent permitted under the particular grant agreement, by
transferring to the Company shares of stock of the Company at their fair market
value as of the date of exercise of the option as determined in accordance with
paragraph 6(b), provided that the optionee held the shares of stock for at least
six months. Notwithstanding the foregoing, the Company may arrange for or
cooperate in permitting broker-assisted cashless exercise procedures. The
Company may also extend and maintain, or arrange for the extension and
maintenance of, credit to an optionee to finance the optionee's purchase of
shares pursuant to the exercise of options, on such terms as may be approved by
the Board or the Committee, subject to applicable regulations of the Federal
Reserve Board and any other applicable laws or regulations in effect at the time
such credit is extended.
(e) Exercise. Except for options which have been transferred pursuant to
paragraph 6(f), no option shall be exercisable during the lifetime of an
optionee by any person other than the optionee, his or her guardian or legal
representative. The Board or the Committee shall have the power to set the time
or times within which
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each option shall be exercisable and to accelerate the time or times of
exercise; provided, however, except as provided in paragraph 12, no options may
be exercised prior to the later of the expiration of six months from the date of
grant thereof or shareholder approval, unless otherwise provided by the Board or
Committee. To the extent that an optionee has the right to exercise one or more
options and purchase shares pursuant thereto, the option(s) may be exercised
from time to time by written notice to the Company stating the number of shares
being purchased and accompanied by payment in full of the purchase price for
such shares. Any certificate for shares of outstanding stock used to pay the
purchase price shall be accompanied by a stock power duly endorsed in blank by
the registered owner of the certificate (with the signature thereon guaranteed).
If the certificate tendered by the optionee in such payment covers more shares
than are required for such payment, the certificate shall also be accompanied by
instructions from the optionee to the Company's transfer agent with respect to
the disposition of the balance of the shares covered thereby.
(f) Nontransferability. No option shall be transferable by an optionee
otherwise than by will or the laws of descent and distribution, provided that
the Committee in its discretion may grant options that are transferable, without
payment of consideration, to immediate family members of the optionee or to
trusts or partnerships for such family members; the Committee may also amend
outstanding options to provide for such transferability.
(g) ISO $100,000 Limit. If required by applicable tax rules regarding a
particular grant, to the extent that the aggregate fair market value (determined
as of the date an Incentive Stock Option is granted) of the shares with respect
to which an Incentive Stock Option grant under this Plan (when aggregated, if
appropriate, with shares subject to other Incentive Stock Option grants made
before said grant under this Plan or another plan maintained by the Company or
any ISO Group member) is exercisable for the first time by an optionee during
any calendar year exceeds $100,000 (or such other limit as is prescribed by the
Code), such option grant shall be treated as a grant of Nonqualified Stock
Options pursuant to Code Section 422(d).
(h) Investment Representation. Unless the shares of stock covered by the
Plan have been registered with the Securities and Exchange Commission pursuant
to Section 5 of the Securities Act of 1933, as amended, each optionee by
accepting an option grant represents and agrees, for himself or herself and his
or her transferees by will or the laws of descent and distribution, that all
shares of stock purchased upon the exercise of the option grant will be acquired
for investment and not for resale or distribution. Upon such exercise of any
portion of any option grant, the person entitled to exercise the same shall upon
request of the Company furnish evidence satisfactory to the Company (including a
written and signed representation) to the effect that the shares of stock are
being acquired in good faith for investment and not for resale or distribution.
Furthermore, the Company may if it deems appropriate affix a legend to
certificates representing shares of stock purchased upon exercise of options
indicating that such shares have not been registered with the Securities and
Exchange Commission and may so notify its transfer agent.
(i) Rights of Optionee. An optionee or transferee holding an option grant
shall have no rights as a shareholder of the Company with respect to any shares
covered by any option grant until the date one or more of the options granted
thereunder have been properly exercised and the purchase price for such shares
has been paid in full. No adjustment shall be made for dividends (ordinary or
extraordinary, whether cash, securities or other property) or distributions or
other rights for which the record date is prior to the date such share
certificate is issued, except as provided for in paragraph 6(k). Nothing in the
Plan or in any option grant agreement shall confer upon any optionee any right
to continue performing services for the Company or any Affiliated Group member,
or interfere in any way with any right of the Company or any Affiliated Group
member to terminate the optionee's services at any time.
(j) Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of an option. The value of any fractional
share subject to an option grant shall be paid in cash in connection with an
exercise that results in all full shares subject to the grant having been
exercised.
(k) Reorganizations, Etc. Subject to paragraph 9 hereof, if the outstanding
shares of stock of the class then subject to this Plan are increased or
decreased, or are changed into or exchanged for a different number or kind of
shares or securities, as a result of one or more reorganizations, stock splits,
reverse stock splits, stock dividends, spin-offs, other distributions of assets
to shareholders, appropriate adjustments shall be made in the
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<PAGE> 158
number and/or type of shares or securities for which options may thereafter be
granted under this Plan and for which options then outstanding under this Plan
may thereafter be exercised. Any such adjustments in outstanding options shall
be made without changing the aggregate exercise price applicable to the
unexercised portions of such options.
(l) Option Modification. Subject to the terms and conditions and within the
limitations of the Plan, the Board or the Committee may modify, extend or renew
outstanding options granted under the Plan, accept the surrender of outstanding
options (to the extent not theretofore exercised), reduce the exercise price of
outstanding options, or authorize the granting of new options in substitution
therefor (to the extent not theretofore exercised). Notwithstanding the
foregoing, no modification of an option (either directly or through modification
of the Plan) shall, without the consent of the optionee, alter or impair any
rights of the optionee under the option.
(m) Grants to Foreign Optionees. The Board or the Committee in order to
fulfill the Plan purposes and without amending the Plan may modify grants to
participants who are foreign nationals or performing services for the Company or
an Affiliated Group member outside the United States to recognize differences in
local law, tax policy or custom.
(n) Other Terms. Each option grant agreement may contain such other terms,
provisions and conditions not inconsistent with the Plan as may be determined by
the Board or the Committee, such as without limitation discretionary performance
standards, tax withholding provisions, or other forfeiture provisions regarding
competition and confidential information.
7. TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time terminate or amend the Plan; provided, that
shareholder approval shall be obtained of any action for which shareholder
approval is required in order to comply with Rule 16b-3, the Code or other
applicable laws or regulatory requirements within such time periods prescribed.
8. SHAREHOLDER APPROVAL AND TERM OF THE PLAN
The Plan shall be effective as of July 10, 1995, the date as of which it
was adopted by the Board, subject to ratification by the shareholders of the
Company within (each of) the time period(s) prescribed under Rule 16b-3, the
Code, and any other applicable laws or regulatory requirements, and shall
continue thereafter until terminated by the Board. Unless sooner terminated by
the Board, in its sole discretion, the Plan will expire on July 10, 2005 solely
with respect to the granting of Incentive Stock Options or such later date as
may be permitted by the Code for Incentive Stock Options, provided that options
outstanding upon termination or expiration of the Plan shall remain in effect
until they have been exercised or have expired or been forfeited.
9. MERGER, CONSOLIDATION OR REORGANIZATION
In the event of a merger, consolidation or reorganization with another
corporation in which the Company is not the surviving corporation, the Board,
the Committee (subject to the approval of the Board) or the board of directors
of any corporation assuming the obligations of the Company hereunder shall take
action regarding each outstanding and unexercised option pursuant to either
clause (a) or (b) below:
(a) Appropriate provision may be made for the protection of such option by
the substitution on an equitable basis of appropriate shares of the surviving
corporation, provided that the excess of the aggregate fair market value (as
defined in paragraph 6[b]) of the shares subject to such option immediately
before such substitution over the exercise price thereof is not more than the
excess of the aggregate fair market value of the substituted shares made subject
to option immediately after such substitution over the exercise price thereof;
or
(b) Appropriate provision may be made for the cancellation of such option.
In such event, the Company, or the corporation assuming the obligations of the
Company hereunder, shall pay the optionee an amount of cash (less normal
withholding taxes) equal to the excess of the highest fair market value (as
defined in paragraph 6[b]) per share of the Common Stock during the 60-day
period immediately preceding the merger,
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<PAGE> 159
consolidation or reorganization over the option exercise price, multiplied by
the number of shares subject to such options (whether or not then exercisable).
10. DISSOLUTION OR LIQUIDATION
Anything contained herein to the contrary notwithstanding, on the effective
date of any dissolution or liquidation of the Company, the holder of each then
outstanding option (whether or not then exercisable) shall receive the cash
amount described in paragraph 9(b) hereof and such option shall be cancelled.
11. WITHHOLDING TAXES
(a) General Rule. Pursuant to applicable federal and state laws, the
Company is or may be required to collect withholding taxes upon the exercise of
an option. The Company may require, as a condition to the exercise of an option
or the issuance of a stock certificate, that the optionee concurrently pay to
the Company (either in cash or, at the request of optionee but in the discretion
of the Board or the Committee and subject to such rules and regulations as the
Board or the Committee may adopt from time to time, in shares of Common Stock of
the Company) the entire amount or a portion of any taxes which the Company is
required to withhold by reason of such exercise, in such amount as the Committee
or the Board in its discretion may determine.
(b) Withholding from Shares to be Issued. In lieu of part or all of any
such payment, the optionee may elect, subject to such rules and regulations as
the Board or the Committee may adopt from time to time, or the Company may
require that the Company withhold from the shares to be issued that number of
shares having a fair market value (as defined in paragraph 6[b]) equal to the
amount which the Company is required to withhold.
(c) Special Rule for Insiders. Any such request or election (to satisfy a
withholding obligation using shares) by an individual who is subject to the
provisions of Section 16 shall be made in accordance with the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
12. AUTOMATIC GRANTS TO CERTAIN DIRECTORS
(a) Initial Grant. Each Nonemployee Director on the effective date of this
Plan as set forth in paragraph 8 (July 10, 1995) thereafter automatically shall
be granted options to acquire 9,246 shares of the Company's Common Stock, except
that the Chairman of the Board shall receive 10,496 shares of the Company's
Common Stock.
(b) Additional Grants. On September 6, 1996, and immediately after each
annual meeting of shareholders, beginning with the 1997 annual meeting, each
person who is a Nonemployee Director at such time shall automatically be granted
options to acquire 15,000 shares of the Company's Common Stock (a "Subsequent
Grant") subject to the terms of paragraph 12(c), provided that if the Chairman
of the Board is a Nonemployee Director on the date of any Subsequent Grant, he
or she shall also receive options to acquire an additional 2,500 shares of the
Company's Common Stock.
(c) Terms of Options. Notwithstanding anything in paragraph 6(c) to the
contrary, options granted pursuant to this paragraph 12 shall have a 10-year
term, provided that any option held by a director who is removed from the Board
for cause shall expire on the date of such removal. The options granted pursuant
to this paragraph 12 shall become exercisable at the following times: (i) 50% of
the options shall become exercisable on the first anniversary of the effective
date of the grant; and (ii) 50% shall become exercisable on the second
anniversary of the effective date of grant. The exercise price of all options
granted pursuant to this paragraph 12 shall be the fair market value of the
Company's Common Stock on the date of grant.
(d) Limitation on Amendment. This paragraph 12 shall not be amended more
than once every six months other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder.
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<PAGE> 160
ANNEX F
PROXY CARD PROXY CARD
UNISON HEALTHCARE CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON XXXX##, 1996
The undersigned appoints Jerry M. Walker, Craig R. Clark and Paul J. Contris,
or any of them, as proxies for the undersigned, each with full power of
substitution, to attend the Special Meeting of Stockholders of Unison
HealthCare Corporation, to be held on XXXX##, 1996, and at any adjournments or
postponements of the Special Meeting, and to vote as specified in this Proxy
all the Common Shares of the Company which the undersigned would be entitled to
vote if personally present.
This Proxy when properly executed will be voted in accordance with the
directions indicated hereon. If no direction is made, this Proxy will be voted
FOR each of the proposals. The Board of Directors recommends that you vote FOR
each of the proposals.
(Continued, and to be Marked, Signed, and Dated, on Reverse Side)
<PAGE> 161
UNISON HEALTHCARE CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/
1. To approve and adopt an overall transaction including the Signature
Merger Agreement and the Signature Mergers. For Against Abstain
/ / / / / /
2. To approve an amendment to Unison's Certificate of Incorporation
to increase the number of authorized shares of Unison Common
Stock from 10,000,000 to 25,000,000. For Against Abstain
/ / / / / /
3. To approve and adopt an amendment to Unison's 1995 Stock
Option Plan to increase the number of underlying shares of
Unison Common Stock from 511,046 to 800,000 and to
increase formula grants of options to nonemployee directors
from 6,246 shares upon election and fifth anniversary of elec-
tion to 15,000 shares (17,500 shares in the case of the chair-
man) for 1996 and at each annual meeting thereafter.
For Against Abstain
/ / / / / /
4. To consider and act upon any other matters which may properly come before the
Special Meeting or any postponements or adjournments thereof.
PLEASE MARK, SIGN, DATE, AND RETURN
The undersigned acknowledges receipt of the Notice of Special
Meeting of Stockholders and of the Proxy Statement.
Dated: ________________________________________________, 1996
Signature(s) ________________________________________________
_____________________________________________________________
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS. JOINT OWNERS SHOULD
EACH SIGN PERSONALLY. WHERE APPLICABLE, INDICATE YOUR OFFICIAL
POSITION OR REPRESENTATION CAPACITY.
<PAGE> 162
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1996
------------------------------------
PROSPECTUS/PROXY AND INFORMATION STATEMENT
------------------------------------
This document, in connection with the appropriate Prospectus/Information
Statement Supplement or Proxy Statement Supplement delivered herewith, is
intended for use in connection with pending acquisitions by Unison HealthCare
Corporation ("Unison") of: (i) American Professional Holding, Inc. ("Ampro") and
Memphis Clinical Laboratory, Inc. ("Memphis"); and (ii) Signature Health Care
Corporation ("Signature Health Care"), Arkansas, Inc., Cornerstone Care, Inc.,
Douglas Manor, Inc. and Safford Care, Inc. (collectively the "Signature
Affiliates") and also with proposals to increase Unison's authorized number of
shares of Common Stock from 10,000,000 to 25,000,000, to increase the number of
shares of Unison Common Stock authorized for issuance under Unison's 1995 Stock
Option Plan (the "Option Plan") from 511,046 to 800,000 and to increase formula
grants to nonemployee directors under the Option Plan.
This Prospectus/Proxy and Information Statement contains information and
financial statements with respect to Unison, the entities proposed to be
acquired, certain other recent acquisitions and other commitments of Unison, but
does not contain complete information regarding any of the above transactions
and should be read in conjunction with the Proxy Statement Supplement or
Prospectus/Information Statement Supplement relating to each particular
transaction. The Proxy Statement Supplement or Prospectus/Information Statement
Supplement relating to a particular transaction will set forth information with
regard to such acquisition, including: (i) information as to the entity being
acquired; (ii) a description of the proposed transactions and agreements
relating thereto; (iii) information relating to the related meeting of Unison
stockholders or Ampro shareholders to vote on the transaction; and (iv)
information with respect to dissenters' rights, if applicable.
This Prospectus/Proxy and Information Statement, together with the
Prospectus/Information Statement Supplement relating to the Ampro and Memphis
transaction, constitutes the Prospectus of Unison covering the shares of its
$.001 par value common stock ("Unison Common Stock") which may be issued in such
acquisition transaction. It does not constitute a Prospectus with respect to the
transactions with Signature or the Signature Affiliates, which are being
effected without registration under the Securities Act of 1933, as amended (the
"1933 Act"), but it will be provided to the holders of shares in Signature and
the Signature Affiliates for their information prior to the consummation of
those transactions. Up to a maximum of 2,049,434 shares of Unison Common Stock
may be issued in connection with the foregoing pending acquisitions, subject to
any adjustments for increases or decreases in the market price of Unison Common
Stock.
The executive offices of Unison are located at 7272 East Indian School
Road, Suite 214, Scottsdale, Arizona 85251, and Unison's telephone number is
(602) 423-1954.
SEE "RISK FACTORS" AT PAGE 9 FOR A DISCUSSION OF CERTAIN SPECIAL RISKS
RELATING TO UNISON AND PENDING OR CONTEMPLATED TRANSACTIONS.
------------------------
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE FOREGOING ACQUISITIONS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus/Proxy and Information Statement should be used only in
conjunction with a related Proxy Statement Supplement or Prospectus/Information
Statement Supplement.
------------------------
The date of this Prospectus/Proxy and Information Statement is ,
1996
<PAGE> 163
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN AS CONTAINED IN THIS PROSPECTUS/PROXY AND INFORMATION
STATEMENT AND ANY SUPPLEMENT HERETO, IN CONNECTION WITH THE MATTERS DESCRIBED
HEREIN AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS/PROXY AND INFORMATION STATEMENT, AS SUPPLEMENTED, DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY AND
INFORMATION STATEMENT, AS SUPPLEMENTED, NOR ANY DISTRIBUTION OF THE SECURITIES
MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS
GIVEN.
THIS PROSPECTUS/PROXY AND INFORMATION STATEMENT, AS SUPPLEMENTED, DOES NOT
COVER ANY RESALE OF THE SECURITIES TO BE RECEIVED BY THE HOLDERS OF ANY ACQUIRED
ENTITIES UPON CONSUMMATION OF THE PROPOSED TRANSACTIONS, AND NO PERSON IS
AUTHORIZED TO MAKE ANY USE OF THIS PROSPECTUS/PROXY AND INFORMATION STATEMENT IN
CONNECTION WITH ANY SUCH RESALE.
AVAILABLE INFORMATION
Unison is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities Exchange Commission (the "Commission"). Unison Common Stock
is listed on the Nasdaq National Market under the symbol UNHC. Reports, proxy
statements and other information filed by Unison can be inspected at the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 10006 and can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Midwest Regional Office, Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, and the address of the Commission's site is:
http//www.sec.gov.
Unison has filed with the Commission a Registration Statement on Form S-4
(together with any amendments, schedules and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the shares of Unison Common
Stock to be issued in the Ampro and Memphis Mergers. This Prospectus/Proxy and
Information Statement, as supplemented, does not contain all of the information
contained in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. The Registration
Statement is available for inspection and copying as set forth above. Statements
contained in this Prospectus/ Proxy and Information Statement, as supplemented,
or in any document incorporated by reference into this Prospectus/Proxy and
Information Statement, as supplemented, as to the contents of any contract or
other document referred to herein or therein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
2
<PAGE> 164
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY............................................................................. 5
The Company....................................................................... 5
Summary Historical and Pro Forma Combined Financial Data.......................... 7
Market Price Data and Dividends................................................... 8
RISK FACTORS........................................................................ 9
Limited Operating History......................................................... 9
History of Losses and Accumulated Deficit......................................... 9
Risks of Default from High Leverage, Substantial Lease Obligations and Limited
Capital Resources.............................................................. 9
Financial Covenants............................................................... 9
Difficulty of Acquiring and Integrating Additional Facilities and Services........ 10
Risks of Noncompliance with Government Regulations................................ 10
Uncertainties Resulting from Governmental Budgetary Constraints; Proposed
Budgetary Legislation.......................................................... 11
Potential Reductions of Reimbursement by Third-Party Payors....................... 11
Conflicts of Interest Arising from Benefits to Affiliates of Unison............... 12
Conflicts of Interest from Related Party Transactions............................. 13
Management Discretion Regarding Use of Proceeds from Senior Notes................. 13
Competition....................................................................... 13
Liability and Insurance........................................................... 13
Issuance of Authorized Shares of Common Stock Without Stockholder Approval........ 13
Dependence on Management and Skilled Personnel.................................... 14
Control by Management and Certain Shareholders.................................... 14
Potential Changes in Control; Cross Defaults and Related Risks.................... 14
Environmental Liability Risks..................................................... 15
Possible Volatility of Stock Prices............................................... 15
Effect of Certain Anti-takeover Provisions........................................ 15
Shares Eligible for Future Sale; Registration Rights.............................. 15
Forward-Looking Statements........................................................ 16
RECENT AND PENDING UNISON ACQUISITIONS AND OTHER COMMITMENTS........................ 17
Recent Acquisitions............................................................... 17
Pending Acquisitions.............................................................. 18
The Senior Notes.................................................................. 19
UNISON MARKET PRICE DATA AND DIVIDEND POLICY........................................ 19
CAPITALIZATION...................................................................... 20
UNISON UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.................. 21
UNISON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................ 35
Recent and Pending Acquisitions................................................... 35
Results of Operations............................................................. 36
Unison Historical................................................................. 37
BritWill Historical............................................................... 39
Liquidity and Capital Resources................................................... 40
BUSINESS OF UNISON.................................................................. 45
Introduction...................................................................... 45
Market Overview................................................................... 45
</TABLE>
3
<PAGE> 165
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Operating Strategy................................................................ 46
Growth Strategy................................................................... 48
Patient Services.................................................................. 49
Operations........................................................................ 50
Description of Management Services and Agreements................................. 51
Description of Lease Agreements................................................... 52
Competition....................................................................... 52
Revenues Sources.................................................................. 53
Government Regulation............................................................. 53
Insurance......................................................................... 59
Employees......................................................................... 59
Labco and Memco; Certain Other Subsidiaries....................................... 59
Properties........................................................................ 60
Legal Proceedings................................................................. 62
UNISON MANAGEMENT................................................................... 63
Directors and Executive Officers.................................................. 63
Executive Compensation............................................................ 64
Compensation of Directors......................................................... 66
1995 Stock Option Plan............................................................ 66
Employment Contracts, Termination of Employment, and Change-in-Control
Arrangements................................................................... 68
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions...................................................................... 68
CERTAIN TRANSACTIONS................................................................ 71
PRINCIPAL STOCKHOLDERS.............................................................. 73
DESCRIPTION OF UNISON CAPITAL STOCK................................................. 75
Common Stock...................................................................... 75
Preferred Stock................................................................... 75
Other Securities.................................................................. 75
Certain Provisions of Certificate of Incorporation Affecting Stockholders......... 76
Limitation of Liability and Indemnification Agreements............................ 76
Voting Agreement.................................................................. 77
Registration Rights............................................................... 77
LEGAL OPINIONS...................................................................... 77
EXPERTS............................................................................. 77
</TABLE>
4
<PAGE> 166
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus/Proxy and Information Statement. References to
"Unison" or the "Company" refer to Unison HealthCare Corporation, formerly known
as SunQuest HealthCare Corporation, and its consolidated subsidiaries and their
predecessors, or to any of them, depending on the context.
THE COMPANY
Unison is a provider of high quality traditional long-term and specialty
health care services. Unison provides a broad range of health care services
including nursing care, rehabilitation therapy, respiratory therapy and other
specialized services to patients whose needs span the continuum of care from
home care through subacute care. Subacute care includes those services provided
to patients with medically complex conditions who require more than three hours
per day of skilled nursing, medical supervision and access to specialized
equipment and services, but do not require many of the other services provided
by acute care hospitals. Unison also maintains special units with 495 beds
designed to treat patients with specific medical conditions such as Alzheimers,
AIDS and those requiring wound management. As of September 1, 1996, the Company
operated 51 facilities, including 45 long-term and specialty care facilities (41
of which are Medicare certified) with 4,666 beds and six independent or assisted
living facilities with 196 beds, in twelve states, principally in the midwest
and southwest regions of the United States.
Unison also provides certain ancillary services through both internally
developed and affiliated companies. Ancillary services are those services that
can be billed and reimbursed separately from routine services. Unison recently
established a pharmacy operation and Medicare Part B billing and supply company
to provide ancillary services to both Unison operated facilities and
non-affiliated health care providers. Unison has also acquired a therapy
services company which provides physical, occupational and speech therapy
through local outpatient clinics and long-term care facilities primarily in the
southeastern United States. It has also agreed to acquire two affiliated
laboratory services companies to provide medical laboratory testing services.
See "Recent and Pending Unison Acquisitions and Other Commitments."
Unison believes that it has established a strong competitive position in
the markets it serves by providing appropriate auxiliary services, specialty
health care services and high quality long-term care. Unison continues to
provide high quality health care services, as evidenced by its generally low
deficiency rating in state regulatory compliance surveys compared with national
averages. Unison has improved and is continuing to improve its payor mix and
growth both in specialty services and in revenue and operating profits. For the
six months ended June 30, 1996, Unison achieved a quality mix (defined as
revenues derived from private payors, Medicare and commercial insurers) of 48.2%
compared to 42.8% for the same period in 1995.
Unison believes that it is favorably positioned to benefit from recent
trends in the industry, including demographic shifts, advances in medical
technology and health care cost containment efforts. Unison seeks to
differentiate itself through an intense and focused quality care program that
strives to meet and anticipate changing regulatory requirements. Unison also
believes that it will benefit from increasing demand for long-term care and
specialty health care services, limited supply of new long-term care beds and
consolidation within the industry.
Unison's long-term strategy is to provide a full range of long-term care
services across the entire continuum of care from independent and assisted
living to subacute, specialty and traditional long-term care services. Unison's
operating strategy is to increase the revenues and profitability of the
facilities it operates by: (i) emphasizing the continued development and
expansion of specialty health care services to treat higher acuity patients in
cooperation with local hospitals and physicians; (ii) expanding the scope of
ancillary services provided in and to Unison facilities; (iii) increasing
occupancy levels and improving the Unison's payor mix; (iv) achieving and
maintaining a high standard of regulatory compliance and patient care in each
facility that Unison operates now or in the future; (v) providing independent
living and assisted living opportunities which are operated in hand with
Unison's care facilities; and (vi) containing costs.
5
<PAGE> 167
Unison intends to continue to grow its business by: (i) selectively leasing
additional long-term and specialty health care facilities in geographic
clusters; (ii) developing and acquiring additional ancillary services companies;
and (iii) developing in-house specialty care units within its current and future
facilities. In leasing new facilities, Unison intends to focus on facilities
with at least 100 licensed beds near one or more hospitals, especially in
markets with population concentrations in excess of 100,000. Additional
ancillary services are likely to include pharmacy services, home health care
services and reference laboratory services. Specialty units, which typically
generate higher profit margins than are available from more traditional long-
term care services, may include specialty units for Alzheimer's care, for AIDS
care, for specialized rehabilitation services and for the treatment of medically
complex patients. Unison believes that concentrating several long-term care
facilities within strategic geographic areas provides operating efficiencies and
economies of scale, better positions Unison to compete for managed care
contracts and facilitates the development of its ancillary and specialty health
care services.
The founders of Unison, who had previously worked together as executives of
Samaritan Senior Services, Inc., commenced operations of SunQuest HealthCare
Corporation with two facilities in July 1992. The Company had grown to 22
facilities when, on August 10, 1995, the Company acquired BritWill HealthCare
Company ("BritWill") (the "BritWill Acquisition"). BritWill had strategic
geographic concentrations of facilities in Texas and Indiana. The BritWill
Acquisition provided the Company with 28 additional facilities representing
2,816 beds. On November 14, 1995 the Company changed its name from SunQuest
HealthCare Corporation to Unison HealthCare Corporation. Unison has agreed to
acquire two related medical reference laboratory companies (the "Ampro and
Memphis Mergers") and a long term care provider and related companies with 13
facilities in Colorado and Arizona (the "Signature Mergers"), in each case
subject to specified conditions. See "Recent and Pending Unison Acquisitions and
Other Commitments."
The Company's principal executive office is located at 7272 East Indian
School Road, Suite 214, Scottsdale, Arizona, 85251, and its telephone number is
(602) 423-1954.
6
<PAGE> 168
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except share and selected operating data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------
----------------------------------- HISTORICAL
HISTORICAL PRO FORMA PRO FORMA PRO FORMA ----------------------------------
1996 1996(2) 1995(2) 1995(2) 1995 1994 1993 1992(1)
----------- --------- --------- --------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................. $64,997 $99,081 $71,322 $164,485 $61,285 $12,406 $1,956 $ 379
Expenses:
Wages and related........................ 32,447 53,209 42,974 97,406 31,811 7,149 1,455 190
Other operating.......................... 21,172 25,132 15,441 38,554 20,777 3,902 545 109
Rent..................................... 6,653 8,313 6,596 14,471 6,565 1,299 99 8
Interest................................. 1,452 6,694 6,248 12,834 1,058 84 11 5
Depreciation and amortization............ 1,054 3,085 3,203 6,289 1,050 51 7 3
------
-
------- ------- ------ ---- -------- ------- -------
Total expenses......................... 62,778 96,433 74,462 169,554 61,261 12,485 2,117 315
------
-
------- ------- ------ ---- -------- ------- -------
Income (loss) before income taxes.......... 2,219 2,648 (3,140) (5,069 ) 24 (79) (161) 64
Income taxes (credit)...................... 932 1,059 (1,256) (2,028 ) 50 1 (20) 26
------
-
------- ------- ------ ---- -------- ------- -------
Net income (loss).......................... $ 1,287 $ 1,589 $(1,884) $ (3,041 ) $ (26) $ (80) $ (141) $ 38
======= ======= ====== ==== ======== ======= ======= =======
Per share data:
Net income (loss) per share.............. $ .31 $ .26 $ (.57) $ (.90 ) $ (.02) $ (.06) $ (.11) $ .03
Weighted average shares outstanding...... 4,132 6,181 3,315 3,398 1,349 1,266 1,266 1,266
SELECTED OPERATING DATA(2):
Leased and Owned Facilities(1):
Number of facilities................... 42 55 26 56 43 11 2 --
Number of licensed beds:
Long-term care....................... 3,787 4,837 1,830 4,922 3,872 631 74 --
Assisted and independent living...... 134 262 232 240 112 104 30 --
Managed Facilities(1):
Number of facilities................... 8 8 9 10 10 9 5 4
Number of licensed beds................ 892 892 990 1,096 1,096 990 612 436
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
HISTORICAL PRO FORMA(3)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 847 $ 20,156
Working capital........................................................................... 4,848 41,590
Lease operating rights and other assets................................................... 42,588 84,818
Goodwill.................................................................................. 11,195 40,390
Total assets.............................................................................. 84,743 210,091
Total debt................................................................................ 31,111 129,737
Stockholders' equity...................................................................... 22,886 44,006
</TABLE>
- ---------------
(1) Number of facilities expressed are at end of period. Unison operations
commenced in July 1992.
(2) Gives effect to the BritWill Acquisition and other acquisitions in 1995 and
1996, the Ampro and Memphis Mergers, the Signature Mergers and the sale of
$100.0 million of Senior Notes (see "Other Recent and Pending Unison
Acquisitions and Other Commitments") as if such transactions had occurred on
January 1, 1995.
(3) Gives effect to the Ampro and Memphis Mergers, the Signature Mergers and the
sale of $100.0 million of Senior Notes (see "Other Recent and Pending Unison
Acquisitions and Other Commitments") as if they had occurred on June 30,
1996. See the Unaudited Pro Forma Condensed Combined Financial Statements
and Notes thereto.
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<PAGE> 169
MARKET PRICE DATA AND DIVIDENDS
Unison Common Stock is traded on the Nasdaq National Market under the
symbol UNHC. The following tables set forth, for the fiscal quarter indicated,
the high and low sale prices of Unison Common Stock, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
UNISON
-------------------
HIGH LOW
------- -------
<S> <C> <C>
Year Ended December 31, 1995
Fourth Quarter (commencing December 19, 1995).................. $ 9.375 $ 9.000
Year Ending December 31, 1996
First Quarter.................................................. 11.750 8.875
Second Quarter................................................. 15.500 10.250
Third Quarter (through September 17, 1996)..................... 14.750 10.875
</TABLE>
On July 26, 1996, the last trading day prior to the announcement by Unison
of the proposed Signature Mergers, the closing sale price of Unison Common Stock
was $13.00 per share. On September 17, 1996, the closing sale price of Unison
Common Stock was $13.25 per share.
Unison has never paid dividends on its Common Stock.
8
<PAGE> 170
RISK FACTORS
The following risk factors and the information provided elsewhere in this
Prospectus/Proxy and Information Statement and the related Proxy Statement
Supplement and Prospectus/Information Statement Supplement should be considered
carefully in evaluating the Signature Mergers, the Ampro and Memphis Mergers,
the Certificate Amendment and the Option Plan Amendment.
LIMITED OPERATING HISTORY. Unison began operations in 1992 and through the
third quarter of 1995 incurred net losses. Unison reported a net profit in the
fourth quarter of 1995 and in each of the first and second quarters of 1996.
Unison's future profitability will depend on many factors, including the
successful integration of acquired operations, general economic conditions,
occupancy levels, the level of competition, Unison's ability to attract and
retain qualified personnel at competitive rates, government regulation and
reimbursement policies, Unison's ability to integrate other complementary
businesses into its organization and the successful implementation of its growth
strategy. See "-- Difficulty of Acquiring and Integrating Additional Facilities
and Services," "Unison Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business of Unison -- Growth Strategy"
and "-- Government Regulation."
HISTORY OF LOSSES AND ACCUMULATED DEFICIT. Through the third quarter of
1995, Unison operated at a loss on an historical and pro forma basis. Unison
reported a net profit in the fourth quarter of 1995 and in each of the first and
second quarters of 1996. There can be no assurance that Unison will be
profitable in the future. Unison's future profitability will depend on many
factors including those mentioned above. See "-- Limited Operating History" and
"Unison Management's Discussion and Analysis of Financial Condition and Results
of Operations."
RISKS OF DEFAULT FROM HIGH LEVERAGE, SUBSTANTIAL LEASE OBLIGATIONS AND
LIMITED CAPITAL RESOURCES. After giving effect to the Ampro and Memphis Mergers,
the Signature Mergers, the acquisition of RehabWest, the anticipated private
placement of approximately $100.0 million of senior, unsecured Notes (the
"Senior Notes") and the application of approximately $24.7 million of proceeds
from such placement to reduce outstanding indebtedness (including indebtedness
and contingent obligations to the former BritWill shareholders), $129.1 million
in total indebtedness (75.3% of total capitalization) and $1.7 million of
contingent obligations (1.0% of total capitalization) will remain outstanding.
As such, a substantial portion of Unison's cash flow from operations will be
required to make principal and interest payments on outstanding indebtedness.
Unison also has significant long term lease obligations. Unison's pro forma rent
expense (including effects of recent and planned acquisitions) for the six
months ended June 30, 1996 was approximately $8.3 million. Unison is not likely
to be able to repay the principal of the Senior Notes unless it completes
another substantial public or private sale of debt or equity securities before
that date. Substantially all of the assets of Unison and its subsidiaries are
pledged to secure indebtedness and lease obligations. See "-- Financial
Covenants," "-- Potential Changes in Control; Cross Defaults and Related Risks,"
"Capitalization," "Unison Unaudited Pro Forma Condensed Combined Financial
Statements" and "Unison Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FINANCIAL COVENANTS. Some of Unison's leases and loan agreements contain
covenants requiring Unison to achieve specified improvements in its operating
results or financial ratios by specified future dates. Although Unison is
currently in compliance with these ratios, it has not always satisfied these
obligations in the past and there can be no assurance that it will be able to
satisfy all of these obligations in the future. Unison expects that the Senior
Notes will include covenants that prohibit or limit, among other things, the
sale of assets, the making of acquisitions and other investments, the incurrence
of additional debt and liens and the payment of dividends, and that require
Unison to maintain a minimum consolidated net worth and to comply with certain
financial ratio tests, and that limit Unison's ability to sell certain assets,
engage in certain transactions with affiliates, engage in certain mergers and
consolidations and enter a new line of business. See "Recent and Pending Unison
Acquisitions and Other Commitments -- The Senior Notes." Unison's failure to
comply with any of these covenants could result in an event of default, thereby
permitting acceleration of such indebtedness as well as indebtedness under other
instruments that contain cross-acceleration or cross-default provisions, which
in turn could have a material adverse effect on Unison's financial condition and
the results of operations.
9
<PAGE> 171
The degree to which Unison is leveraged and the covenants described above
may adversely affect Unison's ability to finance its future operations and could
limit its ability to pursue business opportunities that may be in the interest
of Unison and its security holders. In particular, changes in medical
technology, existing, proposed and future legislation, regulations and the
interpretation thereof, and the increasing importance of managed care contracts
and integrated healthcare delivery systems may require significant investment in
facilities, equipment, personnel or services. Although Unison expects that cash
generated from operations and amounts available under the Senior Notes, together
with public or private sales of equity securities from time to time, will be
sufficient to allow it to make such investments, there can be no assurance that
Unison will be able to obtain the funds necessary to make such investments. See
"-- Potential Changes in Control; Cross Defaults and Related Risks."
DIFFICULTY OF ACQUIRING AND INTEGRATING ADDITIONAL FACILITIES AND
SERVICES. A key element of Unison's growth to date and strategy for the future
is expansion through the leasing of new or existing long-term and specialty
health care facilities and the acquisition or development of ancillary health
care companies or services, including rehabilitation therapy, physical, speech
and occupational therapy, respiratory therapy and laboratory services. This
expansion has increased and is likely to continue to increase the operating
complexity of Unison and its subsidiaries as a whole and has placed and will
continue to place significant demands on Unison's management and other
resources. Acquisitions are inherently risky due to the possibility of unknown
and unforeseen contingencies affecting the new businesses. Unison incurs certain
costs and operating inefficiencies in connection with the acquisition of a new
skilled nursing facility, typically for two to 12 months following such
acquisition, relating to the integration of such facility's financial and
administrative systems, physical plant and other aspects of its operations into
those of Unison. In addition, the introduction of a substantial portion of
Unison's ancillary services to a new skilled nursing facility may take as long
as one to six months to fully implement. There can be no assurance that Unison
will be successful in identifying, acquiring, managing or integrating additional
facilities, operations and ancillary services, that acquisition risks can be
avoided or controlled, that there will be any operating efficiencies between the
businesses or that the combined businesses will be operated profitably. Unison
may acquire other businesses and develop other services in the future and the
failure to integrate and operate these services or other acquired companies
successfully could have a material adverse effect on Unison's business and
future prospects. See "Business of Unison -- Growth Strategy" and "Other Recent
and Pending Unison Acquisitions and Other Commitments."
RISKS OF NONCOMPLIANCE WITH GOVERNMENT REGULATIONS. The operation of
skilled nursing facilities is subject to Federal, state and local laws relating
to, among other things, the number of beds, the provision of ancillary services,
the adequacy of medical care, distribution of pharmaceuticals, equipment,
personnel, operating policies, fire prevention and compliance with building
codes. Skilled nursing facilities are also subject to periodic inspection by
governmental and other authorities to assure compliance with various standards
and to maintain continued licensing under state law and certification under the
Medicare and Medicaid programs. Although Unison generally has been able to
secure necessary approvals or licenses in the past, it voluntarily closed one
facility during 1996 due to regulatory problems, and the failure to obtain or
renew any required regulatory approvals or licenses could adversely affect
Unison's ability to offer existing or additional services, to receive Medicaid
and Medicare payments, and to expand the geographic scope of its operations, any
of which could adversely affect Unison's business.
The Health Care Financing Administration ("HCFA") announced on March 28,
1995 that it intended to conduct an examination of the billing and reimbursement
practices employed by controlled affiliates of long-term care providers that are
engaged in the provision of ancillary services both to the facilities controlled
and not controlled by the providers. As of the date of this Prospectus/Proxy and
Information Statement, the status of these examinations is not known, although
several public companies have announced that HCFA has requested information or
is conducting examinations. The outcome of these examinations and their
potential future impact on reimbursement and billing regulations, if any, cannot
yet be known. There can be no assurance that such examinations and any resulting
changes in reimbursement regulations will not have a material adverse effect on
Unison. Unison believes it complies with all current regulations regarding
billing and reimbursement practices in its provision of ancillary services, and
intends to continue to do so in the future. Effective July 1, 1995, HCFA
promulgated new survey, certification and enforcement rules governing
10
<PAGE> 172
skilled nursing facilities and nursing facilities participating in the Medicare
and Medicaid programs. Among other things, the new HCFA rules governing survey
and certification of long-term care facilities define or redefine a number of
terms used in the survey and certification process. The rules require states to
amend their state plans (required by Federal law) to incorporate the provisions
of the new rules, including the full range of remedies for nursing facilities
subject to the jurisdiction of the state Medicaid agency. The new HCFA
certification, survey and enforcement regulations impose significant new burdens
on long-term care facilities. The regulations may require state survey agencies
to take aggressive enforcement actions, such as imposing fines, decertifying
facilities, banning admission or revoking necessary licenses and closing
facilities. Additional remedies are available. Unison believes it understands
the new rules and will be able to comply with them. However, the breadth of the
new rules and their recent effective date create uncertainty over how the rules
will be implemented and the ability of Unison's long-term care facilities to
comply with them. After an initial delay in enforcement of the new regulations
during which only the most egregious violations were enforced, HCFA has begun
enforcing the new rules. Published reports indicate that in the initial surveys
conducted, as many as 70% of the facilities surveyed were not in compliance with
the new rules. On August 21, 1996, President Clinton signed the Health Insurance
Portability and Accountability Act ("HR 3103"). HR 3103 contains a variety of
significant health care fraud and abuse provisions. See "Business of Unison --
Government Regulation."
UNCERTAINTIES RESULTING FROM GOVERNMENTAL BUDGETARY CONSTRAINTS; PROPOSED
BUDGETARY LEGISLATION. Political, economic and regulatory influences are
resulting in fundamental changes in the health care industry in the United
States. For example, proposed federal budgets have called for substantial
reductions in projected Medicare spending. In addition, the Clinton
administration and various members of Congress have advanced a number of
legislative proposals to reform the health care system. Among the proposals
considered by the Congress has been a "block grant" funding mechanism for the
disbursement of the Federal share of Medicaid payments to the individual states,
which, if enacted, could cause a reduction in the availability of Medicaid funds
in future years to the states. Certain other provisions of the proposed
legislation are intended to reduce the rate of increase in Medicare and Medicaid
expenditures through cost savings and other measures which are expected to be
developed in the near future.
Unison anticipates that federal and state governments will continue to
review and assess alternative health care delivery systems and payment methods.
Due to uncertainty regarding the ultimate features of reform initiatives and
their enactment and implementation, Unison cannot predict which, if any, reform
proposals will be adopted, when they may be adopted or what impact they may have
on Unison. There can be no assurance that such reforms, if enacted, or
administrative responses to budgetary constraints, will not have a material
adverse effect on Unison. See "Business -- Government Regulation."
POTENTIAL REDUCTIONS OF REIMBURSEMENT BY THIRD-PARTY PAYORS. Revenues
received from the Medicare program for services provided in Unison's facilities
represented approximately 27.2% of Unison's pro forma revenues for the year
ended December 31, 1995 and approximately 32.4% of Unison's revenues for the six
months ended June 30, 1996. The Medicare program is subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and funding restrictions, all of which could have the effect of limiting
or reducing reimbursement levels for Unison's services. Unison cannot predict
whether any changes to this program will be adopted or, if adopted, the effect,
if any, such changes will have on Unison. Any significant decrease in Medicare
reimbursement levels, or the imposition of significant restrictions on
participation in the Medicare program, could have a material adverse effect on
Unison. There can be no assurance that Unison's facilities will continue to
satisfy the requirements for participation in the Medicare program.
Unison bills on a "salary equivalency" fee-based schedule for physical
therapy services and respiratory therapy services provided to Medicare patients
at its facilities, most of which are currently provided through third party
rehabilitation therapy companies but which may increasingly be available through
Unison in the future. Skilled nursing facilities are, with certain exceptions,
only entitled to bill Medicare for such therapy services based on the salary
equivalency guidelines. For rehabilitation therapy services provided directly,
Unison's billing rates and gross margins under the salary equivalency guidelines
for physical therapy services are significantly lower than those for speech
language pathology and occupational therapy, which are
11
<PAGE> 173
reimbursed under the "prudent buyer" rule. HCFA is currently considering changes
to the Medicare reimbursement guidelines for physical therapy services and new
salary equivalency guidelines for speech language pathology and occupational
therapy services. In addition, in April 1995, HCFA sent a memorandum to Regional
Office Administrators containing specific data which intermediaries may use in
making "prudent buyer" decisions regarding occupational and respiratory therapy
and speech language pathology services. Unison believes the data, if followed,
would result in a significant decrease in the amounts reimbursed for such
services throughout the industry. Although Unison has no way to determine when,
or if, any changes will be made to the current Medicare reimbursement guidelines
for physical, respiratory, speech or occupational therapy services, or the
extent to which the data set forth in the memorandum will be used by
intermediaries in providing reimbursement, the imposition of salary equivalency
guidelines on speech language pathology and occupational therapy services that
results in a significant decrease in reimbursement rates for such services, or
the widespread use by intermediaries of the data in the memorandum, could
significantly decrease Unison's margins and have a material adverse effect on
the Unison's business. See "Business of Unison -- Government Regulation."
Unison's facilities that participate in applicable state Medicaid programs
are subject to risks of changes in Medicaid reimbursement and payment delays
resulting from budgetary shortfalls of state Medicaid programs. Unison operates
a total of 16 facilities in Texas and 14 facilities in Indiana. The Texas and
Indiana facilities accounted for 42.4% and 34.6%, respectively, of Unison's pro
forma revenues for the year ended December 31, 1995 and 38.0% and 24.6%,
respectively, for the six months ended June 30, 1996. Furthermore, some state
Medicaid programs require certification of all beds in the facility, which may
limit the ability of a facility in any such state to establish a distinct
Medicare Part A unit for subacute care. In an attempt to limit the Federal
budget deficit, there have been, and Unison expects that there will continue to
be, a number of other proposals to limit Medicare and Medicaid payments for
services. Unison cannot predict whether any of these proposals will be adopted
or, if adopted, the effect, if any, such proposals would have on Unison. Any
adverse change in the regulatory environment or the reimbursement rates paid
under the Medicare program or under the Texas and Indiana Medicaid programs
could have a material adverse effect on Unison's financial position and results
of operations. See "-- Uncertainties Resulting from Governmental Budgetary
Constraints; Proposed Budgetary Legislation," "-- Potential Reductions of
Reimbursement by Third-Party Payors," and "Business of Unison -- Government
Regulation."
There can be no assurance that the rates paid to Unison by Medicare,
Medicaid or other payors will be adequate to reimburse Unison for the cost of
providing services. In addition, cost increases due to inflation without
corresponding increases in reimbursement would adversely affect Unison's
business. See "Business of Unison -- Government Regulation."
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO AFFILIATES OF
UNISON. Unison intends to use approximately $500,000 of the net proceeds of the
sale of the Senior Notes to repay outstanding indebtedness incurred by BritWill
or Unison to Bruce H. Whitehead or his affiliates. An additional $9.8 million of
the net proceeds of the sale of the Senior Notes will be used to repay to the
former shareholders of BritWill outstanding indebtedness (including contingent
obligations) incurred in connection with the BritWill Acquisition. Approximately
$127,000 of the net proceeds of the sale of the Senior Notes will be used by
Unison to pay financial advisory fees owed to Trouver Capital Partners, L.P.
("Trouver") as a result of the Ampro and Memphis Mergers. See "Certain
Transactions."
Bruce H. Whitehead, Unison's Chairman of the Board of Directors, is the
President of the General Partner of WFI which was the beneficial owner of
approximately 81.5% of BritWill's stock at the time of its acquisition by
Unison, making it the beneficial owner of approximately 11.6% of Unison's Common
Stock as of the date hereof. Including his rights as agent for the other former
shareholders of BritWill, Mr. Whitehead is the beneficial owner of approximately
14.1% of Unison's Common Stock as of the date hereof. John T. Lynch, Jr. is an
owner and controlling person of Trouver. Tyrrell L. Garth and Mark W. White were
also shareholders of BritWill at the time of its acquisition by Unison. As
members of the Board of Directors of Unison, Messrs. Whitehead, Lynch, Garth and
White participated in the deliberations of the Board of Directors with respect
to various matters concerning the transactions described herein, including the
offering
12
<PAGE> 174
of the Senior Notes and the uses to be made of proceeds therefrom. See "Unison
Management" and "Principal Stockholders."
CONFLICTS OF INTEREST FROM RELATED PARTY TRANSACTIONS. In addition to his
relationships described under "-- Conflicts of Interest Arising from Benefits to
Affiliates of Unison" and "-- Control by Management and Certain Stockholders,"
an affiliate of Bruce H. Whitehead, BritWill Investments -- Texas, Ltd.
("BritWill Texas"), is the lessor of six of Unison's long term care facilities
in Texas, and under certain circumstances he has the right or obligation to
purchase nine other facilities that Unison leases from Omega HealthCare
Investors, Inc. ("Omega"). Certain of Unison's obligations to Omega are
guaranteed by Bruce H. Whitehead. One of Unison's directors, John T. Lynch, Jr.,
is a partner in Trouver, which is entitled to receive compensation from
acquisitions and financings under certain circumstances. These business
relationships may create conflicts of interest in managing Unison's business in
the future. See "Certain Transactions."
MANAGEMENT DISCRETION REGARDING USE OF PROCEEDS FROM SENIOR
NOTES. Approximately 80% of the net proceeds of the sale of the Senior Notes
are committed to the Signature Merger, the acquisition of RehabWest, reduction
of outstanding indebtedness (including contingent obligations) to the former
BritWill shareholders, and to other specific uses identified in this
Prospectus/Proxy and Information Statement, with the remainder available for
other corporate purposes such as working capital, debt reduction or future
acquisitions. Unison will have broad discretion in using the unallocated net
proceeds of the offering. Prospective investors will not have an opportunity to
evaluate the relative merits of such unspecified uses. See "Recent and Pending
Unison Acquisitions and Other Commitments -- The Senior Notes -- Use of Note
Proceeds."
COMPETITION. The long-term care, pharmacy and therapy industries are
highly competitive. Unison competes with general acute care hospitals, skilled
nursing facilities, rehabilitation hospitals, long-term care hospitals, assisted
living facilities, home care providers and other subacute and specialty care
providers. Many of these companies have greater financial and other resources
than Unison. No assurance can be given that Unison will have the resources to
compete successfully with such companies. In addition, cost containment efforts,
which encourage more efficient utilization of acute care hospital services, have
resulted in decreased hospital occupancy in recent years. As a result, a
significant number of general acute care hospitals have converted portions of
their facilities to other purposes, including various types of long term and
subacute care. Unison expects this trend to continue. Consequently, there can be
no assurance that Unison will not encounter increased competition in the future,
which could limit its ability to complete strategic acquisitions on attractive
terms, to attract patients or residents, to attract and retain key personnel, or
otherwise expand its business, any of which could have a material adverse effect
on Unison's financial position or results of operations. See "Business of
Unison -- Competition."
LIABILITY AND INSURANCE. The provision of health care services entails an
inherent risk of liability. In recent years, participants in the long-term care
industry have become subject to an increasing number of lawsuits alleging
malpractice or related legal theories, many of which involve large claims and
significant defense costs. Unison maintains professional malpractice insurance
and other insurance coverage which it believes to be adequate, although it
self-insures for certain workers compensation risks. Unison's insurance policies
generally must be renewed on an annual basis. Although Unison has not
experienced difficulty in obtaining insurance coverage at acceptable rates,
there can be no assurance that Unison will be able to obtain such insurance on
commercially reasonable terms in the future, if at all, or that any such
insurance will be adequate. In addition, a successful claim against Unison in
excess of Unison's insurance coverage could have a material adverse effect on
Unison and its financial condition. Claims against Unison, regardless of their
merit or eventual outcome, may also have a material adverse effect on Unison's
ability to attract patients or residents or expand its business. See "Business
of Unison -- Insurance" and "-- Legal Proceedings."
ISSUANCE OF AUTHORIZED SHARES OF COMMON STOCK WITHOUT STOCKHOLDER
APPROVAL. If adopted, the Amendment to Unison's Certificate of Incorporation
will increase the number of authorized shares of Unison Common Stock from
10,000,000 shares to 25,000,000 shares. Following consummation of the Signature
Mergers and the Ampro and Memphis Mergers there will be approximately 6,039,249
million shares of Unison Common Stock outstanding, approximately 2,115,705
shares of Unison Common Stock reserved for
13
<PAGE> 175
issuance pursuant to other commitments and approximately 1,845,046 million
shares of Unison Common Stock which are authorized and unissued. Such unissued
shares may be issued by the Unison Board of Directors without further Unison
stockholder action unless the issuance is in connection with a transaction for
which stockholder approval is otherwise required under applicable law or to
comply the requirements of the Nasdaq National Market or with any agreement with
any stock exchange on which Unison Common Stock is then listed.
DEPENDENCE ON MANAGEMENT AND SKILLED PERSONNEL. Unison depends upon the
active involvement of its senior managers, including its executive officers. The
loss of one or more of such officers could have a material adverse effect on
Unison's business and future operations. Unison has entered into employment
agreements with Messrs. Clark, Contris, Oberfield, Rollins and Walker as
executive officers. Unison's success and growth strategy also depend on its
ability to attract and retain qualified clinical management, marketing and other
personnel. Unison competes with general acute care hospitals, rehabilitation
facilities, nursing homes, ambulatory care facilities and other health care
providers for the services of physicians, registered nurses, therapists and
other clinical personnel. Such clinical personnel are in high demand and are
often subject to competing offers. There can be no assurance that Unison will be
able to attract and retain the qualified personnel necessary for its business
and planned growth. See "Business -- Operations" and "Unison
Management -- Employment Agreements."
CONTROL BY MANAGEMENT AND CERTAIN STOCKHOLDERS. After completion of the
Ampro and Memphis Mergers and the Signature Mergers, Unison's officers and
directors will own approximately 46.9% of Unison's outstanding stock (including
approximately 21.2% to be owned as a result of the Signature Mergers by David A.
Kremser, who will become a director of Unison upon the closing of the Signature
Mergers). WFI is the beneficial owner of 458,091 shares of Unison Common Stock
(approximately 7.6% of the shares outstanding after completion of the Ampro and
Memphis Mergers and the Signature Mergers). Bruce H. Whitehead is the beneficial
owner of approximately 14.1% of Unison Common Stock, including both the shares
issuable to WFI and shares issuable to other former shareholders of BritWill (as
to which he currently shares investment control as agent for such shareholders).
Accordingly, the parties listed above will continue to have significant control
over Unison. In addition, the beneficial holders of approximately 1,175,000
shares of Unison Common Stock (approximately 29.0% of the stock outstanding)
have agreed to vote in favor of three nominees selected by WFI for so long as
the $13.5 million amended and restated subordinated note executed in connection
with the BritWill Acquisition (the "Subordinated Note") or related contingent
payment obligations remain outstanding. See "Recent and Pending Unison
Acquisitions and Other Commitments," "Unison Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Unison Management -- Directors and Executive Officers" and
"Principal Stockholders."
POTENTIAL CHANGES IN CONTROL; CROSS DEFAULTS AND RELATED RISKS. In
connection with the BritWill Acquisition, Unison's Board of Directors was
expanded to include representatives of both entities, as well as additional
unaffiliated persons. Messrs. Walker, Rollins, Contris, and Clark have pledged
substantially all of their Unison Common Stock (aggregating approximately 24.1%
of Unison Common Stock currently outstanding) to the former BritWill
shareholders to secure the Company's obligations incurred in connection with the
BritWill Acquisition. In the event of a default, Mr. Whitehead could foreclose
on the pledged stock and the former shareholders of BritWill (of which Whitehead
Family Investments, LLC ("WFI") has a controlling interest) would effectively
gain control of Unison. Through his voting and investment control of WFI and as
agent for the other former shareholders of BritWill, Mr. Whitehead beneficially
owns approximately 11.6% of Unison's Common Stock currently outstanding.
In connection with the Signature Merger, approximately 1,283,019 shares of
Unison Common Stock (subject to adjustment in certain circumstances, see "Recent
and Pending Unison Acquisitions and Other Commitments") will be issued to David
A. Kremser, who will also be added to Unison's Board of Directors. Mr. Kremser's
stock ownership would be approximately 23.3% of the Unison shares to be
outstanding after the Signature Merger, making Mr. Kremser the largest
stockholder and potentially a controlling person of Unison.
14
<PAGE> 176
An affiliate of Mr. Whitehead leases or subleases six facilities to Unison,
subject to mortgage loans from Omega HealthCare Investors, Inc., a provider of
secured loans and leasehold financing to the health care industry ("Omega"),
which is not related to Unison and under certain circumstances he has the right
or obligation to purchase nine other facilities that Unison leases from Omega.
Substantially all of the leases from Omega are subject to cross-default
provisions. Any of these factors could ultimately lead to a change in ownership
or control of one or more of Unison's facilities. Omega is not affiliated with
or controlled by Unison or any affiliate of Unison, or any officer or director
of any of the foregoing.
The terms of the Senior Notes (see "Recent and Pending Unison Acquisitions
and Other Commitments -- The Senior Notes") will also have cross-default
provisions, so a default on any of Unison's obligations could require repayment
or refinancing of all of these obligations.
ENVIRONMENTAL LIABILITY RISKS. Certain Federal, state and local
environmental laws, regulations and ordinances impose liability for
environmental costs, damages, and/or expenses upon current or previous owners or
operators of real property. Pursuant to these environmental laws, a current or
previous owner and/or operator of real property may be required to investigate
and remediate any hazardous or toxic substance or petroleum product discovered
at or released upon such property. The current or previous owner and/or operator
may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination. These environmental laws often impose
responsibility to investigate, remediate and reimburse others for costs incurred
based upon strict liability without regard to whether the owner or operator knew
of or caused the presence of contamination. The liability under such
environmental laws has also been determined to be joint and several unless the
harm is divisible and there is a reasonable basis to allocate responsibility.
The costs and expenses to investigate, remediate or remove such contamination
may be substantial. The owner's ability to sell or lease such property or to
borrow using such property as collateral may be adversely affected by the
presence of such contamination or the owner may continue to be adversely
affected even after the responsible parties have taken steps to remediate such
contamination.
Unison is not currently aware of any material environmental liability
relating to any of the leased or managed facilities or related to any properties
that it would own or lease as a result of the Ampro Merger or the Signature
Mergers. However, the environmental condition of a property is difficult to
assess with certainty, so it is possible that Unison may be unaware of
undetected conditions at a facility that could give rise to material
environmental liabilities in the future.
POSSIBLE VOLATILITY OF STOCK PRICES. The stock market has experienced
price and volume fluctuations which have particularly affected the market price
for many health care companies and have often been unrelated to the operating
performance of these companies. The market price of Unison Common Stock could
also be subject to significant fluctuations in response to variations in
Unison's quarterly operating results, litigation, future announcements
concerning Unison, legislative or regulatory changes in the interpretation of
existing statutes or regulations affecting the health care industry generally or
long-term care business in particular, general trends in the industry and other
events or factors.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of Unison's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Bylaws (the "Bylaws"), the Delaware General Corporation Law,
and certain change of control provisions of Unison's employment contracts with
senior executives and of the Senior Notes may discourage or prevent certain
types of transactions involving a change of control of Unison, including
transactions in which the stockholders might otherwise receive a premium for
their shares over then current stock prices. See "Description of Unison Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of Unison
Common Stock in the public market after the date hereof could adversely affect
prevailing market prices. All of the shares issued in the Ampro and Memphis
Mergers will be eligible for resale upon satisfaction of applicable "pooling"
requirements. Holders of 1,233,497 shares of Unison Common Stock are eligible
for sale under Rule 144 ("Rule 144") under the Securities Act of 1933, as
amended (the "Securities Act"). An additional 561,815 shares of Unison Common
Stock beneficially owned by other stockholders of Unison will become eligible
for sale under Rule 144 in August 1997 (or earlier if certain proposed rules
pending before the Securities and
15
<PAGE> 177
Exchange Commission (the "Commission") are implemented, shortening the holding
period requirement of Rule 144), subject to compliance with the volume
limitation and other requirements of such Rule. Similarly, the shares issued in
the Signature Merger will become eligible for sale under Rule 144 within two
years after issuance. Additional shares of Unison Common Stock, including shares
issuable upon the exercise of options, will also become eligible for sale in the
public market from time to time in the future. In addition, the holders of the
561,815 shares of Unison Common Stock issued to the former shareholders of
BritWill upon conversion of the debenture issued in connection with the
acquisition of BritWill (and 783,804 shares of Unison Common Stock pledged as
security for Unison's obligations incurred in the acquisition of BritWill, in
the event of default on such obligations), the 120,000 shares issuable upon
exercise of warrants issued to the representatives of the underwriters of
Unison's initial public offering, the shares underlying the convertible notes
($1.0 million) and convertible debentures ($1.8 million) issued in the
acquisition of Sunbelt, up to 300,000 shares issuable upon exercise of warrants
issued to Imperial Bank in connection with a loan from Imperial Bank (and
additional shares of Unison Common Stock issuable upon a default by Unison under
such loan) and the 1,509,434 shares (subject to adjustment under certain
circumstances) issuable in the Signature Health Care Merger have the right to
require Unison to register such shares of Unison Common Stock for sale under the
Securities Act. Unison also has granted "piggyback" registration rights with
respect to the shares mentioned above (other than the shares under the
convertible instruments issued in connection with the acquisition of Sunbelt)
and an additional 84,659 shares of Unison Common Stock underlying a convertible
note, which is only convertible upon a default under such note. Controlling
stockholders could also cause Unison to register their stock for resale and to
facilitate such secondary offerings. See "Description of Capital Stock --
Registration Rights."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus/Proxy and Information
Statement, including without limitation statements containing the words
"believes," "anticipates," "intends," "expects" and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of Unison or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and in the regions in which Unison operates; industry capacity;
demographic changes; existing government regulations and changes in, or the
failure to comply with, government regulations; legislative proposals for
healthcare reform; the ability to enter into managed care provider arrangements
on acceptable terms; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against Unison; competition; the loss of any
significant customers; changes in business strategy or development plans; the
ability to attract and retain qualified personnel; the significant indebtedness
of Unison; the availability and terms of capital to fund the expansion of
Unison's business, including the acquisition of additional skilled nursing
facilities and ancillary health care services providers; and other factors
referenced in this Prospectus/Proxy and Information Statement. Certain of these
factors are discussed in more detail elsewhere in this Prospectus/Proxy and
Information Statement, including without limitation under the captions
"Summary," "Risk Factors," "Unison Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business of Unison." GIVEN
THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. Unison disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
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<PAGE> 178
RECENT AND PENDING UNISON ACQUISITIONS AND OTHER COMMITMENTS
Unison is continually engaged in discussions regarding potential
acquisitions and believes that acquisitions will remain an important part of
Unison's business strategy for the foreseeable future.
RECENT ACQUISITIONS
On August 10, 1995, Unison acquired BritWill HealthCare Company
("BritWill") to achieve the size necessary to assist Unison in the pursuit of
its overall business strategy (the "BritWill Acquisition"). Immediately prior to
the BritWill Acquisition, Unison operated 22 facilities, and the BritWill
Acquisition provided Unison with an additional 28 facilities, representing, at
the time of the BritWill Acquisition, 2,816 beds and strategic concentrations of
facilities in Texas and Indiana. The purchase and sale agreement for the
BritWill Acquisition, as modified through the date hereof (the "Purchase and
Sale Agreement"), requires fixed payments and additional contingent payments
that are due only if certain revenue targets are achieved. The total fixed
purchase amount of $20.6 million consisted of a short-term note in the amount of
$5.6 million (the "Term Note"), an $8.0 million subordinated promissory note
(the "Subordinated Note") and a $7.0 million debenture convertible into 561,815
shares of Unison Common Stock (the "Convertible Debenture"). Unison repaid the
Term Note in January 1996, and Bruce Whitehead, as the holder of the Convertible
Debenture and as agent for the former stockholders of BritWill, has converted
the Convertible Debenture in its entirety. In addition, monthly contingent
payments aggregating approximately $10.3 million may be due through August 2000
if Unison achieves specified monthly revenue conditions, and a lump sum
contingent payment of $11.5 million (the "Lump Sum Payment"), subject to
reduction up to $1.4 million under certain circumstances (the "Reduction"), is
due in August 2000 if revenues exceed $150.0 million in the 12 months ending
June 30, 2000. At least 50% of the outstanding balance of the Subordinated Note
and the Lump Sum Payment are due and the Reduction will be waived in the event
of any public or private sale of debt or equity securities in excess of
$10,000,000 such as the placement of the Senior Notes. See "The Senior Notes."
In connection with the BritWill Acquisition, certain officers of Unison have
pledged shares of Unison Common Stock and entered into a voting agreement, and
the former BritWill shareholders have received registration rights covering the
shares of Unison Common Stock received upon conversion of the Convertible
Debenture. See "Unison Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
On March 28, 1996, Unison entered into a definitive Purchase and Sale
Agreement for the acquisition, effective as of February 1, 1996, of 90% of the
outstanding common stock of each of four rehabilitation therapy service centers
from Paul G. Henderson and Paige B. Plash. The therapy centers provide services
to 56 facilities in six states. In consideration for the stock of the four
therapy centers, Unison paid $800,000 in cash, issued term notes for $1.0
million in the aggregate (the "Sunbelt Notes") and issued subordinated
debentures totalling $1.8 million (the "Sunbelt Debentures"). Contingent
payments of $750,000 and $1.25 million in the aggregate will be paid to Mr.
Henderson and Mr. Plash if audited pre-tax income of the centers equals $2.9
million for the 12 months ending December 31, 1996 and $5.4 million for the 12
months ending December 31, 1997. Pro rata contingent payments may be due if
audited pre-tax income is lower. Unison will purchase the remaining equity
interests of Mr. Henderson and Mr. Plash in the four therapy centers during the
first half of 1998. The remaining equity interests will be priced at a pro rata
portion of seven times the after tax net income of the therapy centers for the
12 months ending December 31, 1997. The Sunbelt Notes and Sunbelt Debentures
bear interest at 10.0% and are convertible into Unison Common Stock at the
election of the holder at a conversion price equal to the average closing price
(85% of the average closing price with respect to the Sunbelt Notes) for Unison
Common Stock for the 20 trading days preceding the date of conversion. The
Sunbelt Notes mature, as to equal principal amounts, on February 1, 1997 and
February 1, 1998, and the Sunbelt Debentures have maturity dates of February 1
in each of 1997, 1998 and 1999, also as to equal principal amounts.
On August 1, 1996, Unison acquired the leasehold rights to two skilled
nursing facilities, Enumclaw and Walla Walla, in the State of Washington with an
aggregate of 222 beds. Unison previously operated these facilities under
management agreements with Franciscan Eldercare ("Franciscan"). In each
restructuring, Franciscan sold the facility to a third party who in turn leased
the facility to SunQuest SPC, Inc. ("SunQuest"), a wholly-owned subsidiary of
Unison. At the time of the restructuring, management fees were approximately
$8,500 per month and $17,500 per month for Enumclaw and Walla Walla,
respectively. The
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<PAGE> 179
base monthly rents under the leases are $34,199 and $18,278 for Enumclaw and
Walla Walla, respectively. The initial term of the Enumclaw lease expires May 1,
2006. SunQuest has the option to renew the lease for two successive periods of
five years each. The term of the Walla Walla lease expires on December 31, 2016.
Unison also recently acquired leasehold rights to several other facilities
that were not material to Unison, including Homestead of McKinney, in McKinney,
Texas, and Valley Vista, in Sandpoint, Idaho.
PENDING ACQUISITIONS
Unison, Labco Acquisition Co., a Delaware corporation and a newly formed
wholly-owned subsidiary of Unison ("Labco"), and American Professional Holding,
Inc., a Utah corporation ("Ampro"), entered into an Agreement and Plan of Merger
dated as of July 3, 1996 pursuant to which, subject to approval of the
shareholders of Ampro and certain other conditions, Labco will merge with and
into Ampro (the "Ampro Merger"), with Ampro being the surviving corporation. As
part of the same overall plan, Unison, Memphis Acquisition Co., a Delaware
corporation and a newly formed wholly-owned subsidiary of Unison ("Memco"), and
Memphis Clinical Laboratory, Inc., a Tennessee corporation ("Memphis"), entered
into an Agreement and Plan of Merger dated as of July 3, 1996 pursuant to which,
subject to approval of the shareholders of Memphis and certain other conditions,
Memco will merge with and into Memphis (the "Memphis Merger"), with Memphis
being the surviving corporation. As a result of the Ampro and Memphis Mergers,
Ampro and Memphis will become wholly-owned subsidiaries of Unison. Ampro and
Memphis operate medical laboratories (primarily the testing of body fluids and
tissues for disease or chemical concentrations) in Dallas, Texas, Poplar Bluff,
Missouri and Memphis, Tennessee and at September 1, 1996, provided testing
services to approximately 295 nursing homes and other health care facilities. At
the effective time of the Ampro and Memphis Mergers, each of the outstanding
shares of Ampro's common stock will be converted into the right to receive
approximately 0.051 of a share of Unison Common Stock, for a total of 521,000
shares of Unison Common Stock, and each outstanding share of common stock of
Memphis (the "Memphis Shares") will be converted into the right to receive
approximately 54 shares of Unison Common Stock, except that 648 Memphis Shares
owned by William R. Seals will instead be converted into the right to receive a
Unison promissory note in the principal amount of $250,000 and cash in the
amount of approximately $240,000. An option (the "Memphis Option") for the
Memphis Shares held by the controlling shareholders of Ampro will be allowed to
lapse (at September 30, 1996) unexercised. The three controlling shareholders of
Ampro, Messrs. Maguire, McGee and McKinney, hold the Memphis Option and appoint
two of three members of the Board of Directors of Memphis. The Ampro Merger and
the Memphis Merger are mutually contingent transactions.
On August 2, 1996, Unison, Mr. David A. Kremser, Mr. John D. Filkoski,
Signature Health Care Corporation, a Delaware corporation ("Signature Health
Care"), Arkansas, Inc., a Colorado corporation ("Arkansas"), Cornerstone Care,
Inc., a Colorado corporation ("Cornerstone"), Douglas Manor, Inc., a Colorado
corporation ("Douglas"), and Safford Care, Inc., a Colorado corporation
("Safford,") and collectively with Signature Health Care, Arkansas, Cornerstone
and Douglas, "Signature") entered into a series of Agreements and Plans of
Merger. Pursuant to these agreements, each of the Signature entities will merge
with and into a wholly-owned subsidiary of Unison to be formed, with the
relevant Signature entity being the surviving corporation in each case.
Signature operates 11 skilled nursing facilities and two assisted living
facilities in Colorado and Arizona. At the effective time of the Signature
Health Care Merger Agreement, the outstanding shares of capital stock of
Signature Health Care (the "Signature Health Care Shares") will be converted
into the right to receive (a) cash equal to approximately $10,200,000 (minus the
amount paid to redeem outstanding options for Signature Health Care Shares) and
(b) 1,509,434 shares of Unison Common Stock, subject to adjustment if the
Average Daily Price of Unison Common Stock is less than $11.25 per share or
greater than $15.25 so that the product of the Average Daily Price and the
number of shares issued remains at $16,981,132.50 if the Average Daily Price is
less than $11.25 per share and at $23,018,868.50, the Average Daily Price is
greater than $15.25 Average Daily Price is defined for these purposes as the
average daily closing price for Unison Common Stock during the thirty day period
ending five days prior to the last trading day prior to the closing date for the
Signature Health Care Merger. The shares of the other Signature entities will be
converted into the right to receive cash and promissory notes equal to
approximately $28,000,000 in the aggregate. The Signature Mergers are
conditioned upon, among other
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<PAGE> 180
things, Unison entering into a definitive agreement to acquire the assets and
business of RehabWest, Inc. for an aggregate purchase price of $5,500,000 and
subject to other terms and conditions satisfactory to Unison and to Messrs.
Kremser and Filkoski.
THE SENIOR NOTES
General. It is a condition to Unison's obligation to consummate the
Signature Mergers that Unison have completed a public or private offering of
subordinated debt or common stock in an amount and on terms acceptable to
Unison. Unison intends to satisfy this condition through the placement of $100.0
million principal amount of Senior Notes (the "Senior Notes") on or about the
date of the Signature Mergers.
Unison anticipates that the Senior Notes will mature approximately ten
years after their issue date and will be entitled to semiannual payments of
interest. Unison will not be required to redeem or prepay Senior Notes prior to
maturity except in the event of a change in control, in which event Unison will
be required to offer to purchase the Senior Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the purchase date. Unison
will be permitted to redeem the Senior Notes at its option beginning in 2001 at
a premium that declines to par in 2005. In addition, Unison will have the right
to redeem a specified percentage of the Senior Notes with the net cash proceeds
from one or more public equity offerings. The Senior Notes will be secured by
guarantees of Unison's current and future subsidiaries (including Signature,
Ampro and Memphis upon the closing of their respective mergers), but will
otherwise be unsecured. The indenture relating to the Senior Notes will contain
certain covenants including (among others) covenants limiting: (i) the
incurrence by Unison or its subsidiaries of additional indebtedness or lease
payment obligations; (ii) certain restricted payments, including payments of
dividends on and redemption of capital stock by Unison; (iii) transactions with
affiliates; (iv) mergers, acquisitions and asset sales; and (v) the creation of
liens securing indebtedness. Unison will be obligated promptly to file and cause
to become effective an exchange offer registration statement with respect to an
offer to exchange the Senior Notes for requested notes with terms substantially
identical to the Senior Notes.
Use of Proceeds. The net proceeds to Unison (after underwriting discounts
and expenses) from the Senior Notes is estimated to be approximately $96.2
million. Unison intends to use approximately $37.7 million of such proceeds to
satisfy its cash obligations pursuant to the Signature Mergers, approximately
$5.5 million to acquire RehabWest, approximately $21.1 million to repay long
term debt and contingent obligations (including about $9.8 million to pay half
of Unison's aggregate debt and contingent obligations to the former shareholders
of BritWill), about $12.7 million to reduce short-term debt and accounts
payable, and the remaining $19.2 million for future acquisitions and working
capital.
UNISON MARKET PRICE DATA AND DIVIDEND POLICY
Unison Common Stock is traded on the Nasdaq National Market under the
symbol UNHC. The following table sets forth, for the fiscal quarter indicated,
the high and low sale prices of Unison Common Stock, as reported on the Nasdaq
National Market, since it first began trading on December 19, 1995.
<TABLE>
<CAPTION>
UNISON
-------------------
HIGH LOW
------- -------
<S> <C> <C>
Year Ended December 31, 1995
Fourth Quarter (commencing December 19, 1995).......................... $ 9.375 $ 9.000
Year Ending December 31, 1996
First Quarter.......................................................... 11.750 8.875
Second Quarter......................................................... 15.500 10.250
Third Quarter (through September 17, 1996)............................. 14.750 10.875
</TABLE>
On September 17, 1996, the closing sale price of Unison Common Stock was
$13.25 per share.
Unison has never paid any dividends on its Common Stock and it does not
expect to pay dividends for the foreseeable future.
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<PAGE> 181
CAPITALIZATION
The following table sets forth the capitalization of Unison as of June 30,
1996 as adjusted to give effect to the issuance by Unison of the Senior Notes in
the amount of $100.0 million and the application of the estimated net proceeds
therefrom, the Ampro and Memphis Mergers, the Signature Mergers and previous
acquisitions in 1995 and 1996. This table should be read in conjunction with the
historical financial statements of the Company and BritWill and the Unaudited
Pro Forma Condensed Combined Financial Statements, including the related notes
thereto, appearing elsewhere in this Prospectus/Proxy and Information Statement.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current maturities of long term debt................................. $ 3,576 $ 1,697
======= ========
Long-term debt, excluding current portion............................ $ 27,535 $128,040
Stockholder's equity:
Preferred Stock, $0.001 par value; 1,000,000 shares authorized; no
shares issued or outstanding.................................... -- --
Common Stock, $0.001 par value; 10,000,000 shares authorized;
3,871,312 shares issued and outstanding; 5,920,746 shares issued
and outstanding as adjusted(3).................................. 3 5
Additional paid in capital......................................... 21,804 41,902
Retained earnings.................................................. 1,079 2,099
------- --------
Total stockholders' equity.................................... 22,886 44,006
------- --------
Total capitalization....................................... $ 50,421 $172,046
======= ========
</TABLE>
- ---------------
(1) Gives effect to the Ampro and Memphis Mergers, the Signature Mergers and
previous acquisitions in 1995 and 1996 as if they occurred on June 30,
1996. The table includes the Senior Notes amounting to $100.0 million which
will be issued in connection with the Signature Mergers.
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UNISON UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
are presented assuming that the acquisitions of Signature and Rehab West will be
accounted for as purchases and the Ampro Mergers will be accounted for as a
poolings-of-interests. Accordingly, the Unaudited Pro Forma Condensed Combined
Financial Statements include the combined operations of Unison, Ampro and
Memphis for all periods presented. The Unaudited Pro Forma Condensed Combined
Statements of Operations for the six months ended June 30, 1996 and 1995 and the
year ended December 31, 1995 have been prepared as if the acquisitions of
Signature and RehabWest had been consummated as of January 1, 1995. The
Unaudited Pro Forma Condensed Combined Balance Sheet has been prepared as if all
of the aforementioned business combinations had been consummated as of June 30,
1996.
The Unaudited Pro Forma Condensed Combined Statements of Operations also
include the results of operations of BritWill and Sunbelt for the periods from
January 1, 1995 through the respective dates of acquisition. BritWill was
acquired on August 10, 1995 in a business combination accounted for as a
purchase. Sunbelt was acquired effective February 1, 1996 in a business
combination accounted for as a purchase.
The pro forma information is based on the historical statements of
operations of the acquired businesses giving effect to the placement of the
Senior Notes and the other assumptions and adjustments described in the
accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to present the results of operations of Unison had the business
combinations taken place on the dates specified, nor are they necessarily
indicative of the results of operations that may be achieved in the future. The
Unaudited Pro Forma Condensed Combined Financial Statements should be read in
conjunction with "Unison Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the separate historical financial
statements and notes thereto of Unison, BritWill, Signature, RehabWest, Ampro
and Memphis included elsewhere in this Prospectus/Proxy and Information
Statement.
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<PAGE> 183
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------------------------------------------------------------------
SENIOR PRO FORMA PRO FORMA
UNISON SIGNATURE(A) REHABWEST AMPRO(B) NOTES(C) ADJUSTMENTS COMBINED
------- ------------ --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 847 $ -- $ 116 $ 30 $ 62,490 $ (43,200)(d) $ 20,156
(127)(e)
Accounts and notes receivable,
net............................. 22,152 7,761 402 2,149 -- -- 32,464
Other current assets.............. 2,413 1,009 16 399 -- -- 3,837
------- ------- ----- ------ -------- -------- --------
Total current assets............ 25,412 8,770 534 2,578 62,490 (43,327) 56,457
Lease operating rights and other
assets, net....................... 42,588 1,692 -- 319 3,800
1,750 34,669(d) 84,818
Goodwill, net....................... 11,195 1,721 -- 943 -- 26,531(d) 40,390
Property and equipment, net......... 5,548 17,213 8 657 -- 5,000(d) 28,426
------- ------- ----- ------ -------- -------- --------
Total assets.................... $84,743 $ 29,396 $ 542 $4,497 $ 68,040 $ 22,873 $210,091
======= ======= ===== ====== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt............................ $ 3,576 $ 312 $ -- $ 895 $ 7,500
(11,086) $ 500(d) $ 1,697
(7,500)
Other current liabilities......... 16,988 3,223 295 1,664 (1,500) -- 13,170
------- ------- ----- ------ -------- -------- --------
Total current liabilities....... 20,564 3,535 295 2,559 (12,586) 500 14,867
Long-term debt...................... 27,535 19,188 -- 691 100,000
(19,374) -- 128,040
Deferred taxes...................... 9,030 2,921 -- -- -- 4,000(d) 15,951
Other long-term liabilities......... 4,728 2,499 -- -- -- -- 7,227
------- ------- ----- ------ -------- -------- --------
Total liabilities............... 61,857 28,143 295 3,250 68,040 4,500 166,085
------- ------- ----- ------ -------- -------- --------
Stockholders' equity:
Common stock...................... 3 7 -- 10 -- (15)(f) 5
Additional paid-in capital........ 21,804 62 (472) 90 -- 20,418(g) 41,902
Retained earnings................. 1,079 1,184 719 1,147 -- (127)(e)
(1,903)(h) 2,099
------- ------- ----- ------ -------- -------- --------
Total stockholders' equity...... 22,886 1,253 247 1,247 -- 18,373 44,006
------- ------- ----- ------ -------- -------- --------
Total liabilities and
stockholders' equity.......... $84,743 $ 29,396 $ 542 $4,497 $ 68,040 $ 22,873 $210,091
======= ======= ===== ====== ======== ======== ========
Common shares outstanding........... 3,871 2,049(i)(j) 5,920
Book value per common share......... $ 5.91
$ 7.43
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
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<PAGE> 184
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNISON PRO FORMA UNISON REHAB PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS(K) ADJUSTMENTS PRO FORMA SIGNATURE(O) WEST AMPRO(P) ADJUSTMENTS COMBINED
---------- -------------- ----------- ----------- ------------ ------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net
patient... $ 63,442 $ 5,140 $ -- $ 68,582 $ 21,984 $2,337 $ -- $ -- $92,903
Other...... 1,555 569 (249)(l) 1,875 268 -- 3,562 473(q) 6,178
------ ----- ----- ------ ------ ----- ----- ------ ------
Total
revenues... 64,997 5,709 (249) 70,457 22,252 2,337 3,562 473 99,081
Expenses:
Wages and
related... 32,447 3,336 -- 35,783 14,263 1,649 1,514 -- 53,209
Other
operating... 21,172 2,230 (249)(l) 23,153 4,684 132 1,493 (4,330)(r) 25,132
Rent....... 6,653 21 538(l) 7,212 1,044 6 51 -- 8,313
Interest... 1,452 249 (247)(l)
23(m) 1,477 1,006 3 56 4,152(s) 6,694
Depreciation
and
amortization... 1,054 121 (113)(l)
7(n) 1,069 845 1 98 125(t)
912(u)
35(v) 3,085
------ ----- ----- ------ ------ ----- ----- ------ ------
Total
expenses... 62,778 5,957 (41) 68,694 21,842 1,791 3,212 894 96,433
------ ----- ----- ------ ------ ----- ----- ------ ------
Income (loss)
before
income
taxes...... 2,219 (248) (208) 1,763 410 546 350 (421) 2,648
Income tax
expense
(benefit)... 932 -- (227) 705 (383) -- 118 619 1,059
------ ----- ----- ------ ------ ----- ----- ------ ------
Net income
(loss)..... $ 1,287 $ (248) $ 19 $ 1,058 $ 793 $ 546 $ 232 $(1,040) $ 1,589
====== ===== ===== ====== ====== ===== ===== ====== ======
Net income
per share:
Primary.... $ 0.32 $ 0.26 $ 0.26
Fully
diluted... 0.31 0.26 0.26
Weighed
average
shares used
in per
share
calculation:
Primary.... 4,070 4,070 2,049 (i)(j 6,119
Fully
diluted... 4,132 4,132 2,049 (i)(j 6,181
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
23
<PAGE> 185
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER PRO FORMA PRO FORMA
ACQUISI- ADJUST- UNISON REHAB ADJUST- PRO FORMA
UNISON BRITWILL TIONS(K) MENTS PRO FORMA SIGNATURE(O) WEST AMPRO(P) MENTS COMBINED
------- ------- -------- --------- --------- --------- ------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net
patient... $12,415 $32,723 $7,591 $ -- $52,729 $11,880 $1,465 $ -- $ -- $66,074
Other.... 1,029 269 22 (249)(l) 1,071 60 -- 3,644 473(q) 5,248
------- ------- ------ ----- ------- ------- ------- ------- ------- -------
Total
revenues... 13,444 32,992 7,613 (249) 53,800 11,940 1,465 3,644 473 71,322
Expenses:
Wages and
related... 7,486 19,813 5,164 -- 32,463 7,931 1,162 1,418 -- 42,974
Other
operating... 4,587 7,422 2,302 (249)(l)
(750)(w) 13,312 2,129 229 1,545 (1,774)(r) 15,441
Rent..... 1,151 4,448 75 538(l)
94(x) 6,306 230 5 55 -- 6,596
Interest,
net.... 183 603 289 (338)(l)
140(m)
247(y) 1,124 947 6 19 4,152(s) 6,248
Depreciation
and
amortization... 88 500 127 (183)(l)
43(n)
589(z) 1,164 827 5 135 125(t)
912(u)
35(v) 3,203
------- ------- ------ ----- ------- ------- ------- ------- ------- -------
Total
expenses... 13,495 32,786 7,957 131 54,369 12,064 1,407 3,172 3,450 74,462
------- ------- ------ ----- ------- ------- ------- ------- ------- -------
Income
(loss)
before
income
taxes.... (51) 206 (344) (380) (569) (124) 58 472 (2,977) (3,140)
Income tax
expense
(benefit)... 1 26 -- (255) (228) (41) -- 157 (1,144) (1,256)
------- ------- ------ ----- ------- ------- ------- ------- ------- -------
Net income
(loss)... $ (52) $ 180 $ (344) $(125) $ (341) $ (83) $ 58 $ 315 $(1,833) $(1,884)
======= ======= ====== ===== ======= ======= ======= ======= ======= =======
Net income
per
share.... $ (0.04) $ (0.27) $ (0.57)
Weighed
average
shares
used in
per share
calculation... 1,266 1,266 2,049(i)(j) 3,315
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
24
<PAGE> 186
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER PRO FORMA PRO FORMA
ACQUISI- ADJUST- UNISON REHAB ADJUST- PRO FORMA
UNISON BRITWILL TIONS(K) MENTS PRO FORMA SIGNATURE(O) WEST AMPRO(P) MENTS COMBINED
------- ------- -------- --------- --------- --------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net
patient... $57,743 $38,378 $ 20,190 $ -- $116,311 $32,769 $3,382 $ -- $ -- $152,462
Other....... 3,542 476 73 (499)(l) 3,592 281 -- 7,203 947(q) 12,023
------- ------- ------- ------ -------- ------- ------ ------ ------- --------
Total
revenues... 61,285 38,854 20,263 (499) 119,903 33,050 3,382 7,203 947 164,485
Expenses:
Wages and
related... 31,811 23,280 14,427 -- 69,518 22,006 2,648 3,234 -- 97,406
Other
operating... 20,777 8,923 4,857 (499)(l)
(875)(w) 33,183 5,761 524 3,256 (4,170)(r) 38,554
Rent........ 6,565 5,223 364 1,076(l)
(110)(x) 13,118 1,235 10 108 -- 14,471
Interest,
net....... 1,058 793 693 (675)(l)
280(m)
288(y) 2,437 1,967 9 118 8,303(s) 12,834
Depreciation
and
amortization.. 1,050 592 434 (366)(l)
86(n)
687(z) 2,483 1,550 6 262 250(t)
1,668(u)
70(v) 6,289
------- ------- ------- ------ -------- ------- ------ ------ ------- --------
Total
expenses... 61,261 38,811 20,775 (108) 120,739 32,519 3,197 6,978 6,121 169,554
------- ------- ------- ------ -------- ------- ------ ------ ------- --------
Income (loss)
before
income
taxes....... 24 43 (512) (391) (836 ) 531 185 225 (5,174) (5,069 )
Income tax
expense
(benefit)... 50 30 -- (414) (334 ) (67) -- 82 (1,708) (2,028 )
------- ------- ------- ------ -------- ------- ------ ------ ------- --------
Net income
(loss)...... $ (26) $ 13 $ (512) $ 23 $ (502 ) $ 598 $ 185 $ 143 $(3,466) $ (3,041 )
======= ======= ======= ====== ======== ======= ====== ====== ======= ========
Net income
(loss) per
share....... $ (0.02) $ (0.37 ) $ (0.90 )
Weighted
average
shares used
in per share
calculation... 1,349 1,349 2,049(i)(j) 3,398
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
25
<PAGE> 187
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO
PRO FORMA FORMA
UNISON AMPRO(P) ADJUSTMENTS COMBINED
------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Net patient.................................. $11,070 $ -- $ -- $11,070
Other........................................ 1,336 6,000 -- 7,336
------- ------ ---- -------
Total revenues....................... 12,406 6,000 -- 18,406
Expenses:
Wages and related............................ 7,149 2,445 9,594
Other operating.............................. 3,902 2,560 -- 6,462
Rent......................................... 1,299 107 1,406
Interest..................................... 84 63 -- 147
Depreciation and amortization................ 51 234 -- 285
------- ------ ---- -------
Total expenses....................... 12,485 5,409 -- 17,894
------- ------ ---- -------
Income (loss) before income taxes.............. (79) 591 -- 512
Income tax expense............................. 1 171 -- 172
------- ------ ---- -------
Net income (loss).............................. $ (80) $ 420 $ -- $ 340
======= ====== ==== =======
Net income (loss) per share.................... $ (0.06) $ 0.19
Weighed average shares used in per share
calculation.................................. 1,266 540(j) 1,806
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
26
<PAGE> 188
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
UNISON AMPRO(P) ADJUSTMENTS COMBINED
------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net patient.................................... $1,076 $ -- $ -- $ 1,076
Other.......................................... 880 5,055 -- 5,935
------ ------ ---- ------
Total revenues.............................. 1,956 5,055 -- 7,011
Expenses:
Wages and related.............................. 1,455 2,234 3,689
Other operating................................ 545 2,084 -- 2,629
Rent........................................... 99 107 206
Interest....................................... 11 33 -- 44
Depreciation and amortization.................. 7 150 -- 157
------ ------ ---- ------
Total expenses......................... 2,117 4,608 -- 6,725
------ ------ ---- ------
Income (loss) before income taxes................ (161) 447 -- 286
Income tax expense (benefit)..................... (20) 197 -- 177
------ ------ ---- ------
Net income (loss)................................ $ (141) $ 250 $ -- $ 109
====== ====== ==== ======
Net income (loss) per share...................... $(0.11) $ 0.06
Weighed average shares used in per share
calculation.................................... 1,266 540(j) 1,806
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
27
<PAGE> 189
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. PRO FORMA ADJUSTMENTS
The pro forma results do not purport to present the results of operations
of Unison had the business combinations taken place on the dates specified, nor
are they necessarily indicative of the financial position or results of
operations that may be achieved in the future. The Unaudited Pro Forma Condensed
Combined Financial Statements have been prepared under the assumptions set forth
in the following notes.
The adjustments to the pro forma statements of operations are discussed
below.
(a) Represents the combined balance sheets of Signature Health Care and the
Signature Affiliates as of June 30, 1996, as follows:
<TABLE>
<CAPTION>
SIGNATURE SIGNATURE SIGNATURE
HEALTH CARE AFFILIATES COMBINED
----------- ---------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts and notes receivable, net............................ $ 5,185 $2,576 $ 7,761
Other current assets.......................................... 764 245 1,009
------- ------ -------
Total current assets.................................. 5,949 2,821 8,770
Lease operating rights and other assets, net.................... 1,507 185 1,692
Goodwill, net................................................... 1,721 -- 1,721
Property and equipment, net..................................... 16,442 771 17,213
------- ------ -------
Total assets.......................................... $25,619 $3,777 $29,396
======= ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................. $ 259 $ 53 $ 312
Other current liabilities..................................... 2,184 1,039 3,223
------- ------ -------
Total current liabilities............................. 2,443 1,092 3,535
Long term debt.................................................. 18,519 669 19,188
Deferred taxes................................................ 2,921 -- 2,921
Other long-term liabilities................................... 1,036 1,463 2,499
Stockholders' equity:
Common stock.................................................. 2 5 7
Additional paid-in capital.................................... 1,611 (1,549) 62
Retained earnings............................................. (913) 2,091 1,184
------- ------ -------
Total stockholders' equity............................ 700 553 1,253
------- ------ -------
Total liabilities and stockholders' equity............ $25,619 $3,777 $29,396
======= ====== =======
</TABLE>
28
<PAGE> 190
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(b) Represents the combined balance sheets of Ampro and Memphis, as
follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------------------------
PRO FORMA PRO FORMA
AMPRO MEMPHIS ADJUSTMENTS COMBINED
------ ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 14 $ 16 $ 30
Accounts and notes receivable, net.................. 2,048 101 2,149
Other current assets................................ 385 14 -- 399
------ ---- ----- ------
Total current assets........................ 2,447 131 -- 2,578
Lease operating rights and other assets, net.......... 319 -- -- 319
Goodwill, net......................................... 943 -- -- 943
Property and equipment, net........................... 497 160 -- 657
------ ---- ----- ------
Total assets................................ $4,206 $291 $ -- $4,497
====== ==== ===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................... $ 395 $ 10 $ 490(1) $ 895
Other current liabilities........................... 1,585 79 -- 1,664
------ ---- ----- ------
Total current liabilities................... 1,980 89 490 2,559
Long-term debt........................................ 669 22 -- 691
Stockholders' equity:
Common stock........................................ 10 1 (1) 10
Additional paid-in capital.......................... 400 -- (310) 90
Retained earnings................................... 1,147 179 (179) 1,147
------ ---- ----- ------
Total stockholders' equity.................. 1,557 180 (490) 1,247
------ ---- ----- ------
Total liabilities and stockholders'
equity.................................... $4,206 $291 $ -- $4,497
====== ==== ===== ======
</TABLE>
- ---------------
(1) Represents the consideration paid for Memphis, comprised of cash in the
amount of $240,000 (assumed to be borrowed) and the assumption of debt
amounting to $250,000.
(c) In connection with the Signature Merger, Unison will issue the
unsecured Senior Notes in the principal amount of $100,000,000. The Senior Notes
will bear interest at 10.25% and mature in 2006. In addition, in August 1996
Unison obtained interim financing in the amount of $7,500,000 for working
capital. Proceeds from the Senior Notes and working capital note will be used as
follows (in thousands):
<TABLE>
<S> <C>
Debt issue costs.......................................................... $ 3,800
Contingent payment to the former BritWill stockholders.................... 1,750
Repayment of short-term debt.............................................. 11,086
Repayment of long-term debt............................................... 19,374
Reduction of accounts payable............................................. 1,500
Funds available for acquisitions and working capital...................... 62,490
--------
$100,000
========
</TABLE>
Short-term debt repaid includes (i) the working capital note amounting to
$7,500,000, (ii) the consideration for the Memphis Merger amounting to $490,000
as described in note (b) and (iii) the current
29
<PAGE> 191
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
portion of long-term debt refinanced with the proceeds of the Senior Notes. The
contingent payment to the former BritWill stockholders is added to leasehold
rights and amortized over 25 years.
(d) Consideration for the aggregate purchase price for Signature is
comprised of cash amounting to approximately $37,700,000, a promissory note in
the amount of $500,000 and Unison Common Stock with a market value of
approximately $20,000,000. Unison will pay $5,500,000 in cash to acquire
RehabWest.
The following is the allocation of the purchase price of Signature and
Rehab West (in thousands):
<TABLE>
<S> <C>
Purchase price for Signature............................................... $58,200
Purchase price for Rehab West.............................................. 5,500
-------
Total purchase price....................................................... 63,700
Less net historical assets acquired:
Signature................................................................ 1,253
Rehab West............................................................... 247
-------
1,500
-------
Excess of purchase price over net historical assets acquired............... $62,200
=======
Allocation of purchase price:
Lease operating rights................................................... $34,669
Goodwill................................................................. 26,531
Property and equipment................................................... 5,000
Deferred tax liability................................................... (4,000)
-------
$62,200
=======
</TABLE>
Lease operating rights are being amortized over the lease terms, including
renewal options, not to exceed 35 years. Goodwill represents the amount of the
purchase price in excess of identifiable assets and is being amortized over 40
years. The adjustment to property and equipment is based on the estimated fair
value of the assets acquired as determined by independent appraisals.
(e) In connection with the Ampro Merger, Unison paid a financial advisory
fee to Trouver in the amount of approximately $127,000.
(f) To adjust common stock based on 5,920 pro forma shares outstanding with
a par value of $.001, as follows:
<TABLE>
<S> <C>
Unison historical common stock.................................................. $ 3
Shares issued in connection with Signature Merger............................... 1
Shares issued in connection with Ampro Merger................................... 1
---
Unison pro forma common stock................................................... $ 5
===
</TABLE>
(g) The increase in additional paid-in capital is comprised of the
following (in thousands):
<TABLE>
<S> <C>
Market value of stock issued in connection with the Signature Merger....... $20,000
Less amounts allocated to common stock................................... (2)
Reclassification of Ampro common stock................................... 10
Elimination of historical paid-in capital (deficit):
Signature................................................................ (62)
RehabWest................................................................ 472
-------
$20,418
=======
</TABLE>
30
<PAGE> 192
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(h) To eliminate the historical amounts of retained earnings recorded by
Signature ($1,184,000) and RehabWest ($719,000).
(i) To record 1,509,434 common shares to be issued in connection with the
Signature Health Care Merger.
(j) To record 540,000 common shares to be issued in connection with the
Ampro and Memphis Mergers.
(k) Other Acquisitions: The following table summarizes the operating
results for the following leases entered into from January 1, 1995 through the
later of the date of lease inception or the period of the statement of
operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
ACQUISITION --------------------- ---------------------
ACQUISITION DATE REVENUES EXPENSES REVENUES EXPENSES
------------------------------- ----------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nightingale.................... Oct. 1995 $ -- $ -- $ 4,438 $ 4,506
The Oaks of Boise.............. July 1995 -- -- 815 911
Sunbelt Therapy................ Feb. 1996 544 568 5,942 5,725
Franciscan Enumclaw............ Aug. 1996 2,060 2,294 3,860 4,313
Franciscan Walla Walla......... Aug. 1996 969 999 1,371 1,507
Other acquisitions (1)......... July 1996 2,136 2,096 3,837 3,813
------ ------ ------- -------
$5,709 $5,957 $20,263 $20,775
====== ====== ======= =======
</TABLE>
- ---------------
(1) Represents less than 10% of Unison pro forma net income.
(l) Operating lease pro forma adjustments represent adjustments to the
pre-lease operating results of the facilities identified in note (k). The
historical results have been adjusted to include the lease expense incurred by
Unison, elimination of management fee income to Unison and elimination of the
lessor's depreciation, interest expense and management fees.
(m) Effective as of February 1, 1996, Unison purchased 90% of the
outstanding common stock of Sunbelt. In consideration for the $3,600,000
purchase price, Unison paid cash in the amount of $800,000, issued promissory
notes in the aggregate amount of $1,000,000 (the "Sunbelt Notes") and issued
subordinated convertible debentures in the aggregate amount of $1,800,000 (the
"Sunbelt Debentures"). The Sunbelt Notes and Sunbelt Debentures bear interest at
10.0%, which amounts to approximately $23,000 for the one month ended January
31, 1996, $140,000 for the six months ended June 30, 1995 and $280,000 annually.
The Sunbelt Notes and Sunbelt Debentures are convertible at the option of the
holder into shares of Unison Common Stock based on the average market price (85%
of the average market price with respect to the Sunbelt Notes) of Unison's stock
for the 20 trading days prior to the date of conversion. The effect of the
conversion of the Sunbelt Notes and Sunbelt Debentures is not included in the
calculation of historical or pro forma net income per share because the effect
is antidilutive.
(n) To record amortization of goodwill related to the acquisition of
Sunbelt. Under the purchase method of accounting, assets acquired and
liabilities assumed were recorded at the estimated fair value. The excess of the
$3,600,000 purchase price over the net assets acquired was recorded as goodwill
in the amount of $3,433,000 and amortized over 40 years. Such amortization
amounts to approximately $7,000 for the one month ended January 31, 1996,
$43,000 for the six months ended June 30, 1995 and $86,000 annually.
31
<PAGE> 193
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(o) The following table summaries the operating results for Signature, as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996
REVENUES EXPENSES REVENUES EXPENSES
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Signature Health Care............................. $12,848 $13,388 $24,410 $24,517
Signature Affiliates.............................. 9,404 8,071 8,640 7,935
------- ------- ------- -------
$22,252 $21,459 $33,050 $32,452
======= ======= ======= =======
</TABLE>
(p) Represents the combined income statements of Ampro and Memphis, as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995
---------------------------- ----------------------------
PRO FORMA PRO FORMA
AMPRO MEMPHIS COMBINED AMPRO MEMPHIS COMBINED
------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient.................... $ -- $ -- $ -- $ -- $ -- $ --
Other.......................... 3,088 474 3,562 3,225 419 3,644
------ ---- ------ ----- ---- ------
Total revenues......... 3,088 474 3,562 3,225 419 3,644
Expenses:
Wages and related.............. 1,341 173 1,514 1,273 145 1,418
Other operating................ 1,309 184 1,493 1,359 186 1,545
Rent........................... 37 14 51 40 15 55
Interest....................... 56 -- 56 19 -- 19
Depreciation and
amortization................ 81 17 98 112 23 135
------ ---- ------ ------ ---- ------
Total expenses......... 2,824 388 3,212 2,803 369 3,172
------ ---- ------ ------ ---- ------
Income before income taxes....... 264 86 350 422 50 472
Income tax expense............... 94 24 118 143 14 157
------ ---- ------ ------ ---- ------
Net income....................... $ 170 $ 62 $ 232 $ 279 $ 36 $ 315
====== ==== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
---------------------------- ----------------------------
PRO FORMA PRO FORMA
AMPRO MEMPHIS COMBINED AMPRO MEMPHIS COMBINED
------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient.................... $ -- $ -- $ -- $ -- $ -- $ --
Other.......................... 6,421 782 7,203 5,152 848 6,000
------ ---- ------ ------ ---- ------
Total revenues......... 6,421 782 7,203 5,152 848 6,000
Expenses:
Wages and related.............. 2,913 321 3,234 2,119 326 2,445
Other operating................ 2,864 392 3,256 2,159 401 2,560
Rent........................... 79 29 108 77 30 107
Interest....................... 118 -- 118 63 -- 63
Depreciation and
amortization................ 194 68 262 147 87 234
------ ---- ------ ------ ---- ------
Total expenses......... 6,168 810 6,978 4,565 844 5,409
------ ---- ------ ------ ---- ------
Income (loss) before income
taxes.......................... 253 (28) 225 587 4 591
Income tax expense (benefit)..... 86 (4) 82 170 1 171
------ ----- ------ ------ ---- ------
Net income (loss)................ $ 167 $(24) $ 143 $ 417 $ 3 $ 420
====== ==== ====== ====== ===== ======
</TABLE>
32
<PAGE> 194
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
PRO FORMA
AMPRO MEMPHIS COMBINED
------ ------- ---------
<S> <C> <C> <C>
Revenues:
Net patient............................................. $ -- $ -- $ --
Other................................................... 4,190 865 5,055
------ ------- ---------
Total revenues.................................. 4,190 865 5,055
Expenses:
Wages and related....................................... 1,872 362 2,234
Other operating......................................... 1,681 403 2,084
Rent.................................................... 77 30 107
Interest................................................ 33 -- 33
Depreciation and amortization........................... 81 69 150
------ ------- ---------
Total expenses.................................. 3,744 864 4,608
------ ------- ---------
Income before income taxes................................ 446 1 447
Income tax expense........................................ 197 -- 197
------ ------- ---------
Net income................................................ $ 249 $ 1 $ 250
====== ======= ========
</TABLE>
(q) To record interest income on approximately $19,163,000 of excess
proceeds from the issuance of subordinated notes at an assumed interest rate of
5%.
(r) To eliminate management fees paid by Signature to Yankee Creek
Management Company, LLC, which is wholly owned by Messrs. Kremser and Filkoski,
net of estimated incremental operating costs incurred by Unison, as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------- YEAR ENDED
1996 1995 DECEMBER 31, 1995
------ ------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Signature management fees....................... $4,608 $2,052 $4,244 $4,726
Less incremental operating expenses............. 278 278 278 556
------ ------ ------ ------
$4,330 $1,774 $3,966 $4,170
====== ====== ====== ======
</TABLE>
(s) To record interest expense on the $100,000,000 principal amount of
Senior Notes at an estimated rate of 10.25%, net of repayments, as follows:
<TABLE>
<CAPTION>
SIX MONTHS ANNUAL
---------- -------
(IN THOUSANDS)
<S> <C> <C>
Interest on subordinated notes................................. $5,125 $10,250
Less interest on refinanced debt............................... 973 1,947
---------- --------
---
Net increase in interest expense............................... $4,152 $ 8,303
========== ===========
</TABLE>
(t) To record additional depreciation expense related to the adjustment to
property and equipment set forth in note (d). The $5,000,000 asset will be
amortized over the estimated useful life of 20 years.
33
<PAGE> 195
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(u) To record amortization of the intangible assets described in note (d),
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ANNUAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Amortization of goodwill:
Signature..................................................... $ 266 $ 532
Rehab West.................................................... 66 131
Amortization of lease operating rights -- Signature Merger
(35 years).................................................... 495 991
Amortization of deferred financing costs -- Senior Notes
(10 years).................................................... 190 380
Elimination of Signature historical amortization................ (105) (366)
--------- -------
---
Total................................................. $ 912 $1,668
========= ==========
</TABLE>
(v) To record amortization of the payment to the former BritWill
stockholders described in note (c). The $1,750,000 payment was added to lease
operating rights and is being amortized over 25 years. Amortization expense
amounts to $35,000 for the six-month period and $70,000 annually.
(w) On August 10, 1995, Unison purchased all of the outstanding common
stock of BritWill, a long-term care company operating approximately 28
facilities located in Texas and Indiana (the "BritWill Acquisition"). In
connection with the BritWill Acquisition, other operating expenses have been
reduced to give effect to the following estimated annual cost savings to be
realized (in thousands):
<TABLE>
<S> <C>
Elimination of duplicate corporate compensation and benefits........ $ 710
Reduction of insurance costs........................................ 300
Reduction of corporate office rent and operating costs.............. 468
Other............................................................... 22
-------
---
$1,500
==========
</TABLE>
(x) To record amortization of a lease liability incurred in connection with
the BritWill Acquisition. The lease liability represents the excess of the value
of BritWill's lease obligations over market lease rates, based on independent
appraisals. Amortization expense related to the lease liability amounts to
approximately $188,000 annually.
(y) To record interest on debt incurred to acquire BritWill. In connection
with the BritWill Acquisition, Unison issued an $8,000,000 senior subordinated
note bearing interest initially at 8.0%, or $640,000 annually. Interest expense
related to other debt obligations was reduced by $147,000 based on the
anticipated replacement of the accounts receivable sales program with BritWill's
receivables financing program.
(z) Under the purchase method of accounting, the BritWill assets acquired
and liabilities assumed were recorded at the estimated fair value as determined
by an independent appraisal. The excess of the purchase price over the fair
value of net assets acquired is being amortized over 40 years, the noncompete
agreement and assembled work force intangible assets are being amortized over
five years, and the lease operating rights intangible assets are being amortized
over the respective lease terms, not to exceed 25 years. Such amortization is
approximately $2,007,000 annually. Amortization expense was reduced by $830,000
annually to eliminate BritWill's historical amortization of intangible assets.
NOTE 2. INCOME TAXES
Estimated provisions for income taxes related to pro forma adjustments are
based on an assumed combined federal and state income tax rate of 40%.
34
<PAGE> 196
UNISON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unison's statements regarding its potential for growth and liquidity and
capital resources are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act and are based on the assumptions set
forth in this discussion and analysis of financial condition and results of
operations. While Unison believes that such assumptions are reasonable, any of
such assumptions could prove to be inaccurate. Important factors which could
cause actual growth and liquidity and capital resources to vary from the
discussion herein are set forth in such discussions and include without
limitation the factors discussed in "Risk Factors" and "Business of Unison."
GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. Unison disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
The following material should be read in conjunction with Unison's
Consolidated Financial Statements and related notes thereto for the years ended
December 31, 1995, 1994 and 1993 and the Condensed Consolidated Financial
Statements and related notes thereto for the six months ended June 30, 1996 and
1995. All references in this discussion and analysis to years are to fiscal
years ended December 31 of such year.
RECENT AND PENDING ACQUISITIONS
On March 28, 1996, Unison entered into a definitive purchase and sale
agreement for the acquisition, effective February 1, 1996, of 90% of the common
stock of four rehabilitation therapy centers (collectively, "Sunbelt Therapy")
(the "Sunbelt Acquisition"). The transaction was accounted for as a purchase. In
August 1995, Unison acquired BritWill Healthcare Company ("BritWill"), a
long-term care company operating 28 facilities in Texas and Indiana (the
"BritWill Acquisition"). The transaction was accounted for as a purchase. See
Note 3 of Notes to Condensed Consolidated Financial Statements.
On July 3, 1996, Unison, through a newly formed wholly owned subsidiary,
entered into an Agreement and Plan of Merger (the "Ampro Agreement") with
American Professional Holding, Inc. ("Ampro"). In the merger, the outstanding
shares of Ampro Common Stock will be converted into the right to receive that
number of shares of Unison Common Stock obtained by dividing 521,000 by the
number of issued and outstanding shares of Ampro prior to the effective time of
the Merger. Unison also entered into an Agreement and Plan of Merger (the
"Memphis Agreement") with Memphis Clinical Laboratory, Inc. ("Memphis"). In the
merger, three shareholders who own approximately 35% of the outstanding shares
of Memphis will receive pro rata portions of 19,000 shares of Unison Common
Stock and the holder of the remaining shares of Memphis will receive cash in the
estimated amount of $240,000 and a promissory note in the amount of $250,000.
The Ampro Agreement and the Memphis Agreement are mutually contingent and
subject to shareholder approvals. The mergers will be accounted for as
"poolings-of-interest."
Effective August 1, 1996, Unison acquired the leasehold rights to two
skilled nursing facilities located in the State of Washington with an aggregate
of 222 beds. These facilities were previously operated by Unison under a
management contract. See Note 7 of Notes to Condensed Consolidated Financial
Statements.
On August 2, 1996, the Company entered into agreements for the acquisition
of Signature Health Care Corporation ("Signature Health Care") and four
affiliated companies, Douglas Manor, Inc. ("Douglas"), Safford Care, Inc.
("Safford"), Arkansas, Inc. ("Arkansas"), and Cornerstone Care, Inc.
("Cornerstone") and collectively with Signature Health Care, Douglas, Safford
and Arkansas ("Signature"). Signature operates 13 long-term care facilities in
Colorado and Arizona. Through mergers with each of the Signature companies and
newly formed wholly owned subsidiaries of the Company, each of the Signature
companies will become wholly owned subsidiaries of Unison. Outstanding shares of
Signature Health Care will be converted into the right to receive, subject to
certain adjustments, cash equal to approximately $10.2 million and shares of
Unison Common Stock equal to approximately $20.0 million. Outstanding shares of
Douglas, Safford, Arkansas and Cornerstone will be converted into the right to
receive, subject to certain adjustments, cash equal to approximately $28.0
million in the aggregate. The merger agreements are subject to regulatory and
shareholder approval. The mergers will be accounted for as purchases. It is a
condition to the closing of the
35
<PAGE> 197
Signature Mergers that Unison have entered into a definitive agreement for the
acquisition of RehabWest, Inc. for approximately $5.5 million and subject to
other terms that are satisfactory to Unison and to the owners of RehabWest. The
principal creditors of RehabWest are David Kremser and John Filkoski, who sold
RehabWest to its employees in March 1996. As of the date hereof, Unison has not
reached an agreement for the acquisition of RehabWest.
RESULTS OF OPERATIONS
The following table summarizes selected operating statistics of Unison and
its subsidiaries.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
-------------- -----------------------
1996 1995 1995 1994 1993
----- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Leased Facilities:
Number of facilities......................... 42 13 43 11 2
Number of licensed beds:
Long-term care............................ 3,787 780 3,872 631 74
Assisted and independent living........... 134 104 112 104 30
Managed Facilities:
Number of facilities......................... 8 9 10 9 5
Number of licensed beds...................... 892 990 1,096 990 612
Institutional Pharmacies:
Number of outlets............................ 2 -- 1 -- --
Nonaffiliated facilities served.............. 31 -- 17 -- --
Therapy Services:
Nonaffiliated entities served................ 44 -- -- -- --
</TABLE>
The following table identifies Unison's sources of net operating revenues.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, DECEMBER 31,
------------- ----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percentage of total revenues
Long-term care................................. 89.5% 99.4% 97.9% 100 % 100 %
Therapy contracts.............................. 5.1 -- -- -- --
Pharmacies..................................... 4.2 -- 1.1 -- --
Medicare Part B billing and supply............. 1.2 .6 1.0 -- --
---- ----
---- ---- --- ---
Total....................................... 100% 100% 100%
100 % 100 %
======== ========
=== ===
</TABLE>
Unison's revenues fluctuate from facility to facility based on various
factors, including total capacity, occupancy rates, reimbursement systems and
rates among the payor categories, payor mix and the scope and utilization of
Unison's ancillary services. Medicare patients generate the highest revenue per
patient day, although profitability is not always increased due to the
additional costs associated with the higher level of care required by such
patients. In general, private pay sources are more profitable to Unison than
governmental reimbursement sources. Unison generally derives a higher profit
margin from ancillary services than from basic nursing services.
36
<PAGE> 198
Data for nursing center operations with respect to sources of net patient
revenues by payor type are set forth below (long-term care only).
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------- -------------------------
1996 1995 1995 1994 1993
---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Medicaid................................... 51.8% 57.2% 55.9% 58.5% 82.8%
Medicare................................... 32.4 23.2 26.9 9.1 3.4
Private and other.......................... 15.8 19.6 17.2 32.4 13.8
</TABLE>
UNISON HISTORICAL
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
In the six months ended June 30, 1996, Unison realized net income of $1.3
million compared to a loss of $53,000 in the prior year period. Income before
taxes amounted to $2.2 million in the current six-month period compared to a
loss of $52,000 in the prior year. Net operating revenues were $65.0 million in
the 1996 period compared to $13.4 million in the prior year. The increase in net
operating revenues is primarily attributable to revenues from patient services
which increased from $12.4 million in the 1995 period to $63.4 million in the
current six-month period. The increase is the result of (i) the increase in the
number of leased facilities operated; (ii) the acquisitions of institutional
pharmacies and Sunbelt Therapy; and (iii) an increase in Unison's quality mix to
48.2% for the six months ended June 30, 1996 compared to 42.8% in the prior year
period.
Wages and related expense increased from $7.5 million to $32.4 million in
the six months ended June 30, 1996 due primarily to the increase in the number
of leased facilities operated. Wages and related expense as a percentage of
revenues decreased from 55.7% in 1995 to 49.9% in the 1996 period as a result of
operating efficiencies.
Other operating expenses increased from $4.6 million to $21.2 million in
the 1996 period. The increase is due primarily to acquisitions. Other operating
expenses as a percentage of revenues amounted to 32.6% in 1996 compared to 34.1%
in the 1995 period.
Rent expense increased from $1.2 million in the 1995 period to $6.7 million
in the current period. The increase is due primarily to the increase in the
number of leased facilities operated. Rent expense as a percentage of revenues
increased from 8.6% to 10.2% in the current period.
Interest expense amounted to $1.5 million in the current period compared to
$183,000 in 1995. The increase is the result of debt incurred and assumed in
connection with acquisitions as well as increases in borrowings under lines of
credit. See "-- Liquidity and Capital Resources." Interest expense as a
percentage of revenues increased from 1.4% in the 1995 period to 2.2% in the
current year period.
Depreciation and amortization expense increased from $88,000 in 1995 to
$1.1 million in the current period. The increase is due primarily to the
increase in goodwill and lease operating rights associated with acquisitions.
Depreciation and amortization expense as a percentage of revenues increased from
.7% in the 1995 period to 1.6% in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased from $12.4 million in 1994 to $61.3 million
in 1995, an increase of 394%. The increase is primarily attributable to revenues
from patient services which increased from $11.1 million in 1994 to $57.7
million in 1995. Patient days increased from 140,153 in 1994 to 613,316 in 1995.
Of this growth in patient revenues and census, 90% is attributable to
acquisitions. Unison operated five leased nursing facilities at December 31,
1994 compared to 38 leased nursing facilities at December 31, 1995. The revenues
related to the 28 facilities acquired from BritWill are included in Unison's
results of operations for periods subsequent to July 31, 1995. Management fees
and other revenue increased from $1.3 million in 1994 to
37
<PAGE> 199
$3.5 million in 1995 as a result of an increase in management agreements from
six facilities in 1994 to 12 facilities during 1995 (with eight facilities under
such management agreements at December 31, 1995).
Wages and Related. Wages and related expense increased from $7.1 million
in 1994 to $31.8 million in 1995, an increase of 345%. The increase in wages and
related expense is primarily attributable to the increase in the number of
leased facilities operated. Wages and related expense as a percent of revenues
decreased from 57.6% in 1994 to 51.9% in 1995 as a result of operating
efficiencies.
Other Operating. Other operating expenses increased from $3.9 million in
1994 to $20.8 million in 1995, an increase of 433%. The increase is attributable
to an increase in the number of facilities operated. Other operating expenses as
a percent of revenues increased from 31.4% in 1994 to 33.9% in 1995.
Rent Expense. Rent expense increased from $1.3 million in 1994 to $6.6
million in 1995, an increase of 406%. The increase is primarily a result of the
increase in the number of leased facilities from five leased facilities in 1994
to 10 during the first seven months of 1995 and an additional 28 facilities from
the BritWill acquisition for the last five months of the year. Rent expense as a
percent of patient revenues increased from 10.5% in 1994 to 10.7% in 1995.
Interest Expense. Interest expense increased from $84,000 in 1994 to $1.1
million in 1995. The increase is primarily attributable to the agreement entered
into in April 1995 to sell the Company's accounts receivable and additional
indebtedness assumed in connection with the BritWill Acquisition. Interest
expense as a percent of revenues increased from 0.7% in 1994 to 1.7% in 1995.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased from $51,000 in 1994 to $1.0 million in 1995. The increase is
due primarily to the amortization of goodwill and lease operating rights
attributable to the increase in leased facilities, related equipment purchases
and leasehold improvements. Depreciation and amortization expense as a percent
of revenues increased from 0.4% in 1994 to 1.7% in 1995.
Income/Loss before Income Taxes and Net Loss. Income before income taxes
amounted to $24,000 in 1995 compared to a loss of $79,000 in 1994. There was no
tax benefit provided for the 1994 loss since a valuation reserve was established
for such future tax benefit. Net loss amounted to $26,000 in 1995 compared to a
loss of $80,000 in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased from $1.9 million in 1993 to $12.4 million in
1994, an increase of 534%. The increase is primarily attributable to an increase
in the number of facilities, which caused revenues from patient services to
increase from $1.1 million in 1993 to $11.1 million in 1994. As a result of the
additional lease agreements, patient days increased from 14,053 in 1993 to
140,153 in 1994. Of this change, more than 90% was attributable to acquisitions.
Management fees and other revenue increased from $880,000 in 1993 to $1.3
million in 1994 as a result of improved financial conditions at the existing
managed facilities as well as an increase in the number of facilities managed by
Unison.
Wages and Related Expenses. Wages and related expenses increased from $1.5
million in 1993 to $7.1 million in 1994, an increase of 391%. The increase in
wages and related expenses is primarily attributable to the increase in leased
facilities. Wages and related expenses as a percent of revenues decreased from
74.4% in 1993 to 57.6% in 1994.
Other Operating. Other operating expenses increased from $545,000 in 1993
to $3.9 million in 1994, an increase of 616%. The increase is primarily
attributable to the increase in leased facilities. Other operating expenses as a
percent of revenues increased from 27.9% in 1993 to 31.4% in 1994.
Rent Expense. Rent expense increased from $99,000 in 1993 to $1.3 million
in 1994. The increase is primarily attributable to the increase in leased
facilities. Rent expense as a percent of revenues earned in connection with the
leasing arrangements has increased from 5.1% in 1993 to 10.5% in 1994.
Interest Expense. Interest expense increased from $11,000 in 1993 to
$84,000 in 1994, an increase of 664%. The increase in interest expense is
primarily attributable to borrowings under a line of credit amounting to
$950,000. Interest expense as a percent of revenues increased from 0.6% in 1993
to 0.7% in 1994.
38
<PAGE> 200
Depreciation and Amortization Expense: Depreciation and amortization
expense increased from $7,000 in 1993 to $51,000 in 1994, an increase of 629%.
The increase in depreciation and amortization expense is primarily attributable
to the increase in equipment and leasehold improvements purchased as a result of
the increase in the number of leased facilities. Depreciation and amortization
expense as a percent of revenues remained constant at less than 0.4% in 1993 and
1994.
Loss before Income Taxes and Net Loss. Loss before income taxes improved
from a loss of $161,000 in 1993 to a loss of $79,000 in 1994. There was no tax
benefit provided for the losses since a valuation reserve was established for
such income tax benefits in 1993 and 1994. Net loss improved from a loss of
$141,000 in 1993 to a loss of $80,000 in 1994.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"), requires that impairment losses be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS 121 also addresses the accounting for
long-lived assets to be disposed of. The adoption of SFAS 121 in the first
quarter of 1996 has not materially impacted the Company's financial statements.
BRITWILL HISTORICAL
Overview
BritWill's long-term care facilities derived 28.6% of resident care revenue
from Medicare and ancillary services for the seven months ended July 31, 1995
compared to 18.8% in the comparable 1994 period. For the year ended December 31,
1994, 17.6% of resident care revenue was derived from Medicare and ancillary
services compared with 5.0% for the year ended December 31, 1993, reflecting the
industry trend toward providing ancillary and specialty care services. BritWill
expects the industry trend towards providing niche services to continue as state
budgets for Medicaid, in particular, continue to face financial stress. BritWill
is taking steps to prepare itself for survival in a reformed health care
environment by diversifying into assisted living programs and subacute care. As
managed care organizations continue to limit hospitalization costs, the ability
of long-term care facilities to provide increasing levels of care at lower costs
than acute care hospitals provides an avenue to increase census. In addition,
BritWill plans to bring certain sub-contracted ancillary services in-house,
including pharmacy and rehabilitative therapy to enhance overall ancillary
margins.
During the periods discussed below, BritWill's results of operations have
been affected by certain industry trends, changing components of total revenue
and, to some extent, changes in BritWill's debt structure. BritWill's results of
operations have also been impacted by acquisitions in each of the periods
discussed.
Seven Months Ended July 31, 1995 Compared to Seven Months Ended July 31, 1994
Revenues. Revenues increased from $29.9 million in 1994 to $38.9 million
in 1995, an increase of 30.1%. These increases are primarily attributable to the
expansion of Medicare services; there were 15 facilities in the Medicare program
in the first seven months of 1994 compared to 24 in 1995. Medicare and ancillary
revenue were 7.0% and 7.0%, respectively, of patient revenues in 1994 compared
to 23.0% and 6.0%, respectively, of patient revenues for 1995. Management fee
revenues decreased by $120,000 or 75% due to the conversion of 2 facilities from
management contracts to leases in November of 1994. However, this decrease was
offset by an additional $3.2 million in patient revenues.
Wages and Related Expense. Wages and related expense increased from $17.0
million in 1994 to $23.3 million in 1995, an increase of 37.1%. Salary and wages
increased 18.4%. New leases contributed to $1.7 million of the wage increase.
The remaining increase is attributable to increased staffing necessary to
support the Company's increased Medicare services.
Lease Expense. Lease expense increased from $4.7 million in 1994 to $5.2
million in 1995, an increase of 10.6% due to the addition of the 3 facilities in
the fourth quarter of 1994.
General and Administrative. General and administrative expenses increased
from $3.4 million in 1994 to $3.9 million in 1995, an increase of 14.7%. This
increase is primarily attributable to new leases. As a
39
<PAGE> 201
percentage of revenues, general and administrative expenses declined from 11.2%
of revenue in 1994 to 10.0% of revenue in 1995.
Depreciation and Amortization. Depreciation and amortization increased
from $487,000 in 1994 to $591,000 in 1995, an increase of 21.4%. This increase
is attributable to additional equipment and leasehold improvements at BritWill's
facilities.
Interest Expense. Interest expense increased from $571,000 in 1994 to
$906,000 in 1995, an increase of 58.7%. This increase was primarily due to
additional borrowings under the revolving credit facility.
Income (Loss) before Income Taxes and Net Income. Income before income
taxes increased from a loss of $1.9 million for the seven months ended July 31,
1994 to income of $43,880 for the seven months ended July 31, 1995. This was
primarily attributable to an increase in acuity of patients and an increase in
Medicare patients in 1995; thus, ancillary utilization increased resulting in
substantially improved performance. There was no tax benefit provided for the
1994 loss since a valuation reserve was established for such income tax
benefits. Net income increased from a net loss of $1.9 million for the seven
months ended July 31, 1994 to net income of $13,380 for the seven months ended
July 31, 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased from $32.7 million in 1993 to $54.4 million
in 1994, an increase of 66.4%, primarily attributable to the acquisition of nine
facility leases in Texas, primarily in the fourth quarter of 1993. In addition,
in the latter half of 1994, there was a significant increase in Medicare patient
days as there were more Medicare certified facilities. Management fee revenues
decreased 28.1% due to the conversion of two facilities from management
contracts to leases in June 1994 and two additional facilities in November. The
increase in patient census was diluted by a modification in Rule 14 under the
Indiana Medicaid reimbursement program. The effect of this ruling decreased
revenues by $1.2 million.
Operating Expenses. Operating expenses increased from $23.5 million in
1993 to $40.0 million in 1994, an increase of 70.2%. Facility salaries and wages
increased 68.2%, attributable to new leases in Texas. Ancillary expenses
increased $1.7 million due to the increase in the number of facilities
participating in the Medicare program.
Lease Expense. Lease expense increased from $5.1 million in 1993 to $8.3
million in 1994, an increase of 62.7%, due to the new leases.
General and Administrative. General and administrative expenses increased
from $3.7 million in 1993 to $6.3 million in 1994, an increase of 70.3%. This
increase is primarily attributable to new leases and additional resources
dedicated to expanded Medicare operations in 1994.
Depreciation and Amortization. Depreciation and amortization increased
from $704,000 in 1993 to $987,000 in 1994, an increase of 40.2%. This is
primarily attributable to the amortization of leasehold rights recorded as part
of the acquisition of five of the Texas facilities in December of 1994.
Interest Expense. Interest expense increased from $385,000 in 1993 to
$872,000 in 1994, an increase of 126.5%, primarily due to the payment of
interest on subordinated long-term debt.
Income/Loss before Income Taxes and Net Loss. Loss before income taxes
increased from $542,155 for the year ended December 31, 1993 to $1.9 million for
the year ended December 31, 1994. This was primarily attributable to an increase
in supplies expense, principally ancillary costs, in 1994 which were not
billable to Medicaid. There was no tax benefit provided for the losses since a
valuation reserve was established for such income tax benefit. Net loss
increased from $593,905 in 1993 to $2.0 million in 1994.
BritWill Liquidity and Capital Resources
As of July 31, 1995, BritWill had working capital of $952,000 and the
current ratio was 1.09 to one. Net cash provided by BritWill's operating
activities during the seven months ended July 31, 1995 totaled $97,000. Capital
expenditures for the seven months ended July 31, 1995 totaled $1.1 million and
cash provided by financing activities totaled $1.3 million.
40
<PAGE> 202
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, Unison had $847,000 in cash compared to $6.1 million at
December 31, 1995 and $118,000 at December 31, 1994. Unison had working capital
of $4.8 million at June 30, 1996 compared to working capital deficits at
December 31, 1995 and 1994 amounting to $1.2 million and $866,000, respectively.
Cash used in operations in the six months ended June 30, 1996 amounted to
$4.3 million compared to cash provided amounting to $1.3 million in the prior
year period. The change is due primarily to fluctuations in current assets and
liabilities in the 1996 first quarter. Of this increase, $2.5 million is the
result of a change in Unison's accounts receivable-backed credit facility. In
March 1996, the agreement to sell accounts receivable was replaced with a line
of credit secured by eligible accounts receivable. As a result, accounts
receivable at June 30, 1996 include amounts which, under the sales agreement,
would have been deducted from the accounts receivable balance. Cash used in
operations in the year ended December 31, 1995 amounted to $1.2 million compared
to $393,000 in 1994 and $114,000 in 1993. The increase is due primarily to the
increase in accounts receivable and other current assets resulting from the
growth in the number of facilities operated, offset in part by increases in
current liabilities.
Net cash used in investing activities amounted to $4.0 million and $326,000
in the six months ended June 30, 1996 and 1995, respectively, and $3.2 million,
$744,000 and $18,000 in the years ended December 31, 1995, 1994 and 1993,
respectively. Capital expenditures were $2.0 million and $236,000 in the six
months ended June 30, 1996 and 1995, respectively, and $1.1 million, $371,000
and $13,000 in the years ended December 31, 1995, 1994 and 1993, respectively.
Cash used in connection with acquisitions, including lease deposits, amounted to
$2.0 million in the six months ended June 30, 1996 compared to $90,000 in the
same period in 1995. In the year ended December 31, 1995, cash used for
acquisitions totalled $2.1 million compared to $373,000 in 1994 and $5,000 in
1993.
Net cash provided by financing activities amounted to $3.0 million in the
six months ended June 30, 1996 compared to $926,000 used in the prior year
period. In the year ended December 31, 1995, cash provided by financing
activities amounted to $10.4 million compared to $1.2 million in 1994 and
$123,000 in 1993. Net proceeds from Unison's initial public offering (the "IPO")
amounted to $14.6 million of which approximately $4.1 million was used to repay
notes payable to the former shareholders of BritWill, as discussed elsewhere
herein.
At June 30, 1996, the Company had $31.1 million in total debt (57.6% of
total capitalization as compared with 56.3% of total capitalization at December
31, 1995), contingent payment obligations due over the next five years totaling
up to approximately $21.8 million and minimum leasehold obligations totaling
approximately $121.8 million over the same period. This increase in total debt
is primarily attributable to an increase in the Company's working credit
facilities of $12.0 million and debt issued in connection with acquisitions in
the amount of $3.2 million, which increase is offset in part by the repayment of
the Term Note to the agent for the former BritWill shareholders in the amount of
$5.6 million and the conversion of the remainder of the Convertible Debenture
into shares of Unison Common Stock. To the extent that existing resources and
future earnings are insufficient to fund its activities and to repay its fixed
and contingent obligations, either near term or in future years, Unison will
need to raise additional funds through debt or equity financings. There can be
no assurance that such financings will be available, or if available, that
necessary financing will be available on terms favorable to Unison and its
stockholders.
By agreement finalized in April 1996, but providing for effectiveness as of
August 10, 1995 (the "Purchase Modification"), which was modified in August 1996
in the name described below, Unison, BritWill and the agent for the former
holders of BritWill shares immediately prior to the acquisition of BritWill by
Unison (the "Former BritWill Shareholders") amended the BritWill purchase
agreement and Unison's related promissory notes and other obligations to the
Former BritWill Shareholders in the following principal respects: (a) The fixed
purchase price for the BritWill stock and the principal amount of the related
subordinated promissory note to the Former BritWill Shareholders (the
"Subordinated Note") were reduced by $5.5 million. In addition, the interest
rate applicable to the outstanding balance of the Subordinated Note for each
interest period throughout its term was reduced by 400 basis points (initially
from 12% to 8% per annum); (b) Unison's contingent payment obligations to the
Former BritWill Shareholders were increased by
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the amount of the payment reductions resulting from the changes described in
clause (a) above. The contingent payment obligations are subject to the
achievement of specified consolidated revenue conditions. Upon the occurrence of
certain events, the contingent payment obligations could be converted into fixed
payment obligations. Thereafter, the fixed payment obligations could be
accelerated in certain events; (c) the fixed purchase price for the BritWill
stock and the principal amount of the related three-year promissory note to the
Former BritWill Shareholders (the "Term Note") were increased by approximately
$100,000. At the same time, the period during which no interest accrued on the
Term Note was extended to January 2, 1996 (the date on which Unison repaid the
Term Note in full); (d) the parties agreed that based upon Unison's consolidated
balance sheet as of December 31, 1996, Unison's contingent payment obligation
due in June 2000 to the Former BritWill Shareholders will be reduced by up to
$1.4 million (the "Reduction Amount") if Unison is unable to collect or
establish the collectability of certain accounts receivable that were owned by
BritWill when it was acquired by Unison and were adjusted downward in the
purchase allocation of the BritWill Acquisition. The Reduction Amount, however,
will be subject to being "earned back" and paid to the Former BritWill
Shareholders if Unison achieves specified quarterly revenue conditions during
1997 and thereafter.
The principal immediate effect of the Purchase Modification is to decrease
Unison's fixed burden and interest expense (with a corresponding increase in its
income for financial reporting and tax purposes) and to increase its contingent
obligations by a like amount. The Purchase Modification had no effect on the
timing or amount of payments to the Former BritWill Shareholders during 1995.
The Purchase Modification may reduce or delay future payment obligations to the
Former BritWill Shareholders if the specified revenue conditions for the
contingent payments are not satisfied, but under no circumstances can the
changes increase the total amounts owing from, or accelerate the due dates of
payments by, Unison to the Former BritWill Shareholders over the amounts and to
earlier due dates than those that could apply under the same circumstances if
the Purchase Modification had not occurred. The specified revenue conditions in
the Purchase Modification do not represent a forecast or projection of any kind
or for any purpose and should not be relied upon as such. The changes included
in the Purchase Modification resulted in an increase in pretax income of
$484,000 for the year ended December 31, 1995. Absent the Purchase Modification,
Unison's consolidated pretax loss for the year ended December 31, 1995 would
have been $459,685. Copies of the Modification Agreement, the Contingent Payment
Agreement and the restated Subordinated Notes are attached as exhibits to this
report and are incorporated herein. The foregoing summary of the Purchase
Modification is qualified in its entirety by this reference to such documents.
By the modification to the Purchase Modification finalized in August 1996,
but providing for effectiveness as of August 10, 1995, Unison, BritWill and the
Former BritWill Shareholders amended the Purchase Modification in the following
principal respects: (a) upon any debt or equity financing of $100.0 million or
more (including the proposed $100.0 million placement of Senior Notes), the
Former BritWill Shareholders agreed that Unison would not be obligated to pay
more than one-half of the outstanding aggregate amount of the Subordinated Note
and the principal portion of the contingent payments, and that Unison would not
be obligated to make any such payment prior to January 1, 1997; provided,
however, that if Unison does not pay such amounts in full upon such a financing,
the Former BritWill Shareholders will be deemed to have earned back all of the
Reduction Amount; and (b) the rate at which the Former BritWill Shareholders
could earn back the Reduction Amount was increased.
The obligations and notes associated with the BritWill Acquisition, after
the Purchase Modification, include the following: (i) the $7.0 million
Convertible Debenture, which has been converted in full into Unison common
stock; (ii) the $8.0 million Subordinated Note, as amended, payable in monthly
installments of $54,000 of interest only at the rate of 8.0% for the first 18
months, and monthly payments of principal and interest of $76,000 to $117,000
for the next 42 months at 8.0% to 10.0%. The Subordinated Note requires that the
Company maintain (a) specified ratios of operating cash flows to current
obligations increasing over time; (b) a specified ratio of current assets to
current liabilities; and (c) cash and unencumbered credit facilities of minimum
levels. At March 31, 1996, Unison was in compliance with these requirements. The
entire remaining principal balance outstanding under the Subordinated Note and
all unpaid interest are due and payable upon the earlier to occur of either
August 9, 2000 or the completion of any secondary public or private
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debt or equity offering of at least $10.0 million; (iii) the $5.6 million Term
Note which was repaid on January 2, 1996; (iv) a $3.4 million note which was
repaid from the proceeds of Unison's IPO; in December 1995; (v) scheduled
contingent monthly payments, as amended, through August 2000 of $144,0000 to
$225,000 are required upon attainment of specified revenues and will be added to
leasehold rights when and if paid; and (vi) a contingent payment of $11.5
million (subject to adjustment pursuant to the Purchase Modification) is due
August 9, 2000 (or earlier in the event of certain securities offerings, or
under certain circumstances) if revenues during the 12 months ending June 30,
2000 exceed $150.0 million, which will also be added to leasehold rights when
and if paid. If a default occurs on any one or more of the above obligations,
after the expiration of all applicable cure periods with respect to any of the
above, all of the liabilities become due and payable. In order to meet the terms
of the above obligations, specifically the Subordinated Note, Unison expects
that it will be necessary to seek outside financing through an offering of debt
or equity securities or similar outside financing arrangement. There can be no
assurance, however, that such financing will be available to Unison, or, if
available, on terms favorable to Unison. In addition, Unison is required to meet
a series of financial covenants and conditions related to existing leases and
financing assumed with the BritWill Acquisition, including maintenance of
specified operating ratios, levels of working capital and net worth. At June 30,
1996, Unison was in compliance with these covenants.
In March 1996, Unison refinanced its existing revolving credit lines with a
new $10.0 million revolving credit facility. Borrowings under the credit
facility bear interest at the prime rate plus 2% (10.25% at March 31, 1996) and
are secured by Unison's eligible accounts receivable. At June 30, 1996,
borrowings under this credit facility amounted to $8.7 million. Further, in
August 1996, Unison entered into a $1.0 million line of credit secured by its
ancillary accounts receivable with the same lender. This new line is being
accounted for as a sale of receivables. Unison also executed unsecured
promissory notes with a lessor in the amount of $4.0 million with interest
payable at 10.25% to 10.75%. The notes are guaranteed by Jerry M. Walker,
Unison's President.
In May 1996, Unison executed a promissory note payable to the agent for the
Former BritWill Shareholders in the amount of $1.0 million. Interest is payable
at 12.0% and the note is due on demand after 30 days from issuance. On August
30, 1996, Unison repaid $500,000 of the outstanding principal from the proceeds
of the Imperial Loan described below. In June 1996, Unison also entered into an
agreement allowing Unison to lease equipment in the aggregate amount of
$921,000. The lease term is for three years and the effective interest rate is
11.47%. At June 30, 1996, borrowings under this agreement amounted to $648,000.
Unison is negotiating for two more lease lines. The first of these lines would
be in the amount of $450,000, with a three year term, and would be used for
furniture and fixtures. The second of these lines would be in the amount of
approximately $1.5 million, with a four or five year term, at Unison's option,
and would be used principally for computer hardware and software. Completion of
negotiations for these two lines cannot be assured.
In August 1996, Unison entered into a short term loan agreement with
Imperial Bank providing for up to $7.5 million of borrowings (the "Imperial
Loan") and drew $5 million of this amount. Another $2.5 million is expected to
be drawn in October. The loans bear interest at the rate of 9.75% per annum and
are due in February 1997. Among other covenants, the Imperial Loan requires a
minimum debt coverage ratio and level of net worth. Unison has issued or will
issue stock purchase warrants for an aggregate of 300,000 shares in conjunction
with the Imperial Loan, which is also convertible into Unison Stock at a
discount in the event of a loan default.
In August 1996, Unison also delivered to one of its suppliers a $771,005
promissory note bearing interest at the rate of 9% per annum and requiring
monthly installments of principal and interest until May 1997 or earlier in the
event of a public or private sale of Unison equity securities (the"Red Line
Note"). The Red Line Note was issued in satisfaction of certain accounts payable
and is convertible into Unison Common Stock at a discount in the event of a loan
default.
Unison intends to finance a substantial portion of its growth through
sale/leaseback transactions with REITs, financial institutions and private and
other investors. Continued expansion, including the acquisition of Signature and
the cash consideration in the acquisition of Memphis, and the repayment of the
$11.5 million
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contingent payment and Subordinated Note in August 2000 will require a
substantial, additional public or private placement of equity or debt
securities. Unison may also make use of traditional long-term debt, including
publicly issued debt, to finance development. Unison will continue to require
new services of working capital as acquisitions are completed and Unison
continues to expand its existing business. Unison is currently negotiating with
several lenders to increase the availability of working capital for continuing
operations, to fund acquisitions and to decrease the cost of existing
borrowings. There can be no assurance that any such financing will be available
to Unison or, if available, that the terms will be acceptable to Unison. If
Unison is unable to obtain such financing on acceptable terms, it may be unable
to achieve its growth and development goals.
In January 1996, Unison acquired an institutional pharmacy in Indiana for
$200,000 in cash and a note in the amount of $400,000.
On March 28, 1996, Unison entered into a definitive purchase and sale
agreement for the acquisition, effective as of February 1, 1996, of 90% of the
outstanding common stock of Sunbelt Therapy. In consideration for the stock of
Sunbelt Therapy, Unison paid $800,000 in cash, issued term notes for $1.0
million in the aggregate (the "Notes") and issued subordinated convertible
debentures totaling $1.8 million (the "Debentures"). In addition, contingent
payments will be due if specified pretax income targets are achieved. The Notes
and Debentures bear interest at 10%, payable quarterly beginning May 1, 1996,
and are convertible into Unison common stock at the option of the holder at a
conversion price equal to the average closing price (85% of the average closing
price with respect to the Notes) of Unison's common stock for the 20-day trading
period preceding the date of conversion. The Notes mature in equal principal
amounts on February 1, 1997 and 1998, and the Debentures mature in equal
principal amounts on February 1, 1997, 1997 and 1999.
In June 1996, Unison voluntarily terminated its participation in the
Medicare and Medicaid programs at its 94-bed Hillside Health Care Center in
Bonner Springs, Kansas. The facility was subsequently closed. The closure of
this facility is not expected to have a material impact on Unison's results of
operations or financial condition.
Unison is currently negotiating for the sale of $100.0 million of unsecured
senior promissory notes (the "Senior Notes"). It is currently anticipated that
the Senior Notes will bear interest at the rate of 10.25% per annum, will mature
in 2006, will be secured by guarantees from Unison's existing and future
subsidiaries, and will be redeemable at Unison's option beginning in 2001 at a
premium that declines to par in 2005.
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BUSINESS OF UNISON
INTRODUCTION
Unison HealthCare Corporation is a provider of high quality traditional
long-term and specialty health care services. Unison provides a broad range of
health care services including nursing care, rehabilitation therapy, respiratory
therapy and other specialized services. Subacute care includes those services
provided to patients with medically complex conditions who require more than
three hours per day of skilled nursing, medical supervision and access to
specialized equipment and services, but do not require many of the other
services provided by acute care hospitals. Unison also maintains special units
with an aggregate of 495 beds designed to treat patients with specific medical
conditions such as Alzheimer's, AIDS and those requiring wound management.
Unison commenced operations in July 1992 as SunQuest HealthCare Corporation and
changed its name to Unison HealthCare Corporation on November 14, 1995. As of
August 31, 1996, Unison operated 51 facilities, consisting of 45 long-term and
specialty care facilities (41 of which are Medicare certified) with 4,666 beds
and six independent or assisted living facilities with 196 units in 12 states,
principally in the midwest and southwest regions of the United States. Pursuant
to the Signature Merger Agreements, Unison has committed (subject to the
satisfaction or waiver of certain conditions) to acquire companies that operate
11 long term care facilities and two assisted living facilities in Arizona and
Colorado.
Unison has also begun providing certain ancillary services through both
internally developed programs and affiliated companies. Ancillary services are
those services that can be billed and reimbursed separately from routine
services. In 1995, Unison established a pharmacy operation and Medicare Part B
billing and supply company to provide ancillary services to both Unison operated
facilities and non-affiliated health care providers. Ancillary services include
physical, speech and occupational therapies, respiratory therapies and
laboratory services. Effective February 1, 1996, Unison acquired four
rehabilitation therapy services companies, including Henderson and Associates
Physical Therapy and Sunbelt Therapy Management Services, Inc., (collectively,
"Sunbelt") which provide physical, occupational and speech therapy through local
outpatient clinics and long-term care facilities primarily in the southeastern
United States. The rehabilitation companies also provide therapy services to
seven hospitals in Alabama, Mississippi, Oklahoma and West Virginia. Pursuant to
the Ampro Merger Agreement, Unison has committed to acquire (subject to the
satisfaction or waiver of certain conditions) two reference laboratory companies
with facilities in Texas, Missouri and Tennessee.
Unison seeks to establish a strong competitive position in the markets it
serves by providing specialty health care services and high quality long-term
care. Unison continues to provide high quality health care services, as
evidenced by its low deficiency rating in state regulatory compliance surveys
compared with national averages. Unison continuously endeavors to improve its
payor mix and growth both in specialty services and in revenue and operating
profits. Unison achieved a quality mix for the year ended December 31, 1995
(defined as revenues derived from private payors, Medicare and commercial
insurers) of 44% compared to 39% in 1994 and 48.2% for the six months ended June
30, 1996 compared to 42.8% for the six months ended June 30, 1995.
MARKET OVERVIEW
Unison believes there will continue to be significant growth opportunities
to provide health care services to long-term care residents in non-hospital
settings, including both long-term care facilities and assisted or independent
living facilities. The factors that contribute to this growth potential include
the following:
Aging Population. According to the United States Bureau of the Census, the
overwhelming majority of the patients in long-term care facilities and residents
in assisted or independent living facilities are over the age of 65. The number
of people over the age of 65 in the United States has grown from approximately
25.8 million in 1980, or 11.3% of the population, to approximately 31.6 million
in 1990, or 12.6% of the population, and is projected to increase to
approximately 59.7 million, or 20% of the population, by 2025. The United States
Bureau of the Census also reported that approximately 6% of the United States
population between the ages of 75 and 84 and 22% of those over 84 used some form
of health care services in a long-term care facility. As the United States
population ages, the demand for Unison's services is expected to increase.
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Cost Containment Pressures. Governmental and private pay sources have
adopted cost containment measures which encourage reduced lengths of stay in
acute care hospitals. Many of the patients being discharged, in particular
elderly patients, require additional skilled nursing care and specialty health
care services, such as those provided by Unison. Any subsequently adopted health
care reform proposals are expected to continue to emphasize the cost containment
efforts included in health care reform legislation to result in early discharge
of patients from the hospital setting. See "-- Government Regulation."
Advances in Medical Technology. Sophisticated new forms of medical
equipment and treatment have lengthened life expectancies, increasing the number
of individuals requiring specialized care and supervision. In the past, the
level of care required by many of these individuals was not generally available
outside acute care hospitals. However, long-term care providers such as Unison
have become a more attractive alternative to acute care hospitals in certain
instances due to technological advances that have enabled long-term care
providers to offer services less expensively than are provided by acute care
hospitals.
Limitations in the Supply of Long-Term Care Facilities. Many states (but
not all of the states in which Unison operates) have enacted certificate of need
or similar legislation which generally limit the construction of long-term care
facilities and the addition of beds or services in existing facilities.
Furthermore, high construction costs, limitations on government reimbursement
for the full costs of construction, and start-up expenses also act to constrain
growth in the numbers of facilities. Concurrently, as the demand for skilled and
subacute services in long-term care facilities increases, the supply of nursing
home beds will be filled by residents with the highest level of care
requirements. This shift will, in turn, increase the care requirements of
residents of assisted or independent living facilities. As a result, the Company
believes that the supply of long-term care facilities may not grow as quickly as
the demand for such facilities. See "-- Government Regulation -- Certificates of
Need."
OPERATING STRATEGY
Unison's operating strategy is to increase the revenues and profitability
of the facilities it operates by (i) emphasizing the continued development and
expansion of specialty health care services to treat higher acuity patients in
cooperation with local hospitals and physicians; (ii) expanding the scope of
ancillary services provided in Unison facilities and offered to unaffiliated
operators of long term care facilities; (iii) increasing occupancy levels and
improving Unison's payor mix; (iv) achieving and maintaining a high standard of
regulatory compliance and patient care in each facility that Unison operates now
or in the future; (v) providing independent living and assisted living
opportunities which are operated in hand with Unison's care facilities; and (vi)
containing costs.
Expanding Services to Treat Higher Acuity Patients. Specialty health care
services are developed in each facility in cooperation with the local medical
community and are tailored to the specific needs of that community. Specialty
programs are developed by marketing professionals and facility administrators
working directly with local hospital discharge planners and physicians. This
community approach complements Unison's decentralized management structure and
differentiates Unison from other providers of long-term care and specialty
services. Management feels that its approach generally is well received by the
local medical community, as demonstrated by the increase in Unison's quality mix
in 1995 as compared with 1994 and in the first six months of 1996 as compared
with the prior year period.
Unison's facilities currently offer a wide variety of specialty health care
services, which may include: (i) intensive rehabilitation services; (ii) wound
management; (iii) enteral and parenteral feeding programs; (iv) intravenous drug
administration, including chemotherapy; (v) respiratory therapy; (vi)
orthopaedic rehabilitation; and (vii) other specialized subacute services.
Expanding The Scope of Ancillary Services. Unison provides ancillary
services to facility residents in response to physician orders. The major
ancillary services include physical, speech, and occupational therapies;
pharmaceuticals; parenteral and enteral nutrition; infusion and respiratory
therapies; and laboratory services. Historically, Unison has provided most of
these services through contracts with third party providers, but it is
increasingly offering such services through affiliated ancillary services
companies, both in its own facilities and to third party operators of long term
care facilities.
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Increasing Occupancy Levels and Improving the Payor Mix. Unison's
marketing efforts are focused on the hospital and medical community in each
market to promote higher occupancy levels and improved payor mix at its
facilities and assisted or independent living centers in that particular market.
Improving payor mix often means developing programs that respond to the needs of
the residents in each specific payor class, which may include Medicare, private
pay, managed care, active and retired United States military programs and
commercial insurance payors. Unison's goal is to achieve quality mix revenue
levels of 60% in its facilities. Unison defines all categories of payors other
than Medicaid as "quality mix." For the year ended December 31, 1995 and for the
six months ended June 30, 1996, Unison derived approximately 44% and 48%,
respectively, of its revenues from payors other than Medicaid. Quality mix
levels are heavily influenced by hospital discharge patterns in each market
served.
Maintaining High Standards of Regulatory Compliance and Patient
Care. Although its record is not perfect (Unison voluntarily closed one
facility during 1996 due to regulatory problems), Unison believes it is an
industry leader in providing quality patient care and in maintaining regulatory
compliance. In the 12 states in which Unison operates long-term and specialty
care facilities and independent or assisted living facilities, approximately 16%
of all nursing facilities surveyed have deficiencies requiring "significant
correction" as defined. Only 13% of Unison facilities surveyed as of July 30,
1996 had deficiencies cited at this level. All of Unison's 45 nursing facilities
are in compliance. All of Unison's facilities have fully implemented Unison's
Quality Improvement Program.
Unison currently employs nine registered nurses under the direction of the
Vice President of Clinical Operations to direct the quality improvement and
regulatory compliance activities of the facilities. These nursing professionals
are organized in regional teams in cooperation with the regional operations
executives. Together with the facility administrators and Directors of Nursing,
these professionals make up a team of nearly 110 long-term care professionals
who are committed to achieving and maintaining high standards of quality
improvement and regulatory compliance. With the implementation of the new
Omnibus Budget Reconciliation Act of 1987 ("OBRA") regulations on July 1, 1995,
aggressive regulatory compliance activities are an even more important aspect of
long-term care operations. The new OBRA enforcement regulations have increased
the potential penalties against skilled nursing facilities with poor regulatory
compliance history and those providing substandard care. See "-- Government
Regulation -- Enforcement Proceedings and Sanctions; Certification
Requirements."
Providing Independent Living and Assisted Living Opportunities. Unison
believes that independent and assisted living arrangements have become an
increasingly important component of the continuum of care required by older
Americans. Cost containment pressures from government and private payors alike
encourage discharge from long-term and specialty care facilities before
residents may be fully able to care entirely for themselves. The change from the
traditional family structure which cared for the sick and elderly to dual income
families has increased the need for facilities that can assist such persons.
Unison believes that offering services at this important level of the continuum
of care enables it to maintain contacts with potential consumers of its
long-term and specialty health care services and thus improve its occupancy
levels and profitability. Independent living centers are not required to be
licensed and are subject only to minor regulations. In most states, assisted
living facilities are required to be licensed but the requirements are much less
restrictive than those of skilled nursing facilities. These centers provide
fewer nursing and medical services than are provided at Unison's long-term care
facilities. Unison believes that the availability of health care services is one
of the significant reasons that residents move to an assisted or independent
living center. A complete market analysis is conducted for each of Unison's
nursing centers to assess the feasibility of assisted living services to
complement the continuum of care offered.
Containing Costs. Unison believes that the increasing penetration of
managed care will intensify the focus on containing costs. Unison establishes
detailed operating budgets at its facilities and the administrator is
responsible for adherence to these budgets. Unison provides supervisory
oversight at the regional level, and regular review by members of executive
management. Monitoring the performance of these budgets at the facility level
has enabled Unison to maintain control over its operating costs, which has
improved the operating performance of Unison's facilities.
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GROWTH STRATEGY
Unison intends to continue to grow its business by (i) selectively leasing
additional long-term and specialty health care facilities in geographic
clusters; (ii) developing and acquiring additional ancillary services companies;
and (iii) developing in-house specialty care units within its current and future
facilities. In leasing new facilities, Unison intends to focus on facilities
with at least 100 licensed beds near one or more hospitals, especially in
markets with population concentrations in excess of 100,000. Additional
ancillary services are likely to include pharmacy services, home health care
services and reference laboratory services such as those provided by Ampro and
Memphis (see "Certain Information Regarding Ampro and Memphis"). Specialty
units, which typically generate higher profit margins than are available from
less specialized basic long-term care services, may include specialty units for
Alzheimer's care, AIDS care, specialized rehabilitation services and the
treatment of medically complex patients. Based on its experience, Unison
believes that concentrating several long-term care facilities within strategic
geographic areas provides operating efficiencies and economies of scale, better
positions Unison to compete for managed care contracts, and facilitates the
development of its ancillary and specialty health care services.
Achieving Local Economies of Scale. Unison's strategy of creating clusters
of facilities allows it to achieve and exploit economies of scale. These
clusters of facilities -- approximately six to eight facilities in a specific
area -- allow cluster-based teams of regional managers to oversee operations.
The clusters eliminate the need for a large centralized infrastructure to
support field operations and enable Unison to leverage management across a
larger base of patient revenue. Unison is able to more efficiently monitor
individual facilities, ensuring high quality patient care. Clustering facilities
also enables Unison to leverage the addition of ancillary services over a larger
patient base. The proposed Signature Mergers will include the acquisition of
five long term care facilities in the Denver, Colorado area that fit well within
this strategy of creating clusters of facilities.
Unison believes that a substantial opportunity exists to achieve additional
synergies through the combined marketing of both long-term care facilities and
assisted or independent living centers, primarily because of the changing needs
of Unison's residents. This strategy provides an opportunity for entry at each
point in the continuum of care. Cost containment pressures will result in
patients and residents changing facilities more frequently as a result of their
moves up or down the continuum of care in an effort to receive the appropriate
care from the most efficient provider of each level of care. Unison expects to
benefit from its ability to offer continuity of care to its patients and
residents. In addition, Unison believes that it will achieve synergies in its
assisted and independent living center operations as the level of care provided
increases in such facilities.
Competing for Managed Care Contracts. Unison's cluster strategy positions
it to compete for managed care contracts by offering a group of long-term care
facilities and ancillary services in a specific geographic area. Many of the
markets in which it operates facilities are just beginning to experience
significant managed care penetration. A primary goal of managed care is to
transition patients out of full service hospitals and into lower cost care
settings, including subacute care facilities. Managed care organizations demand
consistently high quality of service, and their subscribers seek a range of
options when choosing a care provider. The availability of comprehensive
services that span the range from independent living to subacute care will
enable Unison to attract and compete effectively for managed care contracts
within the entire care continuum. Although a low percentage of Unison's revenues
is currently derived from managed care, senior management has significant
experience in developing managed care business. Unison currently maintains
managed care contracts with several managed care organizations.
Developing In-House Ancillary and Specialty Care Services Programs. Unison
recently has developed programs and established affiliated operations to provide
ancillary services. One reason for developing these programs is to improve the
quality of patient care by controlling the delivery of these services. In May
1995, Unison established Quest Pharmacies, Inc. ("Quest") to develop a
nationwide institutional pharmacy business. Quest has acquired the pharmacy
operations of Med-Shop Pharmacy in Gilmer, Texas and Indiana Prescription Lab,
an institutional pharmacy in Bloomington, Indiana, and is seeking to acquire
other pharmacies. As of August 26, 1996, Quest provided institutional pharmacy
services to 57 long-term care facilities, including 25 Unison facilities and 32
facilities operated by others. Since March 1995 the Company
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has also operated a Medicare Part B billing and supply company that focuses on
wound management and enteral and parenteral feeding services.
In addition to providing services to its own long-term and specialty health
care facilities, each of these ancillary providers seeks to provide services to
other, unrelated long-term care providers, further expanding Unison's revenue
base. In each instance, Unison identifies acquisition candidates with an
existing portfolio of business which can augment the revenues available,
diversify the scope of operations, and improve the quality and consistency of
the services being offered by Unison.
PATIENT SERVICES
Unison's objective is to provide a full range of long-term care services
across the entire continuum of care from independent living services to subacute
care services, all of which are provided primarily to the elderly. For those
among the elderly requiring limited service, independent living facilities offer
assistance with activities of daily living as needed. For residents in need of
greater assistance, the services of an assisted living facility are necessary,
where nutritional, housekeeping, and limited medical services are offered. For
the elderly in need of specialized support, rehabilitation, nutrition,
respiratory therapies and other treatments, skilled nursing care is often
required. The innovation of specialized subacute services within skilled nursing
facilities also responds to the needs of patients requiring intense and
specialized treatment and rehabilitation therapy services immediately after
hospitalization.
Long-Term Care Services. Unison's long-term care facilities provide basic
health care services, including room and board, dietary services, recreational
therapy, social services, housekeeping, laundry and nursing services. In
addition, the long-term care facilities dispense medications and otherwise
follow care plans prescribed by the patient's physician. Unison's long-term care
facilities are licensed by state licensing agencies and are extensively
regulated at the Federal, state, and local level. Unison also provides for the
delivery of specialty medical services at its facilities. See "-- Growth
Strategy -- Developing In-House Ancillary and Specialty Care Services Programs."
Assisted and Independent Living Services. Services and facilities at
assisted and independent living centers include central dining facilities,
limited nursing services, recreational areas, social programs, housekeeping,
laundry and maintenance service, emergency call systems, special features for
handicapped persons and transportation to shopping and special events. These
facilities provide fewer skilled nursing and medical services than are provided
at Unison's long-term care facilities. Unison believes that the availability of
health care services is one of the significant reasons that residents move to an
assisted or independent living center.
Ancillary Services. Unison provides ancillary services to the residents of
skilled nursing facilities in response to physician orders. The major ancillary
services include physical, speech and occupational therapies, pharmaceuticals,
parenteral and enteral nutrition, infusion and respiratory therapies and
laboratory services. In addition, Unison has acquired two pharmacy companies and
a therapy provider will continue to seek to expand ancillary services.
Specialty Subacute Care Services. Subacute care is a major component of
Unison's growth strategy. Unison provides care to patients with specialized
needs through its designated units for the treatment of Alzheimer s disease,
AIDS patients and others. These units are located in specially designed sections
within selected facilities and are staffed by specially trained personnel.
Unison operates 26 such units consisting of 231 licensed beds in Alzheimer's
units, 39 beds in AIDS units and 225 beds in other specialty units, including
wound management, hospice care, rehabilitation services and respiratory therapy.
In addition to providing care tailored to the unique needs of patients within
these units, these services include education and support to the patients'
families. These units generally receive higher levels of reimbursement. The
daily cost to patients for the Unison's specialty services are generally
significantly less than the cost charged for similar services by acute care
hospitals.
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OPERATIONS
In its role as lessee or manager, Unison is responsible for the day-to-day
operation of both leased and managed facilities. These responsibilities include
recruiting, hiring and training all nursing and other personnel, and directing
the full scope of patient care activities that are necessary to operate the
facilities. In general, these activities include direct patient care nursing
services, food service, social services and resident activity programs,
housekeeping and maintenance, business office services including billing and
accounts receivable management, accounts payable, accounting and finance,
quality assurance, and regulatory compliance at each facility.
Organization. Unison strongly believes that long-term and specialty care
facilities should be managed on a decentralized basis. This approach places
direct decision making as close to the bedside as possible so that facilities
will be able to better respond to the specific needs of each medical community.
In order to accomplish this, Unison has created four regions, each of which is
supervised by a regional vice president. The regional vice president is
supported by a clinical operations specialist, a financial consultant, a
regional director of marketing, and assistant regional managers and clerical
personnel, all of whom are employed by Unison. Daily operations of each leased
and managed facility are supervised by an on-site licensed administrator. The
administrator of each facility is supported by other professional personnel,
including a medical director, who assists in the medical management of the
facility, a director of marketing who directs the sales and marketing efforts of
the facility and a director of nursing who supervises a staff of registered
nurses, licensed practical nurses and nurses aides. Other personnel include
dietary staff, activities and social service staff, housekeeping, laundry and
maintenance staff and a business office staff. Unison believes that this
decentralized team approach differentiates it from other operators of long-term
and specialty care services who organize themselves in a more traditional
functional manner.
Quality Management. Unison maintains an active, effective quality
improvement program that is focused on important aspects of care and critical
key indicators that define, measure and improve the quality of care provided to
its patients. The program is an internal facility process focused on involvement
of direct care givers. Quantitative, systematic, data-driven reporting is
monitored by Unison's eight registered nurses under the direction of the Vice
President of Clinical Operations. These monthly reports are used to monitor
adherence to the standards of care established by Unison's Quality Improvement
program. The ability to administer these standards of quality is accomplished
through on-site visits conducted by specially trained, credentialed health care
professionals. Frequent direct observation and assessment of the quality of care
provided to Unison's patients in tandem with the oversight of each facility's
Quality Improvement program results in patients receiving better care, thereby
experiencing higher quality of life.
In addition to its Quality Improvement program, Unison provides each of its
facilities with the resources it needs to administer the exemplary quality of
care Unison expects. Complete policy and procedure manuals are maintained by
Unison and provided to each facility. The manuals are regularly updated to
include changes in regulatory requirements and improvements in clinical
practices.
The facility administrator at each facility is primarily responsible for
adherence to Unison's standards of practice. Each facility administrator's
incentive compensation is based, in part, on the achievement of specified
quality objectives. Clinical Operations Specialists provide individualized
on-site training to direct care givers. Clinical Operations Specialists also
conduct mock state and federal surveys in advance of scheduled annual surveys,
to insure that quality improvement standards and procedures are in compliance.
Unison has often entered into leases of facilities that have had regulatory
compliance or quality difficulties. Unison generally achieves prompt and
significant improvements of such facilities, once it takes control. In the year
ended, in thirteen new acquisitions, regulatory records contained a total of 285
total deficiencies cited prior to acquisition. This number was reduced to 138
deficiencies cited on first governmental review conducted after acquisition: a
48.4% reduction in regulatory noncompliance. Of these thirteen new acquisitions
prior to the BritWill Acquisition, seven have had a second review, resulting in
an Update additional 36.7% reduction in noncompliance. Management believes that
its expertise in this area, as reflected by the above statistics, differentiates
it from most other providers of long-term and subacute care.
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Marketing. Unison's marketing efforts are designed to promote higher
occupancy levels and improved patient quality mix. Marketing is also involved in
evaluating existing and future markets for introduction of additional ancillary
and specialty services. Unison believes that the long-term health care and
assisted and independent living industries are driven by local market forces and
that patients and referral sources are generally located in the immediate
geographic area of the facility. Unison's marketing strategy emphasizes the role
and performance of the administrator and director of admission and marketing in
promoting the services offered by Unison facilities in each local community,
particularly the medical community and their role in the local continuum of
care.
Unison maintains an active marketing program that is focused on market
analysis, competitive services, sales training, and accountability and tracking
systems. These systems define, measure and improve the quality of contacts and
relationships with Unison's referral sources. Quantitative and systematic
reporting and analysis is monitored by the regional directors of marketing,
under the supervision of the Vice President of Marketing. Market specific
information, along with weekly and monthly reporting, is used to monitor
adherence to the standards established by Unison.
The hub of this strategy is the local facility administrator and director
of admissions and marketing. These individuals, under the direction of the
corporate and regional marketing staff, are responsible for establishing and
building relationships with various referral sources including general and
specialty physicians, hospital administration and discharge planners, insurance
case managers and other local community organizations. In addition to soliciting
referrals from these sources, Unison seeks to use their input in conjunction
with demographic and medical data analysis to identify specific market needs,
and to introduce new and needed services where appropriate. The facilities also
are involved in community affairs in order to maintain a public awareness of
their services. Unison believes that the emphasis on local marketing efforts,
supported by corporate resources and analysis, allows it to identify and respond
to the needs of the local medical community quickly and effectively.
The marketing function of Unison is also involved in the market analysis of
potential acquisitions. By evaluating the medical communities for each potential
acquisition, Unison seeks to create a "day one" marketing plan for the targeted
acquisition.
Through extensive training of facility admissions and marketing personnel,
along with administrators and directors of nursing, Unison helps organize and
coordinate the types and levels of services provided in each market. The
marketing and clinical divisions of Unison work jointly with administrators to
identify specialty needs and services.
DESCRIPTION OF MANAGEMENT SERVICES AND AGREEMENTS
Of Unison's 51 facilities, five are operated as managed facilities, in
which Unison's responsibilities include recruiting, hiring and training all
nursing and other personnel on behalf of the owner and providing quality
assurance, resident care, dietary care, marketing, accounting, and data
processing services. Services performed at the headquarters level include group
contract purchasing, employee training and development, quality assurance
oversight, human resource management, assistance with third-party reimbursement,
financial and accounting functions, cash management policy and procedure
development, system design and development and marketing support. Unison's
financial reporting system monitors certain key indicators for each managed
facility. These indicators include payroll, admissions and discharges, cash
collections, net patient care revenues, staffing trend analysis and measurement
of operational data on a per patient day basis.
Unison receives a base management fee for the management of long-term care
facilities ranging generally from 3.5% to 6.0% of net revenues of each facility.
Other than certain corporate and regional overhead costs, the services provided
at a facility are the facility owner's expense. The facility owner also is
obligated to pay for all required capital expenditures. Unison is not required
to advance funds to the owners of the facilities it manages.
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DESCRIPTION OF LEASE AGREEMENTS
Unison leases 46 long-term and specialty health care facilities and
assisted or independent living centers. Unison's leases typically are triple net
obligations, have initial terms of 5-10 years with renewal options for up to 15
to 20 years and are classified as operating leases within the meaning of
Statement of Financial Accounting Standards No. 13. Unison typically grants its
lessor a security interest in Unison's personal property at the leased facility.
The leases generally require Unison to maintain a minimum net worth, expend
specified sums per bed for capital expenditures, maintain certain current ratios
and coverage ratios and prohibit Unison from operating any additional facilities
within a certain radius of the leased facility. In addition, Unison is generally
required to maintain comprehensive insurance covering the facilities it leases
as well as personal and real property damage insurance and professional
malpractice insurance. Failure to pay rent within a specified time period
constitutes a default under each lease agreement, which default, if uncured,
permits the facility's lessor to terminate the lease. In all cases, Unison's
interest in the premises is subordinated to that of the lessor's mortgage
lenders.
Unison's two most significant lessors are Omega HealthCare Investors, Inc.
("Omega") and BritWill Investments-Texas, Ltd. ("BritWill Texas") which are
discussed below.
Omega Lease Agreements. Unison has entered into a series of leases with
Omega for 14 facilities, nine in Indiana and five in Texas (the "Omega Leases").
Each of Unison's Omega Leases currently provides for an initial term that
expires in 2005 and allows Unison up to three five-year renewal options. The
Omega Leases require Unison to pay stated rent, subject to annual increases
based upon inflation or the increase in net revenues of the leased facilities
(whichever results in the greater increase in rent), up to a maximum increase
equal to 5.0% of the prior year's rent. If Unison exercises its renewal options,
rent for the period covered by the option is at fair market value as determined
by independent third-party appraisers, and is thereafter subject to increases on
the same basis as the initial term rent. The Omega Leases also grant Unison the
right, but not the obligation, to purchase the Omega facilities upon the
expiration of the initial term. The purchase price is based on facility cost at
the beginning of the lease term and an annual rate of increase of 2.0% per year
from the beginning date until the renewal date. Based on currently available
information, Unison expects to renew the Omega Leases upon the expiration of the
initial term.
BritWill Texas Lease Agreements. Unison entered into a Combined Operating
Lease and Sublease Contract and Agreement (the "Combined Agreement") for the
lease or sublease by BritWill Texas to BritWill Investments-II, Inc., a Delaware
corporation ("BritWill II"), of six facilities in Texas. The Combined Agreement
provides for an initial term that expires on December 31, 2003. The Combined
Agreement and related documents require Unison to pay monthly amounts equal to:
(i) the amount of the monthly payments made by BritWill Texas to Omega pursuant
to the Loan Agreement between those parties dated November 30, 1993, which
provided the financing for BritWill Texas' acquisition of the subject
facilities; (ii) all payments due from lessees under the leases for the subject
facilities that are sub-leased; and (iii) payment of certain third-party seller
subordinated notes incurred in connection with the acquisition of the subject
facilities.
COMPETITION
Unison long-term and specialty health care facilities compete with general
acute care hospitals, skilled nursing facilities, rehabilitation hospitals,
long-term care hospitals, assisted living facilities, home care providers and
other subacute and specialty care providers. Many of these companies have
greater financial and other resources than Unison. No assurance can be given
that Unison will have the resources to compete successfully with such companies.
In addition, cost containment efforts, which encourage more efficient
utilization of general acute care hospital services, have resulted in decreased
hospital occupancy in recent years. As a result, a significant number of general
acute care hospitals have converted portions of their facilities to other
purposes, including various types of long term and subacute care. Unison
believes that the primary factors in competing for subacute patients and
programs are the scope and quality of services offered, and the price of such
services.
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Unison's pharmacy, rehabilitation therapy and product supply businesses
compete with national, regional and local pharmacies, therapy providers and
product supply companies, some of which have significantly greater financial and
other resources than Unison. Similarly, Ampro and Memphis compete with other
medical reference laboratory companies in their respective geographic areas. No
assurance can be given that Unison will have the resources to compete
successfully with such companies. Unison believes that the primary factors in
competing for product supply business are the price and quality of the products
offered, that the primary factor in competing for pharmacy business is prompt
service, that the primary factors in competing for rehabilitation therapy
business are quality of service and availability of competent therapists, and
that the primary factor in competing for medical reference laboratory services
is prompt service.
REVENUE SOURCES
Medicare, Medicaid, and other payor sources each pay at different rates,
which are customarily expressed as rates per patient day. As the following table
sets forth for the periods presented the pro forma mix of net patient revenues
by payor sources.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sources of Net Patient Revenues
Medicaid................................. 51.8% 57.2% 55.9% 58.5% 82.8%
Medicare................................. 32.4 23.2 26.9% 9.1% 3.4%
Private and other........................ 15.8 19.6 17.2% 32.4% 13.8%
----- ----- ----- ----- -----
Total................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the pro forma patient mix, adjusted to
reflect the BritWill Acquisition as if such transaction had occurred at the
beginning of the period presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------- ---------------
1996 1995 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sources of Net Patient Revenues
Medicaid.......................................... 51.8% 54.7% 55.4% 60.2%
Medicare.......................................... 32.4 27.1 27.2% 16.2%
Private and other................................. 15.8 18.2 17.4% 23.6%
----- ----- ----- -----
Total.......................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Changes in the mix of a facility's patient population among Medicaid,
Medicare, and private pay can significantly affect the profitability of the
facility's operations because of the widely varying rates of payment between
these various payors.
GOVERNMENT REGULATION
Introduction. The federal government and all states in which Unison
operates regulate various aspects of Unison's business. All of Unison's skilled
nursing facilities are certified or approved as providers under one or more of
the Medicaid or Medicare programs. To participate in the Medicare or Medicaid
program, each facility must comply with federal participation requirements and
meet additional state licensure requirements. All of these programs are
currently the subject of numerous legislative and regulatory proposals at both
federal and state levels, some of which could adversely affect Unison. Further,
some state Medicaid programs require certification of all beds in a facility,
which may limit the ability of a facility in such states to establish distinct
part Medicare units for subacute care. Long-term care facilities include both
skilled nursing facilities for Medicare and nursing facilities for Medicaid. The
Federal Social Security Act (the "Act") authorizes the Secretary of the
Department of Health and Human Services to execute agreements with state survey
agencies to determine whether skilled nursing facilities meet the federal
participation requirements for Medicare. State
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survey agencies perform the same survey tasks for nursing facilities
participating or seeking to participate in the Medicaid program. The results of
Medicare and Medicaid surveys are used by the Healthcare Financing
Administration ("HCFA") and Medicaid state agencies as the basis for decisions
to execute, deny or terminate provider agreements with facilities.
Enforcement Proceedings and Sanctions; Certification Requirements. Before
enactment of OBRA, the only adverse actions available to HCFA and the states
against facilities that were determined to be out of compliance with federal
participation requirements were termination, nonrenewal or automatic
cancellation of provider agreements; denial of participation for prospective
facilities; and denial of payment for new admissions in lieu of termination when
the facilities had deficiencies that did not pose an immediate and serious
threat to the health and safety of residents. OBRA amended the Act to revise
requirements for the survey and certification and enforcement process for
Medicare and Medicaid. OBRA revised and expanded Medicare and Medicaid
provisions dealing with state and federal responsibilities for survey and
certification, types and requirements for surveys, survey team composition and
responsibilities, requirements for validation surveys, procedures for
investigating complaints and monitoring compliance, disclosure of results of
inspections and activities and provisions for penalties imposed on the states
for failure to comply with survey process requirements. OBRA also provided
changes in the enforcement process and remedies for noncompliance to be used in
lieu of or in addition to termination of facilities' participation in the
Medicare or Medicaid program.
Effective July 1, 1995, HCFA promulgated new survey, certification and
enforcement rules governing skilled nursing facilities and nursing facilities
participating in the Medicare and Medicaid programs. Among other things, the new
HCFA rules governing survey and certification of long-term care facilities
define or redefine a number of terms used in the survey and certification
process. The rules require states to amend their state plans (required by
federal law) to incorporate the provisions of the new rules, including the full
range of remedies for nursing facilities subject to the jurisdiction of the
state Medicaid agency. Additional remedies are available.
Unannounced standard surveys must be conducted at least every 15 months
with a state-wide average of 12 months. In addition to the standard survey,
survey agencies have the authority to conduct surveys as frequently as necessary
to determine whether facilities comply with requirements of participation, to
determine whether facilities have achieved correction and to monitor care if
there is a change of ownership or management of a facility. Furthermore, the
state survey agency must review all complaint allegations and conduct a standard
or an abbreviated standard survey to investigate complaints of violations or
requirements by long-term care facilities if a review of the complaint shows
that a deficiency in one or more of the federal requirements may have occurred
and only a survey will determine whether a deficiency or deficiencies exist. If
a facility has been found to furnish substandard quality of care, or have
deficiencies requiring "significant improvement," it is subject to an extended
survey. The extended survey is intended to identify policies and procedures
which may have caused a facility to furnish substandard quality of care.
HCFA's new rules substantially revise provisions regarding enforcement of
compliance for long-term care facilities with deficiencies. The rules allow
either HCFA or state agencies to impose one or more remedies provided under the
rules for any particular deficiency. Facilities must provide a plan of
correction for all deficiencies regardless of whether a remedy is imposed. At a
minimum, the following remedies are available: termination of provider
agreement; temporary management; denial of payment for new admissions; civil
money penalties; closure of the facility in emergencies or transfer of residents
or both; and state monitoring. States may also adopt optional remedies. The new
rules divide remedies into three categories. Category 1 remedies include
directed plans of correction, state monitoring and directed in-service training.
Category 2 remedies include denial of payment for new admissions; denial of
payment for all individuals (imposed only by HCFA); and civil money penalties of
$50 to $3,000 per day. Category 3 remedies include temporary management,
immediate termination or civil money penalties of $3,050 to $10,000 per day. The
rules define situations in which one or more of the penalties must be imposed.
The new HCFA certification, survey and enforcement regulations impose
significant new burdens on long-term care facilities. The regulations may
require state survey agencies to take aggressive enforcement
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actions. The breadth of the new rules and their recent effective date create
uncertainty over how the rules will be implemented and the ability of any
long-term care facility to comply with them.
Unison believes that its facilities substantially comply with the various
state licensure and Federal certification requirements applicable to them.
However, in the ordinary course of its business, Unison sometimes receives
notices of alleged deficiencies for failure to comply with various regulatory
requirements. Unison immediately reviews such notices and takes appropriate
corrective action. Certain of Unison's facilities have received notices in the
past from state agencies which have resulted in fines and/or the agencies taking
steps to decertify the facilities from participation in Medicare and Medicaid
programs. In nearly all such cases, such deficiencies were remedied before any
facilities were decertified. In one instance, Unison paid or agreed to pay
certain monetary penalties totaling $134,225 (following reductions due to waiver
of appeal rights) for violations of Medicare regulations and approximately
$16,000 for violations of state regulations and voluntarily terminated the
participation of that facility in the Medicare program and transferred residents
to other facilities. Hillside had a history of regulatory problems dating before
Unison acquired it in February 1995. In a series of visits to Hillside,
especially in the period from January through May 1996, government surveyors
cited the facility for numerous violations of Medicare and state regulations
relating to matters involving, among other things, patient care and physical
plant requirements. Although Unison disagreed with some of the findings and
believes it achieved significant improvements in the delivery of care during
May, on May 31, 1996 Unison requested that HCFA accept Hillside's voluntary
withdrawal from the Medicare and Medicaid programs because of the substantial
time and expense to be anticipated in the regulatory appeals process and the
poor prospects of a satisfactory outcome.
Certificates of Need. Many states (although not every state in which
Unison operates) have adopted certificate of need or similar health planning
laws which generally require prior state agency approval of certain
acquisitions, new bed additions or services or capital expenditures. To the
extent that such approvals are required for Unison to expand its operations, or
enter new geographic markets, Unison could be adversely affected by its
inability to obtain the necessary approvals and could incur delays and expenses
associated with obtaining such approvals.
Patient Referral Regulations. Unison is also subject to federal and state
laws that prohibit certain direct and indirect payments between health care
providers that are intended, among other things, to induce or encourage the
referral of patients to, or the recommendation of, a particular provider of
items or services. Violation of these laws may result in criminal fines,
imprisonment and exclusion from the Medicare and Medicaid programs. Federal
regulations establish certain safe harbors from liability under this statute.
While failure to satisfy all of the criteria for a safe harbor does not
necessarily mean that an arrangement is unlawful, arrangements that are of the
same generic kind as those for which a safe harbor is available may be subject
to scrutiny if they fail to quality for the appropriate safe harbor. In
addition, under separate statutes, submission of claims for payment that are
deemed to be false or fraudulent, or for items or services that are "not
provided as claimed," may lead to civil monetary penalties, criminal fines and
imprisonment, and/or exclusion from participation in Medicare, Medicaid and
other federally funded state health care programs.
Under Medicare conditions of participation and some state licensure laws,
Unison, because of its method of service delivery, is required to contract with
health care providers, practitioners and suppliers, including hospitals,
facilities, physicians, pharmacies and medical equipment companies. Some of
these individuals or entities may refer, or be in a position to refer, patients
to Unison, and Unison may refer, or be in a position to refer, patients to
certain of these individuals or entities. Because there is no procedure to
obtaining a binding determination or advisory opinion from any agency, Unison is
not able to determine its ultimate compliance with these laws. (HR 3101 for the
first time has established a procedure requiring the Secretary of the Department
of Health and Human Services to issue advisory opinions concerning some activity
punishable under federal health care fraud statutes. The section concerning
advisory opinions does not take effect until six months after the date of
enactment of HR 3101, and will sunset four years after the date of enactment.)
Although Unison believes its practices are not in violation of these laws, there
can be no assurance that such laws will ultimately be interpreted in a manner
consistent with Unison's practices.
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Additional legislation that became effective in stages on January 1, 1992
and January 1, 1995 prohibits physician referrals for certain "designated health
services" rendered to Medicare and Medicaid patients by a provider in which the
referring physician has an ownership interest or other financial relationship.
Various exceptions are available for financial arrangements that would otherwise
prohibit physician self-referrals. Many states have also enacted physician
self-referral laws that apply whether or not Medicare or Medicaid payments are
involved. Similar penalties, including fines and loss of licensure or
eligibility to participate in government reimbursement programs, apply to
violations of these state self-referral laws. These self-referral laws could
require Unison to modify its contractual arrangements in order to satisfy an
available exception, or limit the ability of physicians with whom Unison has
compensation arrangements to refer patients to Unison.
The nursing home industry has been a particular target of intense focus by
government regulators seeking to discover and prosecute claims of health care
fraud. For example, Medicare intermediaries and carriers have been given new
instructions from HCFA concerning investigating and referring for prosecution
suspected instances of Medicare and Medicaid fraud and abuse. In May, 1996, the
federal government announced the first year results of its "Operation Restore
Trust" initiative. This initiative is a combined federal and state effort
designed to combat health care fraud, waste and abuse and specifically targets
the Medicare and Medicaid programs in connection with services of home health
agencies, nursing homes and durable medical equipment suppliers. These entities
are targeted because they account for the fastest growing cost areas in the
Medicare and Medicaid programs. Operation Restore Trust is focused in five
states: California; Florida; Illinois; New York and Texas. In May, 1996, the
Office of Inspector General issued a "special fraud alert" concerning suspected
nursing facility fraud and abuse. This special fraud alert focused on problems
with claims for services not rendered or not provided as claimed and claims
falsified to circumvent coverage limitations on medical supplies. The Company
expect efforts of this sort to continue.
Payment For Services. Unison derives a significant portion of its net
revenues, directly or indirectly, from the Medicare and Medicaid programs. These
programs are subject to statutory and regulatory changes, retroactive and
prospective rate adjustments, administrative rulings and funding restrictions,
all of which could limit or reduce reimbursement for Unison's services. Any
significant decrease in Medicare or Medicaid reimbursement amounts could have a
material adverse effect on Unison. Unison also obtains payment from private
insurers, including managed care organizations and private pay patients. The
facilities also have contracts with private payors, including health maintenance
organizations and other managed care organizations, to provide certain health
care services to cover patients for a set per diem payment for each patient.
There can be no assurance that the rates paid to Unison by these payors will
remain at comparable levels or be adequate to reimburse Unison for the cost of
providing services to covered beneficiaries. In addition, cost increases due to
inflation without corresponding increases in reimbursement could adversely
affect Unison's business.
The Medicare Program. The Medicare Program is a federally funded and
administered health insurance program for individuals age 65 and over or who are
disabled as defined by the Social Security Administration.
Rehabilitation Therapy Services. Medicare covers and pays for
rehabilitation therapy services furnished in facilities in various ways.
Medicare reimburses the skilled nursing facility based on a reasonable cost
standard. For rehabilitation services provided directly, specific guidelines
exist for evaluating the reasonable cost of physical therapy, occupational
therapy and speech language pathology services. Medicare applies salary
equivalency guidelines in determining the reasonable cost of physical therapy
and respiratory services, which is the cost that would be incurred if the
therapist were employed by a nursing facility, plus an amount designed to
compensate the provider for certain general and administrative overhead costs.
Medicare pays for occupational therapy and speech language pathology services on
a reasonable cost basis, subject to the so-called "prudent buyer" rule for
evaluating the reasonableness of the costs. Unison's gross margins for its
physical therapy services under the salary equivalency guidelines are
significantly less than for its services under the "prudent buyer" rule.
HCFA has announced its intention to propose rules in 1996 applying salary
equivalency guidelines to occupational therapy and speech language pathology
services, while updating physical and respiratory therapy guidelines. In
addition, on April 14, 1995, HCFA issued a memorandum to Regional Office
Administrators in
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response to requests by intermediaries for information as to reasonable costs
for occupational therapy and speech language pathology services. The cost data
in the memorandum set forth rates for occupational therapy and speech language
pathology services that are lower than the Medicare reimbursement rates
currently received by Unison for occupational therapy and speech language
pathology services. Although the memorandum states that the cost data is to be
informative and not serve as a limit on reimbursement rates for occupational
therapy and speech language pathology services, intermediaries and customers of
Unison may apply the cost data guidelines as absolute limits on payments. The
cost data figures contained in the memorandum have been subject to criticism by
the industry, and Unison is unable to determine what effect, if any, such
criticism will have on future actions or policy decisions taken by HCFA in
connection with Medicare reimbursement rates for occupational therapy and speech
language pathology services. Unison cannot predict when, or if, any changes will
be made to the current Medicare reimbursement methodologies for rehabilitation
therapy services, or to the extent to which the data in the HCFA memorandum will
be used by intermediaries in providing reimbursement. The imposition of salary
equivalency guidelines on speech language pathology and occupational therapy
services, or the widespread use by intermediaries of the data in the memorandum,
could significantly impact Unison's margin expectations.
Skilled Nursing Facility Services. The Medicare program covers patients
requiring daily skilled nursing and other rehabilitation care following a
minimum three-day stay in a general acute care hospital, but does not cover
patients requiring only intermediate or custodial levels of care. With certain
exceptions, payment for skilled nursing facility services is made prospectively
with each facility receiving an interim payment during the year for its expected
reimbursable costs. The interim payment is later adjusted to reflect actual
allowable direct and indirect costs of services based on the submission of an
annual cost report at year end. Each facility is also subject to limits on
reimbursement for routine costs. Under the Omnibus Budget Reconciliation Act of
1993, these cost limits are currently frozen at 1993 levels. Exceptions to these
limits are available for, among other things, the provision of atypical
services. In July 1994, HCFA issued new guidelines for requesting exceptions to
the cost limits for all requests submitted after July 20, 1994. Due in part to
the provision of subacute services, Unison's costs for care delivered to
Medicare patients in certain of its long-term and specialty healthcare
facilities have exceeded the routine cost limits. Unison's failure to recover
excess costs or to obtain such exceptions could adversely affect Unison's
results of operations and growth strategy.
Pharmacy. Pharmacists and those providing pharmacy services in the United
States are regulated by state statutes and the rules and regulations of state
boards of pharmacy. Currently, Unison operates pharmacies only in Texas and
Indiana. As required by Texas and Indiana law, Unison and its pharmacists are
licensed as a retail pharmacy and as pharmacists, respectively.
In addition, both state and federal regulators prohibit the dispensing of
certain drugs or medicines other than pursuant to a prescription written by a
licensed physician. In order to implement these restrictions, regulations impose
strict recordkeeping requirements with respect to the handling and dispensing of
controlled substances, small quantities of which are maintained in Unison's
pharmacy for use in filling prescriptions. These requirements also impose
significant recordkeeping obligations upon Unison and its pharmacists. Unison is
subject to regular audits by governmental authorities to monitor compliance with
recordkeeping and other requirements imposed by law and regulation. Penalties
for failure to comply with applicable regulations can range from imposition of
fines to the suspension or revocation of the license of the pharmacy, one or
more pharmacists, or both.
Unison currently provides pharmacy services to 17 Company-affiliated, and
26 non-affiliated skilled nursing facilities in East Texas, and six
Unison-affiliated and six non-affiliated skilled nursing facilities in Indiana,
and two other Unison-affiliated skilled nursing facilities in Arizona and Idaho,
and expects to serve all of Unison's affiliated skilled nursing facilities in
Indiana by the end of 1996.
The Medicaid Program. All of Unison's skilled nursing facilities are
certified to participate in applicable state Medicaid programs. Medicaid is a
joint Federal-state medical assistance program for individuals who meet certain
income and resource standards. Facilities participating in the Medicaid program
are required to meet state licensing requirements to be certified in accordance
with state and federal regulations and to enter into contracts with the state
agency to provide services at the rates established by the state. Current
Federal
57
<PAGE> 219
law requires Medicaid programs to pay rates that are reasonable and adequate to
meet the costs which must be incurred by a nursing facility in order to provide
care and services in compliance with applicable standards, although there can be
no assurance that the provision will survive the current legislative efforts to
revise Medicaid. Beyond this general mandate, however, states have considerable
flexibility in establishing their Medicaid reimbursement systems, and as a
result, the payment methodologies and rates vary significantly from state to
state. All of the states in which Unison operates Medicaid-certified facilities
use a cost-based reimbursement system under which reimbursement rates are
determined by the state from cost reports filed annually by each facility, on a
prospective or retrospective basis. Recently, several states, including Texas,
have adopted case-mix prospective payment systems, pursuant to which payment
levels increase based on a patient's acuity level and need for services.
Reimbursable costs normally include the costs of providing health care services
to patients, administrative and general costs, and the costs of property and
equipment. Not all costs incurred are reimbursed, however, because of cost
ceilings applicable to both operating and fixed costs. Some state Medicaid
programs include an incentive allowance for providers whose costs are less than
the ceilings and who meet other requirements. In addition, certain Medicaid
payments are subject to relatively long collection cycles and payment delays due
to budget shortfalls in state Medicaid programs.
Medicaid reimbursement regulations for Indiana nursing facilities have been
revised three times since August 1, 1994. The first set of revised regulations
(known as "Rule 14") replaced the Rule 4.1 prospective payment system which had
existed since 1983. Under Rule 4.1, actual rate increases after the base period
were generally limited to approximately 3.0% and facility operators were
permitted to bill separately for certain ancillary therapy services and
non-routine medical supplies.
With the adoption of Rule 14, the Indiana reimbursement system changed from
a true prospective payment system to a modified cost-based system. Base rates
are now determined by actual costs in the base period subject to various line
item limits. Rates for subsequent years are set at the lower of costs from the
prior year or rates from the prior year inflated by the HCFA Skilled Nursing
Facility Market Basket Index, subject to maximum allowable limits and various
line item limits. This system has, over the last decade, resulted in an increase
in annual reimbursement rates of approximately 6%. Rule 14 also precludes
facility operators from billing separately for certain ancillary therapy
services and non-routine medical supplies. The overall impact of Rule 14 reduced
total Medicaid nursing facility payments by $10 million statewide out of total
prior year expenses of $720 million. The elimination of separate billing for
supplies and therapies had a significant effect on certain facility operators
who had relied heavily on this mechanism to underwrite operating losses from per
diem rates. Rule 14.1, Rule 14.2 and legislation effective July 1, 1995 have
made minor amendments which have generally increased certain line item limits.
Commencing in late 1996, a DRG-like case mix reimbursement system will be
implemented in Indiana.
Health Care Reform. On August 21, 1996, President Clinton signed the
Health Insurance Portability and Accountability Act ("HR 3103"). HR 3103
contains a variety of significant health care fraud and abuse provisions. HR
3103 contains a variety of significant health care fraud and abuse provisions.
Among them are: creation of a coordinated federal health care fraud and abuse
program; establishment of a Medicare integrity program under which the
government will enter into contracts to, among other things, review activities
undertaken by providers of services, audit cost reports, make determinations
whether payment under Medicare should be made for services rendered and develop
lists of items of durable medical equipment which are subject to prior
authorization requirements; expansion of current health care fraud and abuse
sanctions to "federal health care programs" defined as "any plan or program that
provides health benefits, whether directly, through insurance, or otherwise,
which is funded directly, in whole or in part, by the United States Government"
as well as any state health care program as defined in the Social Security Act;
creation of a health care fraud criminal sanction; expansion of sanctions
applicable to health care fraud; creation of a criminal penalty for fraudulent
disposition of assets in order to obtain Medicaid benefits; and expansion of the
authority to impose, and increasing the amount of, civil monetary penalties.
The Clinton administration and various members of Congress have proposed a
number of legislative proposals to reform the health care system. Congress is
also considering proposals to significantly reduce Medicare and Medicaid
spending, either as a part of efforts to reduce the budget or as a separate
initiative. In addition, some of the states in which Unison operates are
considering or implementing various healthcare
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<PAGE> 220
reform proposals. These proposals could limit the types of services or number of
providers available to Medicaid beneficiaries. Unison anticipates that Congress
and state legislatures will continue to review and assess health care reform and
budget reduction. Talks in Congress have reached a stalemate with regard to the
type and extent of legislative reform of Medicare and Medicaid programs. Due to
uncertainties regarding the ultimate features of reform or budget initiatives
and their enactment and implementation, Unison cannot predict which, if any,
reform proposals will be adopted, when they may be adopted or what impact they
may have on Unison. No assurance can be given that such measures will not have a
material adverse effect on Unison.
INSURANCE
Unison carries general liability, comprehensive property damage,
malpractice, workers' compensation and other insurance coverages that management
considers adequate for the protection of its assets and operations. There can be
no assurance, however, that the coverage limits of such policies will be
adequate or that insurance will continue to be available to Unison on
commercially reasonable terms in the future. A successful claim against Unison
in excess of its insurance coverage could have a material adverse effect on
Unison and its financial condition and results of operations. Claims against
Unison, regardless of their merit or outcome, may also have an adverse effect on
Unison's reputation and business.
EMPLOYEES
As of August 31, 1996, the Company employed approximately 3,000 full time
equivalent employees. Unison has collective bargaining agreements covering
approximately 303 of its full time equivalent employees but has never
experienced a work stoppage and believes that its overall relations with its
employees are good.
The principal executive offices of Unison are located at 7272 East Indian
School Road, Suite 214, Scottsdale, Arizona 85251, and its telephone number is
(602) 423-1954.
LABCO AND MEMCO; CERTAIN OTHER SUBSIDIARIES
Labco Acquisition Co. ("Labco") and Memphis Acquisition Co. ("Memco"),
recently formed Delaware corporations, are wholly-owned subsidiaries of Unison.
Labco and Memco were organized solely to effect the proposed Mergers with Ampro
and Memphis and neither has had any operations. The principal offices of Labco
and Memco are located at 7272 East Indian School Road, Suite 214, Scottsdale,
Arizona 85251, and their telephone number is (602) 423-1954. Unison will form
five additional subsidiaries, one under the DGCL and four under the CBCA, to
effect the Signature Mergers.
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<PAGE> 221
PROPERTIES
The following table summarizes certain information regarding the long-term
care facilities and assisted and independent living centers operated by Unison
as of August 31, 1996. Except as indicated, all of the facilities are leased.
<TABLE>
<CAPTION>
NUMBER OF MEDICARE
LICENSED OCCUPANCY CERTIFIED
FACILITY NAME LOCATION BEDS RATE BEDS
- ---------------------------------------------- ---------------------------- --------- --------- --------
<S> <C> <C> <C> <C>
HERITAGE REGION
Marshall Manor Nursing Home................. Guntersville, Alabama 91 99.0% 20
Terrace Lake Villa I(2)..................... Guntersville, Alabama 26 80.3 --
Terrace Lake Villa II(2).................... Guntersville, Alabama 16 80.1 --
Edgewater(2)................................ Guntersville, Alabama 40 80.4 --
Ridgewood Health Care Center................ Jasper, Alabama 98 98.6 20
Bayshore Convalescent Center(1)............. N. Miami Beach, Florida 150 64.4 31
Lake City Extended Care Center(1)(4)........ Lake City, Florida 60 32
Homestead of McKinney....................... McKinney, Texas 138 97.7 12
Oakwood Healthcare Center................... Arlington, Texas 120 75.3 20
Twin Pines of Lewisville.................... Lewisville, Texas 120 74.0 14
Peachtree Center Nursing and Rehabilitation
Facility(1)............................... Smyrna, Tennessee 89 94.1 16
HEARTLAND REGION
Boonville Convalescent Center............... Boonville, Indiana 107 97.7 17
Capital Care Healthcare Center.............. Indianapolis, Indiana 60 83.8 10
Cloverleaf of Knightsville.................. Knightsville, Indiana 86 97.1 10
English Estates HealthCare.................. Lebanon, Indiana 130 66.1 20
English Senior Living(2)(5)................. Lebanon, Indiana 22 -- --
Holiday Manor............................... Princeton, Indiana 91 81.7 12
Kendallville Manor HealthCare Center........ Kendallville, Indiana 60 84.7 12
Lockerbie Healthcare Center................. Indianapolis, Indiana 79 77.1 --
Nightingale................................. Westland, Michigan 236 90.1 --
Owensville Convalescent Center.............. Owensville, Indiana 68 98.1 12
Parkview Manor.............................. Indianapolis, Indiana 39 60.2 39
Sunset Manor................................ Greencastle, Indiana 79 91.7 6
Wellington Manor(3)......................... Indianapolis, Indiana 132 76.7 --
Willow Manor Convalescent Center............ Vincennes, Indiana 142 74.5 27
Windsor Manor Nursing and Rehabilitation
Center(1)(4).............................. Indianapolis, Indiana 162 38
Bonner Health Center........................ Bonner Springs, Kansas 50 99.0 --
Oswego Manor................................ Oswego, Kansas 56 66.6 13
Marshall Manor(1)........................... Marshall, Michigan 71 96.0 15
Henry Clay Villa Nursing Facility........... Markleysburg, Pennsylvania 74 93.2 10
Henry Clay Villa Assisted Living
Facility(2)............................... Markleysburg, Pennsylvania 32 40.6 --
MOUNTAIN REGION
SunCrest HealthCare Center.................. Phoenix, Arizona 115 91.6 16
The Oaks at Boise........................... Boise, Idaho 88 70.1 24
Mountainside Care Center.................... Sandpoint, Idaho 95 92.2 19
White Pine Care Center...................... Ely, Nevada 99 78.6 9
Franciscan Health Care Center of Enumclaw... Enumclaw, Washington 148 70.5 28
Franciscan Health Care Center of
Walla Walla............................... Walla Walla, Washington 74 60.6 12
Valley Vista(2)............................. Sandpoint, Idaho 60 81.7 --
</TABLE>
60
<PAGE> 222
<TABLE>
<CAPTION>
NUMBER OF MEDICARE
LICENSED OCCUPANCY CERTIFIED
FACILITY NAME LOCATION BEDS RATE BEDS
- ---------------------------------------------- ---------------------------- --------- --------- --------
<S> <C> <C> <C> <C>
PRAIRIE REGION
Colonial Pines Healthcare Center............ San Augustine, Texas 107 79.6 16
Elkhart Manor............................... Elkhart, Texas 102 75.1 10
Four States Care Center..................... Texarkana, Texas 180 52.4 30
Green Acres Nursing Home.................... Emory, Texas 68 79.9 16
Hemphill Care Center........................ Hemphill, Texas 90 92.5 10
Heritage Plaza Nursing Home................. Texarkana, Texas 90 80.5 22
Pine Grove Nursing Center................... Center, Texas 120 93.7 26
Pine Haven Care Center...................... Texarkana, Texas 120 73.4 14
Pleasant Manor Living Center................ Waxahachie, Texas 120 89.0 24
Reunion Plaza Senior Care and Retirement
Center.................................... Texarkana, Texas 102 75.2 26
South Place Nursing Center.................. Athens, Texas 120 88.2 32
Texarkana Nursing Center.................... Texarkana, Texas 120 69.1 28
West Place Nursing Center................... Athens, Texas 120 71.5 16
----- ---
Total beds(5)........................ 4,666 784
===== ===
</TABLE>
- ---------------
(1) Facilities are managed, not leased.
(2) Facilities are independent living and assisted living operations which are
not eligible for Medicare certification.
(3) An application for Medicare certification is pending.
(4) Unison provides reduced-scope management services to these facilities and
receives management fees which average 3.0% of revenues.
(5) Does not include assisted living beds. Totals do not represent all
facilities leased or managed and all licensed or certified beds because the
Heritage Oaks and Hillside Care facilities are not currently in operation.
The following table describes certain additional facilities, as of August
1, 1996, that are operated by Signature and related entities and which are
proposed to be acquired by Unison in the Signature Mergers.
<TABLE>
<CAPTION>
MEDICARE
NUMBER OF OCCUPANCY CERTIFIED
FACILITY NAME LOCATION BEDS RATE BEDS
- ---------------------------------------------- ---------------------------- --------- --------- --------
<S> <C> <C> <C> <C>
Amberwood Court(1)............................ Denver, Colorado 81 88 21
Brookshire House(1)........................... Denver, Colorado 70 90 10
Christopher House(1).......................... Wheat Ridge, Colorado 75 89 12
Arkansas Manor(2)............................. Denver, Colorado 116 91 24
Cornerstone Care Center(2).................... Lakewood, Colorado 140 97 12
The Arbors(2)................................. Camp Verde, Arizona 116 84 20
Los Arcos(1).................................. Flagstaff, Arizona 80 98 20
Rio Verde(1).................................. Cottonwood, Arizona 80 95 16
Pueblo Norte(1)............................... Show Low, Arizona 100 84 10
Douglas Manor(2).............................. Douglas, Arizona 64 84 8
Village Catered Care(2)(3).................... Douglas, Arizona 64 41 --
Safford Care Center(2)........................ Safford, Arizona 128 93 24
Peppertree Catered Care(2)(3)................. Safford, Arizona 64 96 --
----- ---
1,178 177
===== ===
</TABLE>
- ---------------
(1) The facility real estate is owned.
(2) The facility real estate is leased.
(3) Assisted living facility.
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<PAGE> 223
Unison leases approximately 11,000 square feet of office space in
Scottsdale, Arizona that houses the executive offices of Unison. The lease
expires in the year 2000. Unison maintains regional offices in Texarkana, Texas,
Birmingham, Alabama and Indianapolis, Indiana, and may open new regional offices
as growth requires. These regional offices are either in small office suites or
in homes of the regional executives. Quest leases approximately 3,600 square
feet of commercial office space in Longview, Texas for its pharmacy operations.
In addition, Quest leases approximately 2,000 feet of office space in
Bloomington, Indiana for its Indiana pharmacy. Sunbelt Therapy Management
Services, Inc., through the four therapy companies, leases an aggregate of
approximately 38,000 square feet of space for outpatient clinics and fitness
centers in Mississippi and Alabama. Lease terms on most of the office and
pharmacy space range from one to five years. Management believes that Unison's
leased properties are adequate for its present needs and that suitable
additional or replacement space will be available as required.
LEGAL PROCEEDINGS
Unison is, and may in the future be, party to litigation arising in the
ordinary course of its business. There can be no assurance that Unison's
insurance coverage will be adequate to cover all liabilities occurring out of
such claims or that any such claims that are not covered by insurance will not
have an adverse effect on Unison's business. Unison has no reason to believe
that any pending claims are material, whether or not covered by insurance.
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<PAGE> 224
UNISON MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Jerry M. Walker, 51, has served as President and Chief Executive Officer of
Unison since it commenced operations in July 1992, when he founded Unison with
Mr. Rollins and Mr. Contris. From June 1989 until joining Unison, he was the
Chief Executive Officer of Samaritan Senior Services, Inc., a regional operator
of subacute and long-term care facilities based in Phoenix, Arizona. Mr. Walker
is a member of the American College of Health Care Administrators and is a
Certified Public Accountant.
Phillip R. Rollins, 39, has served as the Executive Vice President and
Chief Operating Officer of Unison since it commenced operations in July 1992.
From June 1989 until joining Unison, he worked with Mr. Walker and Mr. Contris
as the Director of Operations of Samaritan Senior Services, Inc. Prior to
joining Samaritan Senior Services, Mr. Rollins was the Director of Medicare and
Ancillary Services for Life Care Centers of America, a private operator of
long-term care facilities headquartered in Cleveland, Tennessee. Mr. Rollins is
a member of the American College of Health Care Administrators.
Paul J. Contris, 37, served as Executive Vice President and Chief Financial
Officer of Unison from July 1992 through August 15, 1995. On August 15, 1995, he
became Executive Vice President and Chief Accounting Officer of Unison, and in
September 1996 he became Executive Vice President Acquisitions and Development
of Unison. Prior to founding Unison with Mr. Walker and Mr. Rollins, he was the
Vice President -- Finance of Samaritan Senior Services. Mr. Contris began his
employment with the predecessor of Samaritan Senior Services in October 1984.
Prior to joining Samaritan Senior Services, he was employed in the acquisitions
department of The Hillhaven Corporation. Mr. Contris is a Certified Public
Accountant.
Craig R. Clark, 47, has served as the Executive Vice President and Chief
Financial Officer of Unison since it acquired BritWill in August 1995, having
served BritWill as Executive Vice President and Chief Financial Officer since
June 1994. In September 1996, Mr. Clark was also appointed to serve as Unison's
Chief Accounting Officer. From 1972 until September 1989, Mr. Clark was
associated with Arthur Young & Company, most recently as Partner. From September
1989 until September 1992, Mr. Clark was Vice President -- Finance and Chief
Accounting Officer of Republic Health Corporation, the predecessor of OrNda
HealthCorp, Inc. From September 1992 until joining BritWill in June 1994, he was
a privately employed consultant. Mr. Clark is a Certified Public Accountant.
Bruce H. Whitehead, 44, has served as the Chairman of the Board of Unison
since August 1995. He is also President and Chief Executive Officer of the
general partner of WFI. Prior to joining Unison, Mr. Whitehead was Chairman of
BritWill from its inception in 1993. From 1984 through 1992, Mr. Whitehead was
President of The BritWill Company, which also invested in and managed long-term
care facilities.
Tyrell L. Garth, 48, has served as a Director of Unison since August 1995.
Mr. Garth is a partner in the law firm of Moore, Landry, Garth, Jones,
Barmeister and Hulett, LLP, which served as general counsel to BritWill prior to
its acquisition by Unison in August 1995. Mr. Garth is also a director of
American Eco Corporation, Houston, Texas, a full service environmental and
mechanical contracting firm, whose common stock is listed on both the American
Stock Exchange and the Toronto Stock Exchange.
John T. Casey, 50, has served as a Director of Unison since August 1995.
From October 1991 through August 1995, Mr. Casey was the Chief Operating Officer
of American Medical International, a publicly traded hospital management
company. Prior to October 1991, Mr. Casey was President of Samaritan Health
Services, a hospital and long-term care provider.
John T. Lynch, 48, has been a director of Unison since June 1992. Mr. Lynch
was also a director of BritWill since 1992. In January 1990, he co-founded
Trouver Capital Partners, L.P., a private investment banking firm and serves as
one of its general partners. Mr. Lynch was Managing Director and a member of the
Health Care Finance Group of Furman Selz Incorporated, and was Managing Director
and head of Health Care Finance Groups at Thomson McKinnon Securities, Inc. and
Dean Witter Reynolds, Inc. for the period 1980 through 1990.
Mark W. White, 56, has served as a Director of Unison since August 1995.
Mr. White has been an attorney in private practice since 1987. From 1983 to
1987, Mr. White served as Governor of the State of Texas. Mr. White is also a
director of American Eco Corporation.
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<PAGE> 225
L. Robert Oberfield, 58, has been President of Quest Pharmacies, Inc., a
majority owned subsidiary of Unison, since it was organized in March 1995. From
December 1992 to March 1995, he was employed by Sunscript Pharmacy Corp., a
subsidiary of Sun Healthcare Company, most recently as President. From September
1990 to December 1992 he was employed by RDS Acquisition Corp. ("RDS"). RDS
commenced bankruptcy proceedings in December 1991. At the time the proceedings
commenced, Mr. Oberfield was the Senior Vice President of RDS, and he served as
its President thereafter until December 1992.
Paul G. Henderson, 41, has served as President of Sunbelt Therapy
Management Services, Inc. since the acquisition of Sunbelt by Unison in March
1996. For the past six years, Mr. Henderson has been active in the founding and
management of physical therapy service providers (Sunbelt) and in providing
patient care.
Terry Troxell-Gurka, 45, has served as Director of Professional Services of
Unison since it commenced operations in July 1992. On November 15, 1994, she
became Vice President of Clinical Operations of Unison. From July 1991 until
July 1992, Ms. Troxell-Gurka served as Director of Professional Services of
Samaritan Senior Services, Inc. Prior to joining Samaritan Senior Services, she
was employed by the Arizona Department of Health from 1985 until 1991, where she
served as Program Manager of health Care Facility Licensure and Enforcement,
overseeing the licensing, certification and enforcement of all licensed health
care facilities in Arizona. Ms. Troxell-Gurka is a licensed registered nurse and
a Certified Gerontologist Clinical Specialist. She sits on the American Health
Care Association's national facility standards committee and Long-Term Care
Nurse Council. She is a member of the American Gerontological Nurses Association
and the Association for Professionals in Infection Control and Epidemiology.
David A. Kremser, 48, founded Signature Health Care Corporation in July
1987 and has served as its Chairman, President, Chief Executive Officer and a
Director since then. Mr. Kremser also serves as the Chief Executive Officer for
each of Arkansas, Cornerstone, Douglas and Safford. From January 1985 through
1987, Mr. Kremser was a Director and Executive Vice President of Columbia
Corporation, a long-term care company, and the President of Columbia West
Corporation, a subsidiary of Columbia Corporation. Prior to joining Columbia
Corporation, he was affiliated with ARA Services, Inc., most recently with
responsibility for the ARA's operations in California, Colorado, Wyoming and
Texas.
EXECUTIVE COMPENSATION
The following table sets forth, with respect to the years ended December
31, 1995 and 1994, compensation awarded to, earned by or paid to (i) Unison's
Chief Executive Officer and (ii) the four other executive officers who were
serving as executive officers at December 31, 1995 and whose total salary and
bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
--------------------- UNDERLYING
SALARY BONUS OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) COMPENSATION
- ---------------------------------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jerry M. Walker,.................................... 1995 $250,000 $ 37,500 33,924
President, Chief Executive Officer 1994 161,952
Phillip R. Rollins,................................. 1995 200,000 30,000 33,924
Executive Vice President Operations, 1994 138,515
Chief Operating Officer
Craig R. Clark,..................................... 1995 200,000 30,000 33,924 $ 88,250(2)
Executive Vice President, Chief 1994 14,231 20,000
Financial Officer
Paul J. Contris,.................................... 1995 200,000 30,000 33,924
Executive Vice President Acquisition and 1994 138,515
Development(3)
Terry Troxell-Gurka,................................ 1995 97,575 2,710 6,185
Vice President Clinical Operations 1994 75,465
David A. Kremser,................................... 1995 390,000 825,000
Director(4)
</TABLE>
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<PAGE> 226
- ---------------
(1) Certain columns have been omitted where there has been no compensation paid
or awarded to or earned by any of the named executives required to be
reported in such columns.
(2) Includes consulting fees of $87,750 paid by BritWill before Mr. Clark became
an employee of BritWill and $500 of fees as a director of BritWill. See
"-- Employment Contracts, Termination of Employment, and Change-in-Control
Arrangements."
(3) Mr. Contris served as Unison's Executive Vice President Finance and Chief
Accounting Officer from August 15, 1995 until September 1996.
(4) Mr. Kremser will become a Director of Unison after the Closing of the
Signature Mergers. Amounts shown were paid by Signature Health Care.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
The following table sets forth information about stock option grants during
the last fiscal year to the executive officers named in the Summary Compensation
Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
- ------------------------------------------------------------------------------------ REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
TOTAL RATES
OPTIONS/ OF STOCK PRICE
NUMBER OF SARS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION
UNDERLYING EMPLOYEES OR BASE TERM(4)
OPTION/SARS IN FISCAL PRICE EXPIRATION -------------------
NAME GRANTED (#) YEAR(2) ($/SH)(3) DATE 5% ($) 10% ($)
- --------------------------------- ------------ ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jerry M. Walker.................. 33,924 12.54% $10.00 8/10/2005 $247,270 $574,585
Phillip R. Rollins............... 33,924 12.54 $10.00 8/10/2005 247,270 574,585
Craig R. Clark................... 33,924 12.54 $10.00 8/10/2005 247,270 574,585
Paul J. Contris.................. 33,924 12.54 $10.00 8/10/2005 247,270 574,585
Terry Troxell-Gurka.............. 6,185 2.29 $10.00 8/10/2005 45,082 104,758
</TABLE>
- ---------------
(1) Consists entirely of stock options.
(2) Based on total grants during the fiscal year of 270,541.
(3) The options were granted with an exercise price of $10.00 per share and were
repriced in January 1996 to $9.00 per share. All other discretionary grants
at $10.00 per share were also repriced; formula grants to nonemployee
directors under the Automatic Option Grant Program were not repriced.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% or 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The potential
realizable value of the foregoing options is calculated by assuming that the
market price of the underlying security appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
repriced exercise price and sold on the last day of its term at the
appreciated price.
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<PAGE> 227
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE
TABLE(1)
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table concerning the number and value
of options outstanding at the end of the last fiscal year. There were no option
exercises during the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE(1)
- --------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Jerry M. Walker.......................................... 0/33,924 0/12,722
Phillip R. Rollins....................................... 0/33,924 0/12,722
Craig R. Clark........................................... 0/33,924 0/12,722
Paul J. Contris.......................................... 0/33,924 0/12,722
Terry Troxell-Gurka...................................... 0/6,185 0/2,319
</TABLE>
- ---------------
(1) Value as of December 31, 1995 is based upon closing bid price of $9.375 as
reported on the Nasdaq National Market for December 29, 1995, minus the
exercise price after repricing, multiplied by the number of shares
underlying the option.
COMPENSATION OF DIRECTORS
The nonemployee directors of Unison receive an annual retainer of $10,000,
$1,000 for each Board and Committee meeting attended, plus reimbursement of
expenses, and the right to participate in the Option Plan. Directors who are
also executive officers of Unison receive no additional compensation for serving
on the Board of Directors.
THE 1995 STOCK OPTION PLAN
Unison's 1995 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors effective July 10, 1995 and approved by the stockholders on
August 8, 1995. Up to 511,046 shares of Unison Common Stock have been authorized
for issuance under the Option Plan. The Board of Directors approved on September
6, 1996, and directed to be submitted to stockholders for approval at the Unison
Special Meeting, an amendment to the Option Plan (the"Option Plan Amendment")
which would effect an increase in the number of shares of Unison Common Stock
authorized for issuance under the Option Plan from 511,046 to 800,000. See "The
Option Plan Amendment" in the Proxy Statement Supplement.
The Option Plan is divided into two separate components: (i) a
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price determined by the Plan Administrator and (ii)
the Automatic Option Grant Program under which option grants will automatically
be made at periodic intervals to eligible non-employee Board members to purchase
shares of Unison Common Stock at an exercise price equal to 100% of their fair
market value on the grant date.
The Discretionary Option Grant Program is administered by the Compensation
Committee. The Compensation Committee as Plan Administrator has complete
discretion to determine which eligible individuals are to receive option grants,
the time or times when such option grants are to be made, the number of shares
subject to each such grant, the status of any granted option as either an
incentive stock option or a non-qualified stock option under the Federal tax
laws, the vesting schedule to be in effect for the option grant and the maximum
term for which any granted option is to remain outstanding.
Upon an acquisition of Unison by merger, consolidation or reorganization,
each outstanding option may be substituted with shares of the acquiring company
or such option may be canceled in consideration for a cash payment to the
optionee of an amount per option share equal to the excess of the highest fair
market
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<PAGE> 228
value of Unison Common Stock during the 60-day period preceding the acquisition
over the option exercise price. A similar cash payment will be made to each
optionee upon the dissolution or liquidation of Unison.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of Unison Common
Stock on the new grant date.
Under the Automatic Option Grant Program, prior to September 6, 1996, each
individual serving as a non-employee member of the Board of Directors of Unison
on the date of adoption of the Option Plan by the Board of Directors received an
option grant on such date for 9,246 shares of Unison Common Stock, except that
the Chairman of the Board of Directors received an option for 10,496 shares.
Similar additional grants were to be made at every fifth annual stockholder
meeting thereafter. Beginning with and after September 6, 1996, if the Option
Plan Amendment is approved, nonemployee directors are entitled to receive annual
option grants in respect of 15,000 shares (17,500 shares in the case of the
Chairman of the Board) at each annual meeting of stockholders.
Each automatic grant will be exercisable 50% one year after the grant and
100% two years after the grant and will have a term of 10 years, subject to
earlier termination following the optionee's removal from the Board of Directors
for cause.
The Board of Directors may amend or modify the Option Plan at any time. The
Option Plan will terminate on July 9, 2005, unless sooner terminated by the
Board of Directors.
Effective July 10, 1995, the Board of Directors granted options to purchase
306,126 shares of Unison Common Stock in the aggregate under the 1995 Plan to
certain employees of Unison, including each of the executive officers in the
following amounts: Jerry M. Walker, Philip R. Rollins, Craig R. Clark and Paul
J. Contris, 33,924 shares each, which vest over two-year period from the grant
date; and to L. Robert Oberfield and Terry Troxell-Gurka, 6,185 shares each,
which vest over a four-year period from the grant date. All of the options have
an exercise price (after repricing in January 1996) of $9.00 per share. Such
exercise price is equal to the fair market value of the Common Stock on the
grant date, as determined by the Board of Directors.
On September 1996 the Compensation Committee of the Board of Directors
confirmed a special, one-time grant (originally promised in July 1996 subject to
Compensation Committee Approval) of options for 60,000 shares to Craig R. Clark,
at an exercise price of $9.00 per share in conjunction with his assumption of
additional responsibilities as Unison's Chief Accounting Officer. On the same
date, but subject to approval of the Option Plan Amendment by Unison's
stockholders, the Compensation Committee recommended, and the full Board
approved, the issuance of options for an additional 416,850 shares to Unison
employees at an exercise price of $13.75 per share (its fair market value at
date of grant), including options for 40,000 shares each to Messrs. Rollins,
Costris and Clark, options for 10,000 shares to each, Mr. Oberfield and Mr.
Henderson and options for Ms. Troxell-Gurka for 7,500 shares all as reflected in
the following table:
1996 OPTION GRANTS
UNISON STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION OPTION SHARES
---------------------------------------------------------------------- -------------
<S> <C>
Jerry M. Waller, President, CEO....................................... 0
Phillip R. Rollins, Executive Vice President.......................... 40,000
Craig R. Clark, Executive Vice President.............................. 100,000
Paul J. Contris, Executive Vice President............................. 40,000
Terry Troxell-Gurka, Vice President................................... 7,500
Executive Group (7 persons)........................................... 197,500
Non-Executive Director Group.......................................... 92,500
Non-Executive Officer Employee Group.................................. 186,850
</TABLE>
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<PAGE> 229
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
Unison has entered into employment agreements with each of Messrs. Walker,
Rollins and Contris, each of which expires in August 1998, subject to automatic
renewal for successive one-year periods unless either Unison or the employee has
given notice of non-renewal 30 days prior to expiration. The employment
agreements provide for an annual base salary of $275,000 for Mr. Walker and
$220,000 for each of Messrs. Rollins and Contris and the right to earn quarterly
and annual incentive compensation totalling at least 60% of base salary. The
right to receive incentive compensation is based on Unison's attainment of its
quarterly and annual budget as reflected in its quarterly and annual filings
with the Commission. During 1995, Messrs. Walker, Rollins and Contris were each
granted options to purchase 33,924 shares of Unison Common Stock under the
Option Plan and in September 1996 Messrs. Rollins and Contris were granted
options for an additional 40,000 shares at an exercise price of $13.75 per
share, subject to stockholder approval of the Option Plan Amendment. If any of
the employment agreements is terminated by Unison other than for cause, Unison
must pay the employee one year's base salary or his base salary for the
remaining term of the agreement, whichever is longer, and the employee's
pro-rated performance bonus. If any of the employment agreements is not renewed
at the end of the initial or subsequent term, the employee will be entitled to
receive one year's base salary. The employment agreements contain a one-year
nonsolicitation of employees and customers provision. Each of Messrs. Walker,
Rollins and Contris may be terminated upon Unison's failure to meet certain
financial covenants under the Pledge Agreements. See "Certain Transactions."
Unison initially entered into an employment agreement with Mr. Clark for an
eighteen-month term beginning in August 1995 at an annual base salary of
$200,000 and incentive compensation as described above. In September 1996 Mr.
Clark's contract was amended to extend the term to August 1998 and his annual
base salary was increased to $220,000. If the employment agreement is terminated
other than for cause, Mr. Clark will be entitled to receive one year's base
salary or his base salary for the remaining term of the agreement, whichever is
longer, and his pro-rated performance bonus. The employment agreement contains a
one-year nonsolicitation of employees and customers provision. Mr. Clark's
employment agreement with BritWill was terminated in connection with the
BritWill Acquisition, and Mr. Clark received a payment of $175,000 (equal to one
year of base salary) pursuant thereto. During 1995, Mr. Clark was granted an
option to purchase 33,924 shares of Unison Common Stock under the Option Plan,
and on September 6, 1996, the Compensation Committee confirmed the earlier grant
of an option to purchase 60,000 shares of Unison Common Stock under the Option
Plan at an exercise price of $9.00 per share and, subject to stockholder
approval of the Option Plan Amendment, options for an additional 40,000 shares
at an exercise price of $13.75 per share.
Unison entered into an employment agreement with Mr. Oberfield for a
one-year term beginning in May 1995, subject to automatic renewal for successive
one-year terms unless either Unison or Mr. Oberfield has given notice of
non-renewal 30 days prior to expiration. The employment agreement provides for
an initial annual base salary of $96,000. The annual base salary increased to
$136,800 as of January 1996 because Quest had become profitable during 1995. Mr.
Oberfield is also entitled to participate in Unison's incentive compensation
program for key employees, up to a maximum award of 15% of his base salary. If
the employment agreement is not renewed by Unison other than for cause, Unison
must pay Mr. Oberfield one year's base salary and his prorated incentive
compensation. During 1995, Mr. Oberfield was granted an option to purchase 6,185
shares of Unison Common Stock under the Option Plan, and in September 1996 he
was granted an option to purchase an additional 10,000 shares at $13.75 per
share, subject to approval of the Option Plan Amendment by the stockholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Prior to August 1995, decisions concerning compensation of executive
officers were made by an Executive Committee of the Board of Directors,
consisting of Messrs. Walker, Rollins and Contris. On August 17, 1995, the Board
of Directors created a Compensation Committee consisting of Messrs. Garth, White
and Casey. See "-- Directors and Executive Officers."
The BritWill Acquisition. By a Second Amended and Restated Purchase and
Sale Agreement, amended in April 1996, effective as of August 10, 1995, Unison
acquired BritWill. A short-term note in the
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<PAGE> 230
amount of $5.6 million (the "Term Note"), an $8.0 million subordinated
promissory note (the "Subordinated Note") and a $7.0 million convertible
debenture (the "Convertible Debenture") issued as consideration for the BritWill
Acquisition were issued to the former shareholders of BritWill, one of whom is
Mr. Garth. The primary BritWill shareholder entitled to receive payments is WFI,
which owned 81.5% of the stock of BritWill prior to the BritWill Acquisition.
Bruce H. Whitehead is the president of the general partner of WFI and holds a 1%
ownership interest in WFI. The remaining 99% ownership interest in WFI is held
by the Whitehead Family Trust, the sole beneficiaries of which are the children
of Bruce H. Whitehead. Mr. Whitehead is the Chairman of the Board of Unison. The
Term Note was repaid in full in January 1996. The Convertible Debenture has been
converted into 561,815 shares of Common Stock. The Subordinated Note bears
interest at rates ranging from 8.0% to 10.0%, calls for partial payments of
principal prior to maturity and matures at the earlier of August 9, 2000 or the
completion of the placement and funding of any future public or private offering
of debt or equity securities. The Subordinated Note also requires Unison to
maintain certain cash balances and financial covenants. In addition, monthly
contingent payments aggregating approximately $10.3 million may be due through
August 2000 if Unison achieves specified monthly revenue conditions, and a lump
sum contingent payment of $11.5 million (the "Lump Sum Contingent Payment") is
due in August 2000 if revenues exceed $150.0 million in the 12 months ending
June 30, 2000. The Lump Sum Payment is subject to reduction by up to $1.4
million if during 1996 Unison does not collect or establish the collectability
of certain accounts receivable that were owned by BritWill at the time of the
acquisition and if certain specified quarterly consolidated revenue conditions
are not achieved. These contingent amounts will be added to lease operating
rights when and if paid. The Lump Sum Payment is due earlier in the event of any
future public or private debt or equity financing or under certain other
circumstances.
To secure payment of the deferred purchase price for the BritWill
Acquisition, Jerry M. Walker, Phillip R. Rollins and Paul J. Contris each
executed stock pledge agreements (the "Pledge Agreements") in favor of Bruce H.
Whitehead, as agent for the former BritWill shareholders. Pursuant to the Pledge
Agreements, 7.5% of the pledged stock was released upon completion of the
Company's initial public offering of Common Stock during December 1995 and
January 1996 (the "IPO"), and another 7.5% will be released six months
thereafter. During the term of the Pledge Agreements, employment agreements
executed by Messrs. Walker, Rollins and Contris may be terminated by Mr.
Whitehead if Unison fails to satisfy certain financial covenants. Craig R. Clark
also executed a pledge agreement in favor of Bruce H. Whitehead, as agent for
the former BritWill shareholders, pledging all of his rights as a former
BritWill shareholder to receive cash or Common Stock from the Acquisition Notes
and the Convertible Debenture. See "-- Employment Contracts, Termination of
Employment, and Change-in-Control Arrangements."
In connection with the BritWill Acquisition, BritWill executed a promissory
note in the amount of $3.4 million (the "Renewal Note"), bearing interest at the
rate of 12.0% and payable to WFI. The Renewal Note was a renewal, extension and
combination of certain outstanding indebtedness of BritWill to WFI and BritWill
Investment Company. The Renewal Note required monthly payments of interest,
commencing September 10, 1995, and quarterly principal reduction payments of
$1.0 million, commencing on October 1, 1996. The Renewal Note was not secured,
and Unison repaid the Renewal Note from proceeds of the IPO.
Subsequent to the BritWill Acquisition, Unison incurred the Whitehead
Loans, which were evidenced by a $500,000 promissory note payable to WFI and a
$250,000 promissory note payable to WFI (the "Supplemental Notes"), each bearing
interest at the rate of 12.0%, in consideration of cash advances to Unison. The
$500,000 Supplement Note required monthly payments of interest, commencing
September 10, 1995, matured on December 31, 1995 and was unsecured. The $250,000
Supplemental Note required monthly payments of interest, commencing October 9,
1995, matured on the earlier to occur of December 31, 1995 or the completion of
the IPO and was unsecured. Unison repaid the Supplemental Notes from proceeds of
the IPO.
Indiana Sale-Leaseback. Certain obligations of Unison to Omega Healthcare
Investors, Inc. ("Omega"), the owner of nine facilities that the Company leases
in Indiana and a party unrelated to the Company and BritWill, are guaranteed by
Bruce H. Whitehead, Unison's Chairman of the Board. BritWill Investments - I,
Inc., a Delaware corporation and a wholly-owned subsidiary of Unison ("BritWill
I"), obtained a leasehold interest in the nine facilities located in Indiana
pursuant to a sale-leaseback agreement in
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<PAGE> 231
November 1992. Fee title to the facilities was acquired initially from
affiliates of Cloverleaf Healthcare Services, Inc. (collectively, "Cloverleaf")
by BritWill Investments -- Indiana L.P., a Texas limited partnership ("BritWill
Indiana"), which is an entity owned and controlled by Bruce H. Whitehead.
BritWill Indiana sold the nine facilities to Omega for approximately $19.8
million, and Omega simultaneously entered into a master lease with BritWill I
for all nine facilities with minimum annual rent of approximately $2.3 million,
subject to adjustment. As further consideration for its funding of the purchase
price and its concurrent granting of the master lease, Omega required that
BritWill and Bruce H. Whitehead guarantee the obligations of BritWill I under
the master lease.
At the time of the sale leaseback transaction, the nine facilities were
subject to existing leases to Cedar Care, Inc., an Indiana corporation ("Cedar
Care"), or Sherwood HealthCare Corp., an Indiana corporation ("Sherwood") (the
"Cedar Care and Sherwood Leases"). The Omega master lease with BritWill I
recognized the Cedar Care and Sherwood Leases and treated them as subleases
subject to the master lease. Cedar Care and Sherwood are operators of each of
the nine facilities subject to the sale-leaseback, and they are beneficially
owned and controlled by Tyrrell L. Garth, a director of the Company. In addition
to and in connection with the Cedar Care and Sherwood Leases, Cedar Care and
Sherwood entered into a series of management agreements with BritWill I for the
operation of those nine facilities and four other Indiana facilities. Fees under
the management agreements are based upon the revenues of Cedar Care and Sherwood
from the facilities, such that all net income of Cedar Care and Sherwood is paid
to BritWill I under the management agreements and the Cedar Care and Sherwood
Leases. These arrangements are both accounted for and described as leaseholds.
In addition, Cedar Care and Sherwood have agreed to cooperate with the Company
in whatever manner the Company may elect in order to transfer, assign or
otherwise account for their interests in the facilities.
Participation Agreement. A portion of the indebtedness renewed pursuant to
the Renewal Note was originally evidenced by a promissory note in the original
principal amount of $2.5 million due November 24, 2002, bearing interest at the
rate of 12.0% (the "Participation Note"). At the time of execution of the
Participation Note, Garth Financial Services, Inc. ("GFS"), which is
wholly-owned by Mr. Garth, entered into a Participation Agreement dated December
24, 1992, under which GFS was entitled to receive principal and interest
payments on $400,000 of the Participation Note. The Participation Agreement
provides GFS with a priority in payments received on the Participation Note.
Also on December 24, 1992, BritWill entered into a Bonus Participation Agreement
with WFI, as additional consideration for the Participation Note, under which
WFI was entitled to quarterly bonus payments equal to the greater of 7.5% of the
unrestricted cash flow of BritWill or $10,000 until the Participation Note was
paid in full. The Participation Agreement and the Bonus Participation Agreement
terminated with repayment of the Renewal Note.
Omega Financing. In March 1996, Unison borrowed $3.5 million from Omega.
The borrowing is evidenced by a promissory note, bears interest at 10.25% and is
guaranteed by Unison and by Jerry M. Walker, Unison's President and Chief
Executive Officer.
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CERTAIN TRANSACTIONS
For additional information concerning Certain Transactions, see "Unison
Management -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions."
Texas Sale-Leasebacks. BritWill Investments -- II, Inc., a Delaware
corporation and a wholly-owned subsidiary of Unison ("BritWill II") acquired
leasehold interests in five facilities in Texas from Omega through two separate
sale-leaseback transactions. All five leases from Omega to BritWill II are
guaranteed by Bruce H. Whitehead, BritWill and BritWill Investments -- Texas
("BritWill-Texas"), as required by Omega. In December 1993, BritWill-Texas,
which is owned and controlled by Bruce H. Whitehead, purchased fee title to
three facilities, and simultaneously sold the facilities to Omega. Omega
concurrently entered into a master lease agreement to lease the facilities to
BritWill II. The second sale-leaseback transaction was consummated in the same
manner between the same parties for two facilities in December 1994. The second
sale-leaseback replaced a mortgage for the two facilities under which Omega had
loaned $4.6 million to BritWill-Texas in return for a promissory note and liens
on the two facilities. BritWill-Texas sold the two facilities to Omega in
exchange for the release of its obligations under the promissory note, and Omega
simultaneously leased the facilities to BritWill II with minimum annual rent of
approximately $555,000, subject to adjustment.
Omega Security Deposit. The Omega lease to BritWill II required BritWill
II to post a security deposit with Omega. BritWill-Texas advanced $1.4 million
to Omega for the required deposit. BritWill II has the benefit of that deposit
and owes that amount to BritWill-Texas.
Texas Mortgage Transaction. BritWill II leases six facilities in Texas
from BritWill Texas. BritWill-Texas acquired the six facilities in December 1993
with a $10.2 million loan from Omega. Omega is unrelated to Unison and the other
parties involved in the Texas mortgage transaction. The note for the transaction
contains an initial interest rate of 11.25%, subject to adjustment, with
interest payable monthly. The note also requires annual principal reduction
payments of $60,000, escalating to $120,000 over the term of the note. The loan
from Omega is guaranteed by BritWill and Bruce H. Whitehead. BritWill-Texas
continues to receive lease payments from BritWill II for those facilities. The
aggregate annual base rental for those facilities, which have a total of 767
licensed beds, is $1.1 million.
Texas Avalon Facilities. Through separate assignments in November 1994,
BritWill II acquired two leasehold interests from Avalon Care, Inc., an entity
owned and controlled by Bruce H. Whitehead, in exchange for the assumption by
BritWill II of the obligations of Avalon Care, Inc. under the two leases.
Certain Indebtedness. BritWill incurred certain indebtedness to entities
owned and controlled by Bruce H. Whitehead, which was renewed, extended and
combined in the Renewal Note. This indebtedness included: (i) a promissory note
in the original principal amount of $1.0 million due June 30, 1995, bearing
interest at the rate of 12.0%, from BritWill to BritWill Investment Company;
(ii) a promissory note in the original principal amount of $500,000 due June 30,
1995, bearing interest at the rate of 12.0%, from BritWill to BritWill
Investment Company; (iii) a promissory note in the original principal amount of
$600,000 due June 1, 1995, bearing interest at the rate of 12.0%, from BritWill
to WFI; and (iv) the Participation Note. The Renewal Note was repaid in full.
BritWill II is also obligated to repay five unsecured promissory notes to
BritWill-Texas currently in the amounts of $418,000, $409,000, $387,000,
$585,000 and $893,000. Interest accrues on the notes at 9.0%, the prime rate
plus 2.0%, the prime rate plus 2.0%, 10.0% and 10.0%, respectively. Aggregate
monthly interest payments under all five notes was approximately $17,000 in
1995. Four notes are scheduled to mature in November 2001, and the $1.1 million
note is due in October 2004.
Agreements with Trouver Capital Partners, L.P. John T. Lynch, Jr., a
Director of Unison and beneficial owner of approximately 3.81% of the Company's
Common Stock at the Record Date, is a General Partner of Trouver. Two other
partners of Trouver are beneficial owners of approximately 1.42%, in the
aggregate, of Unison's Common Stock. Unison and Trouver are parties to the
Unison/BritWill Combination Advisory Agreement dated July 10, 1995 (the
"Combination Agreement"), pursuant to which Trouver provided financial advisory
services to assist in the combination of Unison and BritWill as well as agreeing
to provide stand-by financing. Trouver's compensation under the Combination
Agreement was $675,000, which has been
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paid in full. In addition, Unison and Trouver are parties to a Financial
Advisory Agreement dated July 10, 1995 (a similar agreement dated March 16, 1992
expired during 1995) pursuant to which Trouver acted and will act as financial
advisor with respect to business and acquisition plans and opportunities and in
respect of private placement of debt or equity securities or working capital
facilities. Fees payable under the agreement range from 2% to 5% for the private
placement of debt or equity or certain other financings, and from 1.5% to 10%
for services rendered in the acquisition of additional leased or managed
facilities or other corporate development transactions. Trouver assisted Unison
in securing lease or management agreements in respect of four long-term and
specialty health care facilities, for which it is entitled to receive fees of up
to $400,000 over the next eight years based upon Unison's management fees or
earnings over that period. Accrued compensation through August 1995 totalled
$32,537.
Transactions with Sentry Healthcare Acquirors. Unison leases one long-term
and specialty health care facility and manages four facilities that are owned by
affiliates of Douglas K. Mittleider, who beneficially owns approximately 2.97%
of Unison's Common Stock at the Record Date (but owned more than 5% of Unison's
Common Stock at the time the agreements were entered into). The lease agreement
with Mr. Mittleider requires rental payments of $16,500 per month and extends
through June 2013. The management agreements provide compensation to Unison
equal to approximately 5% of patient revenues for three of these facilities and
3% for the other two facilities. Management considers these terms to be
competitive with those generally prevailing in the industry.
On December 30, 1994, Unison issued to Sentry, an entity owned by Mr.
Mittleider, a warrant to purchase 178,503 shares of Unison Common Stock for
consideration of $200 (less than $0.01 per share), and in consideration for
those agreements and for assistance in arranging other business transactions for
Unison. The warrant contains piggyback registration rights. Sentry exercised the
warrant as to 60,000 shares of Unison Common Stock in January 1996 and sold the
shares in the IPO's over-allotment option.
Quest Pharmacies, Inc. On or about May 15, 1995, Unison and L. Robert
Oberfield incorporated Quest Pharmacies, Inc. Quest is 75% owned by Unison and
25% owned by Mr. Oberfield. Quest was created for the primary purpose of
establishing and operating pharmacy facilities for the provision of
pharmaceutical services and supplies to Unison's long-term and specialty health
care facilities and to third parties. Unison and Mr. Oberfield have entered into
a shareholder agreement (the "Quest Shareholders Agreement") pursuant to which,
among other things, Mr. Oberfield has a right to put his Quest stock to Unison,
and Unison has a right to require Mr. Oberfield to sell his Quest stock to
Unison, in May of 1998 or in May of any year thereafter in exchange for a cash
payment or, at Mr. Oberfield's option, stock in Unison. The amount that Unison
would be required to pay for the purchase of Mr. Oberfield's 25% of the
outstanding Quest stock is based upon a formula set forth in the Quest
Shareholders Agreement, and is intended to approximate his 25% share of the
value of Quest's earnings contribution to Unison, based on the earnings of both
Quest and Unison and on the ratio of Unison's stock price to its recent
earnings.
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PRINCIPAL STOCKHOLDERS
Only stockholders of record at the close of business on , 1996
(the "Unison Record Date") will be entitled to vote at the Unison Special
Meeting. On the Unison Record Date, there were issued and outstanding 3,989,815
shares of Unison Common Stock. Each holder of Unison Common Stock is entitled to
one vote, exercisable in person or by proxy, for each share of Unison Common
Stock held of record on the Unison Record Date. The presence of a majority of
the shares of Unison Common Stock entitled to vote, in person or by proxy, is
required to constitute a quorum for the conduct of business at the Unison
Special Meeting. The Inspector of Election appointed by either the Chairman of
the Board of Directors or the President of Unison shall determine the shares
represented at the meeting and the validity of proxies and ballots and shall
count all proxies and ballots.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Unison Common Stock at the Record Date with respect to (i) each
person known to Unison to own beneficially more than five percent of the
outstanding shares of Unison Common Stock, (ii) each director of Unison, (iii)
each of the executive officers listed in the Summary Comparison Table set forth
herein and (iv) all directors and executive officers of Unison as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------------------------------
PRIOR TO THE AFTER THE
SIGNATURE, AMPRO AND SIGNATURE, AMPRO AND
MEMPHIS MERGERS MEMPHIS MERGERS
----------------------- -----------------------
IDENTITY OF STOCKHOLDER OR GROUP NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Bruce H. Whitehead(2)........................ 463,337 11.60% 463,337 7.67%
Jerry M. Walker(3)........................... 329,336 8.22 329,336 5.44
Phillip R. Rollins(4)........................ 329,336 8.22 329,336 5.44
Paul J. Contris(5)........................... 314,336 7.85 314,336 5.19
John T. Lynch, Jr.(6)........................ 152,208 3.81 152,208 2.52
c/o Trouver Capital Partners, L.P.
P.O. Box 7053
Princeton, NJ 08543
Craig R. Clark(7)............................ 54,984 * 54,984 *
Tyrrell L. Garth(8).......................... 10,707 * 10,707 *
Mark W. White(9)............................. 7,665 * 7,665 *
John T. Casey................................ 20,000 * 20,000 *
David A. Kremser(10)......................... -- -- 1,283,019 21.24
All executive officers and directors as a
group (12 persons prior to the Signature,
Ampro and Memphis Mergers and 13 persons
following the Signature, Ampro and Memphis
Mergers)................................... 1,688,995 41.38 2,972,014 55.40
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon exercise of stock options which are
currently exercisable or which become exercisable within 60 days of the
date of the table are deemed beneficially owned by the optionee. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons or entities named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Includes 458,089 shares of Unison Common Stock issued to Whitehead Family
Investments, Ltd. ("WFI") upon conversion of the Convertible Debenture
issued to the former shareholders of BritWill HealthCare Company
("BritWill") as partial payment of the purchase price for the acquisition
of BritWill (the "BritWill Acquisition"). Mr. Whitehead has sole voting and
investment power with respect to the shares held by WFI. Does not include
5,248 shares of Unison Common Stock issuable
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upon exercise of outstanding options which will vest in August 1997.
Includes 5,248 shares of Unison Common Stock issuable upon exercise of
immediately exercisable options.
(3) All but 15.0% of these shares are pledged to secure payment of the deferred
purchase price for the BritWill Acquisition. Does not include 16,962 shares
of Unison Common Stock issuable upon exercise of options which will vest in
August 1997. Includes 16,962 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options.
(4) All but 15.0% of these shares are pledged to secure payment of the deferred
purchase price for the BritWill Acquisition. Does not include 16,962 shares
of Unison Common Stock issuable upon exercise of options which will vest in
August 1997. Includes 16,962 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options.
(5) All but 15.0% of these shares are pledged to secure payment of the deferred
purchase price for the BritWill Acquisition. Does not include 16,962 shares
of Unison Common Stock issuable upon exercise of options which will vest in
August 1997. Includes 16,962 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options.
(6) Includes 10,140 shares of Unison Common Stock as to which he currently
shares investment power with Bruce H. Whitehead. Excludes 4,623 shares of
Unison Common Stock issuable upon exercise of options which will vest in
August 1997. Includes 4,623 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options.
(7) All of these shares are pledged to secure payment of the deferred purchase
price for the BritWill Acquisition. Includes 38,022 shares of Unison Common
Stock as to which Mr. Clark currently shares investment power with Bruce H.
Whitehead. Excludes 16,962 of Unison Common Stock issuable upon exercise of
options granted which will vest in August 1997. Includes 16,962 shares of
Unison Common Stock issuable upon exercise of immediately exercisable
options.
(8) Includes 6,084 shares of Unison Common Stock held by Mr. Garth as trustee
of a trust for the benefit of Jessica Garth Abeshire and Joshua Garth, as
to which he currently shares investment power with Bruce H. Whitehead. Does
not include 4,623 shares of Unison Common Stock issuable upon exercise of
options which will vest in August 1997. Includes 4,623 shares of Unison
Common Stock issuable upon exercise of immediately exercisable options.
(9) Includes 3,042 shares of Unison Common Stock, as to which he currently
shares investment power with Bruce H. Whitehead. Does not include 4,623
shares of Common Stock issuable upon exercise of options which will vest in
August 1997. Includes 4,623 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options.
(10) Includes 1,283,019 shares of Unison Common Stock to be issued to Mr.
Kremser in the Signature Health Care Merger. Mr. Kremser will become a
Director of Unison upon closing of the Signature Mergers.
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<PAGE> 236
DESCRIPTION OF UNISON CAPITAL STOCK
The following description of Unison's capital stock does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of Unison's Certificate of Incorporation and Bylaws, copies of which
have been filed with the Commission as exhibits to Unison's Annual Report on
Form 10-K for the year ended December 31, 1995.
The authorized capital stock of Unison consists of 10,000,000 shares of
Common Stock, par value $.001 per share, and 1,000,000 shares of Preferred
Stock, par value $.001 per share. If the Ampro and Memphis Mergers and the
Signature Mergers occur, an aggregate of 6,039,249 shares of Unison Common Stock
will be issued and outstanding (assuming no exercise of outstanding options or
conversion of convertible securities), and no shares of Preferred Stock will be
issued or outstanding.
COMMON STOCK
Holders of Unison Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of Unison Common Stock do
not have cumulative voting rights, and therefore holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of Unison Common Stock are entitled to receive such dividends as
may be declared from time to time by the Board of Directors out of funds legally
available therefor. Unison does not anticipate paying cash dividends in the
foreseeable future. In the event of the liquidation, dissolution or winding up
of Unison, the holders of Unison Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities.
Holders of Unison Common Stock have no preemptive, conversion or redemption
rights and are not subject to further calls or assessments by Unison. All of the
outstanding shares of Unison Common Stock are, and the shares offered by Unison
hereby and by the related Prospectus/Information Statement Supplement will be,
if issued, validly issued, fully paid and nonassessable.
The Transfer Agent and Registrar for Unison Common Stock is Harris Trust
and Savings Bank, Chicago, Illinois.
PREFERRED STOCK
Unison's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of Preferred Stock with such dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of Preferred Stock may possess voting, dividend,
liquidation and redemption rights superior to that of Unison Common Stock. The
rights of the holders of Unison Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. Issuance of a new series of Preferred Stock, while
providing desirable flexibility in connection with possible acquisition and
other corporate purposes, could have the effect of entrenching Unison's Board of
Directors and making it more difficult for a Third Party to acquire, or
discourage a Third Party from acquiring, a majority of the outstanding voting
stock of Unison. Unison has no present plans to issue any series of Preferred
Stock.
OTHER SECURITIES
Unison has also issued a number of other outstanding securities. Warrants
for an aggregate of 120,000 shares of Unison Common Stock were issued to the
representatives of the underwriters in Unison's initial public offering of
Unison Common Stock at an exercise price of $11.70 per share. A warrant has been
issued to HealthPartners Funding, L.P. for 16,667 shares of Unison Common Stock
at an exercise price of $0.01 per share. The Sunbelt Notes and Debentures for
$1,000,000 and $1,800,000, respectively, that were issued in connection with the
acquisition of four therapy centers effective February 1, 1996 are convertible
into Unison Common Stock at a conversion price equal to the average closing
price (85% of the average closing price with respect to the Sunbelt Notes) for
the 20 day trading period preceding the date of conversion. A warrant for
75
<PAGE> 237
200,000 shares at an exercise price of $13.88 per share has been issued to
Imperial Bank in conjunction with certain bridge financing, and the bridge
financing note is convertible into Unison Common Stock at a discount from market
value in the event of a default. Options for a total of 511,046 shares of Unison
Common Stock have been issued or authorized for issuance under Unison's employee
stock option plan (with such number to increase to 800,000 if the Option Plan
Amendment is approved). In addition, 1,509,434 shares (subject to adjustment if
the Average Daily Price of Unison Common Stock is less than $11.25 per share or
greater than $15.25 per share) and 540,000 shares are to be issued in connection
with the Signature Mergers and the Ampro and Memphis Mergers, respectively. A
$771,000 promissory note to Red Line Healthcare Corporation (the "Red Line
Note") is convertible into Unison Common Stock at an effective price of $9.11
per share during a default thereon. See "-- Registration Rights," and "Recent
and Pending Unison Acquisitions and Other Commitments."
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AFFECTING STOCKHOLDERS
Unison's Certificate of Incorporation prevents certain transactions with an
"interested person" (defined as any person who, indirectly or directly,
beneficially owns or has the right to acquire or vote more than 5% of Unison's
outstanding voting stock, excluding any person who owned 25% of such securities
on August 10, 1995), including: (i) any merger, consolidation, sale or other
disposition of all or substantially all of the assets of Unison or any
subsidiary of Unison; or (ii) any purchase by Unison or its subsidiaries of all
or substantially all of the stock or assets of an interested person, without
affirmative vote of the holders of at least two-thirds of the outstanding shares
of all classes or series of stock entitled to vote on the election of Unison's
Board of Directors; provided, however, that such stockholder approval will not
be required if the transaction is approved by the Board of Directors, and a
majority of the directors approving such transaction are "continuing directors,"
defined as directors who either: (i) were elected prior to the date an
interested person became an interested person; (ii) was a director on August 10,
1995; or (iii) succeeds a continuing director or fills a newly created
directorship upon the recommendation of a majority of the continuing directors.
Unison's Certificate of Incorporation provides for a classified Board of
Directors. The classification of the Board of Directors may discourage a third
party from making a tender offer or otherwise attempting to gain control of
Unison and may maintain the incumbency of the Board of Directors.
Unison's Certificate of Incorporation also requires that any action
required or permitted by stockholders must be effected at a duly called annual
or special meeting of stockholders and may not be effected by written consent.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
Unison's Certificate of Incorporation provides that to the fullest extent
permitted by Delaware law, a director of Unison shall not be liable to Unison or
its stockholders for monetary damages for breach of fiduciary duty as a
director. Under current Delaware law, liability of a director may not be limited
(i) for any breach of the director's duty of loyalty to Unison or its
stockholders; (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases; and (iv)
for any transaction from which the director derives an improper personal
benefit. The effect of the provision of Unison's Certificate of Incorporation is
to eliminate the rights of Unison and its stockholders (through stockholders'
derivative suits on behalf of Unison) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of Unison or any stockholder to seek nonmonetary
relief such as an injunction or recision in the event of a breach of a
director's duty of care. In addition, Unison's Certificate of Incorporation
provides that Unison shall indemnify its directors, officers, employees and
agents against losses incurred by any such person by reason of the fact that
such person was acting in such capacity.
76
<PAGE> 238
VOTING AGREEMENT
Messrs. Walker, Rollins, Contris and Lynch, who beneficially own an
aggregate of 1,125,216 shares of Unison Common Stock, and Messrs. Joseph A.
Boystak and Edmund C. King, who beneficially own approximately 1.42%, in the
aggregate of Unison's Common Stock (collectively, the "Affiliate Stockholders"),
and Unison are parties to a voting agreement (the "Voting Agreement"). Under the
Voting Agreement, each of the Affiliate Stockholders is required to vote his
shares so as to elect three members of the Board of Directors designated by WFI.
Initially, the designees of WFI are Messrs. Garth, White and Whitehead. Each of
the Affiliate Stockholders is also prohibited from voting his stock in favor of
any proposition that would have the effect of reducing the Board of Directors of
Unison to fewer than three members. The Voting Agreement terminates on the
earliest to occur of: (i) payment in full of the Subordinated Note to the former
shareholders of BritWill HealthCare Company; (ii) August 9, 2005; or (iii) the
written termination by each of the parties to the Voting Agreement.
REGISTRATION RIGHTS
Unison is party to a number of agreements ("Registration Rights
Agreements") pursuant to which the other party has the right to require Unison
to register the sale of shares of Unison Common Stock owned by each other party.
Registration Rights Agreements have been entered with: (a) Mr. Bruce Whitehead,
as agent for the former shareholders of BritWill HealthCare Company in respect
of 561,815 shares of Unison Common Stock owned by them and 783,804 other shares
pledged to them as collateral; (b) the representatives of the underwriters from
Unison's initial public offering in respect of 120,000 shares issuable upon
exercise of warrants with an exercise price of $11.60 per share; (c) the former
owners of Sunbelt Therapy with respect to shares issuable upon conversion of the
Sunbelt Notes ($1.0 million) and Sunbelt Debentures ($1.8 million) issued to
them in that transaction; (d) Imperial Bank with respect to shares issuable upon
conversion of its loans to Unison in the event of a default or upon exercise of
warrants for up to 300,000 shares of Unison Common Stock issued in connection
with such loans; (e) Sentry Healthcare Acquirors, Inc. (piggyback rights only)
in respect of the 118,503 shares of Unison Common Stock that it currently owns
and that it acquired upon exercise of a warrant issued by Unison in 1995; and
(f) Red Line Healthcare Corporation (piggyback rights only) with respect to
shares issuable upon conversion of the Red Line Note during a default thereon.
In addition, the 1,509,434 shares of Unison Common Stock (subject to adjustment
under certain circumstances) to be issued in connection with the Signature
Merger will be subject to registration rights. Unison is obligated to pay all
registration expenses (other than underwriting discounts and commissions and
subject to certain limitations) incurred in connection with such registrations.
LEGAL OPINIONS
Certain legal matters will be passed upon for Unison by Quarles & Brady,
which has also given the opinion regarding tax consequences of the Ampro Merger.
EXPERTS
The consolidated financial statements of Unison HealthCare Corporation at
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 included in the Prospectus/Proxy and Information Statement and
the related financial statement schedule appearing elsewhere herein have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of BritWill HealthCare Company for the one month
ended July 31, 1995 included in the Prospectus/Proxy and Information Sheet of
Unison HealthCare Corporation, which is referred to and made a part of this
Prospectus and Registration Statement, and the related financial statement
schedule appearing elsewhere herein have been audited by Ernst & Young, LLP,
independent auditors, as set forth in
77
<PAGE> 239
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of BritWill HealthCare Company as of
December 31, 1993, 1994 and June 30, 1995 and for the years ended December 31,
1993, 1994 and the six months ended June 30, 1995 included in this
Prospectus/Proxy and Information Statement and Registration Statement have been
so included in reliance of the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of American Professional Holding, Inc. as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 appearing herein have been audited by Ronald H. Ridgers, P.C.,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of Memphis Clinical Laboratory, Inc. as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 appearing herein have been audited by Ronald H. Ridgers, P.C.,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Signature Health Care Corporation,
and the combined financial statements of Arkansas, Inc., Cornerstone Care, Inc.,
Douglas Manor, Inc., and Safford Care, Inc. appearing herein have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of The Oaks of Boise appearing herein have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports.
The financial statements of Nightingale West, Inc. at December 31, 1994 and
for each of the two years in the period ended December 31, 1994 appearing in
this Prospectus/Proxy and Information Statement and Registration Statement have
been audited by Grant, Millman & Johnson, P.C., independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The combined financial statements of Henderson & Associates Rehabilitation
and Sunbelt Therapy Management Services, Inc. appearing herein have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
78
<PAGE> 240
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. FINANCIAL STATEMENTS
UNISON HEALTHCARE CORPORATION
Report of Independent Auditors................................................................. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993..... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994
and 1993..................................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993..... F-7
Notes to Consolidated Financial Statements..................................................... F-8
Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995................ F-20
Condensed Consolidated Statements of Operations for the three months and six months ended June
30, 1996 and 1995............................................................................ F-21
Condensed Consolidated Statements of Cash Flows for the three months and six months ended June
30, 1996 and 1995............................................................................ F-22
Notes to Condensed Consolidated Financial Statements........................................... F-23
BRITWILL HEALTHCARE COMPANY
Report of Independent Auditors................................................................. F-25
Report of Independent Accountants.............................................................. F-26
Consolidated Balance Sheets as of December 31, 1993 and 1994 and June 30, 1995................. F-27
Consolidated Statements of Operations for the years ended December 31, 1993 and 1994, six
months ended June 30, 1995 and one month ended July 31, 1995................................. F-28
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1993 and 1994
and the six months ended June 30, 1995....................................................... F-29
Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1994, six
months ended June 30, 1995 and one month ended July 31, 1995................................. F-30
Notes to Consolidated Financial Statements..................................................... F-31
AMERICAN PROFESSIONAL HOLDING, INC.
Report of Independent Auditor.................................................................. F-41
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996................. F-42
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1995 and 1996...................................................... F-43
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996..................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1996 and 1995.................................................. F-44
Notes to Consolidated Financial Statements..................................................... F-45
MEMPHIS CLINICAL LABORATORY, INC.
Report of Independent Auditor.................................................................. F-50
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996................. F-51
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1995 and 1996...................................................... F-52
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996..................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1996 and 1995.................................................. F-53
Notes to Consolidated Financial Statements..................................................... F-54
SIGNATURE HEALTH CARE CORPORATION
Report of Independent Public Accountants....................................................... F-57
Consolidated Balance Sheets as of December 31, 1995 and 1994 and June 30, 1996................. F-58
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 and
six months ended June 30, 1996 and 1995...................................................... F-59
</TABLE>
F-1
<PAGE> 241
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1994
and six months ended June 30, 1996........................................................... F-60
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 and
six months ended June 30, 1996 and 1995...................................................... F-61
Notes to Consolidated Financial Statements..................................................... F-62
ARKANSAS, INC., CORNERSTONE CARE, INC., DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
Report of Independent Public Accountants....................................................... F-68
Combined Balance Sheet as of December 31, 1995 and six months ended June 30, 1996.............. F-69
Combined Statement of Operation for the year ended December 31, 1995 and six months ended June
30, 1996 and 1995............................................................................ F-70
Combined Statement of Stockholders' Equity for the year ended December 31, 1995 and six months
ended June 30, 1996.......................................................................... F-71
Combined Statement of Cash Flows for the year ended December 31, 1995 and six months ended June
30, 1996 and 1995............................................................................ F-72
Notes to Combined Financial Statements......................................................... F-73
THE OAKS OF BOISE
Report of Independent Accountants.............................................................. F-76
Statements of Assets, Liabilities and Interdivision Account as of June 30, 1995 and 1994....... F-77
Statements of Revenue, Expenses and Interdivision Account for the years ended June 30, 1995
and 1994..................................................................................... F-78
Statements of Cash Flows for the years ended June 30, 1995 and 1994............................ F-79
Notes to Financial Statements.................................................................. F-80
NIGHTINGALE WEST, INC.
Independent Auditors' Report................................................................... F-83
Balance Sheet as of December 31, 1994.......................................................... F-84
Statement of Operations for the nine months ended September 30, 1995 and the years ended
December 31, 1994 and 1993................................................................... F-85
Statements of Retained Earnings for the nine months ended September 30, 1995 and the years
ended December 31, 1994 and 1993............................................................. F-86
Statements of Cash Flows for the nine months ended September 30, 1995 and the years ended
December 31, 1994 and 1993................................................................... F-87
Notes to Financial Statements.................................................................. F-88
HENDERSON AND ASSOCIATES REHABILITATION AND SUNBELT THERAPY MANAGEMENT SERVICES, INC.
Report of Independent Auditors................................................................. F-92
Combined Balance Sheets as of December 31, 1995 and 1994....................................... F-93
Combined Statements of Operations and Stockholders' Equity..................................... F-94
Combined Statements of Cash Flows.............................................................. F-95
Notes to Financial Statements.................................................................. F-96
2. FINANCIAL STATEMENT SCHEDULES
UNISON HEALTHCARE CORPORATION
Schedule II Valuation and Qualifying Accounts................................................. S-1
BRITWILL HEALTH CARE COMPANY
Schedule II Valuation and Qualifying Accounts................................................. S-2
SIGNATURE HEALTH CARE CORPORATION
Schedule II Consolidated Valuation and Qualifying Accounts.................................... S-3
ARKANSAS, INC., CORNERSTONE CARE, INC., DOUGLAS MANOR INC., AND SAFFORD CARE, INC.
Schedule II Combined Valuation and Qualifying Accounts........................................ S-4
</TABLE>
All other schedules are omitted because they are not applicable or not required.
F-2
<PAGE> 242
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Unison HealthCare Corporation
We have audited the accompanying consolidated balance sheets of Unison
HealthCare Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1995. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). 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 Unison
HealthCare Corporation at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, 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
Phoenix, Arizona
April 10, 1996
F-3
<PAGE> 243
UNISON HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 6,097,370 $ 117,641
Accounts receivable-patient, net of allowance for doubtful
accounts of $709,000 in 1995 and $203,000 in 1994 (Notes 4 and
9)............................................................ 14,770,958 1,944,010
Accounts receivable-other, net of allowance for doubtful accounts
of $74,000 in 1995 and $87,000 in 1994 (Notes 4 and 9)........ 1,852,290 417,305
Prepaids and other (Note 5)...................................... 2,244,906 551,988
----------- ----------
Total current assets.......................................... 24,965,524 3,030,944
Equipment and leasehold improvements, net
(Notes 6 and 11)................................................. 3,002,223 707,098
Lease operating rights and other assets (Note 7)................... 38,902,115 280,341
Goodwill, net (Note 3)............................................. 7,472,502 --
Deferred taxes (Note 16)........................................... -- 99,104
Security deposits (Note 8)......................................... 3,189,114 179,350
----------- ----------
$77,531,478 $4,296,837
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit (Note 9).......................................... $ 789,041 $ 950,000
Accounts payable................................................. 9,437,409 1,685,961
Accrued expenses (Note 10)....................................... 8,784,821 1,062,486
Notes payable and current portion of long-term debt due to
affiliates (Notes 11 and 15).................................. 5,823,929 --
Current portion of other notes payable and long-term debt (Note
11)........................................................... 635,701 99,768
Deferred taxes (Note 16)......................................... 702,640 99,104
----------- ----------
Total current liabilities..................................... 26,173,541 3,897,319
Notes payable and long-term debt due to affiliates (Notes 11 and
15).............................................................. 13,691,032 --
Other notes payable and long-term debt (Note 11)................... 4,692,968 539,001
Deferred taxes (Note 16)........................................... 8,173,160 --
Leasehold liability, net (Note 14)................................. 4,621,667 --
Other liabilities.................................................. 294,000 --
----------- ----------
Total liabilities............................................. 57,646,368 4,436,320
Stockholders' equity (deficit) (Note 12):
Preferred stock, $.001 par value, authorized 1,000,000 shares, no
shares issued or outstanding.................................. -- --
Common stock, $.001 par value, authorized 10,000,000 shares,
3,673,748 and 1,249,497 shares issued and outstanding in 1995
and 1994...................................................... 2,524 100
Additional paid-in capital....................................... 20,090,707 42,853
Retained earnings (deficit)...................................... (208,121) (182,436)
----------- ----------
Total stockholders' equity (deficit).......................... 19,885,110 (139,483)
----------- ----------
$77,531,478 $4,296,837
=========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 244
UNISON HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Net patient revenue................................ $57,742,991 $11,069,787 $1,075,970
Management fees.................................... 1,730,003 1,114,609 851,666
Other.............................................. 1,812,182 221,365 28,250
----------- ----------- ----------
Total revenues............................. 61,285,176 12,405,761 1,955,886
Expenses:
Wages and related.................................. 31,811,215 7,148,401 1,455,325
Other operating.................................... 20,776,286 3,901,626 544,801
Rent............................................... 6,565,286 1,298,753 99,407
Interest........................................... 1,058,088 84,396 10,796
Depreciation and amortization...................... 1,049,986 51,228 6,718
----------- ----------- ----------
Total expenses............................. 61,260,861 12,484,404 2,117,047
----------- ----------- ----------
Income (loss) before income taxes.................... 24,315 (78,643) (161,161)
Income tax expense (benefit)......................... 50,000 1,180 (20,417)
----------- ----------- ----------
Net loss............................................. $ (25,685) $ (79,823) $ (140,744)
=========== =========== ==========
Net loss per share................................... $(.02) $(.06) $(.11)
Shares used in per share calculation................. 1,349,020 1,266,164 1,266,164
</TABLE>
See accompanying notes.
F-5
<PAGE> 245
UNISON HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992............ 1,249,497 $ 100 $ -- $ 38,131 $ 38,231
Net loss................................ -- -- -- (140,744) (140,744)
--------- ------ ----------- --------- -----------
Balance at December 31, 1993............ 1,249,497 100 -- (102,613) (102,513)
Stock warrants issued................... -- -- 42,853 -- 42,853
Net loss................................ -- -- -- (79,823) (79,823)
--------- ------ ----------- --------- -----------
Balance at December 31, 1994............ 1,249,497 100 42,853 (182,436) (139,483)
Net loss................................ -- -- -- (25,685) (25,685)
Sale of common stock in public
offering.............................. 2,000,000 2,000 14,612,273 -- 14,614,273
Conversion of debenture................. 424,251 424 5,285,581 5,286,005
Stock warrants issued................... -- -- 150,000 -- 150,000
--------- ------ ----------- --------- -----------
Balance at December 31, 1995............ 3,673,748 $2,524 $20,090,707 $(208,121) $19,885,110
========= ====== =========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 246
UNISON HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................... $ (25,685) $ (79,823) $(140,744)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 1,049,986 51,228 6,718
Provision for doubtful accounts............................. 29,109 127,592 145,650
Tax provision (credit)...................................... 50,000 1,854 (20,417)
Note discount amortization.................................. 20,538 -- --
Leasehold liability amortization............................ (78,333) -- --
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable -- patient, net.......... (7,341,173) (1,929,382) (416,716)
Increase in accounts receivable -- other, net............ (892,287) (346,310) (82,111)
Increase in prepaids and other........................... (593,883) (543,668) (7,774)
Increase in accounts payable and accrued expenses........ 6,533,294 2,325,708 401,810
----------- ----------- ---------
Net cash used in operating activities......................... (1,248,434) (392,801) (113,584)
----------- ----------- ---------
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements.............. (1,080,521) (371,271) (12,931)
Increase in intangibles....................................... (1,139,531) (193,348) (5,232)
Increase in lease deposits.................................... (272,215) (179,350) --
Acquisition of BritWill....................................... (676,635) -- --
----------- ----------- ---------
Net cash used in investing activities......................... (3,168,902) (743,969) (18,163)
----------- ----------- ---------
FINANCING ACTIVITIES
(Decrease) increase in line of credit......................... (2,915,913) 950,000 (3,136)
Proceeds from sale of receivables............................. 2,515,267 197,277 --
Proceeds from notes payable and long-term debt................ 1,820,629 240,119 556,811
Payments on notes payable and long-term debt.................. (5,637,191) (141,120) (430,590)
Proceeds from IPO............................................. 14,614,273 -- --
----------- ----------- ---------
Net cash provided by financing activities..................... 10,397,065 1,246,276 123,085
----------- ----------- ---------
Net increase (decrease) in cash............................. 5,979,729 109,506 (8,662)
Cash and cash equivalents at beginning of period.............. 117,641 8,135 16,797
----------- ----------- ---------
Cash and cash equivalents at end of period.................... $ 6,097,370 $ 117,641 $ 8,135
=========== =========== =========
Supplemental disclosure
Income taxes paid........................................... $ -- $ 1,150 $ 7,162
Interest expense paid....................................... 999,289 84,396 10,796
Supplemental disclosure of noncash investing and financing
activities
BritWill Acquisition:
Increase in assets.......................................... 58,468,673 -- --
Liabilities incurred and assumed............................ 59,420,708 -- --
Conversion of debentures into shares of common stock.......... 5,286,005 -- --
Acquisition of leasehold rights ($237,317) and equipment and
leasehold improvements ($126,103) through issuance of note
payable..................................................... -- 363,420 --
Common stock warrants issued (Note 12)........................ 150,000 42,853 --
</TABLE>
See accompanying notes
F-7
<PAGE> 247
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Unison began operations in July 1992 as SunQuest HealthCare Corporation and
changed its name to Unison HealthCare Corporation ("Unison" or the "Company") in
November 1995. In August 1995, Unison acquired all of the common stock of
BritWill HealthCare Company ("BritWill") (see Note 3). Unison is a provider of
long-term and specialty health care services. At December 31, 1995, Unison
operated and managed 53 facilities including long-term care and specialty care
and independent/assisted living facilities. Unison's operations are located in
twelve states, principally in the midwest and southwest regions of the United
States. In 1995, Unison established a pharmacy operation and Medicare Part B
billing and supply company.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Unison and all of its leased facilities. Significant intercompany transactions
and balances have been eliminated in consolidation.
Revenues and expenses related to the 28 facilities acquired from BritWill
are included in Unison's results of operations for periods subsequent to July
31, 1995.
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.
Net Patient Revenues
Unison's revenues are derived primarily from providing long-term health
care services. Approximately 83%, 70% and 86% of Unison's net patient revenues
for the years ended December 31, 1995, 1994 and 1993, respectively, were derived
from funds under Medicare and Medicaid assistance programs and approximately 82%
and 79% of Unison's net patient accounts receivable at December 31, 1995 and
1994, respectively, are due from such programs. Credit risk exists to the extent
that the Company's most significant source of revenue is reimbursement for
patient care from state-sponsored Medicaid programs and from Medicare. However,
management does not believe that there are significant credit risks associated
with these governmental agencies. Contractual adjustments resulting from
agreements with various organizations to provide services for amounts which
differ from billed charges, including services under Medicare and Medicaid, are
recorded as deductions from gross patient revenue. The estimated third party
payor settlements under Medicare and Medicaid programs are recorded in the
period the related services are rendered and are subject to audit and final
settlement by the fiscal intermediary. Differences between the net amounts
accrued and subsequent settlement, if any, are recorded in operations at the
time the final settlement is determined. As of December 31, 1995 and 1994,
Unison has recognized approximately $1,800,000 and $62,000, respectively, of
Medicare routine cost limit exceptions which are still subject to audit and
final approval by the fiscal intermediary. Based on consultation with outside
reimbursement specialists, it is management's opinion that the ultimate
resolution of third party payor settlements will not have a material adverse
impact on the financial position or results of operations of Unison.
Provision for doubtful accounts is made when the related revenue is
recorded. Accounts, when determined to be uncollectible, are charged against the
allowance for doubtful accounts.
Cash and cash equivalents
Cash and cash equivalents include amounts held in demand deposits at
financial institutions and all highly liquid investments that have an original
maturity of three months or less.
F-8
<PAGE> 248
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Inventories
Inventories are comprised of nursing facility supplies and pharmaceutical
products and are stated at the lower of cost (first-in, first-out) or market.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization for financial statement purposes are computed using the
straight-line method over the lesser of the respective lease term or the
estimated useful life of the respective asset.
Intangible Assets
Direct and incremental costs incurred prior to commencement of Unison's
operations are deferred and charged against operations on a straight line basis
over the life of the respective lease agreement. Certain costs incurred in the
acquisition of facilities such as assembled workforce and covenants not to
compete are amortized on a straight line basis over five years. Lease operating
rights (net of leasehold liabilities) recorded in connection with lease
arrangements or through acquisition have been capitalized and are being
amortized on a straight line basis over the respective initial lease term,
including probable renewal periods, not to exceed twenty-five years. Goodwill is
being amortized over a forty-year period.
Management believes that goodwill has an unlimited useful life and,
therefore, assigned to goodwill a forty-year amortization period. In determining
its unlimited useful life, management considered factors such as: policies of
similar public healthcare and long-term care companies, nature of the long-term
care industry which is positively impacted by the increasing age of the American
population as well as the continual transfer of patients from a high cost acute
care setting to a lower cost long-term care setting, profitability of companies
in the long-term care industry, and the fact that nursing care services provided
in nursing home facilities will be continuously needed in the future and are not
subject to obsolescence.
The Company continually assesses the recoverability of intangible assets by
comparing the carrying amount of the intangible assets to the future benefits or
undiscounted cash flows derived from that asset. Impairments are recognized in
operating results if it is probable that the carrying value of the asset will
not be recovered from future cash flows derived from that asset. The adoption of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in
the first quarter of 1996 is not expected to have a material impact on the
financial statements.
Income Taxes
Unison accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the use of an asset and liability approach for measuring deferred
taxes based on temporary differences between financial statement and tax bases
of assets and liabilities existing at each balance date using enacted tax rates
for years in which the related taxes are expected to be paid or recovered.
Loss Per Share
Loss per share is calculated by dividing net loss by the weighted average
number of common shares outstanding. Unison's common stock equivalents, which
are stock options, stock warrants and convertible debentures, are not included
in the calculation for 1995 because the effect on loss per share is
antidilutive. The accompanying financial statements give retroactive effect to a
stock split of approximately 12.5-to-one effective as of September 28, 1995.
F-9
<PAGE> 249
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In December 1995, Unison issued 2,000,000 shares of its common stock in an
initial public offering (the "IPO") (see Note 12). Pursuant to the Securities
and Exchange Commission Staff Accounting Bulletin No. 83, "Earnings per Share
Computation in an Initial Public Offering," an aggregate of 16,667 common and
common equivalent shares issued during the twelve-month period prior to the IPO,
at prices below the IPO price, have been included as if they were outstanding
for all periods presented.
Unison grants stock options 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.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, recognizes no compensation expense for the stock option grants.
3. SIGNIFICANT BUSINESS TRANSACTIONS AND ACQUISITIONS
In August 1995, Unison acquired BritWill, another long-term care company
operating approximately 28 facilities located in Texas and Indiana. The terms of
the acquisition were modified in April 1996, effective August 10, 1995, such
that Unison acquired all of the outstanding stock of BritWill for a total fixed
purchase amount of $20,600,000 plus, to the extent applicable, monthly
contingent payments ranging in monthly amounts from $143,633 to $225,317
(aggregating approximately $10,300,000) if Unison's monthly consolidated net
patient revenues exceed specified monthly amounts ranging from $8,000,000 to
$11,989,000 for the period from September 9, 1995 through July 31, 2000. An
additional lump sum contingent payment of $11,500,000 (but subject to a
reduction of up to $1,410,000 under specified circumstances) is payable on
August 9, 2000 if Unison has consolidated net patient revenues of not less than
$150,000,000 for the twelve-month period ended June 30, 2000. The purchase price
was comprised of two promissory notes amounting to $13,600,000 in total, and a
$7,000,000 noninterest bearing convertible subordinated debenture. See Note 10.
In connection with the acquisition, Unison paid a financial advisory fee to
Trouver Capital Partners, L.P. ("Trouver") amounting to $675,000. One of
Unison's directors is a partner in Trouver. The acquisition was accounted for as
a purchase. The fixed purchase price in excess of net tangible assets was
allocated among BritWill's assets: goodwill -- $7,000,000; lease operating
rights -- $36,719,485; assembled work force -- $1,250,000 and covenants not to
compete -- $100,000. The contingent portions of the purchase price will be added
to lease operating rights when and if paid; as of December 31, 1995, contingent
payments amounting to $566,668 had been added to lease operating rights.
In addition to the BritWill acquisition, in 1995 Unison entered into
operating lease agreements to obtain leasehold interests in five nursing
facilities. In 1994 and 1993, the Company entered into operating leases for
eight nursing facilities and one assisted living center. The operations of the
nursing facilities and assisted living center acquired are included in Unison's
statements of operations from the date of acquisition.
Summarized below are the unaudited pro forma consolidated results of
operations of Unison for the years ended December 31, 1995 and 1994, assuming
the BritWill Acquisition and the lease agreements were consummated as of January
1, 1994. The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only and are not necessarily indicative of
what would have occurred had these transactions been made at January 1, 1994 or
of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994
------------ -----------
<S> <C> <C>
Revenues............................................. $105,392,000 $85,263,000
Net loss............................................. (152,000) (1,721,000)
Net loss per share................................... $(.11) $(1.31)
</TABLE>
F-10
<PAGE> 250
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE
In April 1995, Unison entered into a sales agreement with HealthPartners
Funding, L.P. ("Health Partners") to routinely sell eligible accounts
receivable, consisting primarily of Medicare and Medicaid receivables, up to
$3,000,000 for a discount fee of up to 1.583% of outstanding eligible
receivables purchased under the agreement. As of December 31, 1995 and 1994,
Unison had sold approximately $2,515,267 and $198,000, respectively, of eligible
accounts receivable to HealthPartners.
The proceeds from the sale were in the form of cash of $1,982,276 and
$118,000 as of December 31, 1995 and 1994, respectively, and collateralization
of accounts receivable of $532,991 and $79,981 (included in other current
assets), as of December 31, 1995 and 1994, respectively (Note 5). Under the
terms of the sales agreement, Unison was required to repurchase from
HealthPartners all Medicare and Medicaid receivables which were uncollected
after 60 days, management receivables which were uncollected after 90 days and
cost report settlement receivables which were uncollected after 120 days. As
additional consideration, Unison has granted to HealthPartners warrants to
purchase common stock equal to at least $150,000. See Note 12 for terms of
warrants. In March 1996, the sales agreement was terminated (Note 11).
Certain of the Company's other accounts receivable are pledged as
collateral under a revolving credit facility (Note 11).
5. PREPAIDS AND OTHER ASSETS
A summary of prepaids and other assets as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Prepaid expenses............................................ $1,071,774 $298,011
Inventory................................................... 640,141 173,996
HealthPartners receivable (Note 4).......................... 532,991 79,981
---------- --------
Other current assets........................................ $2,244,906 $551,988
========== ========
</TABLE>
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of equipment and leasehold improvements and related accumulated
depreciation, by major classification, as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Equipment................................................... $2,167,148 $695,949
Leasehold improvements...................................... 1,120,553 52,668
---------- --------
3,287,701 748,617
Less accumulated depreciation............................... (285,478) (41,519)
---------- --------
$3,002,223 $707,098
========== ========
</TABLE>
7. LEASE OPERATING RIGHTS AND OTHER ASSETS
A summary of lease rights and other assets as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Lease operating rights...................................... $36,999,654 $102,646
Capitalized assembled workforce............................. 1,250,000 --
Covenant not to compete..................................... 100,000 --
Management contract and leasing commissions................. 1,205,759 205,553
----------- --------
39,555,413 308,199
Less accumulated amortization............................... (653,298) (27,858)
----------- --------
$38,902,115 $280,341
=========== ========
</TABLE>
F-11
<PAGE> 251
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SECURITY DEPOSITS
A summary of lease deposits as of December 31:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Security deposits with Omega................................. $2,735,000 $ --
Other deposits............................................... 454,114 179,350
---------- --------
$3,189,114 $179,350
========== ========
</TABLE>
In connection with certain lease agreements with Omega Healthcare
Investors, Inc. ("Omega"), the Company is required to maintain security deposits
with Omega. Omega invests these funds in a mutual fund on behalf of Unison at a
rate of 5.5% at December 31, 1995. BritWill Texas advanced $1,400,000 of the
amount of these deposits to BritWill (Note 11).
9. LINE OF CREDIT
In 1994, Unison maintained a line of credit with a financial institution in
the amount of $950,000, all of which was outstanding at December 31, 1994.
Unison terminated this line of credit agreement in April 1995.
Unison maintained a $6,000,000 revolving line of credit which was secured
by certain of the Company's accounts receivable. As of December 31, 1995,
borrowings under the line of credit amounted to $789,041 with interest payable
at 10.05%. As of December 31, 1995 Unison was not in compliance with respect to
the financial reporting covenants of the line of credit. The line of credit was
terminated in March 1996.
Unison also participated in a revolving credit facility whereby eligible
accounts receivable were sold in an amount up to $3,000,000 (Note 4).
In March 1996, Unison's revolving lines of credit were replaced by a new
$10,000,000 credit facility. Borrowings under this credit facility bear interest
at the prime rate plus 2.0%, mature in 1998 and are secured by the Company's
eligible accounts receivable. The agreement requires Unison to comply with
certain financial and operational covenants including limitations on additional
borrowings and sale of assets and alteration of the existing capital structure.
10. ACCRUED EXPENSES
A summary of accrued expenses as of December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accrued compensation and benefits............................ $4,594,440 $ 818,418
Accrued severance costs(1)................................... 879,077 --
Due to State Medicaid........................................ 469,968 135,321
Other........................................................ 2,841,336 108,747
---------- ----------
Accrued expenses............................................. $8,784,821 $1,062,486
========== ==========
</TABLE>
- ---------------
(1) Represents an accrual for severence, exit and lease termination costs
incurred in connection with the BritWill Acquisition.
F-12
<PAGE> 252
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. NOTES PAYABLE AND LONG-TERM DEBT
A summary of notes payable and long-term debt as of December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- --------
<S> <C> <C>
Subordinated Note(1). ............................................... $ 8,000,000 $ --
Term Note(1). ....................................................... 5,601,597 --
Convertible Debenture(1). ........................................... 1,713,995 --
Subordinated notes payable an affiliate(2). ......................... 4,199,369 --
Payable to State of Indiana Medicaid(3) ............................. 3,741,188 --
Noninterest bearing note payable to lessor, monthly payments of
$11,850 commencing in December 1995, due November 1999. ........... 556,950 568,800
Unamortized discount on noninterest bearing note payable to lessor... (164,304) (205,380)
Note payable in annual installments of $133,333 plus interest at the
published Federal rate, due February 1998.......................... 400,000 --
10.0% subordinated notes payable to third party, payable monthly to
August 1998........................................................ 233,599 --
Other................................................................ 561,236 275,349
----------- --------
24,843,630 638,769
Less current portion................................................. (6,459,630) (99,768)
----------- --------
$18,384,000 $539,001
=========== ========
</TABLE>
- ---------------
(1) In connection with the BritWill Acquisition (Note 3), Unison incurred the
following indebtedness to the former shareholders of BritWill: (i) a
short-term note in the amount of $5,601,597 (the "Term Note"); (ii) a
subordinated promissory note in the amount of $8,000,000 (the "Subordinated
Note") and: (iii) a $7,000,000 noninterest-bearing debenture convertible
into 561,815 shares of common stock (the "Convertible Debenture"). The Term
Note, as amended, was repaid in January 1996. The Subordinated Note is
payable in monthly installments of interest only at 8% until March 1997,
with monthly payments of principal and interest thereafter in amounts
ranging from $76,442 to $117,384 with interest ranging from 8% to 10%. The
Subordinated Note is due the earlier of August 9, 2000 or the completion of
a public or private offering (other than the IPO) of debt or equity
securities with gross proceeds of at least $10,000,000. The holder of the
Convertible Debenture converted a portion of the Convertible Debenture in
December 1995 into 424,251 shares of common stock and converted the
remainder on March 28, 1996.
(2) Represents notes payable to BritWill Investments Texas, Ltd. ("BritWill
Texas"), an affiliate of BritWill. Of this amount, $2,799,369 is payable
monthly with interest at 9% to 10% with the balance due in October 2004. The
remaining $1,400,000 represents an advance from BritWill Texas for a lease
security deposit (Note 8). This note bears interest at the rate earned on
the lease deposit, payable quarterly, and is due December 2003.
(3) In March 1995, BritWill received an erroneous Medicaid reimbursement payment
of approximately $4,300,000 related to one of its Indiana facilities.
Negotiations with the State of Indiana's agent regarding such overpayment
resulted in BritWill retaining the funds subject to BritWill's payment of
interest thereon to the State of Indiana at the higher of the prime rate
plus 3.25% or 12%. In April 1996, the Company agreed to terms with the State
of Indiana for the repayment of the remaining $3.7 million balance by which
(i) Unison paid $1.1 million to Indiana in April 1996; (ii) Indiana will
withhold a retroactive rate increase due to Unison in the amount of
approximately $740,000; (iii) Medicaid reimbursement payments with respect
to five of Unison's facilities in Indiana will offset the amount due to the
State for the months of May through July 1996; and (iv) the unpaid balance
will be due in full in
F-13
<PAGE> 253
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
August 1996. Interest is payable at 14%. The Company has reflected the
amount due as long-term because it will utilize its credit facility, which
matures in 1998 (Note 9), to fund these repayments.
Future maturities of notes payable and long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996.............................................. $ 6,459,630
1997.............................................. 6,224,503
1998.............................................. 1,137,909
1999.............................................. 968,105
2000.............................................. 8,577,789
Thereafter............................................. 1,475,694
-----------
$24,843,630
===========
</TABLE>
The terms of the Subordinated Note require the Company to meet certain
financial covenants including current and cash flow ratios. As of December 31,
1995, Unison was in compliance with respect to these covenants.
12. STOCKHOLDER'S EQUITY (DEFICIT)
Effective July 29, 1991, Unison was authorized to issue 100,000 shares of
preferred stock. No shares were issued or outstanding as of December 31, 1994.
Effective August 14, 1995 the authorized number of shares of Preferred Stock was
increased to 1,000,000. The terms and conditions of the preferred stock are at
the discretion of Unison's Board of Directors and will be determined at the time
of issuance.
In December 1995 and January 1996, Unison completed the IPO in which
2,000,000 shares of common stock were issued at $9.00 per share. Proceeds from
the IPO amounted to $14,614,273, net of expenses, of which $9,727,000 was used
to repay debt (Notes 11 and 15). In connection with the IPO, the Company issued
warrants to the representatives of the underwriters to purchase up to 120,000
shares of common stock, at an exercise price of $11.70 per share, in exchange
for certain advisory services to be provided to Unison during the twelve-month
period following the IPO. The warrants are exercisable for a five-year period
beginning in December 1996.
On August 10, 1995, Unison entered into a stock purchase warrant agreement
with HealthPartners. The agreement entitles HealthPartners to purchase shares of
Unison's common stock with an aggregate market value of $150,000, or
approximately 16,667 shares based on the IPO price of $9.00 per share. The
$150,000 market value has been capitalized as a deferred financing cost and is
being amortized over two years. The warrant may be exercised for $.01 per share
at any time up to two years from the IPO date.
Effective December 31, 1994, Unison completed a stock purchase warrant
agreement to satisfy amounts due to an individual whom actively negotiated
several of Unison's management and operating lease agreements. The warrant
agreement, once exercised, allows 178,503 shares of common stock to be purchased
for $200 through December 31, 1997. Warrants for 60,000 shares of stock were
exercised in January 1996. Since the warrants were granted at less than fair
market value, leasehold rights totaling $42,853 have been capitalized and are
being amortized over the respective initial lease term.
13. STOCK OPTIONS
In July 1995, the Board of Directors approved the 1995 Stock Option Plan
(the "1995 Plan"). Up to 511,046 shares of Common Stock have been authorized for
issuance under the 1995 Plan. The 1995 Plan offers two types of options: (i) a
discretionary option grant program (the "Discretionary Program") under
F-14
<PAGE> 254
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK OPTIONS -- (CONTINUED)
which eligible individuals may, at the discretion of the Board of Directors, be
granted options to purchase shares of common stock at an exercise price
determined by the Board of Directors, and (ii) the automatic option grant
program (the "Automatic Program") under which grants of options will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of common stock at an exercise price equal to 100% of
their fair market value on the grant date. Each grant under the Automatic
Program vests over two years and is exercisable for ten years. Options granted
in 1995 under the Discretionary Program vest over periods of two to four years.
In January 1996, the 1995 Plan was amended by the Board of Directors to change
the exercise price of all outstanding options from $10.00 to $9.00 per share,
which was the IPO price (Note 12).
Information regarding the 1995 Plan follows:
<TABLE>
<CAPTION>
DISCRETIONARY AUTOMATIC
PROGRAM PROGRAM
-------------- ---------
<S> <C> <C>
Shares under option:
Outstanding at December 31, 1994..................................... -- --
Granted............................................................ 270,541 38,334
Canceled........................................................... (4,873) --
------- ------
Outstanding at December 31, 1995..................................... 265,668 38,334
======= ======
Option price per share............................................... $9.00 $9.00
</TABLE>
At December 31, 1995, 245,378 shares of common stock were available under
the 1995 Plan for future awards.
14. LEASES
As of December 31, 1995, Unison operated 43 facilities under noncancelable
operating leases with lease terms ranging from five to twenty years plus renewal
options. The lease agreements provide for contingent rental provisions based on
increases in the consumer price index, Medicaid reimbursement rates and number
of licensed beds. Certain of the leases have purchase options determined by a
specified formula. Unison is responsible for all taxes, maintenance and other
executory costs.
Unison leases 14 facilities from Omega, of which nine facilities are in
Indiana and five are in Texas. Each of the Omega leases expires in 2005 and
allows Unison up to three five-year renewal options. The Omega leases require
the Company to pay stated rent, with annual increases based upon the greater of
5% of incremental revenues or the Consumer Price Index, but limited to a maximum
annual increase of 5%. The Omega leases grant the Company the right, but not the
obligation, to purchase the Omega facilities upon the expiration of the initial
lease term.
The Company leases six facilities located in Texas from BritWill Texas for
an initial term that expires in December 2005. The lease agreement requires
Unison to pay monthly amounts equal to (i) the amount of monthly payments made
by BritWill Texas to Omega pursuant to a loan agreement which provided the
financing for BritWill's purchase of the six facilities; (ii) all payments due
from lessees related to the facilities that are subleased; and (iii) payment of
certain third-party seller subordinated notes incurred in connection with the
acquisition of the six facilities.
Covenants to the Omega leases and the BritWill Texas leases require
maintenance of specified operating ratios, levels of working capital and net
worth. As of December 31, 1995, the Company was not in compliance with the cash
flow to debt covenant. Omega has agreed to waive this covenant as of December
31, 1995. The
F-15
<PAGE> 255
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LEASES -- (CONTINUED)
financial covenant tests will next be applied for the first quarter of 1996, and
the Company expects to be in compliance with the covenants for such period.
In connection with the BritWill Acquisition, Unison recorded a leasehold
liability in the amount of $4,700,000. This adjustment was based on an
independent appraisal which valued the present value of the BritWill lease
obligations based on market lease rates. The leasehold liability is being
amortized over the aggregate lease term of approximately 25 years.
Future minimum lease payments at December 31, 1995, by year and in the
aggregate, under noncancelable operating lease arrangements with initial or
remaining terms of one year or more consist of the following:
<TABLE>
<S> <C>
1996........................................................... $ 10,779,459
1997........................................................... 10,868,398
1998........................................................... 10,915,673
1999........................................................... 10,859,043
2000........................................................... 10,358,871
Thereafter..................................................... 68,001,637
------------
$121,783,081
============
</TABLE>
Unison's lease payments are personally guaranteed to $13,500,000 by the
Chairman of the Board as well as secured by substantially all the personal
property of Unison. Unison's lease payments are senior to all unsecured debt.
15. RELATED PARTY TRANSACTIONS
In connection with the BritWill Acquisition (Note 3) Unison entered into
the following transactions. The Term Note, Subordinated Note and Convertible
Debenture issued as consideration for the BritWill Acquisition were issued to
the former shareholders of BritWill (Note 11). The primary BritWill shareholder
receiving payments was Whitehead Family Investments, Ltd. ("WFI"), which owned
81.5% of the stock of BritWill prior to the BritWill Acquisition. Bruce H.
Whitehead, Chairman of the Board of Unison, is the president of the general
partner of WFI and, together with a family trust, owns 100% of WFI.
In connection with the BritWill Acquisition, a note payable to WFI in the
amount of $3,375,000 was repaid with the proceeds from the IPO. Subsequent to
the BritWill Acquisition, Unison also incurred notes payable to WFI in the
aggregate amount of $750,000 bearing interest at the rate of 12%. These notes
were repaid with the proceeds from the IPO.
Certain obligations of Unison to Omega, the owner of 14 facilities that the
Company leases in Indiana and Texas are guaranteed by Bruce H. Whitehead. Unison
also leases six facilities in Texas from BritWill Texas. Lease expense on these
facilities for the five months ended December 31, 1995 amounted to $504,660. See
Note 14.
With the BritWill Acquisition, Unison also assumed unsecured notes payable
to BritWill Texas with an aggregate balance at December 31, 1995 of $2,799,369
(Note 11). Interest expense on these notes amounted to $83,993 for the five
months ended December 31 1995.
F-16
<PAGE> 256
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. TAXES
The components of the provision (benefit) for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------ --------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ -- $ (4,562)
State............................................... -- 1,180 1,150
Deferred:
Federal............................................. 42,500 -- (14,488)
State............................................... 7,500 -- (2,517)
------- ------ --------
$50,000 $1,180 $(20,417)
======= ====== ========
</TABLE>
The difference between Unison's effective income tax rates and the
statutory rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit)............. $ 8,160 $(22,658) $(52,304)
Increases (decreases) resulting from:
Benefit of graduated income tax.......................... -- -- 5,799
Amortization of intangibles and nondeductible expenses... 91,099 -- --
State tax expense (benefit) net of federal benefit....... 4,950 779 (821)
Valuation allowance...................................... (56,322) 25,057 31,275
Other.................................................... 2,113 (1,998) (4,366)
-------- -------- --------
Income tax expense (benefit)............................... $ 50,000 $ 1,180 $(20,417)
======== ======== ========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Temporary differences are
primarily attributable to reporting for income tax purposes certain items of
income and expense using a cash basis of accounting and recognition of
depreciation using the accelerated cost recovery system.
Significant components of the deferred taxes follow:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
----------------------- --------------------
CURRENT LONG-TERM CURRENT LONG-TERM
--------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Deferred liabilities:
Intangibles....................................... $ -- $(9,937,608) $ -- $ --
Accelerated depreciation.......................... -- (30,810) -- (8,210)
Cash to accrual adjustment........................ (908,339) -- (99,104) --
--------- ----------- -------- --------
Total liabilities................................... (908,339) (9,968,418) (99,104) (8,210)
Deferred assets:
Allowance for doubtful accounts................... 205,699 -- -- --
Net operating loss
carryforward................................... -- 1,795,258 -- 163,646
Valuation allowance............................... -- -- -- (56,332)
--------- ----------- -------- --------
Total assets........................................ 205,699 1,795,258 -- 107,314
--------- ----------- -------- --------
Total net asset (liability)......................... $(702,640) $(8,173,160) $(99,104) $ 99,104
========= =========== ======== ========
</TABLE>
F-17
<PAGE> 257
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. TAXES -- (CONTINUED)
The increase in deferred taxes and the elimination of the valuation reserve
was due to the application of the provisions of SFAS 109 with respect to the
treatment of basis differences between assets acquired and liabilities assumed
in the BritWill acquisition. At December 31, 1995, the Company has consolidated
net operating loss carryforwards which approximate $4,500,000 and begin to
expire in 2007 for federal income tax purposes and 1999 for state income tax
purposes. With respect to the change in ownership certain of the net operating
loss carryforwards could be subject to annual limitations.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of Unison's financial instruments as
of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Notes payable and long-term debt.......................... $24,843,630 $24,206,644
</TABLE>
The carrying amounts reported in the balance sheet for cash, accounts
receivable, lease deposits, accounts payable and borrowings under revolving
lines of credit approximate their fair value. The fair value of the Company's
long-term borrowings is estimated by discounting future cash flows at current
rates offered to Unison for debt of comparable types and maturities. Because no
market exists for these financial instruments, considerable judgment is
necessary in interpreting the data to develop estimates of fair value. The use
of different market assumptions may have a material effect on the estimated fair
value amounts.
18. INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims that are customary risks inherent in the operation of
health facilities and are generally covered by insurance. Unison maintains
property, liability and professional malpractice insurance policies through
commercial carriers on a claims made basis in amounts and with such coverages
and deductibles that are deemed appropriate by management, based upon historical
claims, industry standards and the nature and risks of its business. There can
be no assurance that a future claim will not exceed available insurance
coverages or that such coverages will continue to be available for the same
scope of coverages at reasonable premium rates. Any substantial increase in the
cost of such insurance or the unavailability of any such coverages could have an
adverse effect on Unison's business. However, based upon the evaluation of
Unison's historical asserted and unasserted claim experience, management
believes that the ultimate liability, if any, resulting from the settlement of
any future claim will not have a material impact on Unison's financial position,
operations or liquidity.
Unison maintains workers compensation coverage on its facilities with the
exception of certain facilities located in Texas. The reserve for workers
compensation claims amounts to $184,000 at December 31, 1995 and is included in
accrued expenses. The Company believes that this reserve for asserted and/or
unasserted claims is adequate based on historical results.
19. COMMITMENTS
The Company entered into an agreement with Trouver to provide financial
advisory services in connection with the Company's financing and business
acquisition plans. Trouver is compensated by the Company based on a percentage,
ranging from 1.5% to 10.0%, based on the type of transaction consummated (see
Note 3).
F-18
<PAGE> 258
UNISON HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUBSEQUENT EVENTS
On March 28, 1996, Unison entered into a definitive purchase and sale
agreement for the acquisition, effective February 1, 1996, of 90% of the
outstanding common stock of each of four rehabilitation therapy service centers
(the "Centers"). In consideration for the stock of the Centers, Unison paid
$800,000 in cash, issued term notes in the aggregate amount of $1,000,000 (the
"Notes") and issued convertible subordinated debentures in the aggregate amount
of $1,800,000 (the "Debentures"). In addition, contingent payments will be due
if specified revenue targets are obtained. Both the Notes and Debentures are
convertible into shares of Unison common stock at the option of the holder. The
transaction will be accounted for as a purchase.
F-19
<PAGE> 259
UNISON HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, DECE,BER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 847 $ 6,097
Accounts receivable -- patient, less allowance for doubtful
accounts of $829 at June 30, 1996 and $709 at December 31,
1995........................................................... 19,624 14,771
Accounts receivable -- other, less allowance for doubtful accounts
of $74 at June 30, 1996 and December 31, 1995.................. 2,528 1,852
Prepaid expenses and other current assets......................... 2,413 2,245
------- -------
Total current assets........................................... 25,412 24,965
Lease operating rights and other assets, net........................ 39,329 38,902
Goodwill, net....................................................... 11,195 7,473
Property and equipment, net......................................... 5,548 3,002
Security deposits................................................... 3,259 3,189
------- -------
$84,743 $77,531
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................... $ -- $ 789
Accounts payable.................................................. 7,826 9,437
Accrued expenses.................................................. 8,384 8,785
Notes payable and current portion of long-term debt due to
affiliates..................................................... 2,619 5,824
Current portion of other notes and long-term debt................. 957 636
Deferred taxes.................................................... 778 703
------- -------
Total current liabilities...................................... 20,564 26,174
Line of credit...................................................... 8,742 --
Notes payable and long-term debt due to affiliates.................. 12,271 13,691
Other notes payable and long-term debt.............................. 6,522 4,693
Deferred taxes...................................................... 9,030 8,173
Leasehold liability, net............................................ 4,528 4,621
Other long-term liabilities......................................... 200 294
------- -------
Total liabilities.............................................. 61,857 57,646
------- -------
Stockholders' equity:
Common stock, $.001 par value; 10,000,000 shares authorized;
3,871,312
and 3,673,748 issued and outstanding at June 30, 1996
and December 31, 1995.......................................... 3 2
Additional paid-in capital........................................ 21,804 20,091
Retained earnings (accumulated deficit)........................... 1,079 (208)
------- -------
Total stockholders' equity..................................... 22,886 19,885
------- -------
$84,743 $77,531
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
F-20
<PAGE> 260
UNISON HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Net patient revenue......................... $ 32,480 $ 6,598 $ 63,442 $ 12,415
Management fees............................. 227 470 557 936
Other....................................... 566 52 998 92
--------- --------- --------- ---------
Total revenues........................... 33,273 7,120 64,997 13,443
Expenses:
Wages and related........................... 16,488 3,926 32,447 7,486
Other operating............................. 10,638 2,382 21,172 4,587
Rent........................................ 3,238 594 6,653 1,151
Interest.................................... 842 138 1,452 183
Depreciation and amortization............... 584 50 1,054 88
--------- --------- --------- ---------
Total expenses........................... 31,790 7,090 62,778 13,495
--------- --------- --------- ---------
Income (loss) before income taxes............. 1,483 30 2,219 (52)
Income tax expense............................ 632 -- 932 1
--------- --------- --------- ---------
Net income (loss)............................. $ 851 $ 30 $ 1,287 $ (53)
========= ========= ========= =========
Net income (loss) per share:
Primary..................................... $.21 $.02 $.32 $(.04)
Fully diluted............................... .21 .02 .31 (.04)
Shares used in per share calculation:
Primary..................................... 4,082,723 1,266,164 4,070,169 1,266,164
Fully diluted............................... 4,129,309 1,266,164 4,131,955 1,266,164
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
F-21
<PAGE> 261
UNISON HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
----------- -------
(UNAUDITED)
<S> <C> <C>
Net cash provided by (used in) operating activities (including changes
in all operating assets and liabilities)............................. $ (4,262) $1,295
-------- ------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements..................... (2,010) (236)
Increase in intangibles and other assets............................. (1,022) (27)
Increase in lease deposits........................................... (70) (63)
Acquisitions......................................................... (932) --
-------- ------
Net cash used in investing activities............................. (4,034) (326)
-------- ------
Cash flows from financing activities:
Net increase in borrowings under revolving lines of credit........... 7,953 (950)
Proceeds from long-term debt......................................... 5,131 71
Payments of principal on long-term debt.............................. (10,038) (47)
-------- ------
Net cash provided by (used in) financing activities............... 3,046 (926)
-------- ------
Net increase (decrease) in cash........................................ (5,250) 43
Cash and cash equivalents at beginning of period....................... 6,097 118
-------- ------
Cash and cash equivalents at end of period............................. $ 847 $ 161
======== ======
Supplemental disclosures:
Cash paid for:
Interest............................................................. $ 985 $ 163
Income taxes......................................................... -- --
Acquisitions:
Increase in assets................................................... 5,031 --
Liabilities assumed and incurred..................................... 4,031 --
Conversion of debenture into shares of common stock.................... 1,714 --
Equipment purchased under capital lease................................ 648 --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
F-22
<PAGE> 262
UNISON HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, contains all adjustments which are necessary to state fairly the
financial position, cash flows and results of operations of Unison HealthCare
Corporation and its subsidiaries ("Unison" or the "Company") as of and for
the periods indicated. Unison presumes that users of the interim financial
information herein have read or have access to the audited financial
statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the preceding fiscal year and that the adequacy
of additional disclosure needed for a fair presentation, except in regard to
material contingencies, may be determined in that context. Accordingly,
footnote and other disclosures which would substantially duplicate the
disclosures contained in Unison's most recent annual report to stockholders
have been omitted. Operating results for the three months and six months
ended June 30, 1996 are not necessarily indicative of the results which may
be expected for the year ending December 31, 1996.
2. The provision for doubtful accounts receivable is included in other operating
expenses. Provisions totaled $110,000, $321,000, $31,000 and $50,000 for the
three months and six months ended June 30, 1996 and 1995, respectively.
3. On March 28, 1996, Unison entered into a definitive purchase and sale
agreement for the acquisition, effective February 1, 1996, of 90% of the
common stock of four rehabilitation therapy centers (collectively, "Sunbelt
Therapy"). In consideration for the stock of Sunbelt Therapy, Unison paid
$800,000 in cash, issued term notes for $1,000,000 in the aggregate (the
"Notes") and issued subordinated convertible debentures totaling $1,800,000
(the "Debentures"). In addition, contingent payments will be due if specified
pretax income targets are achieved. The Notes and Debentures bear interest at
10%, payable quarterly beginning May 1, 1996, and are convertible into Unison
common stock at the option of the holder at a conversion price equal to the
average closing price (85% of the average closing price with respect to the
Notes) of Unison's common stock for the 20-day trading period preceding the
date of conversion. The Notes mature in equal principal amounts on February
1, 1997 and 1998, and the Debentures mature in equal principal amounts on
February 1, 1997, 1998 and 1999. The transaction was accounted for as a
purchase.
In August 1995, Unison acquired BritWill HealthCare Company ("BritWill"), a
long-term care company operating 28 facilities in Texas and Indiana. The
transaction was accounted for as a purchase.
Summarized below are the unaudited pro forma consolidated results of
operations of Unison for the periods indicated, assuming the acquisitions
were consummated as of January 1, 1995. The amounts reflect pro forma
adjustments for interest on new debt and amortization of intangible assets
and leasehold liabilities. The unaudited pro forma consolidated results of
operations have been prepared for comparative purposes only and are not
necessarily indicative of what would have occurred had these transactions
been made at January 1, 1995 or of results which may occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
Revenues............................ $33,273 $23,969 $65,541 $48,977
Net income (loss)................... 871 (381) 1,281 (787)
Net income (loss) per share......... $.21 $(.30) $.31 $(.62)
</TABLE>
4. In January 1996, Unison acquired an institutional pharmacy in Indiana. In
consideration for the $600,000 purchase price, the Company paid cash in the
amount of $200,000 and issued a note payable amounting to $400,000. The
acquisition was accounted for as a purchase. Had this transaction occurred as
of January 1, 1995, the pro forma effect on Unison's results of operations
for the three and six months ended June 30, 1996 and 1995 would have been
immaterial.
F-23
<PAGE> 263
UNISON HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. In March 1996, Unison replaced its revolving lines of credit with a new
$10,000,000 revolving credit facility. Borrowings under this credit facility
bear interest at the prime rate plus 2.0% (10.25% at June 30, 1996), mature
in 1998 and are secured by the Company's eligible accounts receivable. The
credit agreement requires Unison to comply with certain financial and
operational covenants including limitations on additional borrowings and
sales of assets and alteration of the existing capital structure. Unison also
executed promissory notes with a lessor in the aggregate amount of $4,000,000
with interest at 10.25% to 10.75%. The notes are guaranteed by Jerry M.
Walker, the Company's President. In May 1996, Unison executed a promissory
note payable to the agent for the former holders of BritWill stock
immediately prior to the acquisition of BritWill in the amount of $1,000,000.
Interest is payable at 12.0% and the note is due on demand after 30 days from
issuance.
6. On July 3, 1996, Unison, through a newly formed wholly owned subsidiary,
entered into an Agreement and Plan of Merger (the "Ampro Agreement") with
American Professional Holding, Inc. ("Ampro"). In the merger, the outstanding
shares of Ampro Common Stock will be converted into the right to receive that
number of shares of Unison Common Stock obtained by dividing 521,000 by the
number of issued and outstanding shares of Ampro prior to the effective time
of the Merger. Unison also entered into an Agreement and Plan of Merger (the
"Memphis Agreement") with Memphis Clinical Laboratory, Inc. ("Memphis"). In
the merger, three shareholders who own approximately 35% of the outstanding
shares of Memphis will receive pro rata portions of 19,000 shares of Unison
Common Stock and the holder of the remaining shares of Memphis will receive
cash in the estimated amount of $233,750 and a promissory note in the amount
of $250,000. The Ampro Agreement and the Memphis Agreement are mutually
contingent and subject to shareholder and regulatory approvals. The mergers
will be accounted for as poolings of interests.
On August 2, 1996, the Company entered into agreements for the acquisition of
Signature Health Care Corporation ("Signature Health Care") and four
affiliated companies, Douglas Manor, Inc. ("Douglas"), Safford Care, Inc.
("Safford"), Arkansas, Inc. ("Arkansas"), and Cornerstone, Inc.
("Cornerstone" and collectively with Signature Health Care, Douglas, Safford
and Arkansas, "Signature"). Signature operates 13 long-term care facilities
in Colorado and Arizona. Through mergers with each of the Signature companies
and newly formed wholly owned subsidiaries of the Company, each of the
Signature companies will become wholly owned subsidiaries of Unison.
Outstanding shares of Signature Health Care will be converted into the right
to receive, subject to certain adjustments, cash equal to approximately
$10,200,000 and shares of Unison's Common Stock equal to approximately
$20,000,000. Outstanding shares of Douglas, Safford, Arkansas and Cornerstone
will be converted into the right to receive, subject to certain adjustments,
cash equal to approximately $28,000,000 in the aggregate. The merger
agreements are subject to regulatory and shareholder approval. The mergers
will be accounted for as purchases.
7. Effective August 1, 1996, Unison acquired the leasehold rights to two skilled
nursing facilities located in the State of Washington with an aggregate of
222 beds. These facilities were previously operated by Unison under a
management contract. Summarized below are the unaudited pro forma
consolidated results of operations of Unison for the periods indicated,
assuming the acquisitions were consummated as of January 1, 1995. The
unaudited pro forma consolidated results of operations have been prepared for
comparative purposes only and are not necessarily indicative of what would
have occurred had this transaction been made at January 1, 1995 or of results
which may occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1996 1995 1996 1995
------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenues..................................... $34,329 $8,366 $67,394 $15,988
Net income (loss)............................ 785 (116) 1,099 (339)
Net income per share......................... $.19 $(.09) $.27 $(.27)
</TABLE>
F-24
<PAGE> 264
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BritWill HealthCare Company
We have audited the accompanying consolidated statement of operations and
cash flows of BritWill HealthCare Company for the month ended July 31, 1995. Our
audit also included the financial statement schedule listed in the Index at Item
14(a). 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 audit 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 results of operations and cash flows of BritWill
HealthCare Company for the one month ended July 31, 1995, 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
Phoenix, Arizona
April 10, 1996
F-25
<PAGE> 265
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of BritWill HealthCare Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of BritWill
HealthCare Company and its subsidiaries at June 30, 1995 and at December 31,
1994 and 1993, and the results of their operations and their cash flows for the
six month period ended June 30, 1995 and for each of the two years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
November 8, 1995
F-26
<PAGE> 266
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 355,864 $ 560,879 $ 858,606
Accounts receivable, less allowance for doubtful accounts of
$480,039, $997,246 and $790,867, respectively............... 4,393,837 6,855,716 7,599,464
Due from third party payors, net............................... 137,974 1,149,319 2,290,066
Inventories.................................................... 319,417 433,483 442,033
Due from affiliates............................................ 7,482 369,234 512,594
Prepaid expenses............................................... 333,197 400,307 486,874
Other receivables.............................................. 33,848 18,831 31,151
Security deposits.............................................. 500,000 637,517
Restricted cash................................................ 600,000 645,000 45,000
----------- ----------- -----------
Total current assets........................................ 6,181,619 10,932,769 12,903,305
Furniture, fixtures and equipment, net........................... 838,741 1,399,216 2,210,682
Other assets, net................................................ 6,966,794 6,971,077 6,827,126
Deferred charges, net............................................ 650,815 573,629 537,321
Security deposits................................................ 1,335,000 2,376,344 2,237,944
----------- ----------- -----------
Total assets................................................ $15,972,969 $22,253,035 $24,716,378
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 2,568,153 $ 6,249,936 $ 5,133,964
Accrued expenses............................................... 1,998,684 3,495,450 7,002,347
Notes payable due affiliates................................... 316,160 668,268 528,230
Notes payable.................................................. 800,000 612,473
Income taxes payable........................................... 51,750 52,896 92,126
----------- ----------- -----------
Total current liabilities................................... 5,734,747 11,079,023 12,756,667
Revolving line of credit......................................... 1,672,577
Subordinated long-term debt due affiliates....................... 6,135,694 8,354,868 8,488,465
Other long-term debt............................................. 1,184,146 48,183
----------- ----------- -----------
Total liabilities........................................... 11,870,441 20,618,037 22,965,892
----------- ----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, $1.00 par value; authorized 1,000,000 shares;
389,750 issued and outstanding in 1993, 421,050 in 1994 and
424,050 in 1995............................................. 389,750 421,050 424,050
Additional paid-in capital..................................... 5,176,836 4,705,540 4,714,469
Treasury stock, 42,600 and 54,650 shares in 1994 and 1995,
respectively, at par........................................ (42,600) (54,650)
Accumulated deficit............................................ (1,464,058) (3,448,992) (3,333,383)
----------- ----------- -----------
Total shareholders' equity.................................. 4,102,528 1,634,998 1,750,486
----------- ----------- -----------
Total liabilities and shareholders' equity.................. $15,972,969 $22,253,035 $24,716,378
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-27
<PAGE> 267
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ONE MONTH
DECEMBER 31, ENDED JUNE ENDED
------------------------- 30, JULY 31,
1993 1994 1995 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Patient care services, net........................... $32,106,741 $53,800,520 $32,723,297 $5,655,071
Management fee from related parties.................. 348,655 251,186 40,430
Other income......................................... 130,107 373,239 228,426 207,270
Other related party income........................... 146,000
----------- ----------- ----------- -----------
Total revenues.................................... 32,731,503 54,424,945 32,992,153 5,862,341
----------- ----------- ----------- -----------
Expenses:
Salaries and contract labor.......................... 19,407,858 32,634,732 19,812,601 3,467,433
Rent................................................. 5,097,014 8,263,642 4,448,134 775,136
Supplies............................................. 3,499,445 6,686,572 4,134,207 716,037
General and administrative........................... 3,670,420 6,252,183 3,255,917 614,191
Depreciation and
amortization...................................... 703,595 986,812 500,682 90,803
Bad debt............................................. 524,333 644,471 21,442 48,631
Other................................................ 50,623 71,529 10,731 121,900
----------- ----------- ----------- -----------
Total expenses.................................... 32,953,288 55,539,941 32,183,714 5,834,131
----------- ----------- ----------- -----------
Income (loss) from
operations........................................ (221,785) (1,114,996) 808,439 28,210
Interest income (expense):
Interest income................................... 64,575 54,545 109,309 3,878
Interest expense.................................. (131,764) (226,587) (105,127)
Related party interest
expense......................................... (384,945) (739,823) (485,265) (88,977)
----------- ----------- ----------- -----------
Income (loss) before income taxes.................... (542,155) (1,932,038) 205,896 (162,016)
Provision for income taxes........................... 51,750 52,896 26,000 4,500
----------- ----------- ----------- -----------
Net income (loss).................................... $ (593,905) $(1,984,934) $ 179,896 $ (166,516)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-28
<PAGE> 268
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ PAID-IN ----------------- ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT TOTAL
------- -------- ---------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992....... 389,750 $389,750 $5,099,827 $ (870,153) $ 4,619,424
Contribution of assets and
liabilities -- net (Note
1)........................... 77,009 77,009
Net loss....................... (593,905) (593,905)
------- -------- ---------- ------ ------ ---------- ----------
Balance, December 31, 1993....... 389,750 389,750 5,176,836 (1,464,058) 4,102,528
Common stock issued............ 31,300 31,300 (23,475) 7,825
Employee receivable due to
common stock issued.......... (7,825) (7,825)
Rescission of shares due to
employee terminations........ 42,600 42,600 $(42,600)
Excess consideration over
historical cost of assets
acquired in a purchase
combination
(Note 1)..................... (482,596) (482,596)
Net loss....................... (1,984,934) (1,984,934)
------- -------- ---------- ------ ------ ---------- ----------
Balance, December 31, 1994....... 421,050.. 421,050 4,705,540 42,600 (42,600) (3,448,992) 1,634,998
Common stock issued............ 3,000 3,000 (2,250) 750
Employee receivable due to
common stock issued.......... (750) (750)
Purchase of shares due to
employee terminations........ 11,929 12,050 (12,050) (64,287) (64,408)
Net income..................... 179,896 179,896
------- -------- ---------- ------ ------ ---------- ----------
Balance, June 30, 1995........... 424,050 $424,050 $4,714,469 54,650 $(54,650) $(3,333,383) $ 1,750,486
======= ======== ========== ====== ====== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-29
<PAGE> 269
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED ONE MONTH
------------------------- JUNE 30, ENDED
1993 1994 1995 JULY 31, 1995
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ (593,905) $(1,984,934) $ 179,896 $ (166,516)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 703,595 1,083,779 574,065 90,803
Increase in accounts receivable................. (2,099,490) (2,461,879) (743,748) (100,036)
(Increase) decrease in amounts due from third
party payors.................................. (105,844) (1,011,345) (1,140,747) 895,801
Decrease (increase) in inventories.............. 77,564 (114,066) (8,550)
Increase in due from affiliates................. (152,825) (361,752) (143,360)
Increase in prepaid expenses.................... (321,615) (67,110) (86,567) (19,097)
(Increase) decrease in other receivables........ (33,848) 15,017 (12,320) (1,047)
(Increase) decrease in other assets and deferred
charges....................................... (69,733) (173,037) 67,370
Payment for restricted cash..................... (45,000)
(Increase) decrease in security deposits........ (141,344) 883 (13,119)
(Decrease) increase in accounts payable......... 1,298,397 3,681,783 (1,115,972) (1,604,192)
Increase in accrued expenses.................... 743,237 1,156,766 3,506,897 90,725
Increase (decrease) in income taxes payable..... 51,750 1,146 39,230 (19,749)
----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities.................................... (432,984) (318,672) 876,670 (779,057)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment................ (366,366) (551,714) (485,009) (136,997)
Purchase of facilities from related party, net of
liabilities of $340,000......................... (482,596)
Construction in progress........................... (170,904) (436,169)
----------- ----------- ----------- -----------
Net cash used in investing activities........... (366,366) (1,205,214) (921,178) (136,997)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable............ 1,380,000 2,283,823
Proceeds from revolving line of credit............. 1,672,577 1,082,377
Payments on notes payable and long-term debt....... (569,685) (364,922) (1,754,875) (117,894)
(Payment for) receipt of restricted cash........... (600,000) 600,000
Payment for debt issuance costs.................... (190,000) (111,059)
Repurchase of shares............................... (64,408)
----------- ----------- ----------- -----------
Net cash provided by financing activities....... 210,315 1,728,901 342,235 964,483
----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents........................................ (589,035) 205,015 297,727 48,429
Cash and cash equivalents at beginning of period..... 944,899 355,864 560,879 858,606
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period........... $ 355,864 $ 560,879 $ 858,606 $ 907,035
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................ $ 403,954 $ 684,615 $ 296,562 $ 82,069
Income taxes.................................... 150 51,502
Supplemental schedule of noncash investing and
financing activities:
Security deposit with Omega through issuance of
note............................................ 1,400,000
Acquisition of other intangibles through issuance
of note......................................... 3,331,547 249,000
Contribution of inventory and accrued
liabilities -- net.............................. 77,009
</TABLE>
See accompanying notes to the consolidated financial statements.
F-30
<PAGE> 270
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1994 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
BritWill HealthCare Company (the "Company") was organized as a Delaware
corporation on August 5, 1992. The Company leases and manages long-term care
facilities located throughout Texas and Indiana. The Company commenced
operations on December 24, 1992. At that time, BritWill Investments -- Indiana
L.P. (BI-Indy), an affiliate of the Company, managed thirteen long-term care
facilities owned by Cloverleaf Enterprises, Inc. Such facilities were leased and
operated by Sherwood Healthcare Corp. (Sherwood) and Cedar Care, Inc. (Cedar
Care). Under the terms of a management agreement, BI-Indy exercised its options
to acquire nine of these facilities and acquire the leasehold rights to the
remaining four facilities from Cloverleaf Enterprises, Inc. Concurrently, the
nine facilities were sold by BI-Indy to Omega Healthcare Investors, Inc. (Omega)
and leased back under a "Master Lease" agreement by BritWill Investments -- I
(BI-1), a subsidiary of the Company. The leasehold rights to the four facilities
were contributed to BI-1 by BI-Indy. Further, BI-Indy assigned the two
management agreements for these thirteen facilities to BI-1.
In December 1993, BritWill Investments Texas, Ltd. (BI-TX), an affiliate of
the Company, entered into purchase agreements for six long-term care facilities
and entered into lease agreements for three facilities with third-party lessors.
The total consideration paid by BI-TX was approximately $18,440,000. BI-TX
financed these transactions through two participating mortgages with Omega
totaling $14,760,000 and the sale of five facilities to Omega for $13,810,000.
BritWill Investments -- II (BI-2), a subsidiary of the Company, then entered
into a noncancelable operating lease ("Texas Master Lease") with Omega for the
five facilities sold by BI-TX and also entered into two noncancelable operating
lease and sublease agreements for six facilities either owned or leased by
BI-TX.
During 1993, BI-TX conveyed supply inventories and certain liabilities and
other accrued expenses from the facilities to BI-2. No consideration was paid by
BI-2 to BI-TX for the inventory and BI-TX did not give BI-2 any consideration
for the transfer of the liabilities and accrued expenses. The amount by which
the predecessor cost of the inventory exceeded the assumed liabilities, $77,009,
was recognized as additional paid-in capital.
Effective November 1, 1994, BI-2 purchased the net assets of two nursing
homes operated by Avalon Care, Inc. ("Avalon"), an affiliated company. The
nursing homes acquired were: Elkhart Manor ("Elkhart") and Oakwood Health Care
Center ("Oakwood") facilities. Avalon assigned the responsibilities and rewards
of the Elkhart and Oakwood operating leases to BI-2. As consideration for the
purchase of the leases, BI-2 forgave intercompany debt from Avalon. The amount
by which the consideration paid exceeded the predecessor cost of the acquired
assets less the assumed liabilities and forgiveness of debt, $482,496, was
recognized as a reduction of additional paid-in capital.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, consisting of BI-1 and BI-2. The financial statements
include the accounts of Cedar Care and Sherwood since December 24, 1992.
Although the Company has no ownership interest in Cedar Care or Sherwood, these
companies are consolidated because the Company has unilateral and perpetual
control over the assets and operations of these companies due to the management
agreements. Under these management agreements, managerial control and operating
proceeds have been transferred directly to BI-1. Fees under the management
agreements are based upon the revenues of Cedar Care and Sherwood from the
facilities, such that all net income of Cedar Care and Sherwood is paid to BI-1.
All significant intercompany accounts and transactions have been eliminated.
F-31
<PAGE> 271
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 these estimates.
Cash and cash equivalents
Cash and cash equivalents include amounts held in demand deposits at
financial institutions and all highly liquid investments that have an original
maturity of three months or less.
Restricted cash
Restricted cash consists of a $600,000 certificate of deposit that is
collateral for a $600,000 bank note payable and a $45,000 certificate of deposit
assigned to a third party as security for payment of insurance claims. As of
June 30, 1995, restricted cash consists of the $45,000 certificate of deposit.
Revenue and accounts receivable
Revenues are derived from patient care services and management fees of
nursing homes not owned or leased by the Company. Credit risk exists to the
extent that the most significant source of revenue is reimbursement for patient
care from state sponsored Medicaid programs in Texas and Indiana and from
Medicare. However, management does not believe that there are any significant
credit risks associated with these governmental agencies. Payments from such
programs are based on cost as defined under the programs, and associated
revenues are presented net of provisions to reduce customary charges to amounts
receivable from such programs. Revenues from private sources are recognized
based upon established charges. Reserves are provided for receivables estimated
to be uncollectible and are adjusted periodically based on the Company's
evaluation of industry conditions, historical collection experience and other
relevant factors.
The following table summarizes the approximate percent of net patient
revenues and accounts receivable from such payors:
<TABLE>
<CAPTION>
NET REVENUE ACCOUNTS RECEIVABLE
------------------------------------------- --------------------------
SIX MONTHS ONE MONTH
DECEMBER 31, ---------- ---------- DECEMBER 31,
------------- JUNE 30, JULY 31, ------------- JUNE 30,
1993 1994 1995 1995 1993 1994 1995
---- ---- ---------- ---------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Medicaid...................... 64.3% 60.5% 53.7% 53.9% 72.1% 57.9% 62.8%
Medicare...................... 5.0 17.6 28.6 28.6 13.8 26.9 25.4
Private....................... 21.5 20.1 16.0 15.9 11.1 9.9 7.9
Other......................... 9.2 1.8 1.7 1.6 3.0 5.3 3.9
---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ==== ====
</TABLE>
Inventories
Inventories consist of medical and other supplies necessary for delivering
resident care at the facilities. Inventories are recorded at the lower of cost
(determined by the first-in, first-out method) or market.
Furniture, fixtures and equipment
Furniture, fixtures and equipment are carried at cost. Depreciation is
recognized using the straight-line method over the estimated useful lives of the
assets, which range from five to ten years. Leasehold improvements are amortized
over the lesser of the estimated useful life or lease term. Maintenance cost and
repairs are expensed as incurred; betterments and leasehold improvements are
capitalized.
F-32
<PAGE> 272
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred charges
Deferred charges consist of costs incurred to acquire leases to the
long-term care facilities, which are amortized on the straight-line method over
the term of the lease. Amortization expense was $77,350, $77,186, $38,366 and
$6,436 for the years ended December 31, 1993 and 1994, the six months ended June
30, 1995 and the one month ended July 31, 1995, respectively.
Income taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS 109). The
cumulative effect of the adoption of SFAS 109 was immaterial to the Company's
financial position. Under SFAS 109, the liability method is used to account for
income taxes. Under this method, the deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial reporting of existing assets and liabilities and their respective tax
basis. The Company's principal differences relate to the availability of tax net
operating loss carry forwards, certain reserves, accrued vacation, and
depreciation.
Interim financial data
The following table sets forth summarized results of operations for
BritWill for the periods indicated:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
---------------------------
1995 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Total revenues.................................... $38,854,000 $29,857,000
Income (loss) from operations..................... 836,000 (1,365,000)
Income (loss) before income taxes................. 44,000 (1,886,000)
Net income (loss)................................. 13,000 (1,912,000)
</TABLE>
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------- JUNE 30,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures..................... $ 854,027 $1,202,684 $1,476,780
Leasehold improvements..................... 121,948 349,943 504,952
Construction in progress................... 33,904 213,596 649,765
Land....................................... 55,904
---------- ---------- ----------
1,009,879 1,766,223 2,687,401
Less accumulated depreciation.............. (171,138) (367,007) (476,719)
---------- ---------- ----------
$ 838,741 $1,399,216 $2,210,682
========== ========== ==========
</TABLE>
Depreciation expense was $158,154, $162,143, $109,712 and $23,468 for the
years ended December 31, 1993 and 1994, the six months ended June 30, 1995 and
the one month ended July 31, 1995, respectively.
F-33
<PAGE> 273
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Leasehold rights -- BI-Indy.......................... $4,103,338 $ 4,103,338 $ 4,103,338
Leasehold rights -- BI-TX............................ 3,331,547 3,331,547 3,331,547
Deferred financing costs............................. 848,733 1,131,224
---------- ----------- -----------
7,434,885 8,283,618 8,566,109
Less accumulated amortization........................ (468,091) (1,312,541) (1,738,983)
---------- ----------- -----------
$6,966,794 $ 6,971,077 $ 6,827,126
========== =========== ===========
</TABLE>
The leasehold rights -- BI-Indy were recorded at the cost of the
predecessor and are being amortized to rent expense over ten years, the term of
the lease.
The leasehold rights -- BI-TX were recorded at the amount of the obligation
entered into to obtain the right to operate nursing homes acquired by BI-TX in
June and December 1993 and are being amortized to rent expense over ten years,
the term of the lease. See Note 10.
Other deferred financing costs include additional acquisition costs and
debt closing costs which are being amortized to interest expense over periods of
three to ten years. The total amount charged to interest expense was $96,967,
$73,838, $83,483 and $13,446 for the years ended December 31, 1993, 1994, the
six months ended June 30, 1995 and the one month ended July 31, 1995,
respectively.
Total amortization expense relating to these assets was $468,091, $747,483,
$352,604 and $60,934 for the years ended December 31, 1993 and 1994, the six
months ended June 30, 1995 and the one month ended July 31, 1995, respectively.
5. SECURITY DEPOSIT
Security deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Lease deposit -- BI-Indy............................... $1,335,000 $1,335,000 $1,335,000
Liquidity deposit -- BI-TX............................. 1,400,000 1,400,000
Other deposits......................................... 141,344 140,461
---------- ---------- ----------
1,335,000 2,876,344 2,875,461
Less current portion................................... (500,000) (637,517)
---------- ---------- ----------
$1,335,000 $2,376,344 $2,237,944
========== ========== ==========
</TABLE>
In connection with the Indiana transaction discussed in Note 1, the Company
is required to maintain a security deposit equal to seven months minimum lease
obligation. These funds are held in escrow and restricted until certain
financial covenants have been met, including but not limited to net worth and
net operating cash flow requirements. These funds are currently invested by the
lessor in a mutual fund on behalf of the Company and bear interest at 7.0%,
6.0%, 5.5% on December 31, 1993 and 1994, and June 30, 1995, respectively.
Accrued interest receivable on these funds is $27,791, $26,656 and $72,389 at
December 31, 1993 and 1994, and June 30, 1995, respectively. This deposit has
been classified as noncurrent.
In connection with the Texas transaction discussed in Note 1, BI-TX
advanced BI-2 $1,400,000. This advance, as described in Note 7, matures in
December 2003 and is classified as a long term liability. These
F-34
<PAGE> 274
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
funds were used as a liquidity deposit with OMEGA (the "lessor") and are
currently invested by the lessor on behalf of the Company and bear interest at
5.25% to 6.0%. The underlying note between BI-2 and BI-TX has interest payable
at the same term as the interest earned on the security deposit. A portion of
this deposit, $500,000, has been classified as current as the terms of the Texas
master lease allow for the use of a letter of credit in place of a security
deposit. The Company has a $500,000 letter of credit available through a third
party.
Other deposits, primarily lease and utility, have been classified as
current at June 30, 1995. Due to the subsequent event described in Note 12, the
Dallas, Texas operations of the Company will be relocated to Phoenix, Arizona by
March 1996.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Amounts due Medicaid -- Indiana............................ $3,741,188
Accrued salaries and benefits.............................. $ 968,003 $1,386,092 1,205,922
Payroll withholding taxes.................................. 541,544 413,531 481,522
Ancillary expense.......................................... 194,039 620,142
Property taxes............................................. 293,286 468,651 396,700
Rent....................................................... 258,811 245,547
Financing costs............................................ 255,000
Other...................................................... 195,851 519,326 311,326
---------- ---------- ----------
$1,998,684 $3,495,450 $7,002,347
========== ========== ==========
</TABLE>
In March 1995, the Company received an erroneous Medicaid reimbursement
payment of approximately $4,300,000 related to one of its Indiana facilities.
Negotiations with the state of Indiana's agent regarding such overpayment
resulted in the Company retaining the money paid subject to the Company's
payment of interest thereon to the state of Indiana. Future amounts due the
Company by the state will be offset against the interest-bearing obligation
until March 25, 1996 at which time the Company must reimburse the state for the
unused portion. The unreimbursed Medicaid payment accrues interest at prime plus
3.25% or 12% per annum, whichever is higher. The Company recorded $72,000 of
interest expense during the six-month period ended June 30, 1995 and $74,440 of
interest expense during the one-month period ended July 31, 1995.
F-35
<PAGE> 275
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Subordinated notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Subordinated notes payable to an affiliate, secured by a
$1,400,000 liquidity deposit bearing interest at 5.2%
to 12.0%, due January 1995 through December 2003
payable quarterly..................................... $ 6,316,548 $ 8,974,136 $ 8,776,782
Line of credit and notes payable to banks, secured by a
$600,000 certificate of deposit and certain accounts
receivable, bearing interest at 6.1% to 10.5% payable
monthly, due January 1995 through October 1995........ 800,000 1,000,000
Note payable to bank, bearing interest at prime plus
2.0% payable monthly, due October 1998................ 50,548 48,183
Note payable to OMEGA, bearing interest at 11.5% payable
monthly, due January 1995............................. 500,000
Subordinated notes payable to third party, bearing
interest at 10.0% payable monthly, due August 1998.... 246,071 239,913
Note payable to officer and affiliate, bearing interest
at 6.0% to 12.0% payable monthly, due September 1994
through February 1995................................. 135,306 49,000
Revolving line of credit advances bearing interest at
the commercial paper 30 day weighted average rate plus
4.25% payable monthly................................. 1,672,577
----------- ----------- -----------
7,251,854 10,819,755 10,737,455
Less current portion.................................... (1,116,160) (1,280,741) (528,230)
----------- ----------- -----------
$ 6,135,694 $ 9,539,014 $10,209,225
=========== =========== ===========
</TABLE>
The maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1995....................................... $ 1,280,741
1996....................................... 831,918
1997....................................... 254,049
1998....................................... 2,496,647
1999....................................... 286,349
Thereafter................................. 5,670,051
-----------
$10,819,755
===========
</TABLE>
The stated interest rate for the line of credit and note payable to bank
bear interest at 2.0% over prime (8.5% at December 31, 1994 and 9.0% at June 30,
1995).
On January 31, 1995, the Company completed a three-year revolving credit
line for $6,000,000. The credit line is collateralized by existing and future
accounts receivable of the Company. The credit line requires the Company to
maintain quarterly financial covenants including fixed charge ratio
requirements, cash velocity test requirements, accounts receivable
day-sales-outstanding requirements and positive earnings test requirements. As
of June 30, 1995, the Company was in compliance with all such quarterly
covenants.
F-36
<PAGE> 276
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ONE MONTH
DECEMBER 31, ---------- ---------
------------------- JUNE 30, JULY 31,
1993 1994 1995 1995
------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Current:
Federal................................ $ 9,296
State and local........................ 51,454 $52,896 $26,000 $4,500
------- ------- ------- ------
60,750 52,896 26,000 4,500
Deferred:
Federal................................ (9,000)
------- ------- ------- ------
$51,750 $52,896 $26,000 $4,500
======= ======= ======= ======
</TABLE>
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory income tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ONE MONTH
DECEMBER 31, ---------- ---------
----------------------- JUNE 30, JULY 31,
1993 1994 1995 1995
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Income taxes computed at statutory
U.S. federal income tax rates..... $(184,332) $(533,067) $ 70,005 $(55,080)
Limitation on (utilization of)
NOL............................... 178,238 473,479 (101,239) 50,080
State and local income taxes........ 51,454 52,896 26,000 4,500
Permanent differences............... 6,390 59,588 31,234 5,000
--------- --------- --------- ---------
$ 51,750 $ 52,896 $ 26,000 $ 4,500
========= ========= ========= =========
</TABLE>
At December 31, 1993 and 1994, June 30, 1995 and July 31, 1995, the Company
has federal tax net operating loss carry forwards of approximately $701,000 and
$2,091,000 and $2,100,000 and $2,100,000, respectively, which expire at various
dates through 2008. Under section 382 of the Internal Revenue Code of 1986, as
amended, the utilization of net operating loss carry forwards may be delayed or
permanently lost if there has been a cumulative change in ownership during the
past three years of more than 50%. Such a change occurred in August 1995 as
described in Note 12. Therefore, the annual limitation on the Company's net
operating loss carry forward is approximately $1,500,000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-37
<PAGE> 277
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
JUNE 30,
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Vacation accrual.................................. $ (61,000) $ (103,197) $ (107,086)
Net operating loss carry forward.................. (260,000) (773,700) (1,034,568)
Capital leases.................................... (690,000) (631,138) (880,088)
Leasehold rights.................................. (20,000) (38,347) (55,191)
Allowance for bad debts........................... (201,000) (387,333) (292,621)
----------- ----------- -----------
Gross deferred tax assets...................... (1,232,000) (1,933,715) (2,369,554)
Valuation allowance................................. 1,223,000 1,933,715 2,369,554
----------- ----------- -----------
Net deferred tax assets............................. (9,000)
Deferred tax liabilities............................
----------- ----------- -----------
Net deferred tax liabilities........................ $ (9,000) $ $
=========== =========== ===========
</TABLE>
9. LEASES
The Company has noncancelable operating leases on substantially all of its
buildings and equipment which expire at various dates through the year 2003.
BI-1 and BI-2 lease sixteen facilities from Omega under the "Master Lease" and
"Texas Master Lease" Agreements.
The approximate future minimum rental commitments at December 31, 1994
under the operating leases are as follows:
<TABLE>
<S> <C>
1995.................................................... $ 8,098,047
1996.................................................... 7,804,644
1997.................................................... 7,886,491
1998.................................................... 7,901,301
1999.................................................... 7,910,753
Thereafter.............................................. 35,869,739
-----------
$75,470,975
===========
</TABLE>
Rent expense under operating leases was $5,097,014, $8,263,642, $4,448,134
and $750,636 during the years ended December 31, 1993 and 1994, the six months
ended June 30, 1995 and the one month ended July 31, 1995, respectively.
The lease terms are generally from eight to ten years with two or three
five-year renewal options. Minimum rentals increase annually based upon the
greater of 5.0% of incremental revenues or the Consumer Price Index, but limited
to a maximum annual increase of 3.5%. Upon exercise of a renewal option, the
rental payments continue in the same fashion as the original lease. The Company
and certain affiliated entities have options to purchase certain properties at
various times at prices determined by a specified formula. The Company and its
subsidiaries have guaranteed performance on the mortgages and lease payments to
Omega as discussed in Note 1 totaling $38,900,000 and $35,500,000 at December
31, 1993 and 1994, respectively.
The lease payments are personally guaranteed to $13,500,000 by the chairman
of the board whose family trust is a majority shareholder of the Company, as
well as secured by substantially all the personal property and equity of the
Company. Lease rental payments are senior to all unsecured debt. The Company is
responsible for all taxes, maintenance and other executory costs.
F-38
<PAGE> 278
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Covenants to the Master Lease and Texas Master Lease include, but are not
limited to, current ratio requirements, cash flow to rent and debt service
requirements, minimum net worth requirements, and minimum cash requirements. In
March 1994, Omega consolidated and amended certain financial covenants related
to the Indiana and Texas Master Leases and the participating mortgages. Certain
payments to affiliates are subordinate to the lease payments made to Omega. As
of December 31, 1993, the Company was in compliance with these covenants, as
amended. As of December 31, 1994, the Company was in default with the cash flow
to rent and cash flow to debt financial covenants. The lessor has agreed to
waive these covenants as of and for the year ended December 31, 1994. As of June
30, 1995, the Company was in compliance with these covenants.
10. RELATED PARTY TRANSACTIONS
BritWill HealthCare Company is a member of a group of affiliated companies
and has extensive transactions and relationships with members of the group.
Management of the Company believes that the terms of these transactions are not
materially different than those which would result from transactions among
wholly unrelated parties.
In December 1992, the Company entered into a transaction with BI-Indy in
which the Company exchanged 75% of its common stock for leasehold rights with a
value of $4,100,000. BI-Indy contributed furniture and equipment and $623,466 of
other costs incurred and capitalized as part of the transaction.
In December 1992, certain affiliates of a director of the Company loaned
the Company $400,000; and Whitehead Family Investments (WFI), a related party,
loaned the Company $2,075,000 which, combined with the director loan, is
recorded as subordinated long-term debt. The loans are subordinate to the lease
obligations on the Company's Indiana facilities. Interest expense on the loans
totaled $297,000 for 1993 and 1994 and $148,500 and $28,875 for the six months
ended June 30, 1995 and one month ended July 31, 1995, respectively. In
addition, the lenders are entitled to a minimum quarterly bonus. The expense for
this bonus agreement totaled $40,000 for both years ended 1993 and 1994 and
$20,000 for the six months ended June 30, 1995 and $3,333 for the one month
ended July 31, 1995.
On December 23, 1993, an officer of the Company, loaned the Company
$70,000, at 12.0% annual interest, for working capital. The loan renewed a
$60,000 loan issued on October 23, 1993. At December 31, 1994, the outstanding
principal balance amounted to $49,000. Such principal balance was repaid in
1995. Interest expense on these loans amounted to approximately $1,400 and
$5,880 in years ended 1993 and 1994, respectively.
In December 1993, the Company entered into a transaction with BI-TX in
which BI-TX contributed $2,800,000 of leasehold rights and $510,000 of working
capital to the Company in exchange for a note payable of $3,310,000. The
outstanding principal balance totaled $2,999,136 and $2,901,782, and at December
31, 1994, and June 30, 1995, respectively. Interest expense on this loan
amounted to approximately $24,000, $226,476, $121,365 and $31,943 in 1993, 1994,
for the six months ended June 30, 1995 and for the one month ended July 31,
1995, respectively.
In December 1994, certain affiliates of a director of the Company loaned
the Company $1,500,000 at 12.0% annual interest. A portion of the loan,
$500,000, represents a renewal of a $250,000 loan issued on December 1, 1994.
Interest expense on these loans amounted to approximately $1,500 in 1994,
$85,562 for the six months ended June 30, 1995 and $15,068 for the one month
ended July 31, 1995.
On June 1, 1994, the Company renewed a $600,000 note payable (in addition
to the above mentioned note) to WFI for working capital at an annual interest
rate of 12.0%. The note was renewed from a loan of the same amount issued on
June 1, 1993. Interest expense on these loans amounted to $42,000, $72,000,
$36,000 and $6,000 for the years ended December 31, 1993 and 1994, the six
months ended June 30, 1995 and the one month ended July 31, 1995, respectively.
F-39
<PAGE> 279
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company manages nursing homes owned by an affiliate. Management fee
revenues charged the affiliate totaled $348,655, $251,186, $40,430 and $0 during
the years ended December 31, 1993 and 1994, the six months ended June 30, 1995
and the one month ended July 31, 1995, respectively.
During 1993, the Company performed certain services for BritWill
Investments Corporation, an affiliated entity, relating to acquisition support
and rental of office space. Total income recognized by the Company for
performing these services was $146,000 in 1993.
11. COMMITMENTS AND CONTINGENCIES
Estimated third party settlements
Final determination of amounts earned under cost-reimbursed programs is
subject to review by appropriate governmental authorities or their agents. In
the opinion of management, adequate provision has been made for any adjustments
that could result from such reviews. In addition, the state of Indiana has
reviewed the Indiana Medicaid reimbursement structure. The ultimate impact to
health care providers in that state has been estimated and management believes
there will not be a material adverse effect on the financial position or results
of operations of the Company.
Medical malpractice and self-insured risks
The Company has obtained medical malpractice coverage with liability limits
of $5,000,000 per claim and in the aggregate. The Company has also obtained
workers' compensation coverage in Indiana but is uninsured with respect to
certain facilities located in Texas. The Company believes that the provision of
$20,000 recorded at December 31, 1994 and $20,550 at June 30, 1995 for asserted
and/or unasserted claims is adequate based on historical results.
12. SUBSEQUENT EVENT
On August 10, 1995, Sunquest HealthCare Corporation, another long-term care
company operating approximately 21 facilities in eleven states, acquired the
Company's outstanding stock for a fixed payment of $26,000,000, plus contingent
amounts of up to approximately $9.8 million if the company achieves specified
revenue targets. The purchase price was comprised of two promissory notes
amounting to $19,000,000, in total, and a $7,000,000 noninterest bearing
convertible subordinated debenture.
In November 1995, a retroactive restatement and correction of the purchase
agreement reduced the fixed purchase price by $6,000,000. The purchase agreement
includes a related contingent purchase price obligation of up to $9,800,000
depending upon future revenues.
F-40
<PAGE> 280
REPORT OF INDEPENDENT AUDITOR
The Board of Directors
American Professional Holding, Inc.
We have audited the accompanying consolidated balance sheets of American
Professional Holding, Inc. as of December 31, 1994 and 1995 and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 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 American
Professional Holding, Inc. at December 31, 1994 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Ronald H. Ridgers, P.C.
Richardson, Texas
March 30, 1996
F-41
<PAGE> 281
AMERICAN PROFESSIONAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 171,725 $ 61,687 $ 13,684
Accounts receivable trade............................ 971,293 1,253,870 1,574,477
Accounts receivable related party.................... 205,210 394,437 473,340
Other current assets................................. 59,587 72,931 385,563
---------- ---------- ----------
Total current assets......................... 1,407,815 1,782,925 2,447,064
---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Land and building.................................... 205,205 205,205 205,205
Vehicles............................................. 181,935 222,823 219,425
Furniture............................................ 64,385 67,594 70,376
Lab equipment........................................ 353,706 542,815 562,068
---------- ---------- ----------
805,231 1,038,437 1,057,074
Less accumulated depreciation.......................... 390,691 517,281 560,518
---------- ---------- ----------
Total property and equipment................. 414,540 521,156 496,556
INTANGIBLE AND OTHER ASSETS:
Goodwill, net of $36,249, $108,746, and $144,992 of
amortization...................................... 1,051,217 978,720 942,474
Accounts receivable stockholders..................... 0 257,250 318,375
Other................................................ 2,238 1,300 1,300
---------- ---------- ----------
Total intangible and other assets............ 1,053,455 1,237,270 1,262,149
---------- ---------- ----------
$2,875,810 $3,541,351 $4,205,769
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable trade............................... $ 304,842 $ 491,080 $ 746,922
Accounts payable related............................. 5,000 0 141,500
Accrued expenses..................................... 136,314 439,098 535,100
Deferred taxes....................................... 223,690 155,690 161,690
Notes payable current................................ 516,115 394,916 394,916
---------- ---------- ----------
Total current liabilities.................... 1,185,961 1,480,784 1,980,128
Long-term debt....................................... 470,334 674,126 669,098
---------- ---------- ----------
Total liabilities............................ 1,656,295 2,154,910 2,649,226
STOCKHOLDERS' EQUITY:
Common stock; par value $.001; 50,000,000 shares
authorized; 10,200,000 shares outstanding......... 10,200 10,200 10,200
Additional paid in capital........................... 399,800 399,800 399,800
Retained earnings.................................... 809,515 976,441 1,146,543
---------- ---------- ----------
Total stockholders' equity................... 1,219,515 1,386,441 1,556,543
---------- ---------- ----------
$2,875,810 $3,541,351 $4,205,769
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 282
AMERICAN PROFESSIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $4,190,398 $5,151,559 $6,421,187 $3,225,220 $3,087,780
DIRECT COSTS:
Direct labor and related
taxes...................... 1,667,264 1,684,506 2,039,835 919,541 937,347
Supplies...................... 659,594 733,967 1,038,506 515,894 437,239
Other direct costs............ 27,960 188,946 148,147 31,461 52,708
---------- ---------- ---------- ---------- ----------
Total direct costs.... 2,354,818 2,607,419 3,226,408 1,466,896 1,427,294
---------- ---------- ---------- ---------- ----------
GROSS PROFIT.................... 1,835,580 2,544,140 3,194,699 1,758,324 1,660,486
GENERAL AND ADMINISTRATIVE:
Wages and related taxes....... 204,969 434,174 873,971 353,223 403,826
Printing...................... 36,866 41,663 105,942 52,736 28,930
Depreciation and
amortization............... 81,392 146,882 193,002 112,304 79,483
Rents......................... 77,067 76,931 78,959 40,010 37,146
Mileage....................... 217,769 214,593 314,310 133,901 174,759
Utilities..................... 86,470 93,454 164,638 76,336 74,215
Supplies...................... 97,285 62,057 74,404 34,930 33,330
Interest...................... 33,343 63,290 118,110 18,499 55,698
Insurance..................... 142,113 183,197 225,590 120,095 116,941
Professional fees............. 49,162 71,923 90,999 48,057 59,152
Management fees............... 195,211 265,325 245,904 117,288 110,500
Other......................... 168,507 304,428 455,864 229,450 222,404
---------- ---------- ---------- ---------- ----------
Total general and
administrative...... 1,390,154 1,957,917 2,941,773 1,336,829 1,396,384
---------- ---------- ---------- ---------- ----------
INCOME BEFORE TAXES............. 445,426 586,223 252,926 421,495 264,102
LESS PROVISION FOR
TAXES......................... 196,800 170,000 86,000 143,300 94,000
---------- ---------- ---------- ---------- ----------
NET INCOME...................... $ 248,626 $ 416,223 $ 166,926 $ 278,195 $ 170,102
========== ========== ========== ========== ==========
NET INCOME PER COMMON SHARE..... $ .02 $ .04 $ .02 $ .03 $ .02
========== ========== ========== ========== ==========
SHARES USED IN CALCULATION...... 10,000,000 10,100,000 10,200,000 10,200,000 10,200,000
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 283
AMERICAN PROFESSIONAL HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................... $ 248,626 $ 416,223 $ 166,926 $ 278,195 $ 170,102
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization................ 81,392 146,882 193,082 112,304 79,483
Increase (decrease) in deferred taxes........ 147,800 6,242 (68,000) (8,000) 6,000
Changes in operating accounts:
Increase in accounts receivable-trade........ (274,047) (284,312) (282,577) (243,014) 320,607)
Increase in account receivable-related
parties.................................... (43,775) (161,435) (189,227) (55,527) (78,903)
Increase (decrease) in other current
assets..................................... 0 (39,587) (13,334) (57,735) (317,632)
Increase (decrease) in accounts
payable-trade.............................. (8,012) 184,973 186,238 3,845 255,842
Increase (decrease) in accounts
payable-related party...................... 0 (20,000) (5,000) (5,000) 141,500
Increase (decrease) in accrued expenses...... 75,132 22,482 302,784 257,426 96,002
--------- --------- --------- --------- ---------
Net cash (used) provided by operating
activities................................... 227,116 271,468 290,892 282,494 36,786
INVESTING ACTIVITIES:
Increase in fixed assets..................... (56,588) (538,357) (233,206) (76,632) (18,637)
Sale of other assets......................... 0 37,762 938 938 0
Increase in notes receivable-stockholders.... 0 0 (257,250) 0 (61,125)
Decrease in other liabilities................ 0 (40,000) 0 0 0
--------- --------- --------- --------- ---------
Net cash used in investing activities........ (56,588) (540,595) (489,518) (73,694) (79,762)
FINANCING ACTIVITIES:
Purchase of subsidiary....................... 0 (300,000) 0 0 0
Proceeds of borrowings....................... 33,941 833,989 627,000 0 185,859
Repayment on debt............................ (125,975) (270,208) (538,412) (292,149) (190,887)
--------- --------- --------- --------- ---------
Net cash (used) provided by financing
activities................................. (92,034) 263,781 88,588 (292,149) (5,028)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH................ 78,494 (5,346) (110,038) (85,349) (48,003)
CASH AT BEGINNING OF PERIOD.................... 98,577 177,071 171,725 171,725 61,687
--------- --------- --------- --------- ---------
CASH AT END OF PERIOD.......................... $ 177,071 $ 171,725 61,687 $ 86,376 $ 13,684
========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE> 284
AMERICAN PROFESSIONAL HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Business -- American Professional Holding, Inc. (the Company) is a Utah
Corporation formed in February 1984 under the name Technologies Properties, Inc.
In July 1993, the Company purchased all of the outstanding stock of Ampro
Medical Services, Inc. (Ampro) a Texas Corporation which operates under the name
of Northlake Professional Laboratory (Northlake). The acquisition of Ampro was
accounted for as a pooling of interest. In addition, the stockholders voted to
change the name of the Company to American Professional Holding, Inc.
In July 1994, the Company purchased all of the outstanding stock of Gamma
Laboratories, Inc. (Gamma) of Poplar Bluff, Missouri for $300,000 in cash and a
note for $580,000. In addition, the Company issued $200,000 of its common stock.
The acquisition of Gamma was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter company accounts and
transactions have been eliminated in consolidation.
Ampro and Gamma are the only operating entities of the Company.
Nature of Business -- Ampro and Gamma principally test blood and other
specimens and provide x-ray services to various nursing homes, long-term health
care providers, clinics, doctors and patients in Texas and Missouri.
Approximately 85% of the Company's revenues are derived from funds provided from
Medicare and Medicaid assistance programs.
Revenue Recognition -- The Company uses the accrual method of accounting
for financial statement purposes in accordance with generally accepted
accounting principles and industry standards. Revenues are recorded in the month
service is provided based on the expected reimbursement prices to be paid by the
third-party providers. Management evaluates receivable amounts and writes down
billed amounts to recoverable amounts on a quarterly basis. Payments under
Medicare and Medicaid are subject to audit and adjustment by the fiscal
intermediary.
Cash -- Cash consists of amounts held in demand deposit accounts at
financial institutions. The Company has no cash equivalents.
Direct Costs -- Direct costs includes all direct labor and related payroll
costs, laboratory supplies, and other direct cost of sales.
Statement of Cash Flows -- The Company has adopted the indirect method of
accounting for its cash flows in accordance with Financial Accounting Standards
Board Statement No. 95.
Fixed Assets -- Fixed assets are carried at cost less accumulated
depreciation. The cost of fixed assets is depreciated over their estimated
useful lives on a straight line method. Lives used in computing depreciation
expense are as follows:
<TABLE>
<S> <C>
Vehicles........................................................ 3 to 5 years
Furniture....................................................... 3 years
Equipment....................................................... 3 to 7 years
Building........................................................ 27.5 years
</TABLE>
Maintenance and repairs are charged to expense as incurred. Additions and
betterments are capitalized. Gains or losses on dispositions are included in
current operations.
F-45
<PAGE> 285
AMERICAN PROFESSIONAL HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- The Company uses the cash basis for reporting for income
tax purposes. Deferred taxes are provided for items of income or expense that
are reported in different periods for financial statement purposes and tax
purposes. The Company has adopted FASB Statement No. 109 for financial statement
reporting purposes.
Account Receivable -- The Company extends credit to certain customers as a
policy of conducting business. The Company's principal customers are nursing
homes, home health care agencies, MHMR facilities, clinics and physicians in
Texas and Missouri. The Company bills Medicare and other third-party payors on
behalf of the customers. Because of its favorable collection experience in the
past, management does not believe a reserve for doubtful accounts is necessary.
Goodwill -- As a result of the purchase of Gamma, the Company recorded
$1,087,466 of goodwill. Such goodwill is being amortized over a fifteen year
life. Amounts amortized are as follows: December 31, 1995 -- $72,497; December
31, 1994 -- $36,249; June 30, 1996 -- $36,248; and June 30, 1995 -- $36,248.
Reclassifications -- Certain amounts have been reclassified to reflect
current classifications,
2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited consolidated balance sheet as of June 30, 1996 and the
unaudited consolidated statements of income and cash flows for the six months
ended June 30, 1995 and 1996, in the opinion of management, have been prepared
on the same basis as the audited consolidated financial statements and include
all significant adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentations of the results of the interim periods. The
data disclosed in these notes to the financial statement for these periods are
also unaudited. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for an entire year.
3. FEDERAL INCOME TAXES
The provision for taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current provision............... $ 49,000 $127,300 $154,000 $151,300 $88,000
Deferred provision.............. 147,800 42,700 (68,000) (8,000) 6,000
-------- -------- -------- -------- -------
Total provision................. $196,800 $170,000 $ 86,000 $143,300 $94,000
======== ======== ======== ======== =======
</TABLE>
In 1993, 1994 and 1995 the Company paid $0, $171,000 and $91,756 in Federal
income taxes, respectively.
The reconciliation of the Company's effective income tax note to the
federal statutory note of 34% for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Federal income taxes at statutory rate............ 34% 34% 34% 34% 34%
Benefit of graduated tax..........................
Accrual to cash adjustments....................... 10 (3) (2) -- --
Other............................................. -- -- 2 -- 2
-- -- -- -- --
44% 29% 34% 34% 36%
== == == == ==
</TABLE>
F-46
<PAGE> 286
AMERICAN PROFESSIONAL HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax reflects the tax affect of temporary differences
resulting from the Company being on the cash reporting basis for tax purposes.
All deferred items are current in nature.
4. NOTES PAYABLE
At December 31, 1994 and 1995 and June 30, 1996, notes payable are
comprised as follows.
<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Note payable to a bank; payments are $16,100 per
month including interest; interest at 10%;
secured by assets of Ampro and personal
guarantees of three major stockholders; matures
June 1998....................................... $283,368 $ 370,819 $ 296,652
Note payable to an individual; payments are
$10,000 per month for the first year, $12,500
per month to August 1996 and $17,222 until
maturity including interest; interest 10%;
mature January 1998; secured by 1,163 shares of
Gamma stock..................................... 430,167 342,442 280,740
Note payable to a bank for a line of credit;
payments are $6,240 per month including
interest; interest at 10%; matures June 1997;
secured by accounts receivable of Gamma......... 60,000 109,065 129,172
Notes payable to bank; payments are $1,801 per
month including interest; interest at 10%
secured by land and building; matures June
1998............................................ 115,048 105,650 99,145
Note payable to a bank; interest only; interest at
10%; matures June 1998; secured by accounts
receivable of Ampro............................. -- 100,000 200,000
Note payable to a supplier; payments are $3,404
per month including interest at 7%; matures June
1995; unsecured................................. 20,126 -- --
Note payable to three individuals; payments are
$1,466 per month principal only; interest at
10%; matures August 1995; secured by accounts
receivable of
Ampro........................................... 11,690 -- --
Note payable to a related party; payments are
$2,709 per month including interest; interest at
10%; matures April 1995; secured by accounts
receivable of Ampro............................. 10,615 -- --
Notes payable to a bank and finance company;
payments are $3,090 per month including
interest; interest from 8.0% to 10.5%; matures
January 1996 to June 1998; secured by
vehicles........................................ 55,435 41,057 58,305
-------- ---------- ----------
Total Notes payable............................... 986,449 1,069,042 1,064,014
Less: current portion............................. 516,115 394,916 394,916
-------- ---------- ----------
$470,334 $ 674,126 $ 669,098
======== ========== ==========
</TABLE>
F-47
<PAGE> 287
AMERICAN PROFESSIONAL HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1996..................................................... $ 394,916
1997..................................................... 232,914
1997..................................................... 367,292
1999..................................................... 10,000
2000 and thereafter...................................... 63,920
----------
$1,069,042
==========
</TABLE>
Interest paid in 1993, 1994, and 1995 was $7,212, $43,082 and $125,446,
respectively.
5. RELATED PARTY ACTIVITIES
The Company paid $5,527, $2,701, and $5,000 for interest in 1993, 1994, and
1995, respectively, to an entity, related by common ownership. (See Note 4) In
addition, the Company paid $195,211, $265,325, and $240,690 in 1993, 1994, and
1995, respectively, in management fees and non-employee compensation to an
entity, related by common ownership. In 1993, 1994, and 1995 the Company paid
certain expenses on behalf of an entity, related by common ownership. The
related entity owed the Company $43,775, $205,210, and $369,437 at December 31,
1993, 1994, and 1995, respectively.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Notes payable and long-term debt.................... $1,069,042 $1,006,970
</TABLE>
The carrying amounts reported in the balance sheet for cash, accounts
receivable, lease deposits, accounts payable and borrowings under revolving
lines of credit approximate their fair value. The fair value of the Company's
long-term borrowings is estimated by discounting future cash flows at current
rates offered to the Company for debt of comparable types and maturities.
Because no market exists for these financial instruments, considerable judgment
is necessary in interpreting the data to develop estimates of fair value. The
use of different market assumptions may have a material effect on the estimated
fair value amounts.
7. COMMITMENTS
The Company leases certain equipment and automobiles as part of its
operations. All such leases are considered operating leases. Future minimum
lease payments at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1995...................................................... $156,304
1996...................................................... 106,230
1997...................................................... 63,206
1998...................................................... 1,955
</TABLE>
F-48
<PAGE> 288
AMERICAN PROFESSIONAL HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PRO-FORMA DATA (UNAUDITED)
The following unaudited pro-forma data summarizes the combined results of
operations of the Company and Gamma as though the merger had occurred at the
beginning of 1993:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Revenues.................................................... $5,750,208 $5,882,564
Net income.................................................. 253,606 367,486
Net income per share........................................ $.02 $.03
</TABLE>
9. SUBSEQUENT EVENT
On March 26, 1996, the Company signed a letter of intent to be acquired by
Unison HealthCare Corporation of Scottsdale, Arizona. The agreement calls for a
stock for stock pooling-of-interests for approximately $8,000,000. Numerous
conditions, appropriate due diligence and various approvals must be completed
before the transaction can be completed.
F-49
<PAGE> 289
REPORT OF INDEPENDENT AUDITOR
The Board of Directors
Memphis Clinical Laboratory, Inc.
We have audited the accompanying balance sheets of Memphis Clinical
Laboratory, Inc. as of December 31, 1994 and 1995 and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 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 financial position of Memphis Clinical Laboratory,
Inc. at December 31, 1994 and 1995 and the results of it's operations and cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Ronald H. Ridgers, P.C.
Richardson, Texas
February 10, 1996
F-50
<PAGE> 290
MEMPHIS CLINICAL LABORATORY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 16,807 $ 10,015 $ 15,994
Accounts receivable trade............................. 63,843 52,933 100,933
Other current assets.................................. 899 899 13,921
-------- -------- --------
Total current assets.......................... 81,549 63,847 130,848
PROPERTY AND EQUIPMENT:
Automobiles........................................... 102,571 5,622 58,622
Equipment............................................. 367,906 349,553 360,921
Leasehold improvements................................ 24,540 27,146 27,146
-------- -------- --------
495,017 435,321 446,689
Less accumulated depreciation........................... 281,119 270,284 286,903
-------- -------- --------
Total property and equipment.................. 213,898 165,037 159,786
-------- -------- --------
$295,447 $228,884 $290,634
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable trade................................ $ 4,500 $ 4,500 $ 0
Accounts payable officer.............................. 44,048 35,786 17,063
Accrued expenses...................................... 34,132 15,096 36,426
Current portion long-term debt........................ 12,408 10,000 10,000
Deferred taxes........................................ 23,000 20,000 25,000
-------- -------- --------
Total current liabilities..................... 118,088 85,382 88,489
Long-term debt.......................................... 34,904 24,886 21,921
-------- -------- --------
Total liabilities............................. 152,992 110,268 110,410
STOCKHOLDERS' EQUITY:
Common stock; no par; 1,000 shares authorized and
outstanding........................................ 1,000 1,000 1,000
Retained earnings..................................... 141,455 117,616 179,224
-------- -------- --------
Total stockholders' equity.................... 142,455 118,616 180,224
-------- -------- --------
$295,447 $228,884 $290,634
======== ======== ========
</TABLE>
See notes to financial statements.
F-51
<PAGE> 291
MEMPHIS CLINICAL LABORATORY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES................................ $863,768 $827,489 $780,952 $418,989 $474,097
DIRECT COSTS:
Direct labor and related taxes........ 307,770 262,072 244,208 116,440 140,448
Supplies.............................. 171,080 176,563 98,560 56,464 56,025
Other direct costs.................... 105,174 106,034 80,577 37,780 41,378
-------- -------- -------- -------- --------
Total direct costs............ 584,024 544,669 423,345 210,684 237,851
-------- -------- -------- -------- --------
GROSS PROFIT............................ 279,744 282,820 357,607 208,305 236,246
INDIRECT EXPENSES:
Wages and related taxes............... 53,766 63,965 76,681 28,671 32,702
Depreciation.......................... 68,968 87,463 68,374 23,484 16,619
Rent.................................. 30,000 30,000 28,542 15,000 13,500
Repairs and maintenance............... 29,894 36,447 36,462 14,471 12,978
Supplies.............................. 15,244 17,265 13,380 7,678 11,760
Taxes................................. 11,751 6,844 5,430 7,201 3,918
Insurance............................. 16,381 16,725 22,190 13,695 5,096
Legal and accounting.................. 3,003 2,788 18,192 7,974 7,496
Management fees....................... 0 0 54,000 0 0
Auto.................................. 16,326 15,467 19,947 6,139 9,279
Utilities............................. 15,554 16,050 17,745 8,249 8,604
Other indirect costs.................. 17,636 6,806 25,600 25,483 28,876
-------- -------- -------- -------- --------
Total indirect costs.......... 278,523 299,820 386,543 158,045 150,828
Operating Income (loss)................. 1,221 (17,000) (28,936) 50,260 85,418
Other income............................ 1,423 21,024 891 140 190
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE TAXES.............. 2,644 4,024 (28,045) 50,400 85,608
PROVISION (BENEFIT) FOR TAXES........... 345 603 (4,206) 14,110 24,000
-------- -------- -------- -------- --------
NET INCOME (LOSS)....................... $ 2,299 $ 3,421 $(23,839) $ 36,290 $ 61,608
======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE...... $ 2.30 $ 3.42 $ (23.84) $ 36.29 $ 61.61
======== ======== ======== ======== ========
SHARES USED IN CALCULATION.............. 1,000 1,000 1,000 1,000 1,000
======== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 292
MEMPHIS CLINICAL LABORATORY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $ 2,299 $ 3,421 $(23,839) $ 36,290 $ 61,608
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating
activities:
Depreciation.............................. 68,968 87,463 68,374 41,042 16,619
Change in deferred taxes.................. 0 0 (3,000) (3,000) 5,000
Changes in operating accounts:
(Increase) decrease in accounts
receivable............................. (12,046) (51,797) 10,910 7,983 (48,000)
(Increase) decrease in note receivable.... (25,000) 25,000 0 0 0
(Increase) decrease in other assets....... 4,400 8,163 0 0 (13,022)
Increase (decrease) in accounts payable... (39,008) (12,748) 0 (4,500) (4,500)
Increase (decrease) in accounts payable --
officer................................ 0 44,048 (8,262) (2,625) (18,723)
Increase (decrease) in accrued expenses... 38,108 (3,976) (19,036) (31,860) 21,330
Increase (decrease) in taxes payable...... 10,342 (21,758) 0 0 0
-------- -------- -------- -------- --------
Net cash provided by operating activities... 48,063 77,816 25,147 43,330 20,312
INVESTING ACTIVITIES:
Increase in fixed assets.................. 70,591 85,795 19,513 4,261 11,368
-------- -------- -------- -------- --------
Net cash (used) by investing activities..... (70,591) (85,793) (19,513) (4,261) (11,368)
FINANCING ACTIVITIES:
Proceeds of borrowings.................... 31,028 55,475 0 0 0
Repayment on debt......................... (8,500) (30,691) (12,426) (5,048) (2,965)
-------- -------- -------- -------- --------
Net cash (used) provided by investing
activities............................. 22,528 24,784 (12,426) (5,048) (2,965)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH............. 0 16,807 (6,792) 34,021 5,979
-------- -------- -------- -------- --------
CASH AT BEGINNING OF PERIOD................. 0 0 16,807 16,807 10,015
-------- -------- -------- -------- --------
CASH AT END OF PERIOD....................... $ 0 $ 16,807 $ 10,015 $ 50,828 $ 15,994
======== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-53
<PAGE> 293
MEMPHIS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Memphis Clinical Laboratory, Inc. (the Company) is
a Tennessee corporation formed in May, 1986. The Company principally test blood
and other specimens and bills the cost to Medicare and other third-party
providers.
The Company uses the accrual method of accounting for financial statement
purposes in accordance with generally accepted accounting principles and
industry standards.
Direct Costs -- Direct costs includes all direct labor, materials,
laboratory supplies and other direct costs of sales.
Statement of Cash Flows -- The Company has adopted the indirect method of
accounting for its cash flows in accordance with Financial Accounting Standards
Board Statement No. 95. The Company has no cash equivalents.
Fixed Assets -- Fixed assets are carried at cost less accumulated
depreciation. The cost of fixed assets is depreciated over their estimated
useful lives on a straight line method. Lives used in computing depreciation
expense are as follows:
<TABLE>
<S> <C>
Equipment........................................................... 5 years
Vehicles............................................................ 5 years
Leasehold improvements.............................................. 5 years
</TABLE>
Maintenance and repairs are charged to expense as incurred. Additions and
betterments are capitalized. Gains or losses on dispositions are included in
current operations.
Income Taxes -- The Company uses the cash basis of accounting for income
tax purposes. In addition, it uses accelerated methods of depreciation in
accordance with federal income tax rules. Deferred taxes have been provided for
these timing differences between book and tax accounting methods. The Company
has adopted FASB Statement No. 109 for financial statement reporting purposes.
Account Receivable -- The Company extends credit to various customers as a
policy of conducting business. The Company's principal customers are nursing
homes, home health care agencies, clinics and physicians in the Memphis,
Tennessee area. Because of favorable collection experience in the past,
management does not believe an allowance for doubtful accounts is necessary.
Reclassifications -- Certain amounts have been reclassified to reflect
current classifications.
2. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited balance sheet as of June 30, 1996 and the unaudited
statements of income and cash flows for the six months ended June 30, 1995 and
1996, in the opinion of management, have been prepared on the same basis as the
audited financial statements and include all significant adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentations of
the results of the interim periods. The data disclosed in these notes to the
financial statement for these periods are also unaudited. Operating results for
the interim periods are not necessary indicative of the results that may be
expected for an entire Year.
F-54
<PAGE> 294
MEMPHIS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE
At December 31, 1994, 1995 and June 30, 1996, notes payable are comprised
as follows:
<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Note payable to officer; payments are $1,099 per month
including interest; interest is at 7%; matures January 1999;
secured by
equipment................................................... $47,312 $34,886 $31,891
Less current portion.......................................... 12,408 10,000 10,000
------- ------- -------
$34,904 $24,886 $21,891
======= ======= =======
</TABLE>
Interest paid in 1993, 1994 and 1995, was $0, $5,172 and $3,088, respectively.
4. RELATED PARTY ACTIVITIES
In accordance with an agreement, the Company pays it's President for rent
of its laboratory facilities. This agreement expires in 2004. The Company paid
$30,000, $30,000 and $28,500 in 1993, 1994 and 1995, respectively.
At December 31, 1993, 1994 and 1995, the Company owes the President for
various advances. These amounts are carried as accounts payable officer in the
accompanying financial statements. In addition, see Note 3.
5. FEDERAL INCOME TAXES
The provision (benefit) for taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Current provision (benefit)........................... $345 $603 $(1,206) $17,110 $19,000
Deferred provision (benefit).......................... -- -- (3,000) (3,000) 5,000
---- ---- ------- ------- -------
Total provision (benefit)............................. $345 $603 $(4,206) $14,110 $24,000
==== ==== ======= ======= =======
</TABLE>
The reconciliation of the Company's effective income tax note to the
federal statutory note of 34% for the years ended December 31, 1993, 1994 and
1995 and the three months ended June 30, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Federal income taxes at statutory rate.................... 34% 34% 34 % 34% 34%
Benefit of graduated tax.................................. (21) -- -- (5) (7)
Cash to accrual adjustments............................... -- (19) -- (1) (1)
NOL Benefit............................................... -- -- (49) -- --
--- --- --- -- --
13% 15% (15)% 28% 28%
=== === === == ==
</TABLE>
Deferred income tax reflects the tax affect of temporary differences
resulting from the Company being on the cash reporting basis for tax purposes.
The Company paid no federal income taxes in 1993, 1994 and 1995.
F-55
<PAGE> 295
MEMPHIS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
Notes payable and long-term debt......................... $ 34,886 $32,100
</TABLE>
The carrying amounts reported in the balance sheet for cash, accounts
receivable, lease deposits, accounts payable and borrowings under revolving
lines of credit approximate their fair value. The fair value of the Company's
long-term borrowings is estimated by discounting future cash flows at current
rates offered to the Company for debt of comparable types and maturities.
Because no market exists for these financial instruments, considerable judgment
is necessary in interpreting the data to develop estimates of fair value. The
use of different market assumptions may have a material effect on the estimated
fair value amounts.
7. COMMITMENTS
Future minimum payments under operating leases are as follows:
<TABLE>
<S> <C>
1996....................................................... $27,000
1997....................................................... 27,000
1998....................................................... 25,650
1999....................................................... 24,300
2000 and thereafter........................................ 76,950
</TABLE>
In 1995, the Company has entered into a three year management agreement
with its President. Such agreement, among other things, provides for a salary of
$60,000 annually, for the President for the term of the agreement which expires
in 1997.
F-56
<PAGE> 296
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Signature Health Care Corporation:
We have audited the accompanying consolidated balance sheets of SIGNATURE
HEALTH CARE CORPORATION (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1995. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements 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 financial position of Signature Health Care
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 15, 1996
F-57
<PAGE> 297
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
JUNE 30, ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents........................... $ -- $ 274,992 $ 919,121
Patient accounts receivable, net of allowance for
doubtful accounts of $194,210 at June 30, 1996 and
$195,900 and $155,200 at December 31, 1995 and
1994.............................................. 5,184,861 3,663,958 1,641,216
Prepaid income taxes................................ 141,525 -- 407,448
Inventory........................................... 256,304 5,000 5,000
Other current assets................................ 265,323 160,073 164,704
Deferred tax asset.................................. 101,300 101,300 102,400
----------- -----------
Total current assets........................... 5,949,313 4,205,323 3,239,889
Property and equipment, at cost..................... 18,391,035 18,264,010 18,020,293
Less-Accumulated depreciation..................... (1,949,127) (1,490,542) (594,150)
----------- -----------
Net property and equipment..................... 16,441,908 16,773,468 17,426,143
Goodwill, net of accumulated amortization of
$924,286 at June 30, 1996 and $639,142 and $68,900
at December 31, 1995 and 1994..................... 1,720,599 2,005,744 2,576,027
Loan fees, net of accumulated amortization of
$64,000 at June 30, 1996 and $49,000 and $20,000
at December 31, 1995 and 1994..................... 260,330 275,330 304,288
Debt service reserve................................ 1,187,288 1,161,808 1,110,647
Receivables due from affiliates, net................ -- 495,031 --
Deposits and other.................................. 59,925 59,925 63,425
----------- -----------
Total other assets............................. 3,228,142 3,997,838 4,054,387
----------- -----------
Total assets................................... $25,619,363 $24,976,629 $24,720,419
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt................ $ 259,064 $ 198,994 $ 141,417
Accounts payable.................................... 1,471,607 1,078,237 189,660
Accrued payroll, taxes and benefits................. 507,784 354,714 676,374
Income taxes payable................................ -- 211,847 --
Accrued property taxes.............................. 63,505 87,683 92,336
Other accrued expenses.............................. 44,348 104,468 31,077
Unearned revenue.................................... 96,402 96,402 121,016
----------- -----------
Total current liabilities...................... 2,442,710 2,132,345 1,251,880
Deferred income taxes............................... 2,921,436 2,939,553 3,219,753
Long-term debt, net of current maturities........... 18,518,886 18,605,174 18,842,292
Payables due to affiliates, net..................... 1,035,935 -- --
----------- -----------
Total liabilities......................... 24,918,967 23,677,072 23,313,925
Common stock, $.01 par value; 1,200,000 shares
authorized; 250,000 shares issued and
outstanding....................................... 2,500 2,500 2,500
Additional paid-in capital.......................... 1,610,600 1,610,600 1,610,600
Accumulated deficit from operations................. (912,704) (313,543) (206,606)
----------- -----------
Total stockholders' equity..................... 700,396 1,299,557 1,406,494
----------- -----------
Total liabilities and stockholders'
equity.................................. $25,619,363 $24,976,629 $24,720,419
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-58
<PAGE> 298
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sub-acute and
rehabilitation........ $ 4,746,382 $ 3,638,225 $ 8,314,758 $ 4,151,426 $ 3,635,407
Alzheimers care......... 890,862 708,815 1,493,735 1,129,135 584,504
Skilled nursing care.... 7,151,720 7,059,116 14,481,606 14,428,066 13,932,573
Miscellaneous
services.............. 58,859 59,757 119,527 200,301 143,285
----------- ----------- ----------- ----------- -----------
Net patient revenue..... 12,847,823 11,465,913 24,409,626 19,908,928 18,295,769
Management fees......... -- -- -- 32,772 --
----------- ----------- ----------- ----------- -----------
Total revenue...... 12,847,823 11,465,913 24,409,626 19,941,700 18,295,769
----------- ----------- ----------- ----------- -----------
Nursing services
(including $1,591,506
and $1,071,642 at June
30, 1966 and 1995 and
$2,365,582, $583,911
and $0 at December 31,
1995, 1994 and 1993
paid to an
affiliate)............ 5,798,958 4,942,391 11,467,625 9,683,175 8,920,580
Dietary services........ 650,887 678,693 1,514,387 1,500,641 1,486,345
General services........ 1,938,984 1,960,668 2,890,000 3,053,090 3,050,311
Provision for bad
debts................. 58,543 71,218 181,339 213,482 125,729
Management fees paid to
an affiliate.......... 3,456,306 2,008,921 4,725,703 2,301,848 1,026,739
Rent.................... 192,582 185,512 375,101 397,297 382,552
Interest, net of $35,161
and $56,841 at June
30, 1996 and 1995 and
$96,959, $90,041 and
$65,674 at December
31, 1995, 1994 and
1993 of income........ 975,065 915,970 1,933,452 1,657,162 930,294
Depreciation and
amortization.......... 758,729 810,480 1,495,634 1,078,710 727,541
----------- ----------- ----------- ----------- -----------
Total expenses..... $13,830,054 $11,573,853 $24,583,241 $19,885,405 $16,650,091
----------- ----------- ----------- ----------- -----------
(Loss) income
before income
taxes............ (982,231) (107,940) (173,615) 56,295 1,645,678
(Benefit) provision
for income
taxes............ (383,070) (41,066) (66,678) 28,654 642,005
----------- ----------- ----------- ----------- -----------
Net (loss)
income...... $ (599,161) $ (66,874) ($ 106,937) $ 27,641 $ 1,003,673
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE> 299
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
CONVERTIBLE -----------------------------
PREFERRED STOCK ADDITIONAL ACCUMULATED TOTAL
---------------------- PAID-IN EARNINGS/ STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- ----------- ------- ------ ---------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992.......... 700,000 $ 2,427,566 250,000 $2,500 $ 191,100 $ 500,645 $ 3,121,811
Net income........................... -- -- -- -- -- 1,003,673 1,003,673
Accretion of mandatory provision..... -- 112,526 -- -- -- (112,526) --
-------- ----------- -------- ------ ---------- ----------- ----------
Balances at December 31, 1993.......... 700,000 $ 2,540,092 250,000 $2,500 $ 191,100 $ 1,391,792 $ 4,125,484
Net income........................... -- -- -- -- -- 27,641 27,641
Purchase of Preferred stock and
elimination of residual interest in
retained earnings.................. (700,000) (2,540,092) -- -- 1,419,500 (1,626,039) (2,746,631)
-------- ----------- -------- ------ ---------- ----------- ----------
Balances at December 31, 1994.......... -- $ -- 250,000 $2,500 $1,610,600 $ (206,606) $ 1,406,494
Net loss............................. -- -- -- -- -- (106,937) (106,937)
-------- ----------- -------- ------ ---------- ----------- ----------
Balances at December 31, 1995.......... -- $ -- 250,000 $2,500 $1,610,600 $ (313,543) $ 1,299,557
-------- ----------- -------- ------ ---------- ----------- ----------
Net loss (unaudited)................. -- -- -- -- -- (599,161) (599,161)
-------- ----------- -------- ------ ---------- ----------- ----------
Balances at June 30, 1996
(unaudited).......................... -- $ -- 250,000 $2,500 $1,610,600 $ (912,704) $ 700,396
======== =========== ======== ====== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE> 300
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................... $ (599,161) $ (66,874) $ (106,937) $ 27,641 $ 1,003,673
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 758,729 810,480 1,495,634 1,078,710 727,541
Provision for bad debts............... 58,543 71,218 181,339 213,482 125,729
Change in deferred taxes.............. (279,100) 73,591 62,083
Changes in non-cash working capital:
Patient accounts receivable........ (1,579,445) (1,258,378) (2,204,081) (421,724) (957,302)
Prepaid income taxes............... -- 407,448 407,448 (407,448) --
Inventory and other current
assets........................... (356,553) (150,619) 4,631 (54,280) 18,673
Accounts payable................... 393,371 591,800 888,577 (149,569) (147,816)
Accrued payroll, taxes and
benefits......................... 153,070 300,317 (321,660) 118,214 69,922
Income taxes payable............... (372,258) (63,492) 211,847 (223,500) (28,059)
Accrued property taxes and other
accrued expenses................. (84,298) (108,501) 68,738 (47,779) (24,349)
Unearned revenue................... -- -- (24,614) 33,213 (22,995)
----------- ------------
Net cash provided by
operating activities............. (1,628,002) 533,399 321,822 240,551 827,100
----------- ------------
Cash flows from investing activities:
Recognition of buyout net asset value... -- -- -- (4,459,908) --
Purchase of property and equipment...... (126,257) (101,719) (243,718) (512,922) (221,573)
Purchase of investments................. -- -- (51,161) (17,739) 7,092
Purchase of goodwill.................... -- -- -- (2,644,885) --
Increase in deferred taxes related to
buyout................................ -- -- -- 2,778,543 --
Change in deposits and other assets..... (25,480) (221,752) 3,500 96,377 (26,078)
----------- ------------
Net cash used in investing
activities....................... (151,737) (323,471) (291,379) (4,760,534) (240,559)
----------- ------------
Cash flows from financing activities:
Repayment of long-term debt............. (26,218) (102,289) (179,541) (11,462,055) (1,065,386)
Receivables due from affiliates, net.... 1,530,965 678,295 (495,031) -- --
Issuance of long-term debt.............. -- -- -- 19,100,000 --
Payment of loan fees.................... -- -- -- (324,297) --
Purchase of preferred stock............. -- -- -- (2,746,631) --
----------- ------------
Net cash (used in) provided by
financing activities............. 1,504,747 576,006 (674,572) 4,567,017 (1,065,386)
----------- ------------
Net (decrease) increase in cash.... (274,992) 785,934 (644,129) 47,034 (478,845)
Cash and cash equivalents,
at beginning of year............. 274,992 919,121 919,121 872,087 1,350,932
----------- ------------
Cash and cash equivalents,
at end of year................... $ -- $ 1,705,055 $ 274,992 $ 919,121 $ 872,087
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE> 301
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIODS)
(1) BUSINESS AND ORGANIZATION
Signature Health Care Corporation and its wholly owned subsidiaries (the
"Corporation") own, operate and manage skilled nursing centers providing
restorative, rehabilitative, and sub-acute services. As of December 31, 1995,
the Corporation owns six nursing homes and leases one for a total of seven
nursing homes with 602 total beds. The Corporation does business in Colorado and
Arizona. The Corporation's nursing homes are subject to licensing and regulation
of their services by various federal and state government agencies. The
Corporation incorporated in Delaware on October 12, 1987.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The accompanying consolidated financial statements include
the accounts of the Corporation and its wholly owned subsidiaries with all
significant intercompany accounts and transactions eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include all
investments with an original maturity of three months or less.
Property and Equipment. Property and equipment are recorded at cost, with
depreciation computed on the straight-line method over the estimated useful
lives of depreciable assets which range from two to 40 years.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS
121 requires that the Corporation perform a review of long-lived assets and
goodwill related to those assets to assess whether an impairment of value
exists. If such an impairment does exist, the related assets must be written
down to fair value.
The Corporation is required to adopt SFAS 121 in fiscal 1996. Management
has not yet determined what the ultimate impact of adopting this new Statement
will be on the Corporation's financial position or results of operations.
Loan Fees. Loan fees amortize over the term of the related debt using the
effective interest method.
Net Patient Service Revenue and Accounts Receivable. Patient revenue is
reported at established rates or estimated net realizable amounts from
third-party payors or others for services rendered. Credit risk exists to the
extent that the Corporation's most significant source of revenue is
reimbursement for patient care from state-sponsored Medicaid programs and from
Medicare. However, management does not believe that there are significant credit
risks associated with these governmental agencies. Contractual adjustments
resulting from agreements with various organizations to provide services for
amounts which differ from billed charges, including services under Medicare and
Medicaid, are recorded as deductions from gross patient revenue. The estimated
third party payor settlements under Medicare and Medicaid programs are recorded
in the period the related services are rendered and are subject to audit and
final settlement by the fiscal intermediary. Differences between the net amounts
accrued and subsequent settlement, if any, are recorded in operations at the
time the final settlement is determined.
Until the year of settlement, accounts receivable are reduced for the
differences between recognized revenue and interim payments received from
third-party payors. The Corporation classifies these differences in
contra-accounts in accounts receivable as payable to Medicare and Medicaid
third-party payors until the year of settlement. These settlement amounts total
$1,084,000, $586,000 and $500,000 as of December 31, 1995, 1994 and 1993,
respectively.
F-62
<PAGE> 302
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company derived patient revenues from various sources in 1995, 1994 and
1993, respectively, as follows:
(a) federal Medicare program (retrospectively reimbursing actual
allowable costs), 33%, 20% and 19%;
(b) negotiated contracts with various government agencies and private
insurance companies, 31%, 36% and 39%;
(c) private pay sources, 19%, 25% and 26%; and
(d) state Medicaid programs (prospectively reimbursing historical
allowable costs plus an inflation factor and profit factor), 17%, 19% and
16%.
Management Fees. During 1994 the Corporation provided accounting services
to a contracted therapy business. In return for its management services, the
Corporation received management fees in an amount equal to 3% of net revenue
plus its costs for providing accounting services.
Goodwill. Goodwill is being amortized over a five-year period.
Income Taxes. The Corporation accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109. "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires the use of an asset and liability
approach for measuring deferred taxes based on temporary differences between
financial statement and tax bases of assets and liabilities existing at each
balance date using enacted tax rates for years in which the related taxes are
expected to be paid or recovered.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited consolidated balance sheet and statement of stockholders'
equity as of June 30, 1996 and the unaudited statements of income and cash flows
for the six months ended June 30, 1995 and 1996, in the opinion of management,
have been prepared on substantially the same basis as the audited consolidated
financial statements and include all significant adjustments necessary for the
fair presentations of the results of the interim periods. The data disclosed in
these notes to the financial statement for these periods are also unaudited.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for an entire year.
(4) LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994, consisted of the following.
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
10 year mortgage at 10.5% payable monthly......... $18,804,168 $18,983,709
Less current maturities......................... (198,994) (141,417)
----------- -----------
Total long-term debt, net of current
maturities............................ $18,605,174 $18,842,292
=========== ===========
</TABLE>
The property and equipment of the Corporation secure the current mortgage.
The mortgage contains a personal guarantee from a stockholder of the
Corporation. The mortgage contains various covenants including debt service
coverage, minimum current ratio, and restrictions on the payment of dividends.
The Corporation
F-63
<PAGE> 303
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
complied with the covenants throughout 1995 and 1994. Cash paid for interest
totaled $2,030,110 $1,658,341, and $993,075 in 1995, 1994 and 1993,
respectively.
Long-term debt maturing in the next five years follows.
<TABLE>
<S> <C>
1996.................................................... $ 198,994
1997.................................................... 220,924
1998.................................................... 245,271
1999.................................................... 272,301
2000.................................................... 302,309
Thereafter.............................................. 17,564,369
-----------
Total long-term debt.......................... $18,804,168
===========
</TABLE>
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, deposits/accounts payable and long-term borrowings approximate their
fair value. The fair value of the Corporation's long-term borrowings is
estimated by discounting future cash flows at current rates offered to the
Corporation for debt of comparable types and maturities. Because no market
exists for these financial instruments, considerable judgment is necessary in
interpreting the data to develop estimates of fair value. The use of different
market assumptions may have a material effect on the estimated fair value
amounts.
(6) EQUITY
The common stock carry certain rights, the more significant of which follow
(see Note 7).
Voting. Each share of common stock carry the right to one vote.
Options. The Corporation reserves 250,000 shares of authorized but
unissued common stock for issuance to employees upon exercise of stock purchase
options. As of December 31, 1995, granted options cover the purchase, of 113,800
shares of common stock, of which 90,000 shares have vested and 23,800 shares
vest upon completion of certain conditions, none of which had occurred as of
December 31, 1995. Activity related to granted options for the three years ended
December 31, 1995 follows:
<TABLE>
<CAPTION>
PRICE PER
SHARES SHARE
------- ---------------
<S> <C> <C>
Granted options at December 31, 1992............................... 95,500 --
Options granted.................................................. 14,000 $6.50 - $10.00
Cancelled options................................................ (2,500) --
-------
Granted options at December 31, 1993............................... 107,000 --
Options granted.................................................. 6,800 $12.00
Cancelled options................................................ (3,000) --
-------
Granted options at December 31, 1994............................... 110,800 --
Options granted.................................................. 6,850 $25.00
Cancelled options................................................ (3,850) --
-------
Granted options at December 31, 1995............................... 113,800 --
-------
</TABLE>
(7) RELATED PARTY TRANSACTIONS
During 1993 the Corporation paid or accrued $158,750 for a consulting fee
to an affiliate of its preferred stockholder for investment banking, financial,
and management services.
F-64
<PAGE> 304
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993 the Corporation advanced $100,000 to an affiliated entity which
will provide physical, occupational, and speech therapy services to the
Corporation and others. This advance was outstanding during 1993 and 1994.
During 1995 the Corporation incurred and paid for management and
rehabilitation services from an entity having common owners.
(8) COMMITMENTS AND CONTINGENCIES
The Corporation leases a nursing home, on a ten year base term expiring in
2000, under which the Corporation possesses (1) the right to renew for one
additional 5 year term and (2) the option to purchase the nursing home through
the end of the base term. The lease provides for certain restrictions on the
maintenance and operation of the nursing home and an annual 2% escalation in the
base rent.
The Corporation also leases office space for its corporate office, on a
year to year basis, under which the Corporation possesses the right to renew for
additional one year terms.
Both leases are treated as operating leases, future lease payments follow.
<TABLE>
<S> <C>
1996..................................................... $ 381,152
1997..................................................... 374,370
1998..................................................... 380,736
1999..................................................... 387,648
2000..................................................... 361,152
----------
Total base term rent........................... $1,885,058
==========
</TABLE>
The Corporation has been named as a defendant in certain litigation.
Corporation management believes amounts which may become payable, if any,
pursuant to such litigation, will be covered by the Corporation's insurance
policies.
(9) INCOME TAXES
The Corporation accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of events which have been included in
the financial statement or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Deferred taxes liability as of December 31, 1995 and 1994 are comprised of
the following.
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Tax credit........................................ $ -- 13,000
Accrued liabilities and allowances................ 101,300 89,400
----------- -----------
Total current deferred tax asset............. 101,300 102,400
----------- -----------
Depreciation and amortization..................... (601,100) (441,200)
Basis step-up (see Note 7)........................ (2,338,500) (2,778,500)
----------- -----------
Total noncurrent deferred tax liability...... (2,939,600) (3,219,700)
----------- -----------
Total net deferred taxes................ $(2,838,300) $(3,117,300)
=========== ===========
</TABLE>
F-65
<PAGE> 305
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation did not record any valuation allowances against the
deferred tax asset at December 31, 1995 and 1994, as the Corporation's
management believes that it is more likely than not that the asset will be
realized. Cash paid for income taxes totaled $0, $462,000 and $608,000 in 1995,
1994 and 1993 respectively.
The components of the income tax provision (benefit) consist of the
following.
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Federal................................... $ 195,484 $ 44,533 $464,005
State..................................... 43,275 9,859 117,000
--------- -------- --------
Current income tax provision............ 238,759 54,392 581,005
--------- -------- --------
Federal................................... (250,077) (21,072) 30,000
State..................................... (55,360) (4,666) 31,000
--------- -------- --------
Deferred income tax provision
(benefit)............................ (305,437) (25,738) 61,000
--------- -------- --------
Total income tax provision
(benefit).......................... $ (66,678) $ 28,654 $642,005
========= ======== ========
</TABLE>
The difference between the Corporation's effective income tax rates and the
statutory rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax expense
(benefit)............................... $ (59,025) $ 19,140 $559,531
Increases (decreases) resulting from:
State tax expense (benefit) net of
federal benefit...................... (8,681) 2,815 82,284
Nondeductible expenses.................. 5,659 6,115 2,603
Other................................... (4,631) 584 (2,413)
--------- -------- --------
Income tax expense (benefit).............. $ (66,678) $ 28,654 $642,005
========= ======== ========
</TABLE>
(10) BUY OUT OF PREFERRED STOCKHOLDERS
On March 30, 1994, the Corporation completed new long-term financing. The
proceeds were used to retire all existing debt, create a minimum debt service
reserve, and redeem all outstanding convertible preferred stock, which had
rights which made it essentially equivalent to common stock and comprised
approximately 67% of the Corporation's equity ownership.
Because a substantive change in control occurred, a proportional share of
the Corporation's net assets were revalued based on the monetary consideration
paid to the preferred shareholders and the assets applicable to common
stockholders' residual interest were carried forward at historical cost, net of
related valuation and allowance accounts.
The transaction resulted in an increase in property and equipment of
approximately $4.4 million, goodwill of $2.6 million, deferred tax liability of
$2.8 million as no step-up in basis was allowed for tax purposes, and the
elimination of retained earnings and an increase in paid-in capital.
The depreciation and amortization related to the increase in property and
equipment and goodwill referred to above totalled $233,350 in 1994 and
$1,210,111 in 1995 and $605,056 and $605,056 for the six months ended June 30,
1995 and 1996, respectively.
F-66
<PAGE> 306
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SUBSEQUENT EVENT
On August 2, 1996, the Corporation entered into an agreement and plan of
merger with Unison HealthCare Corporation ("Unison"). Through the merger the
Corporation will become a wholly owned subsidiary of Unison. Outstanding shares
of the Corporation will be converted into the right to receive, subject to
certain adjustments, cash equal to $10,200,000 and shares of Unison's common
stock equal to approximately $20,000,000. The merger is subject to regulatory
and shareholder approval.
F-67
<PAGE> 307
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc., and Safford Care,
Inc.:
We have audited the accompanying combined balance sheet of ARKANSAS, INC.,
CORNERSTONE CARE, INC., DOUGLAS MANOR, INC., and SAFFORD CARE, INC. (Colorado
corporations) as of December 31, 1995, and the related combined statements of
operations, stockholders' equity and cash flows for the period from inception,
May 9, 1995 through December 31, 1995. These financial statements are the
responsibility of each Corporation's management. Our responsibility is to
express an opinion on these combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Arkansas, Inc.,
Cornerstone Care, Inc., Douglas Manor, Inc., and Safford Care, Inc. as of
December 31, 1995, and the combined results of their operations and their cash
flows for the period from inception through December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 15, 1996
F-68
<PAGE> 308
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996
----------- DECEMBER 31,
1995
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ -- $ 313,198
Patient accounts receivable, net of allowance for doubtful
accounts of $41,000 at June 30, 1996 and $23,000 at December
31, 1995 and
1994........................................................... 2,575,860 2,382,353
Inventory........................................................ 192,817 --
Other current assets............................................. 52,543 3,483
---------- ----------
Total current assets........................................ 2,821,220 2,699,034
Equipment........................................................ 753,524 800,995
Leasehold improvements........................................... 157,026 167,695
---------- ----------
Property and equipment, at cost................................ 910,550 968,690
Less-Accumulated depreciation.................................. (139,921) (54,314)
---------- ----------
Net property and equipment.................................. 770,629 914,376
Deposits and other............................................... 70,605 70,605
Prepaid rent..................................................... 114,814 209,587
---------- ----------
Total other assets.......................................... 185,419 280,192
---------- ----------
Total assets........................................... $ 3,777,268 $3,893,602
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of capitalized lease............................. $ 52,992 $ 48,003
Accounts payable................................................. 593,700 430,382
Accrued payroll, taxes and benefits.............................. 289,820 312,124
Property taxes payable........................................... 64,155 48,015
Other accrued expenses........................................... 60,488 4,905
Unearned revenue................................................. 30,550 30,550
---------- ----------
Total current liabilities................................... 1,091,705 873,979
Deferred rent............................................... -- 91,428
Capitalized lease, net of current portion................... 668,624 668,940
Amounts due affiliates...................................... 1,464,672 1,579,209
---------- ----------
Total liabilities........................................... 3,225,001 3,213,556
Common stock, $.01 par value; 400,000 shares authorized; 4,000
shares issued and outstanding.................................. 4,000 4,000
Additional paid-in capital....................................... 377,000 377,000
Distributions to stockholders.................................... (1,926,000) (406,000)
Accumulated earnings from operations............................. 2,097,267 705,046
---------- ----------
Total stockholders' equity.................................. 552,267 680,046
---------- ----------
Total liabilities and stockholders' equity............. $ 3,777,268 $3,893,602
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-69
<PAGE> 309
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCEPTION TO YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995 1995
---------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Sub-acute and rehabilitation....................... $2,390,306 $ 79,163 $1,965,605
Alzheimers care.................................... 1,108,873 -- 1,063,937
Skilled nursing care............................... 5,695,862 395,168 5,449,292
Miscellaneous services............................. 208,925 713 161,906
---------- -------- ----------
Total revenue................................. 9,403,866 475,044 8,640,740
---------- -------- ----------
Nursing services (including $744,753 and $26,253 at
June 30, 1996 and 1995 and $467,124 at December
31, 1995 paid to an affiliate)................... 3,773,485 212,220 4,286,037
Dietary services................................... 509,366 38,129 634,946
General services................................... 1,591,666 99,017 1,213,308
Provision for bad debts............................ 17,662 6,478 55,624
Management fees paid to an affiliate............... 1,151,824 42,771 797,900
Rent............................................... 851,169 44,578 860,211
Interest, net of $4,624 and $191 at June 30, 1996
and 1995 and $2,600 at December 31, 1995 of
income........................................... 30,366 31,508 33,354
Depreciation and amortization...................... 86,107 16,042 54,314
---------- -------- ----------
Total expenses................................ 8,011,645 490,743 7,935,694
---------- -------- ----------
Net income (loss)........................ $1,392,221 $(15,699) $ 705,046
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE> 310
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
ADDITIONAL DISTRIBUTIONS ACCUMULATED TOTAL
PAID-IN TO EARNINGS/ STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) EQUITY
----- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arkansas, Inc.............................. 1,000 $1,000 $ -- $ -- $ -- $ 1,000
Cornerstone Care, Inc...................... 1,000 1,000 -- -- -- 1,000
Douglas Manor, Inc......................... 1,000 1,000 -- -- -- 1,000
Safford Care, Inc.......................... 1,000 1,000 -- -- -- 1,000
----- ------ -------- --------- -------- ---------
Purchase of common stock.............. 4,000 4,000 -- -- -- 4,000
Douglas Manor, Inc......................... -- -- 259,000 -- -- 259,000
Safford Care, Inc.......................... -- -- 118,000 -- -- 118,000
----- ------ -------- --------- -------- ---------
Additional capital contributions...... -- -- 377,000 -- -- 377,000
Arkansas, Inc.............................. -- -- -- -- 442,759 442,759
Cornerstone Care, Inc...................... -- -- -- -- 170,237 170,237
Douglas Manor, Inc......................... -- -- -- -- (58,419) (58,419)
Safford Care, Inc.......................... -- -- -- -- 150,469 150,469
----- ------ -------- --------- -------- ---------
Net Income............................ -- -- -- -- 705,046 705,046
Arkansas, Inc.............................. -- -- -- (318,000) -- (318,000)
Cornerstone Care, Inc...................... -- -- -- (88,000) -- (88,000)
----- ------ -------- --------- -------- ---------
Distributions to stockholders......... -- -- -- (406,000) -- (406,000)
----- ------ -------- --------- -------- ---------
Balances at December 31, 1995.............. 4,000 $4,000 $ 377,000 $ (406,000) $ 705,046 $ 680,046
----- ------ -------- --------- -------- ---------
Arkansas, Inc. ............................ -- -- -- -- 707,661 707,661
Cornerstone Care, Inc. .................... -- -- -- -- 396,401 396,401
Douglas Manor, Inc. ....................... -- -- -- -- (89,526) (89,526)
Safford Care, Inc. ........................ -- -- -- -- 377,685 377,685
----- ------ -------- --------- -------- ---------
Net Income (unaudited)................ -- -- -- 1,392,221 1,392,221
Arkansas, Inc. ............................ -- -- -- (442,000) -- (442,000)
Cornerstone Care, Inc. .................... -- -- -- (526,000) -- (526,000)
Douglas Manor, Inc. ....................... -- -- -- (203,000) -- (203,000)
Safford Care, Inc. ........................ -- -- -- (349,000) -- (349,000)
----- ------ -------- --------- -------- ---------
Distributions to stockholders
(unaudited)......................... -- -- -- (1,520,000) -- (1,520,000)
----- ------ -------- --------- -------- ---------
Balances at June 30, 1996 (unaudited)...... 4,000 $4,000 $ 377,000 $ (1,926,000) $ 2,097,267 $ 552,267
===== ====== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE> 311
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED INCEPTION TO DECEMBER 31,
JUNE 30, JUNE 30, ------------
1996 1995 1995
---------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 1,392,221 $ (15,699) $ 705,046
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization...................... 86,107 16,042 54,314
Provision for bad debts............................ 17,662 6,478 55,624
Deferred rent expense.............................. (206,242) -- 91,428
Changes in non-cash working capital:
Patient accounts receivable..................... (211,166) (400,923) (2,437,977)
Inventory and other current assets.............. (32,290) (74,651) (213,070)
Accounts payable................................ 163,318 197,855 430,382
Accrued payroll, taxes and benefits............. (22,304) 278,144 312,124
Property taxes payable and other accrued
expenses...................................... 71,723 2,344 52,920
Unearned revenue................................ -- -- 30,550
----------- --------- -----------
Net cash used in operating activities......... 1,259,029 9,590 (918,659)
----------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment................... 57,637 (2,226) (229,455)
Change in deposits and other assets.................. -- (23,495) (70,605)
----------- --------- -----------
Net cash used in investing activities.............. 57,637 (25,721) (300,060)
----------- --------- -----------
Cash flows from financing activities:
Sale of common stock................................. -- -- 4,000
Amortization of lease obligation..................... 4,673 -- (22,292)
Amounts due to affiliates, net....................... (114,537) 295,665 1,579,209
Additional paid in capital........................... -- 377,000
Distributions to stockholders........................ (1,520,000) -- (406,000)
----------- --------- -----------
Net cash provided by financing activities..... (1,629,864) 295,665 1,531,917
----------- --------- -----------
Net (decrease) increase in cash and cash
equivalents.............................. (313,198) 279,534 313,198
Cash and cash equivalents, at beginning of
year..................................... $ 313,198 -- $ --
=========== ========= ===========
Cash and cash equivalents at end of year... -- $ 279,534 313,198
=========== ========= ===========
Supplemental disclosure of non-cash investing and
financing activities:
Acquisition of capitalized equipment lease......... $ -- $ 400,222 $ 739,235
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE> 312
ARKANSAS, INC.,
CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND
SAFFORD CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIODS)
(1) BUSINESS AND ORGANIZATION
Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc., and Safford
Care, Inc. (the "Sub-S Corporations"), operate skilled nursing centers providing
restorative, rehabilitative, and sub-acute services and assisted living centers
providing supervisory nursing services. As of December 31, 1995, the Sub-S
Corporations lease four nursing homes and two assisted living centers with 579
total beds. The Sub-S Corporations do business in Colorado and Arizona. The
Sub-S Corporations' nursing homes and assisted living centers are subject to
licensing and regulation of their services by various federal and/or state
government agencies. The Sub-S Corporations incorporated in Colorado on May 9,
1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combination. The accompanying combined financial statements include the
accounts of the Sub-S Corporations, which all have common ownership, with all
significant intercompany accounts and transactions eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include all
investments with an original maturity of three months or less.
Property and Equipment. Property and equipment are recorded at cost, with
depreciation computed on the straight-line method over the estimated useful
lives of depreciable assets which range from three to ten years.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS
121 requires that the Sub-S Corporations perform a review of long-lived assets
to assess whether an impairment of value exists. If such an impairment does
exist, the related assets must be written down to fair value.
The Sub-S Corporation is required to adopt SFAS 121 in fiscal 1996.
Management has not yet determined what the ultimate impact of adopting this new
Statement will be on the Sub-S Corporations' financial position or results of
operations.
Net Patient Service Revenue and Accounts Receivable. Patient revenue is
reported at established rates or estimated net realizable amounts from
third-party payors or others for services rendered. Credit risk exists to the
extent that the Sub-S Corporations' most significant source of revenue is
reimbursement for patient care from state-sponsored Medicaid programs and from
Medicare. However, management does not believe that there are significant credit
risks associated with these governmental agencies. Contractual adjustments
resulting from agreements with various organizations to provide services for
amounts which differ from billed charges, including services under Medicare and
Medicaid, are recorded as deductions from gross patient revenue. The estimated
third party payor settlements under Medicare and Medicaid programs are recorded
in the period the related services are rendered and are subject to audit and
final settlement by the fiscal intermediary. Differences between the net amounts
accrued and subsequent settlement, if any, are recorded in operations at the
time the final settlement is determined.
F-73
<PAGE> 313
ARKANSAS, INC.,
CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND
SAFFORD CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Until the year of settlement, accounts receivable are reduced for the
differences between recognized revenue and interim payments received from
third-party payors. The Sub-S Corporations classify these differences in
contra-accounts in accounts receivable as payable to Medicare and Medicaid
third-party payors until the year of settlement. These settlement amounts total
$114,550 as of December 31, 1995.
The Sub-S Corporations derived patient revenues from various sources in
1995, as follows:
(a) state Medicaid programs (prospectively reimbursing historical
allowable costs plus an inflation factor and profit factor), 42%;
(b) federal Medicare program (retrospectively reimbursing actual
allowable costs), 22%;
(c) negotiated contracts with various government agencies and private
insurance companies, 21%; and
(d) private pay sources, 15%.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited combined balance sheet and statement of stockholders' equity
as of June 30, 1996 and the unaudited statements of income and cash flows for
the six months ended June 30, 1995 and 1996, in the opinion of management, have
been prepared on substantially the same basis as the audited combined financial
statements and include all significant adjustments necessary for the fair
presentations of the results of the interim periods. The data disclosed in these
notes to the financial statement for these periods are also unaudited. Operating
results for the interim periods are not necessary indicative of the results that
may be expected for an entire year.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, deposits/accounts payable and long-term borrowings approximate their
fair value. The fair value of the Sub-S Corporation's long-term borrowings is
estimated by discounting future cash flows at current rates offered to the Sub-S
Corporation for debt of comparable types and maturities. Because no market
exists for these financial instruments, considerable judgment is necessary in
interpreting the data to develop estimates of fair value. The use of different
market assumptions may have a material effect on the estimated fair value
amounts.
(5) COMMITMENTS AND CONTINGENCIES
The Sub-S Corporations lease nursing homes and assisted living centers, on
a ten year base term expiring in 2005, under which the Sub-S Corporations
possess (1) the right to renew for three additional 10 year terms and (2) the
option to purchase the nursing homes and assisted living centers through the.
end of the base term and any renewals. The leases provide for certain
restrictions on the maintenance and operation of the nursing homes and assisted
living centers and an annual 2.5% escalation in the base rent. Future lease
payments follow.
F-74
<PAGE> 314
ARKANSAS, INC.,
CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND
SAFFORD CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
1996.................................................... $ 1,642,264
1997.................................................... 1,683,320
1998.................................................... 1,725,403
1999.................................................... 1,768,538
2000.................................................... 1,812,752
Thereafter.............................................. 8,729,428
-----------
Total base term rent.......................... $17,361,705
===========
</TABLE>
For financial reporting purposes leases are treated as operating leases
and, for financial reporting purposes, the applicable future lease payments are
being recognized on a straight-line allocation basis. The property and equipment
of the Sub-S Corporations secure the leases. The leases contain various
covenants including completion of capital additions. The Sub-S Corporations
complied with the covenants throughout 1995.
(6) RELATED PARTY TRANSACTIONS
The Sub-S Corporations incurred and paid for management and rehabilitation
services from an entity having common ownership.
(7) INCOME TAXES
The Sub-S Corporations elected and have been granted S corporation status
under the regulations of the Internal Revenue Service. Under these regulations,
The Sub-S Corporations' taxable income is divided among, and passed through to,
its stockholders. Therefore, The Sub-S Corporations do not account for income
taxes and deferred tax assets or liabilities.
(8) SUBSEQUENT EVENT
On August 2, 1996 the Sub-S Corporations entered into agreements and plans
of merger with Unison HealthCare Corporation ("Unison"). Through the mergers the
Sub-S Corporations will become wholly owned subsidiaries of Unison. Outstanding
shares of the Sub-S Corporations will be converted into the right to receive,
subject to certain adjustments, cash equal to approximately $28,000,000. The
merger agreements are subject to regulatory and shareholder approval.
F-75
<PAGE> 315
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Unison HealthCare Corporation:
We have audited the accompanying statements of assets, liabilities and
interdivision account of THE OAKS OF BOISE (formerly, Franciscan ElderCare of
Boise, a division of Franciscan ElderCare Corporation, a Delaware not-for-profit
corporation) as of June 30, 1995 and 1994, and the related statements of
revenue, expenses and interdivision account and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 financial position of The Oaks of Boise as of June
30, 1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
November 2, 1995.
F-76
<PAGE> 316
THE OAKS OF BOISE
STATEMENTS OF ASSETS, LIABILITIES AND INTERDIVISION ACCOUNT
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................. $700..... $ 700
Accounts receivable, net of allowance for doubtful accounts of
$12,500 and $23,000 as of June 30, 1995 and 1994, respectively.... 326,736 226,720
Inventory............................................................ 17,411 20,046
-------- --------
Total current assets............................................ 344,847 247,466
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.............................. 204,093 182,301
LEASE DEPOSIT.......................................................... 50,000 50,000
-------- --------
$598,940 $479,767
======== ========
LIABILITIES AND INTERDIVISION ACCOUNT
CURRENT LIABILITIES:
Accounts payable..................................................... $115,197 $ 51,679
Accrued expenses..................................................... 202,341 257,973
-------- --------
Total current liabilities....................................... 317,538 309,652
INTERDIVISION ACCOUNT.................................................. 281,402 170,115
-------- --------
$598,940 $479,767
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE> 317
THE OAKS OF BOISE
STATEMENTS OF REVENUE, EXPENSES AND INTERDIVISION ACCOUNT
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
NET PATIENT REVENUE............................................... $ 1,744,121 $ 2,041,011
----------- -----------
EXPENSES:
Operating....................................................... 1,714,211 1,467,438
General and administrative...................................... 267,292 267,273
Rent and facilities............................................. 407,218 407,036
Depreciation and amortization................................... 38,809 44,651
----------- -----------
Total expenses............................................. 2,427,530 2,186,398
----------- -----------
EXCESS OF EXPENSES OVER REVENUE................................... (683,409) (145,387)
INTERDIVISION ADVANCES FROM FEC................................... 3,229,790 2,703,125
INTERDIVISION ADVANCES TO FEC..................................... (2,435,094) (2,588,095)
INTERDIVISION ACCOUNT, beginning of year.......................... 170,115 200,472
----------- -----------
INTERDIVISION ACCOUNT, end of year................................ $ 281,402 $ 170,115
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE> 318
THE OAKS OF BOISE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess of expenses over revenue................................. $ (683,409) $ (145,387)
Adjustments to reconcile the excess of expenses over revenue to
net cash used by operating activities --
Depreciation and amortization................................ 38,809 44,651
Changes in assets and liabilities --
Accounts receivable, net..................................... (100,016) 83,796
Inventory.................................................... 2,635 (11,905)
Accounts payable............................................. 63,518 1,023
Accrued expenses............................................. (55,632) (59,239)
----------- -----------
Net cash used in operating activities................... (734,095) (87,061)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements............... (60,601) (27,969)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interdivision advances from FEC................................. 3,229,790 2,703,125
Interdivision advances to FEC................................... (2,435,094) (2,588,095)
----------- -----------
Net cash provided by financing activities............... 794,696 115,030
----------- -----------
CHANGE IN CASH.................................................... -- --
CASH, beginning of year........................................... 700 700
----------- -----------
CASH, end of year................................................. $ 700 $ 700
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE> 319
THE OAKS OF BOISE
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
(1) ORGANIZATION:
The Oaks of Boise (formerly Franciscan ElderCare of Boise) (The Oaks) was
acquired by Unison HealthCare Corporation (a Delaware corporation) (Unison) from
Franciscan ElderCare Corporation (a Delaware not-for-profit corporation) (FEC)
in July 1995 (Note 6). The Oaks is an 88 bed skilled nursing facility located in
Boise, Idaho, and operated as a division of FEC until June 30, 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Net Patient Revenue
Net patient revenue is reported at the estimated billing rates or at the
amount realizable under agreements with third-party payors. During 1995 and
1994, revenues derived from patients covered by Medicare were 16% and 24%,
respectively, and revenues derived from patients covered by Medicaid were 38%
and 43%, respectively. Revenues earned under third-party payor agreements with
Medicare and Medicaid are subject to audit and retroactive adjustment. Amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third-party payor settlements are provided for in the
period the related services are rendered. As of June 30, 1995, accounts
receivable included $169,209 of settlements due from third parties. There were
no settlements due from third parties as of June 30, 1994. Differences between
the amounts accrued and subsequent settlements are recorded in operations at the
time of settlement.
There have been, and management expects that there will continue to be, a
number of proposals to limit Medicare and Medicaid reimbursement, as well as
revenues from certain private payor sources for long-term care services.
Management cannot predict whether any of these proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on the financial
position and results of the operations of The Oaks.
Depreciation and Amortization
Equipment and leasehold improvements are recorded at cost and are
depreciated using the straight-line method over the lesser of the asset's
estimated useful life or term of the related lease (varying from 3 to 15 years).
Expenditures for maintenance, repairs and minor equipment replacements are
charged to expense as incurred.
Inventory
Inventory, consisting of food, linen and miscellaneous supplies, is stated
at the lower of average cost or market.
Income Taxes
The Oaks was a division of FEC, a not-for-profit corporation, through the
acquisition date and accordingly, no provision for income taxes has been
provided in the accompanying financial statements.
F-80
<PAGE> 320
THE OAKS OF BOISE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Expenses
Accrued expenses consisted of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Accrued salaries and benefits.......................... $112,570 $102,342
Amounts owed to third party payors..................... 53,150 115,367
Accrued taxes.......................................... 10,500 11,219
Accrued insurance...................................... -- 9,012
Other.................................................. 26,121 20,033
-------- --------
$202,341 $257,973
======== ========
</TABLE>
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consisted of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Equipment............................................ $ 193,768 $ 156,878
Leasehold improvements............................... 301,461 277,750
--------- ---------
495,229 434,628
Less -- Accumulated depreciation..................... (291,136) (252,327)
--------- ---------
$ 204,093 $ 182,301
========= =========
</TABLE>
(4) RELATED PARTY TRANSACTIONS:
During fiscal 1995, The Oaks was one of several facilities operated as a
division of FEC. FEC makes advances to the facilities for operating purposes and
the facilities forward cash receipts to FEC as part of FEC's centralized cash
management system. Consequently, The Oak's financial statements do not include
certain accounts, such as operating cash, debt or fund balance. The results of
transactions between FEC and The Oaks are reflected in the interdivision account
as of and for the years ended June 30, 1995 and 1994.
Prior to December 1, 1994, management services were provided to The Oaks by
FEC. A management fee of 5% of net patient revenue was charged by FEC. From
December 1, 1994 to June 30, 1995, management services were provided to The Oaks
by Unison. Unison also charged 5% of net patient revenue. Management fees paid
for 1995 and 1994 were $100,500 and $95,000, respectively, and are included in
general and administrative expenses.
The Oaks purchases general liability insurance from an affiliate of FEC.
Liability insurance expense totaled $12,000 and $6,000 for the years ended June
30, 1995 and 1994, respectively.
F-81
<PAGE> 321
THE OAKS OF BOISE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES:
Leases
The Oak's facility is leased by FEC under a noncancelable operating lease
which expires in July, 2000. Future minimum rental commitments under the lease
are as follows, as of June 30, 1995:
<TABLE>
<S> <C>
Years Ending June 30,
1996........................................................ $ 367,536
1997........................................................ 367,536
1998........................................................ 367,536
1999........................................................ 367,536
2000........................................................ 367,536
Thereafter.................................................. 30,628
----------
$1,868,308
==========
</TABLE>
Claims and Litigation
In the normal course of business, The Oaks is subject to claims and
litigation for which FEC carries professional, general liability and other
insurance coverages. In the opinion of management, the outcome of such claims
and litigation will not have a material impact on The Oak's financial position
or results of operations (see Note 6).
(6) SUBSEQUENT EVENT:
Effective July 1, 1995, FEC and Unison entered into a purchase agreement,
pursuant to which Unison purchased certain accounts receivable, equipment,
leasehold improvements and supplies inventory and acquired FEC's rights under
certain contracts, including a sublease of the land and building of The Oak's
facility. The purchase price is subject to certain increases, based on adjusted
cash flow, as defined, for the two years ending June 30, 1997. The purchase
price is also subject to certain decreases, to be determined based on the
facility's net losses, if any, for the year ending June 30, 1996. Unison also
assumed certain of The Oak's liabilities, including accrued vacation and sick
pay. Under the terms of the agreement, Unison is obligated to pay security
deposits totaling $30,628 prior to December 1, 1995, to ensure Unison's
performance on FEC's sublease of the facility.
In conjunction with the purchase agreement, FEC and Unison also entered
into a repurchase option agreement whereby FEC has the option to repurchase the
assets and contract rights sold to Unison. This option is only exercisable if
FEC forms an affiliation with one of two healthcare providers identified in the
purchase agreement.
F-82
<PAGE> 322
INDEPENDENT AUDITORS' REPORT
Board of Directors
Nightingale West, Inc.
8365 Newburgh Rd.
Westland, MI 48185
We have audited the accompanying Balance Sheet of Nightingale West, Inc. (a
Michigan Corporation) as of December 31, 1994, and the related Statements of
Operations, Retained Earnings, and Cash Flows for each of the two years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial position of Nightingale West, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
The accompanying Statements of Operations, Retained Earnings, and Cash
Flows for the nine months ended September 30, 1995 were not audited by us and,
accordingly, we do not express an opinion on them.
GRANT, MILLMAN & JOHNSON, P.C.
October 30, 1995
Farmington Hills, Michigan
F-83
<PAGE> 323
NIGHTINGALE WEST, INC.
BALANCE SHEET
DECEMBER 31, 1994
(READ NOTES TO FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash......................................................................... $ 244,682
Patient Accounts Receivable.................................................. 392,609
Sundry Receivables........................................................... 149,050
Supplies..................................................................... 21,356
Prepaid Expenses............................................................. 92,344
----------
Total Current Assets........................................................... 900,041
----------
Property and Equipment:
Land......................................................................... 200,000
Building and Improvements.................................................... 2,964,084
Equipment.................................................................... 316,778
----------
3,480,862
Less: Accumulated Depreciation............................................... 2,686,848
----------
Book Value of Property and Equipment........................................... 794,014
----------
Other Assets:
Deposits..................................................................... 350
Prepaid Expenses............................................................. 1,943
----------
Total Other Assets............................................................. 2,293
----------
TOTAL ASSETS................................................................... $1,696,348
==========
LIABILITIES
Current Liabilities:
Current Portion of Notes Payable............................................. $ 104,399
Accounts Payable............................................................. 145,968
Accrued Payroll.............................................................. 194,667
Accrued Property Taxes....................................................... 35,651
Accrued Expenses............................................................. 22,009
----------
Total Current Liabilities...................................................... 502,694
----------
Long-Term Liabilities:
Notes Payable, Net of Current Portion........................................ 1,945,309
----------
Total Liabilities.............................................................. 2,448,003
----------
STOCKHOLDERS' EQUITY
Capital Stock -- Common; $1 Par Value;
Authorized 50,000 Shares; Issued and Outstanding 10,000 Shares............... 10,000
Retained Earnings (Deficit).................................................. (761,655)
----------
Total Stockholders' Equity..................................................... (751,655)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $1,696,348
==========
</TABLE>
F-84
<PAGE> 324
NIGHTINGALE WEST, INC.
STATEMENTS OF OPERATIONS
(READ NOTES TO FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE NINE
ENDED ENDED MONTHS ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Net Patient Service Revenue............... $5,318,801 $5,854,088 $4,403,837
Other Revenue............................. 39,540 49,730 34,812
---------- ---------- ----------
Total Revenue............................. 5,358,341 5,903,818 4,438,649
---------- ---------- ----------
Operating Expenses:
Operating............................... 3,962,780 4,300,165 3,474,778
General and Administrative.............. 767,619 800,964 789,872
Interest................................ 176,959 169,038 120,692
Depreciation and Amortization........... 174,549 192,061 129,750
---------- ---------- ----------
Total Operating Expenses.................. 5,081,907 5,462,228 4,515,092
---------- ---------- ----------
Income (Loss) From Operations............. 276,434 441,590 (76,443)
Nonoperating Gains -- Interest............ 8,435 12,367 8,537
Nonoperating Losses -- Sale of Assets..... (2,815) -- --
---------- ---------- ----------
NET INCOME (LOSS)......................... $ 282,054 $ 453,957 $ (67,906)
========== ========== ==========
</TABLE>
F-85
<PAGE> 325
NIGHTINGALE WEST, INC.
STATEMENTS OF RETAINED EARNINGS
(READ NOTES TO FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE NINE
ENDED ENDED MONTHS ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Balance -- Beginning, as Previously
Reported................................ $(929,816) $(695,119) $(761,655)
Cumulative Effect on Prior Years of
Retroactive Restatement for Accounting
Change.................................. (67,850) (70,493) --
--------- --------- ---------
Balance -- Beginning, As Restated......... (997,666) (765,612) (761,655)
Net Income (Loss) for the Period (as
Restated in 1993 and 1994).............. 282,054 453,957 (67,906)
Less: Distributions to Stockholders....... (50,000) (450,000) (150,000)
--------- --------- ---------
Balance -- Ending......................... $(765,612) $(761,655) $(979,561)
========= ========= =========
</TABLE>
F-86
<PAGE> 326
NIGHTINGALE WEST, INC.
STATEMENTS OF CASH FLOWS
(READ NOTES TO FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE NINE
ENDED ENDED MONTHS ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss)....................... $ 282,054 $ 453,957 $ (67,906)
--------- --------- ---------
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating
Activities:
Depreciation and Amortization........ 174,549 192,061 129,750
Loss on Disposal of Property......... 2,815 -- --
(Increase) Decrease in:
Accounts Receivable.................. (371,332) 71,154 166,841
Prepaid Expenses..................... (23,274) 18,182 (28,712)
Supplies............................. (653) 1,397 (3,147)
Other Assets......................... -- (350) --
Increase (Decrease) in:
Accounts Payable..................... 32,776 (13,995) 31,932
Accrued Expenses..................... 33,485 17,892 (26,713)
--------- --------- ---------
Total Adjustments......................... (151,634) 286,341 269,951
--------- --------- ---------
Net Cash Provided by Operating
Activities.............................. 130,420 740,298 202,045
--------- --------- ---------
Cash Flows From Investing Activities:
Cash Payments for the Purchase of
Property............................. (55,442) (108,923) (48,634)
Cash Proceeds From the Sale of
Property............................. 5,000 -- --
--------- --------- ---------
Net Cash Used by Investing Activities..... (50,442) (108,923) (48,634)
Cash Flows From Financing Activities:
Principal Payments on Debt.............. (100,813) (110,435) (78,479)
Distributions to Stockholders........... (50,000) (450,000) (150,000)
--------- --------- ---------
Net Cash Used by Financing Activities..... (150,813) (560,435) (228,479)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Equivalents............................. (70,835) 70,940 (75,068)
Cash and Equivalents, Beginning........... 244,577 173,742 244,682
--------- --------- ---------
Cash and Equivalents, Ending.............. $ 173,742 $ 244,682 $ 169,614
========= ========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash Paid During the Period For:
Interest Expense..................... $ 176,959 $ 169,038 $ 120,692
========= ========= =========
</TABLE>
F-87
<PAGE> 327
NIGHTINGALE WEST, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Nightingale West, Inc. was incorporated under the laws of the State of
Michigan on October 10, 1968. The Company operates a 236-bed nursing home in
Westland, Michigan, and grants credit without collateral to its residents, most
of whom are from the local area, and are insured under third party payor
agreements.
Unaudited Interim Financial Information
The accompanying financial statements for the nine months ended September
30, 1995 are unaudited; however, in the opinion of management, such statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations and cash flows
for such period. The operating results for the interim period are not
necessarily indicative of the results of a full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Income Taxes
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be an S-Corporation. In lieu of corporation income
taxes, the stockholders are taxed on their proportionate share of the Company's
taxable income. Therefore, no provision or liability for federal income taxes
has been included in these financial statements.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
using various straight line and accelerated methods over the estimated useful
lives of the assets.
Patient Service Revenue
Patient service revenue is reported at the estimated net realizable amounts
from residents, third party payers, and others for services rendered. Revenue
under third party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third party payor settlements are provided
in the period the related services are rendered. Differences between the
estimated amounts accrued and interim and final settlements are reported in
operations in the year of settlement.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. During the normal
course of business, the Company regularly maintains cash on deposit in excess of
federally insured limits with financial institutions.
Accounts Receivable
The Company considers its accounts receivable to be fully collectible.
Accordingly, no allowance for doubtful accounts is required. If accounts do
become uncollectible, they will be charged to operations when that determination
is made.
F-88
<PAGE> 328
NIGHTINGALE WEST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Supplies Inventory
Supplies inventory is stated at the lower of cost or market, on a first-in,
first-out basis.
Prepaid Expenses
The Company considers all expenses paid in advance which have an estimated
benefit of one year or less, to be current assets. All other prepaid amounts
which will benefit future periods greater than one year from the balance sheet
date are considered long term.
NOTE 2 -- ASSETS WHOSE USE IS LIMITED
At December 31, 1994, the Company has included in Cash the patient trust
accounts totalling $3,464. The related liability of the same amount is included
in Accounts Payable.
NOTE 3 -- NOTES PAYABLE
Notes Payable at December 31, 1994 consist of the following:
<TABLE>
<CAPTION>
CURRENT LONG TERM
-------- ----------
<S> <C> <C>
Land Contract Payable to a related party, secured by Land and
Building. Monthly payments of $21,724, including interest
at 8.0% through July, 2004................................. $100,649 $1,945,309
Installment Loan payable to a bank, secured by all assets.
Monthly payments of $1,250 plus interest at the bank's
prime rate plus 1.0%, through May, 1995.................... 3,750 --
-------- ----------
TOTAL...................................................... $104,399 $1,945,309
======== ==========
</TABLE>
Future maturities of long term debt as of December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995........................................................ $ 104,399
1996........................................................ 109,002
1997........................................................ 118,050
1998........................................................ 127,847
1999........................................................ 138,459
Thereafter.................................................. 1,451,951
----------
Total....................................................... $2,049,708
==========
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
As referred to in Note 3 above, the Company has included in liabilities at
December 31, 1994, a long term Land Contract Payable for the purchase of real
estate, in the amount of $2,045,958. This contract is payable to a related
entity that has similar management and ownership. Interest expense paid on this
contract is recorded in the Statements of Operations as follows:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------------------------------------------------------------------ --------
<S> <C>
Year ended December 31, 1993...................................... $174,875
Year ended December 31, 1994...................................... $167,752
Nine months ended September 30, 1995.............................. $120,787
</TABLE>
F-89
<PAGE> 329
NIGHTINGALE WEST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LEASES
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred. The
following is a schedule by year of the future minimum lease payments under
operating leases as of December 31, 1994:
<TABLE>
<CAPTION>
MINIMUM
LEASE PAYMENTS
--------------
<S> <C>
Year Ending December 31
1995.................................................. $4,091
1996.................................................. 3,409
------
Total Minimum Lease Payments............................ $7,500
======
</TABLE>
Total rent expense included in the Statements of Operations for the year
ended December 31, 1994 was $682, and $3,068 for the nine months ended September
30, 1995.
NOTE 6 -- CHANGE IN METHOD OF ACCOUNTING FOR COMPENSATED ABSENCES
In prior years, the Company did not record its liability for accrued
compensated absences such as vacation and sick pay. In 1995, the Company changed
its method of accounting for these compensated absences. The change was made
because the Company felt that the new method resulted in a more accurate
recognition of expenses and a better matching of revenues and costs. The
financial statements of the prior periods have been restated to apply the new
method retroactively. The effect on income of the accounting change for the
years ended December 31, 1993 and 1994 are decreases of $2,643 and $2,407
respectively. The cumulative effect of the change to prior years has been
recorded in the Statements of Retained Earnings. There is no tax effect from
this change.
NOTE 7 -- NET PATIENT SERVICE REVENUES
The Company has agreements with third party payers that provide for payment
at amounts different than its established rates. The Company's revenues are
derived mostly from its participation in the Medicaid assistance program, and
the collectibility of these funds is dependent upon the performance of these
programs. Contractual adjustments resulting from these agreements are recorded
as deductions from gross resident revenue.
For the years ended December 31, 1993 and 1994, and the nine month period
ended September 30, 1995, the Company's revenues from the Medicaid program were
approximately 80% of total revenues. At December 31, 1994, the Company's
receivable from the Medicaid program was 93% of total patient receivables.
NOTE 8 -- SUBSEQUENT EVENTS
In 1995 the Company entered into an agreement to sell substantially all of
its operating assets to another unrelated entity for an amount in excess of book
value. The eventual closing and sale is expected to occur in November, 1995.
In addition, the Company's collective bargaining agreement that covers
substantially all of its employees expired in 1995. The parties to the contract
have agreed to continue working under the expired agreement during the contract
negotiations.
F-90
<PAGE> 330
NIGHTINGALE WEST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INSURANCE CLAIMS
Nursing homes are subject to medical malpractice, personal injury, and
other liability claims that are customary risks inherent in the operation of a
health care facility and are generally covered by insurance. The Company
maintains insurance with coverage and deductibles that management deems
appropriate based on historical claims and the nature of the risks of its
business. Although there can be no assurance that a potential future claim will
not exceed the insurance coverage available, management believes that based upon
evaluation of historical asserted and unasserted claims experience, management
believes that the ultimate liability, if any, resulting from the settlement of
any future claim will not have a material impact on Nightingale's financial
position, operations or liquidity.
NOTE 10 -- RECLASSIFICATIONS
Certain accounts in the prior year's financial statements have been
reclassified for comparative purposes to conform with the presentation in these
financial statements.
F-91
<PAGE> 331
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Henderson & Associates Rehabilitation and
Sunbelt Therapy Management Services, Inc.
We have audited the accompanying combined balance sheets of Henderson &
Associates Rehabilitation and Sunbelt Therapy Management Services, Inc. as of
December 31, 1995 and 1994, and the related combined statements of operations
and stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Henderson &
Associates Rehabilitation and Sunbelt Therapy Management Services, Inc. at
December 31, 1995 and 1994, and the combined results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
May 16, 1996
Ernst & Young LLP
Phoenix, Arizona
F-92
<PAGE> 332
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................................. $ 69,779 $ 61,858
Accounts receivable, less allowance for doubtful accounts of $95,000
in 1995 and $91,600 in 1994........................................ 485,843 371,260
Other receivables.................................................... 50,507 14,503
Due from affiliates.................................................. 38,893 60,567
Other................................................................ 24,590 18,958
-------- --------
Total current assets....................................... 669,612 527,146
Property and equipment, less accumulated depreciation of $144,158 in
1995 and $125,054 in 1994.......................................... 90,205 141,132
-------- --------
Total assets............................................... $759,817 $668,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 33,549 $ 23,956
Accrued payroll and related expenses................................. 250,672 174,441
Accrued vacation payable............................................. 149,042 87,183
Due to affiliates.................................................... 39,330 --
Customer deposits.................................................... 27,336 28,067
Current portion of long-term debt and capital lease obligation....... 139,580 65,996
-------- --------
Total current liabilities.................................. 639,509 379,643
Long-term debt and capital lease obligation, less current portion.... 47,618 51,057
Stockholders' equity:
Common stock, $1 par value; 3000 shares authorized, issued and
outstanding..................................................... 3,000 3,000
Retained earnings............................................... 69,690 234,578
-------- --------
Total stockholders' equity................................. 72,690 237,578
-------- --------
Total liabilities and stockholders' equity................. $759,817 $668,278
======== ========
</TABLE>
See accompanying notes.
F-93
<PAGE> 333
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net Patient Service Revenue....................................... $4,803,845 $3,965,529
Operating Expenses:
Salaries and related expenses................................... 3,710,351 2,840,249
Contract labor.................................................. 382,612 345,843
Insurance....................................................... 202,814 230,980
Office supplies and expenses.................................... 127,262 88,902
Rent............................................................ 59,497 57,130
Travel.......................................................... 156,166 100,015
Other........................................................... 92,892 82,754
Depreciation.................................................... 34,741 17,387
Interest........................................................ 12,335 6,651
---------- ----------
Total operating expenses................................ 4,778,670 3,769,911
---------- ----------
Income from operations............................................ 25,175 195,618
Nonoperating losses............................................... (39,744) (46,626)
---------- ----------
Net (loss) income................................................. (14,569) 148,992
Distributions to stockholders..................................... (150,319) (83,541)
Retained earnings at beginning of period.......................... 234,578 169,127
---------- ----------
Retained earnings at end of period................................ $ 69,690 $ 234,578
========== ==========
</TABLE>
See accompanying notes.
F-94
<PAGE> 334
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................................ $ (14,569) $ 148,992
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation.................................................. 34,741 17,387
Loss on partnership investment................................ 16,278 22,457
Loss on disposal of assets.................................... 23,466 24,167
Changes in operating assets and liabilities:
Accounts receivable, net...................................... (128,913) 9,967
Accounts payable.............................................. 9,593 14,730
Other accrued expenses and liabilities........................ 177,420 66,649
Customer deposits............................................. (731) 28,067
--------- ---------
Net cash provided by operating activities................ 117,285 332,416
INVESTING ACTIVITIES
Purchases of property and equipment.............................. (7,280) (144,915)
Changes in other assets.......................................... (21,910) (28,969)
--------- ---------
Net cash used in investing activities.................... (29,190) (173,884)
FINANCING ACTIVITIES
Proceeds from long-term debt..................................... 201,460 99,497
Payments of long-term debt and capital lease obligation.......... (131,315) (92,327)
Distributions to stockholders.................................... (150,319) (83,541)
--------- ---------
Net cash used in financing activities.................... (80,174) (76,371)
--------- ---------
Increase in cash................................................. 7,921 82,161
CASH at beginning of period...................................... 61,858 (20,303)
--------- ---------
CASH at end of period............................................ $ 69,779 $ 61,858
========= =========
</TABLE>
See accompanying notes.
F-95
<PAGE> 335
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Henderson & Associates Rehabilitation (HAR) and Sunbelt Therapy Management
Services, Inc. (Sunbelt) provide a variety of therapy services to patients, and
contract their services to hospitals, home health agencies and other
third-parties.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Henderson &
Associates Rehabilitation and Sunbelt Therapy Management Services, Inc. All
significant intercompany accounts and transactions have been eliminated.
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 combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expenses as
incurred.
INCOME TAXES
HAR and Sunbelt are S corporations, and taxable income or loss flows
through to the individual stockholders for income tax purposes. Accordingly, no
provision for income taxes or income tax liabilities has been included in the
accompanying combined financial statements.
NET PATIENT SERVICE REVENUE
Net patient service revenue is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. HAR and
Sunbelt have negotiated agreements with several organizations to provide therapy
services based on fee schedules.
F-96
<PAGE> 336
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligation consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Lines of credit.................................................... $ 65,050 $ 18,000
Note payable to a bank, due in monthly installments of $1,421,
interest at 1% above prime through November 1996................. -- 30,003
Note payable to a bank in monthly installments of $1,282, interest
at 1% above prime through October 1997........................... -- 31,510
Note payable to a credit union in monthly installments of $680,
interest at 7.11% through December 1997.......................... -- 22,000
Note payable to a bank, due in monthly installments of $2,245,
interest at 8.25% through November 1998.......................... 69,638 --
Note payable to a bank, due in monthly installments of $3,100,
interest at .5% above the average yield of U.S. Treasury Bills
through May 1996, at which time a final installment in the amount
of the unpaid balance is due..................................... 46,785 --
Capital lease obligation in monthly installments of $818........... 5,725 15,540
--------- ---------
187,198 117,053
Less current portion............................................... (139,580) (65,996)
--------- ---------
$ 47,618 $ 51,057
========= =========
</TABLE>
HAR has negotiated a $35,000 line of credit with a bank at an interest rate
of 1% over the prime rate.
Sunbelt has negotiated a $50,050 line of credit with a bank at an interest
rate of .5% over the bank's Base Lending Rate (8.5% at December 31, 1995).
Both lines of credit are secured by personal guarantees of the
stockholders.
Sunbelt has a capital lease for physical therapy equipment with a bargain
purchase option upon completion of the lease. At December 31, 1995, the leased
equipment, which is included in property and equipment in the accompanying
combined balance sheet, is carried at a cost of $21,310 less accumulated
depreciation of $6,038.
The lease expires in June 1996.
The following is a schedule of principal maturities of long-term debt and
capital lease obligation at December 31, 1995:
<TABLE>
<S> <C>
1996............................................................ $139,580
1997............................................................ 23,907
1998............................................................ 23,711
--------
$187,198
========
</TABLE>
3. RELATED PARTIES
HAR and Sunbelt share employees and expenses with several organizations of
which the stockholders are owners. However, HAR and Sunbelt have not billed
these organizations for shared activities and have not
F-97
<PAGE> 337
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
identified the related costs, and the accompanying combined financial statements
do not include revenue from these shared activities.
4. EMPLOYEE BENEFIT PLAN
Sunbelt has a qualified defined contribution plan covering all eligible
employees. Contributions are determined based upon a percentage of each eligible
employee's compensation, as defined by management. Contributions to the plan
were approximately $3,809 in 1995 and $3,458 in 1994.
HAR has a profit sharing plan covering all eligible employees.
Contributions are at the discretion of management. No contributions were made to
the plan in 1995 or 1994.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by HAR and Sunbelt in
estimating the fair value of their financial instruments:
Cash, Accounts Payable and Accrued Liabilities: The carrying amounts
reported in the combined balance sheets approximate their fair values.
Long-Term Debt: The fair values of fixed rate issues are estimated using
discounted cash flow analyses based on the current incremental borrowing rates
for similar types of borrowing arrangements. The carrying amounts of all fixed
and variable rate issues approximate their fair values.
6. SUBSEQUENT EVENT
Unison HealthCare Corporation purchased 90% of the common stock of HAR and
Sunbelt effective February 1, 1996.
F-98
